Court of Appeals Holds Promissory Estoppel and Unconscionability May Foreclose Reliance on the Statute of Frauds

For years, you work with your grandfather to manage his rental apartments.  When he retires from the business, you take over the rentals and upkeep of the building.  You find tenants.  You pay the mortgage and taxes.  You do everything.  In exchange for your years of work, he orally promises to give you the building free and clear of the mortgage, deeds you the property, and changes his will to ensure that the mortgage is paid out of the proceeds of his estate.  But a few years later, your grandfather revokes the will and signs a new one that no longer provides for the mortgage to be paid off.  Can you still hold him to the deal on which you have relied for all these years?

In Matter of Estate of Hennel (No. 78), previewed here, the Court of Appeals says no.  It feels your pain and admits it’s unfair, but it’s not unconscionable, which is the only way to avoid the statute of frauds bar to oral agreements relating to a will.  Unless enforcement of the statute of frauds’ requirement that testamentary agreements be in writing would be unconscionable, the Court held, a written agreement is necessary.

In Hennel, after the later will was admitted to probate, the grandsons objected arguing that they had a binding deal to have the mortgage for the property paid out of their grandfather’s estate and that they held up their end of the bargain. Surrogate’s Court agreed, and granted the grandsons summary judgment and ordered the grandfather’s estate to pay off the mortgage.

The Appellate Division, Third Department affirmed, but with two Justices dissenting. Although the Court noted that wills are generally revocable at any time, it held that the testimony of family attorney who drafted the first will and the grandsons’ conduct in reliance on their agreement with the grandfather established a binding, irrevocable commitment for the estate to pay off the mortgage.  The Court declined to apply the Statute of Frauds, which would have otherwise barred enforcement of the grandsons’ unwritten agreement with the grandfather because it concerned an testamentory provision, because it would have lead to an unconscionable result in this case.

The dissenting Justices agreed with the majority in large part, including that the Statute of Frauds applied, but departed on unconscionability. The dissenters said, the grandsons sustained a few losses, but they were also well compensated for maintaining and renting out the property.  The few minor losses, the dissent would have held, did not rise to the level of unconscionabilty so as to avoid the Statute of Frauds bar.

The Court of Appeals, for the first time, adopts the rule followed by the Appellate Division departments that “where the elements of promissory estoppel are established, and the injury to the party who acted in reliance on the oral promise is so great that enforcement of the statute of frauds would be unconscionable, the promisor should be estopped from reliance on the statute of frauds” (Opn, at 10).  The Court, therefore, approves the rule in Restatement (Second) of Contracts § 139(1) that an oral testamentary promise may be enforced notwithstanding the statute of frauds if enforcement would be the only way to avoid injustice.  But, the Court is quick to point out that it rejects the Restatement’s suggestion that injustice short of unconscionability will suffice.

The new rule is no comfort to the Hennel grandsons, unfortunately.  The Court held that even if the grandsons had shown that the grandfather’s promise was sufficiently clear and unambiguous, they reasonably relied on it by continuing to manage the rentals, and harm caused by their reliance, they cannot enforce the oral agreement to pay off the mortgage of the estate funds.  As the grandsons admitted, they have been able to pay the mortgage on the property solely out of the funds earned from the rentals, without their own money, and the management of the property has not been so burdensome that they had to neglect other business.  Thus, the Court held, the mere fact that the grandsons did not get the full benefit of their bargain does not make the result unconscionable, that is, so egregious that “no person in his or her senses and not under delusion would make on the one hand, and as no honest and fair person would accept on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense” (Christian v Christian, 42 NY2d 63, 71 [1977] [cleaned up]).  In fact, the Court noted, the grandsons could sell the property, pay off the mortgage, and make a $150,000 profit.  So, yes, it’s not fair that the grandfather could later change his mind after the grandsons did everything that they were supposed to, but that is no reason to ignore the law’s requirement that testamentary agreements must be in writing.

The Court of Appeals’ opinion can be found here.

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