Most states provide a mechanism by which a beneficiary or other person interested in a trust or an estate may petition a Court asking the Court to order a fiduciary to account for his, her, or its actions and proceedings. This process is intended to provide the beneficiary with sufficient transparency regarding the fiduciary’s actions typically when the fiduciary has failed to provide such information to the beneficiary upon request. However, this process is often abused by aggrieved individuals (whether or not such grievance is legitimate) in an effort to extort a settlement. Courts must act as gatekeepers to limit the misuse of these types of proceedings.

New York Surrogate’s Court Procedure Act (“SCPA”) 2205(a) provides that the Court may, at any time, issue an Order directing a fiduciary to file his, her, or its interim or final account for judicial settlement and, if the fiduciary fails to comply, the Court has the power to remove such fiduciary. Pursuant to SCPA 2205(b), the Court may make such Order on its own initiative or upon the petition of, inter alia, a “person interested” in the trust or estate, which generally includes a beneficiary, or a “creditor” (i.e., an individual and/or entity who/that holds a claim against the estate or trust).

Under New York law, a fiduciary has a common law duty to keep beneficiaries apprised of matters affecting the estate or trust and to account to the beneficiaries for his, her, or its actions, whether formally through the filing of a fully scheduled account with petition for judicial settlement before the Surrogate’s Court or informally by providing the beneficiaries with access to the books and records of the estate or trust and having the beneficiaries sign an agreement approving the fiduciary’s account and releasing the fiduciary. SCPA 2205 is intended to provide a vehicle for an interested person to compel the fiduciary to account when the fiduciary has failed to provide such information.

When an appropriate party files a petition with the Surrogate’s Court seeking an Order directing the fiduciary to account, in determining whether to grant such application, the Court has considerable discretion. The primary consideration in determining whether to grant such petition is whether it is in the best interests of the estate or trust to require the fiduciary to account at such time. However, more often than not, these petitions are granted as a matter of course.

Even if a fiduciary believes that he, she, or it has appropriately managed the estate or trust and has no concern providing the Court and all interested parties with complete records regarding the administration of the estate or trust, generally, a fiduciary would prefer to settle his, her, or its account informally. Preparing a fully scheduled account for judicial settlement is a costly, time consuming, and intricate process requiring the fiduciary to outline, in detail, each transaction that has occurred within the estate or trust during the accounting proceeding, including the value of property upon acquisition, each sale and purchase of an asset or security, all gain and loss from investments, and the payment of all expenses.

When used appropriately, a petition seeking an Order compelling a fiduciary to account can be a valuable tool in as much as it will provide a mechanism for the interested person to obtain information regarding the fiduciary’s actions and proceedings. However, more often than not, these proceedings are used as a means to harass a fiduciary and cause the estate or trust to unnecessarily incur substantial expense in an effort to force the fiduciary to settle the individual’s grievance.

Consider the following illustrative examples:

• In a divorce proceeding, if a spouse serves or previously served as trustee of a trust for the benefit of the other spouse, the beneficiary-spouse may file a compulsory accounting proceeding in an effort to garner a stronger bargaining position in a divorce settlement, even when the beneficiary-spouse may have been complacent with the trustee’s potentially loose management of the trust during the marriage;
• If the beneficiary wants a distribution from the trust and the trustee, in the exercise of his, her, or its discretion, declined to make such distribution and the trustee appropriately exercised such discretion; and
• If an individual and/or entity makes a claim against an estate or trust that has been rejected by the fiduciary, rather than commencing a proceeding seeking to resolve the validity of the claim, the individual or entity may file a compulsory accounting proceeding, which would require the estate or trust to incur great expense, with little expense to be borne by the individual or entity.

In all of these situations, the fiduciary may conclude that it would be easier, faster, and more cost effective to acquiesce to the demand of such individual and resolve the grievance, whether or not there is any legitimacy to such grievance, rather than engaging in the costly process of preparing and filing his, her, or its account for judicial settlement. Indeed, the pressure to avoid litigation may even negatively impact the other beneficiaries by acquiescing to the demands of an aggressive litigant.

Although compulsory accounting proceedings are intended to and may serve a valid purpose, they are easily susceptible to misuse. Consistent with the intended purpose of compulsory accounting proceedings, Courts must exercise diligence to limit abuse. Accordingly, in deciding whether to grant a petition for a compulsory accounting proceeding, rather than granting these applications as a matter of course, Courts should engage in a more thorough analysis regarding the basis of the application and whether ordering a fiduciary to account would truly be in the best interests of the estate or trust. Otherwise, litigants will continue to use compulsory accounting proceedings and the Courts as a pawn to further their own agenda.