Matter of Millbrook Free Lib. Trust
Annotate this CaseDecided on June 8, 2006
Sur Ct, Dutchess County
In the Matter of Millbrook Free Library Trust.
94990/06
Justin L. Cole, Esq.
Van DeWater & Van DeWater, LLP
Attorneys for Trustee
40 Garden Street
P.O. Box 112
Poughkeepsie, New York 12602
Eliot Spitzer, Esq.
Attorney General of
the State of New York
Carl L. Distefano, Esq.
Assistant Attorney General
120 Broadway
New York, New York 10271
Allan B. Rappleyea, Jr., Esq.
Corbally, Gartland & Rappleyea, LLP
Attorneys for Millbrook Free Library
35 Market Street
Poughkeepsie, New York 12601-3285
James D. Pagones, J.
This is a voluntary intermediate accounting filed by Manufacturers & Traders Trust Company ("M&T"), the successor trustee of the Millbrook Free Library Trust (the "Trust"), dated January 19, 1929. M&T was appointed successor trustee on April 24, 1992. The accounting is for the period of April 23, 1992 through December 31, 2005.
The Trust is a perpetual, income only instrument for the sole benefit of Millbrook Free Library (the "Library"). The only interested parties to this accounting are M&T, the Library and the Attorney General of the State of New York. The Attorney General's role is defined by EPTL Article 8 in that the office represents the ultimate charitable beneficiaries, namely, those members of the public who will benefit from the charitable work of the Library. (see, Margaret Valentine Turano, Practice Commentaries, 17B McKinney's Consolidated Laws of New York, EPTL §8-1.1.)
The Attorney General has filed an objection to Schedules C, C-1 and C-2 of the accounting as they relate to the Trustee's compensation. The Library supports the Attorney General's position.
The Attorney General urges that the Trustee has incorrectly calculated its commissions by charging approximately two-thirds to principal and one-third to income. This appears to be in direct contravention of the explicit language set forth in Articles SIXTH and NINTH of the Trust instrument which respectively provide that the Trustee's compensation is fixed at one per cent of the annual income of the trust and all the Trustee's expenses administering the trust shall be charged against the income of the trust estate. It further appears that the Library negotiated a series of compensation agreements with the Trustee covering the period of the accounting, the most recent of which is set forth in Schedule I of the account.
The record reveals that the trust was converted to a unitrust for the benefit of the Library on January 1, 2003 pursuant to the applicable provisions of EPTL §11-2.4. Under this arrangement, the trustee pays to the income beneficiary four percent (4%) of the principal value of the trust starting in the fourth year (which reflects 4% of the average value over the previous [*2]three years) rather than the income actually earned by the trust. (Turano, supra , Vol. 17B McKinney's, EPTL §11-2.4.)
The Attorney General also cites noncompliance with SCPA §2312(1)&(3) as statutory reasons to sustain the objection. The statute provides that a corporate trustee in the case of a trust created solely for public, religious, charitable, scientific, literary, educational or fraternal uses may retain commissions from income and shall not be entitled to any commission from principal. (SCPA §2312[3][a] and [b].) The 1929 trust created by the Library contains several of the foregoing charitable purposes. M&T is a corporate trustee as defined in SCPA §103(9-a), and its commissions are governed by SCPA §2312 (eff. 8/6/84). The points made by M&T in support of its compensation request are: 1.) the Library negotiated an agreed upon management fee schedule with the Trustee; 2.) the Library has not objected to this arrangement in the past; 3.) the Library has not incurred any financial harm as the sole trust beneficiary; 4.) the Library would be unjustly enriched if the Trustee is directed to pay back that portion of its compensation charged to principal; 5.) the Library now has a guaranteed rate of return as a result of the unitrust created on January 1, 2003; 6.) there is no evidence of willful misconduct or fraud, no damage and no victim; 7.) any mistake by the Trustee in applying SCPA §2312(b) was honest with no attendant loss to the Library; 8.) the Trustee would be severely penalized if ordered to refund a portion of its compensation; 9.) any mistake was one of law and not willful misconduct; and, 10.) Article EIGHTH exonerates the Trustee from liability except for willful misconduct. Several cases in support of points 7, 9 and 10 are cited. The arguments, individually and collectively, are unpersuasive. The case citations are not controlling here.
The Trustee has acknowledged that the Attorney General did not participate in the management fee agreements. This is a pernicious omission.
The Trust sets a specific rate of commission in Article SIXTH. That direction prevails over the statute. (SCPA §2312[1].) While the Trustee and Library are free to contract with each other for services and compensation beyond the provisions of the trust instrument (Turano & Radigan, New York Estate Administration, 2006 Edition, §15.09), the Attorney General should have received notice on the commission issue. There is no doubt that the Trustee management fee schedules attached to Schedule I of the accounting and exhibit B to the Trustee's answering affidavit are substitutes for "compensation" as provided in Article SIXTH of the Trust instrument. The percentages and allocation between principal and income mirror the rates and allocation set forth in SCPA §2309. Omitting the Attorney General from the commission negotiations deprived the public, the ultimate charitable beneficiaries, from having its interest safeguarded. For this reason alone, the objection is allowed. The management fee schedule attached to Schedule I and its predecessors are nullities, including exhibit B to the answering affidavit.
Were this a non-charitable trust, the corporate trustee could allocate its annual commissions payable one-third from income and two-thirds from principal. (SCPA §2312[4].) Since this is a charitable trust, the annual commission is payable only from income. (Rubenstein, New York Surrogate's Court, 2006 Edition, §20.30[5]; SCPA §2312[3].) Moreover, the rate established in Article SIXTH controls in light of this determination. (New York Estate Administration, supra , §15.09; SCPA §2312[1].)
The Trustee's compensation charged to principal of the Trust as outlined in the account is disallowed. The Trustee is directed to amend the account accordingly and refund such [*3]compensation with nine percent (9%) interest from the date of each payment to the Trustee to the date of repayment to the Trust within thirty (30) days of the date of the decree to be hereafter entered. (Matter of Prankard, 245 AD2d 566 [2d Dept. 1997]; Matter of John D. Rockefeller, Jr. [American Baptist Churches of Metropolitan New York], 2004 NY Slip Op 50135U, 2 Misc 3d 1004A, 784 NYS2d 923 [Sur. Ct., NY County February 24, 2004]; New York Estate Administration, supra , §15.09, n6; CPLR §5004.)
The Court considered the accounting, verified objection, affidavit in opposition to objections with two (2) exhibits and memorandum of law, and correspondence on behalf of Millbrook Free Library, dated May 17, 2006.
The Attorney General is directed to submit a decree on notice consistent with the foregoing within ten (10) days of the date of the decision.
The foregoing constitutes the decision of the Court.
Dated:Poughkeepsie, New York
June 9, 2006ENTER
HON. JAMES D. PAGONES, S.C.J.
TO:
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