This decision and order issues on a petition filed on October 11, 2023 by Mental Hygiene Legal Service (3rd Dept.) ("MHLS"), Jordan Charnetsky, Esq., of counsel. The petition asks the Court to surcharge Ellen H. in her capacity as the former trustee of the Cassandra H. Supplemental Needs Payback Trust, established by order of this Court dated July 11, 2003 ("SNT"). The petition is supported by a memorandum of law with two supporting exhibits, and the following exhibits to the petition: Exhibit A: 1986 case documents; Exhibit B: 2003 order appointing guardian; Exhibit C: Supplemental Needs Payback Trust Agreement; Exhibit D: [*2]Court Examiner affirmation; Exhibit E: letter from MHLS to Judge Guy; Exhibit F: decision and order; Exhibit G: order appointing court evaluator; Exhibit H: court evaluator report; and Exhibit I: order appointing successor guardian and trustee. Ms. H.; her sons, brothers of Cassandra and contingent remaindermen of her SNT; Broome and Tioga County Departments of Social Services, the relevant Medicaid counties; and the Executive Director of the agency that runs the home in which Cassandra resides were all on notice of the application. None filed any objection or response to the application.

The petition was returnable on November 16, 2023, at which time Ellen H. appeared; MHLS, Mr. Charnetsky, Esq., of counsel, appeared; and Kimberlee N. DeFazio, Esq., successor guardian/trustee for Cassandra H., appeared via Microsoft Teams. MHLS rested on their papers; Ms. H. neither filed nor stated any opposition to the petition; Ms. DeFazio filed no responding papers and expressed no position on the relief requested by MHLS.

For the reasons set forth herein, the Court grants the petition of MHLS and issues this decision and order finding Ellen H. failed to appropriately account for expenditures made by her from the resources of Cassandra H. and breached her fiduciary duty as the trustee of the SNT; and surcharging Ellen H. for her actions and inactions as the former trustee for and guardian of the person and property of Cassandra H..

In or about 1984, Ellen H. and Scott H. filed a personal injury action individually and as parents and natural guardians of Cassandra H., an infant at the time. The suit resulted in the entry of a settlement order dated October 24, 1986. The settlement order directed payment on behalf of and for the benefit of Cassandra H. in the amount a lump sum of $475,000; $2,000 per month, increasing at a rate of three percent (3%) per annum, compounded annually, after 4 years, for the remainder of Cassandra's life;^[FN1] and periodic lump sums totaling $275,000, the last a $155,000 lump sum payment on November 1, 2016.

Ellen H. and Scott H. were appointed as guardians of the person of Cassandra H., pursuant to Surrogate's Court Procedural Act Article 17-A, by order of the Broome County Surrogate's Court dated April 19, 2002. They were later appointed as Co-Guardians of the Person and Property of Cassandra H., pursuant to Mental Hygiene Law Article 81, confirmed by order dated July 10, 2003, superseding and terminating the Surrogate's Court guardianship. The order establishing the Article 81 guardianship also directed the creation of the SNT for Cassandra's benefit. Cassandra's SNT was executed on July 11, 2003 and appointed Scott H. and Ellen H. as trustees.

On January 5, 2023, Broome County Court Examiner Jo A. Fabrizio, Esq., appointed by the Supreme Court, Appellate Division, Third Department to examine initial and annual Article 81guardianship reports required to be filed in Broome County pursuant to Mental Hygiene Law Sections 81.30 and 81.31, filed a motion alleging Scott H., who was by that point deceased, and Ellen H., as Co-Guardians of the Person and Property of Cassandra H., had not filed requested amended annual reports for the years 2016 and 2017 and had not filed any reports for the years 2018 through 2022, and seeking an order of the Court requiring compliance by the Co-Guardians [*3]with Mental Hygiene Law Section 81.31(a).

Ellen H. did not appear at the return on the compliance motion, and the Court appointed MHLS as counsel to locate and represent Cassandra H. in this matter, by order dated February 22, 2023.

The Court convened the next appearance in this matter on March 28, 2023, at which time Ms. Fabrizio appeared; MHLS, Mr. Charnetsky, Esq., of counsel, appeared; and Ellen H. appeared. Following this appearance, the Court issued an order dated March 28, 2023, terminating Ellen H.'s authority as guardian of the property of Cassandra H.. That order also froze withdrawals from certain bank accounts held in the name of Ellen H. only, though Ms. H. purported to hold the funds in those accounts as fiduciary for Cassandra.

