If you’ve served as a professional in the area of trusts and estates for any significant period of time, you’ll find the New Jersey appellate court’s Jan. 31 decision in Stephenson v. Speigle1 somewhat remarkable. The appellate court upheld a decision to rescind and reallocate a transfer on death, even though there was no ambiguity in the documentation, and even though the chancery court judge admittedly could only make assumptions about the decedent's intended result. Reach for this decision fast the next time you discover that a deceased client has made an estate-planning blunder that doesn’t involve an ambiguity.
The Cast of Characters
In honor of the appellate court's reference to Luigi Pirandello’s play, “Six Character in Search of an Author”--yes, the appellate court decision quoted Pirandello! (see below)—we’ll call the parties the Decedent, the Attorney, the Banker and the Personal Representative. (One twist in this case is that the Attorney was the beneficiary of the Decedent’s mistake, so the Personal Representative has been cast as the protagonist.)
In New Jersey, the Decedent executed a will in which he left his entire estate to his family or to trusts for their benefit. Two months later, in Naples, Fla., the Decedent deposited the sum of $143,151.26 into a bank account. That sum constituted about one-third of the value of his assets. The Decedent told the Banker that he wished to name a trust as the “pay-on-death” beneficiary of the bank account, but the Banker dissuaded him because the Decedent didn’t have the trust documents on hand for reference. In response to this advice, the Decedent “improvised” (as the appellate court would later call it) and named the Attorney, who had drafted the Decedent's will, as the account beneficiary.
You can undoubtedly guess what happened in the next act. The Decedent died later that year. The Banker paid the bank account funds to the Attorney. The Personal Representative attempted to recover the bank account funds from the Attorney to add them to the estate, and the Attorney asserted a right to keep the funds for himself.
ATTORNEY (with a resigned inflection)
I come back to the only conclusion that I can draw, which is--for whatever reason--he wanted me to have this money.
The Final Act
The chancery court judge in New Jersey, however, came to a very different conclusion. In short, he found it “inconceivable” that the Decedent intended to benefit the Attorney. The chancery court judge went on to speculate that the Decedent walked into the bank that day “thinking he was going to establish a trust for someone in his family, or maybe fund a trust that was going to be created in the Will.” Based on that theory of the facts, the chancery court judge rummaged around for a cause of action that would require the Attorney to surrender the bank account funds to the Personal Representative. After considering and rejecting several potential causes of action, the chancery court judge ultimately ordered a rescission based on unilateral mistake. In the chancery court judge's opinion, the Decedent’s mistake was “of so great a consequence” that, despite the absence of wrongdoing by the Attorney, it would be “unconscionable” to enforce the contract as actually made.
The Attorney appealed, but the appellate court affirmed the order of rescission based on unilateral mistake, finding that the Personal Representative had proven all four necessary elements: 1) the Decedent made a mistake of such consequence that enforcement of the account’s express terms would be unconscionable; 2) his mistake was material to the undertaking; 3) the mistake occurred regardless of his exercise of reasonable care under the circumstances; and 4) rescission wouldn’t cause serious prejudice to the Attorney (that is, the defendant). “We see no reason,” the appellate court said, “for refusing to apply these principles in favor of beneficiaries of an elderly individual who tried but failed to establish a valid trust.”
The appellate court, however, was so enthusiastic about righting this obvious wrong, it suggested two additional causes of action that could be applied in such situations. First, the appellate court suggested the equitable remedy of a “resulting trust.” Under this remedy, when an express trust fails for any reason, the equitable interest automatically returns to the settlor and his successors in interest. Second, the appellate court suggested that the doctrine of “probable intention,” which has been used by courts to reform mistaken testamentary dispositions, could also apply to bank accounts like this, which the appellate court noted are often referred to as “poor men's wills.” Under this remedy, the court could order rescission of the account or reformation of its terms.
Throughout the appellate court’s decision, it commended the chancery court judge for basing his decision on a common sense approach, notwithstanding difficulties in defining the applicable cause of action. It was on this last point that the appellate court paraphrased Pirandello, writing “‘Inevitably,’ an equitable cause of action ‘often constructs itself.’” However, in light of the courts’ decision not to give any real deference to the bank account beneficiary designation, which apparently contained no ambiguity or flaw in itself, the more appropriate Pirandello quote might have been found in his play,“Right You Are! (If You Think So),” in which one of his characters declares, “I don’t give a rap for the documents, for the truth in my eyes is not in them but in the mind.”2
1. Stephenson v. Speigle, N.J. Super. No. A419311T2 (App. Div. Jan. 31, 2013).
2. Luigi Pirandello, “Right You Are! (If You Think So),” translated by Arthur Livingston (1922) (comma added for clarity).