On appeal from the Superior Court of New Jersey, Law Division, Somerset County, Docket No. SOM-L-1119-03.
The opinion of the court was delivered by: Stern, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 13, 2006
Before Judges Stern, Collester and Sabatino.
Plaintiffs, the executrix of her mother's estate, her co-beneficiary-sisters, and the estate itself, appeal from an order of March 4, 2005 granting summary judgment to defendants John Lolio and his law firm (hereinafter "defendants") in this legal malpractice case stemming from advice given to the executrix on how to pay federal estate taxes that resulted in large tax liability to each of the individual plaintiffs. The critical issues before us are (1) whether defendants owed a duty to the individual beneficiaries to inform them of the personal tax implications which flowed from defendants' advice, and (2) whether the defendants breached a duty to the executrix to make the scope of their representation clear.
The motion judge granted summary judgment to defendants, holding that "[p]laintiffs were third party non-clients of [d]efendants [, and] [d]efendants were retained to be counsel for the Estate and not the individual beneficiaries." The judge further concluded that defendants owed a duty to the Estate alone, as the beneficiaries' individual interests may have conflicted with the interests of the Estate.
Plaintiffs argue that the defendants owed them a duty as individuals and that the terms of the retainer agreement included representation of the individual beneficiary-plaintiffs. We reverse the judgment insofar as plaintiff Clara Heffernan, the executrix, is concerned. We affirm as to the other beneficiaries.
Patricia Albanese ("decedent") died on August 5, 2000. She was survived by three daughters, plaintiffs Clara Heffernan ("Clara"), Anne Albanese, and Judy Albanese, all of whom were beneficiaries under the will. Clara, decedent's executrix, retained defendant John R. Lolio, an attorney at law of the State of New Jersey of the law firm of defendant Sherman, Silverstein, Kohl, Rose & Podolsky, P.A. who had served as decedent's attorney and had prepared her Last Will and Testament, with respect to the estate.
Plaintiffs assert that defendants were retained by Clara to represent the Estate and each of the plaintiffs as individuals. They also contend that Clara similarly retained the services of defendant, Michael DeLorey ("DeLorey") of defendant Prism Financial Group, Inc., to do financial planning on behalf of the individual plaintiffs as well as the Estate. They further claim that defendants and DeLorey "spoke at least a dozen times during the administration of the Estate" and "were working together . . . to figure out the best way to pay the Federal Estate Taxes without exposing [plaintiffs] to any personal income tax liability."*fn2
Defendants assert that they "were retained by [Clara] solely in her capacity as Executrix of Patricia Albanese's estate." To support this contention, they emphasize that the opening of the agreement reads that Clara, as executrix, retained defendants "as attorneys to represent the Estate[,]" and they note that the agreement "does not mention beneficiaries or that the scope of the . . . retention includes providing services/personal tax advice to the beneficiaries." Defendants further assert that they "did not take any action, nor act in any manner, that could cause [plaintiffs], in their individual capacities, to believe that the [defendants] represented their personal interests or were acting for them individually."
The retainer or "fee agreement" with defendants provides that "CLARA HEFFERNAN, Executrix of the Estate of PATRICIA A. ALBANESE, does hereby retain and employ the Law Firm of SHERMAN, SILVERSTEIN, KOHL, ROSE AND PODOLSKY, P.A. as attorneys to represent the Estate." The agreement further provides that, in addition to handling matters before the Surrogate's Office and Probate Courts, defendants would advise us and cause all necessary and proper steps to be taken for the purpose of fixing and paying any and all Federal and State estate taxes and other transfer taxes, the collection of all assets . . . , the payment of all debts . . . , the distributions of the assets that may then remain . . . , the accounting for the acts of the Executrix as the representative of such Estate, and in general the doing of all acts and things necessary for the full and complete settlement of the Estate of the decedent. [Emphasis added.]
The Agreement also states that defendants "shall" be responsible for "[p]ost-mortem planning, including, but not limited to, calculating tax needs[,]" and for "collaboration with the Executrix to obtain the most beneficial tax results." The agreement was signed by defendant Lolio for the firm and by Clara Heffernan, "Individually and as Executrix of the Estate of Patricia A. Albanese."
The Estate was sizable. It included real estate, cash, stocks and bonds, life insurance and other assets including an IRA. Each of the sisters was to receive similar, but not identical, shares of the Estate valued at over $1,000,000 each, and Clara's children were to receive $10,000 each. Decedent's death also triggered the distribution of a "credit shelter trust" that was created under her late husband's will.
The federal estate tax owed by the Estate totaled over $900,000. In order to pay the estate tax, Clara, allegedly upon the advice of Lolio and DeLorey, withdrew funds from the IRA and thereafter made equal distributions to plaintiffs in April 2001. This resulted in a personal income tax burden on the individual plaintiffs of approximately $298,000 each.*fn3
A factual dispute exists as to the advice plaintiffs received prior to making the distributions.
First, plaintiffs contend that they were not apprised of other options for paying the Estate taxes aside from using the Estate's IRA, although they now assert that alternatives existed. In their brief, plaintiffs state, "[d]efendant [l]awyers faxed a letter and called the Estate's financial planner, [DeLorey], to advise that the Estate taxes were going to be paid by withdrawing funds from the Estate's IRA." According to DeLorey, he was "completely surprised" by this, explaining that "[i]t's going to cause, you know, estate taxes." In response, Lolio reportedly told him, "that's the only assets they have." Further, DeLorey testified that he did not mention the tax consequences of using the IRA to pay the estate taxes to any of the plaintiffs, "[b]ecause [Lolio] told me these were the only assets available to pay the taxes from."
Plaintiffs further assert that, despite Lolio's testimony to the contrary, he never outlined options by which Clara could pay the estate taxes. At her deposition, Clara testified that Lolio told her that the bulk of the Estate's assets were in the IRA, no other options for paying the taxes were shared with her, and the decision to use the IRA funds to pay the estate taxes was made because she "didn't feel like there were really any other options at the time." However, earlier in her deposition, Clara also stated that Lolio "said there are various places to take the funds from," but was unable to remember anything more specific about that conversation.
Defendants contend that Lolio advised Clara of other options for paying the taxes aside from using funds from the IRA, but none of these conversations were memorialized in writing. Lolio testified that, at the time a distribution was made from the trust created by plaintiffs' father, he told Clara over the telephone "that money could be used to pay the estate taxes." He stated that Clara "didn't comment one way or the other" regarding this option, although she was aware at that time that the estate tax on decedent's estate "would be [roughly] about a million dollars." Lolio also testified that he discussed three options with Clara on three separate occasions:
[o]ne was to borrow money against the shore property to pay the tax. . . . That wasn't a viable option. They could just about make the mortgage, based on the current mortgage they had. That was her comment. The other was to sell the shore property, which they did not want to do. Then basically the other option was to take some of the money out of the IRA. Because there wasn't other assets under the decedent's name, probate assets, to pay the tax.
Lolio further testified that he did not know if DeLorey advised Clara to pay the estate tax with funds from the IRA.
Second, plaintiffs assert that defendants "failed to advise [them] of [their] personal income tax liability" that would result from withdrawing funds from the IRA, and they only became aware of the liability in 2002 while filing their individual 2001 tax returns. Defendants contend that this advice was given. Lolio testified that he "told [Clara] whatever money she takes out of the IRA is going to have personal income tax consequences[,]" although he did not elaborate as to what the consequences would be nor suggested that she speak to an accountant to obtain specific figures. During his deposition, Lolio also acknowledged that he "never spoke" to Clara about the tax consequences of an IRA withdrawal on her sisters, and he did not ...