The Court convened this matter again on May 3, 2023, via Microsoft Teams, and Ms. Fabrizio appeared; MHLS, Mr. Charnetsky, Esq. appeared; and Ellen H. appeared. At this appearance, the Court determined that the appointment of a court evaluator would be helpful to the resolution of this matter, particularly in providing the Court with sufficient information regarding Cassandra H.'s past and current financial situation, as well as recommendations regarding the property management of the guardianship and Cassandra's SNT. The Court issued an order dated May 4, 2023 appointing Ms. DeFazio as Court Evaluator. Ms. DeFazio submitted her report to the Court and counsel on June 13, 2023.

The Court reconvened the matter on June 15, 2023 via Microsoft Teams, at which time Ms. Fabrizio appeared; Ms. DeFazio appeared; Mr. Charnetsky appeared; Ms. H. appeared; and Peter DeWind, Esq. and James Cornell appeared on behalf of the Tioga County Department of Social Services, an agency with a possible interest regarding the payment of Medicaid on behalf of Cassandra H.. Ms. DeFazio testified regarding the contents of her report, and the report was admitted into evidence.

Based on the report, and all prior proceedings, pleadings, and orders in this matter, the Court found that Cassandra H. requires the appointment of a successor property guardian and trustee of her SNT. On the record, the Court removed Ellen H. as trustee of Cassandra's SNT. The Court also appointed Ms.DeFazio as Guardian of the Property of Cassandra H. and successor trustee of Cassandra's SNT. These findings and determinations were confirmed by written order of the Court dated June 28, 2023.

A supplemental needs trust is a "discretionary trust established for the benefit of a person with a severe and chronic or persistent disability" that is designed to enhance the quality of the disabled individual's life by providing for special needs without duplicating services covered by Medicaid or disrupting or destroying Medicaid eligibility. EPTL 7-1.12(a)(5); Cricchio v Pennisi, 90 NY2d 296, 303 (1997). A first-party, or payback, special needs trust is funded with the assets belonging to a person with a disability and has four basic requirements: the trust contains the assets of the disabled individual; the trust is established for the benefit of the individual by the individual, a parent, grandparent, legal guardian, or court; the beneficiary is under 65 years old at the time of establishment; and the State will receive all amounts remaining in the trust upon the death of the individual for whose benefit the trust is created, up to an amount equal to the total medical assistance paid on behalf of the individual during the course of the beneficiary's life. 42 USC § 1396p(d)(4)(a).

New York State requires that the trustee of a first-party supplemental needs trust follow certain rules in order to maintain the benefit qualifications of this type of trust. The regulations provide remedies to the local social services district if the trustee engages in acts or omissions in a manner inconsistent with the terms of the trust, contrary to applicable laws or regulations, or contrary to the fiduciary obligations of the trustee. 18 NYCRR 360-4.5(b)(5)(iv); see also Executive Law § 63(11).

Once established, the supplemental needs trust must be used for the benefit of the disabled individual. Social Security Programs Operations Manual System ("POMS") SI 01120.201F.2; Lopes v Dep't of Soc. Servs., 696 F3d 180, 186 (2d Cir 2012) (POMS provisions are entitled to "substantial deference, and will not be disturbed as long as they are reasonable and consistent with the statute."). Any provisions that provide benefits to other individuals or entitles during the disabled person's lifetime "will result in disqualification for the special needs trust exception." POMS SI 01120.201F.2. If the trustee uses funds from a trust that is a resource to purchase durable items, such as a car or a house, the deed or title must show the individual (or the trust) as the owner of the item in the percentage that the funds represent the value of the item, and failure to do so may constitute evidence of a transfer of assets in violation of the terms of the trust's terms. Id.

The Court is applying an abuse of discretion standard in analyzing the expenditures undertaken by the trustee in this matter. This analysis centers on three facts: whether the distribution from the trust was made for the primary benefit of the beneficiary; whether the trustee considered whether the distribution involved an expense that could have been paid by a governmental benefit program; and whether the trustee made the distribution despite the availability of a publicly funded option because the trustee determined the beneficiary's need would be better met by the distribution. EPTL 7-1.12(e).

In regard to a contested accounting proceeding, the fiduciary tasked with the accounting has the initial burden of proving she has fully accounted for the assets of the trust. Matter of Curtis, 16 AD3d 725 (3d Dept 2005). When a trustee has failed to keep or produce clear and accurate records and accounts, all adverse presumptions may be taken against the trustee. Matter of Shulsky, 34 AD2d 545 (2d Dept 1970). A fiduciary is required to employ a process of diligence and prudence in the care and management of the trust's assets and affairs as would prudent persons of discretion and intelligence in their own affairs. EPTL 11-1.7(a)(1); Matter of Billmeyer, 142 AD3d 1000 (2d Dept 2016). In a proceeding to settle an account, the court has broad discretion to make such order or decree as justice shall require, including surcharging the trustee with the amount of the inaccuracies in the accounting. Schnare v Sutton, 191 AD2d 859 (3d Dept 1993).

