Flaum v. Birnbaum

120 A.D.2d 183, 508 N.Y.S.2d 115, 1986 N.Y. App. Div. LEXIS 59233
CourtAppellate Division of the Supreme Court of the State of New York
DecidedNovember 10, 1986
StatusPublished
Cited by23 cases

This text of 120 A.D.2d 183 (Flaum v. Birnbaum) is published on Counsel Stack Legal Research, covering Appellate Division of the Supreme Court of the State of New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Flaum v. Birnbaum, 120 A.D.2d 183, 508 N.Y.S.2d 115, 1986 N.Y. App. Div. LEXIS 59233 (N.Y. Ct. App. 1986).

Opinion

OPINION OF THE COURT

Denman, J.

Petitioners, beneficiaries of the estate of Bernard P. Birnbaum, seek an order removing and surcharging respondent Saul I. Birnbaum as coexecutor of the estate; imposing a constructive trust on 50% interest in two properties known as Queensbury Plaza and the bank parcel; ordering the reconveyance to the estate of 50% interest in Queensbury Plaza; directing an accounting by Saul of the profits from his operation of Queensbury Plaza; directing an accounting by Saul of profits from his sale of the bank parcel; and directing Saul to pay attorneys’ fees. Petitioners appeal from so much of the order and decree of the Surrogate as directed the estate to pay Saul the amount due on a corporate note and mortgage which the Referee found Bernard personally guaranteed during his [186]*186lifetime; failed to direct Saul to account for a debt owed by the corporation to the estate; failed to order the permanent removal of Saul as coexecutor; and failed to direct Saul to pay petitioners’ attorneys’ fees. Respondent cross-appeals from so much of the order and decree as imposed constructive trusts upon his interests in Queensbury Plaza and the bank parcel and directed a reconveyance and/or an accounting with respect to respondent’s operation and sale of those properties.

We conclude that the Surrogate erred in ordering the estate to pay Saul on the note and mortgage; that he erred in failing to order Saul to account for a corporate debt to the estate; that he properly imposed constructive trusts on 50% interests in Queensbury Plaza and the bank parcel and properly ordered a reconveyance and/or an accounting with respect to those properties; and that he properly denied petitioners’ requests for the permanent removal of Saul as coexecutor and the imposition of liability upon him for petitioners’ attorneys’ fees.

FACTUAL BACKGROUND

This proceeding focuses on allegations of conversion, fraud and self-dealing by Saul Birnbaum in a series of transactions which resulted in divestment of the estate’s interest in Queensbury Plaza and an adjacent parcel (the bank parcel) in Glens Falls, New York, and culminated in Saul’s acquisition of fee title to both properties and his entire control of the corporation which operated those properties. A previous proceeding focused on similar allegations against Saul in his acquisition of other estate assets (see, Matter of Birnbaum v Birnbaum, 117 AD2d 409). A brief description of the parties to these proceedings and the general background of this bitterly contested estate litigation can be found in our prior opinion in Birnbaum (supra). As in the previous proceeding, the issues on this appeal require us to examine the circumstances surrounding various transactions occurring during Bernard’s lifetime and following his suicide in 1976.

FORMATION OF THE CORPORATION

Queensbury Plaza, Inc. (the corporation), was formed in 1961 by Bernard Birnbaum, David Hannah and Myron Hunt. The corporation’s principal asset was a long-term leasehold interest in a 12-acre parcel owned by John Miller, and later, by his estate. The corporation also owned a fee interest in a [187]*187one-quarter acre parcel located adjacent to the 12-acre parcel. The corporation constructed a shopping center, known as Queensbury Plaza, on the 12-acre parcel and sublet space to various commercial tenants. The corporation also constructed a building on the adjacent parcel which the First National Bank of Glens Falls occupied under a long-term lease.

THE 1963 AGREEMENT — THE ESTATE’S DEBT TO SAUL

Following construction of the shopping center, the corporation ran into financial difficulty. In March 1963, Saul loaned the corporation $139,158.72 and took back a promissory note from the corporation. This note was 50% guaranteed by Bernard who was a 50% shareholder. In May 1963, Saul loaned the corporation an additional $100,000. In exchange for this loan, Saul took back a new note obligating the corporation to pay Saul a total of $240,347.49. Saul also took back a second mortgage on the corporation’s leasehold interest in the plaza property and, in addition, received 50% of the corporation’s stock. There is no documentary evidence that the second corporate note to Saul was personally guaranteed by Bernard. Nevertheless, it is Saul’s claim that there is evidence of Bernard’s personal guarantee in an unsigned letter from Bernard to a third shareholder, David Hannah, to the effect that Bernard and Hannah were "personally liable” on the corporation’s $240,000 debt to Saul. There is no question that the corporation defaulted on the note shortly after it was made and that the only payments ever made were interest payments of $36,000 in 1974 and 1975 and $15,000 in 1976. However, the record indicates that those payments were made by the corporation, not Bernard, and as Saul himself asserts, were clearly designed "to give the corporation an interest deduction in each year of payment.” Saul immediately returned those payments to the corporation. On the basis of an unauthorized calculation of compound interest at 1Vi%, Saul computed the amount due on the note and mortgage, including interest, to be $535,000 as of February 1977, treated that amount as principal, and seeks to collect that amount plus interest from the estate.

saul’s debt to the estate

The general contractor for construction of the plaza was B.C.H. Construction Corp. (BCH). BCH was 90% owned by Bernard Birnbaum. Pursuant to an agreement dated August [188]*18814, 1961, the corporation was to pay BCH or its shareholders (Bernard and David Hannah) 10% of the net construction costs. In 1964 BCH assigned this account receivable to Prime Real Estate Company (Prime), an entity wholly owned by Bernard. This debt was never paid to BCH or to Prime and the corporation continuously carried the debt of approximately $200,000 on its books as a corporate liability. In 1977, after Bernard’s death, Sidney Finger, accountant for the estate, determined that he could not find any substantiation for the debt running from the corporation to BCH or Prime. After discussing the matter with Saul, Finger simply eliminated this liability from the books of the corporation, which was then owned 50% by Saul and 50% by the estate, but which later changed form to an entity owned almost entirely by Saul. Finger simultaneously eliminated from the books of Prime, a corporation owned wholly by the estate, the account receivable represented by this debt.

saul’s purchase of the plaza and bank parcels

By the time of Bernard’s death in 1976, the corporation was encountering critical financial difficulties as a result of deterioration of the plaza, obsolescence, vacancies and unprofitable subleases. Fearing the loss of his investment, Saul proposed to the beneficiaries a complex series of transactions purportedly designed to revitalize the property and turn around its fortunes. The first step involved Saul’s proposed purchase of the bank parcel from the corporation (owned one half by the estate and one half by Saul) and of the plaza property from the estate of John Miller. In February 1977, Saul purchased the bank parcel from the corporation. The nominal consideration of $25,000 for the property was reflected in a credit in Saul’s favor against the alleged $530,000 debt owed by the estate to Saul on the 1963 note and mortgage. Saul subsequently sold the bank parcel to the bank for $56,000 cash plus the bank’s assumption of a $224,000 mortgage on the premises.

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Cite This Page — Counsel Stack

Bluebook (online)
120 A.D.2d 183, 508 N.Y.S.2d 115, 1986 N.Y. App. Div. LEXIS 59233, Counsel Stack Legal Research, https://law.counselstack.com/opinion/flaum-v-birnbaum-nyappdiv-1986.