A fiduciary owes undivided loyalty to the beneficiary, and the fiduciary cannot place herself in a position where she has personal interests in conflict with the duties required by carrying out the fiduciary's role. Matter of Estate of DePlanche, 65 Misc 2d 501 (Sur Ct, New York County 1971). To warrant a surcharge, the fiduciary must be shown to have acted negligently or failed to exercise prudence in the management of the trust, resulting in a loss. Matter of Donner, 82 NY2d 574 (1983).

The Court finds the following facts related to the relief sought in this unopposed [*4]application. Scott and Ellen H. executed Cassandra's SNT, which was established by court order, on July 11, 2003, and is a first-person supplemental needs payback trust. The trust names Scott and Ellen H. as trustees. The trust states:

During the lifetime of [Cassandra H.], the Trust Fund shall be held, IN TRUST, for the benefit of [Cassandra H.] and shall be held, managed, invested, and reinvested by the Trustee in an account at HSBC Bank N.A. The Trustee shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of [Cassandra H.], so much (even to the extent of the whole) of the net income and/or principal of this Trust as the Trustee shall deem advisable, in his or her or its sole and absolute discretion, subject to the limitations set forth below. The Trustee shall annually add to the principal of this Trust the balance of Net income not so paid or applied.

The trust directs that on Cassandra's death, the balance then remaining be paid back to New York State in an amount equal to the funds paid for Medicaid during Cassandra's lifetime. The language mirrors the POMS provisions discussed above, including provisions about the use of available governmental resources prior to expending trust resources on Cassandra's behalf.

Cassandra has been the recipient of monthly annuity payments for nearly 40 years. The payments are currently in excess of $5,000 per month and continue to increase at a rate of three percent (3%) per annum compounded annually, for her lifetime. An initial and multiple subsequent lump sum payments have also been made pursuant to the settlement, with the most recent payment made in the amount of $155,000 on November 1, 2016. Ellen and Scott H., as trustees, were tasked with funding Cassandra's SNT with these annuity payments. The trust directs the funds be held at HSBC Bank, N.A., which initially occurred and continued for the first few years. HSBC Bank underwent several mergers, ultimately becoming KeyBank. In or about 2016, prior to his death in 2018, Scott H. switched the depository of the annuity payments to SEFCU. Since that time the funds have not been deposited into Cassandra's SNT but in accounts titled in Scott's and/or Ellen's names individually, with account nicknames of "Cassie's checking" and "Cassie's savings."

Cassandra's SNT directs the trustees to file annual accountings for the trust. Ms. Fabrizio, as Court Examiner, was unable to approve as accurate and complete the guardianship and trust accountings provided to her by Ellen H. for the period of 2016 to 2022. A significant number of the payments from the trust in the accounts that were filed lack any indication or supporting information that they were made for legitimate trust expenses or applied for the benefit of Cassandra. The accountings contain numerous expenditures that are not itemized and are unsupported by reliable documentation, in the opinion of both the Court Examiner, who commenced this proceeding, and of the Court.

The petition filed by MHLS alleges that during the period of 2016 through June 2023, the accounts held for Cassandra received a total of $574,965.49 in settlement payments from the annuity. During this entire period Cassandra resided in a Medicaid paid group home with supporting services. The Court has not received any information or documentation that refutes the information laid out by MHLS in its petition and supporting papers.

The Court Evaluator's report of June 13, 2023, referred to and incorporated by MHSL in its papers, establishes that the accounts held for Cassandra's benefit held a total of about $58,200 [*5]at that time, leaving $516,765.49 unaccounted for. The petition references and incorporates from the Court Evaluator's report approximately $200,000 in specific noted expenditures from the accounts held for Cassandra, including: payments on multiple automobile loans, none used primarily or substantially for Cassandra's benefit; several large payments on personal loans of Ellen and/or Scott H.; payments on a substantial RV loan at a time it was and could not have been used for Cassandra's benefit; transfers and expenditures made in Arizona and California while the trustees/guardians were in those states and Cassandra was in New York; unexplained cash withdrawals; expenses for a hot tub at Ellen's home during the Covid-19 pandemic, while Cassandra was unable to leave her group home; repaving of the driveway at Ellen's home in that same time period; car repairs; and miscellaneous shopping expenditures.

MHLS, on behalf of Cassandra H., objects to these expenses, arguing that there is no indication any of these expenditures were for Cassandra H.'s sole or primary benefit, as required by the terms of Cassandra's SNT and the rules and regulations governing first-person Medicaid payback trusts. MHLS asks the Court to surcharge Ellen H. in the amount of $516,765.49 for improper and unsupported expenditures made from Cassandra's funds during the period from 2016 through 2022.

The problematic payments raised in the Court Evaluator's report, which are the genesis of this motion, are an issue previously made clear to Cassandra's property guardians and trustees, Ellen and Scott H., nearly twenty years ago. In 2006, three years after Cassandra's SCPA Article 17-A guardianship was converted by the Supreme Court to the current MHLS Article 81 guardianship, improper expenditures from Cassandra's funds and reporting deficiencies were brought to the attention of Ellen and Scott H., with the involvement of their counsel. The guardians/trustees acknowledged their errors and committed to not repeating them, and yet the exact same malfeasance reoccurred. The nominal responses by Ellen H. during the course of the current inquiry have included her expression of lack of knowledge and understanding about her fiduciary duty to her daughter. The Court finds this beyond lacking credibility, and very relevant to the determination made here. It compels a finding of malfeasance, not misfeasance.

Based on the foregoing, the Court finds that Ellen H. abused her discretion, in derogation of her fiduciary duty as trustee of the SNT, when she expended money from Cassandra's financial resources for payments on multiple automobile loans, personal loans, and an RV loan; purchases made while on vacation and/or trips where it is clear Cassandra was not present; numerous unaccounted-for cash withdrawals; hot tub maintenance; driveway repaving; car repairs, home repairs, and purchases of goods. These payments potentially threaten Cassandra's eligibility for public benefits, and it is clearly not in Cassandra's best interest to have her entitlement to governmental benefits like Medicaid threatened in such a way. The Court finds that Cassandra H. was not the sole or primary beneficiary of the vast majority of the expenditures paid for with Cassandra's financial resources from the period of 2016 through June 2023.

The express language of Cassandra's SNT is clear that the purpose is to supplement the financial needs of Cassandra H., so that she may have as fulfilling a life as possible, while still maintaining her eligibility for all public benefits she would otherwise be entitled to. The Court finds Ellen H. breached her fiduciary duty by using Cassandra's resources in a manner inconsistent with the terms of the SNT and Cassandra's needs as a person under a disability. The [*6]receipt and holding of Cassandra's assets in accounts not titled in the name of the guardianship or the trust is similarly a breach of Ellen's fiduciary duty.

The accountings provided by Ellen H. for the period of 2016 through 2022 are incomplete and do not contain sufficient information about the expenditures made with Cassandra's resources. MHLS, as petitioner on this application, has made the requisite showing to shift the burden to Ellen H., as the fiduciary, to prove that her accountings are accurate and complete. Ellen H. was unable to bring forth information or documentation indicating the accountings are accurate and complete or that the funds expended were used for Cassandra's primary or sole benefit. It is clear Ellen H. acted negligently and did not prudently exercise her authority and discretion as trustee or property guardian. Having failed to account properly or act in a prudent manner as fiduciary, Ellen H. is now surcharged for her actions and inactions as former trustee of the SNT and guardian of the property of Cassandra H..

The Court has carefully reviewed the supporting information from the petitioner, including the incorporated information from the Court Evaluator. Some expenditures are unquestionably improper. Some might be in some way helpful, in an ancillary or partial way, to Cassandra, but the burden of establishing that is on Ellen H., who has failed to put forth any rebuttal. A presumption against the appropriateness of the questioned expenditures is therefore applicable. Giving Ms. H. every reasonable benefit of the doubt after careful review, the Court finds that petitioner has established that a surcharge against Ellen H. in the amount of $450,000 is appropriate.

The Court acknowledges in rendering this decision that it is not finding that Ellen H. has failed to fulfill her responsibility as person guardian for Cassandra. That relief was not sought, despite the serious and substantial financial malfeasance evident here, and there is no indication that Ellen should not continue as person guardian for her daughter. The Court also recognizes that the travails and challenges of being the parent of a disabled child are immeasurable, beyond the true ken of the undersigned. Nonetheless, fiduciary duty applies.

This decision constitutes the order of the Court.

In furtherance of this decision, it is hereby

ORDERED, that the application of Mental Hygiene Legal Service (3rd Dept.) dated October 11, 2023 is granted; and it is further

ORDERED, that Ellen H. is surcharged in the amount of $450,000 for breach of her fiduciary duty as property guardian of Cassandra H. and trustee of the Cassandra H. Supplemental Needs Payback Trust, established by order of this Court dated July 11, 2003; and it is further

ORDERED, that judgement may be entered against Ellen H. in the amount of the surcharge rendered.