Matter of JP Morgan Chase Bank N.A. (Strong)
Annotate this CaseDecided on November 26, 2013
Sur Ct, Monroe County
JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank)(Successor by Merger to Chase Lincoln First Bank, N.A.)(Successor in Interest to Lincoln First Bank, N.A.)(Successor by Consolidation to Lincoln First Bank of Rochester)(Formerly Known As Lincoln Rochester Trust Company) as Trustee Under The Trust Agreement Dated May 23, 1932 by Alvah G. Strong, AND Pursuant to the Exercise of the Power of Appointment Under Paragraph Ninth of the Will of Marjorie H. Strong for the Benefit of Marjorie Strong Wehle (Who Died January 8, 2004)
JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank)(Successor by Merger to Chase Lincoln First Bank, N.A.)(Successor in Interest to Lincoln First Bank, N.A.)(Successor by Consolidation to Lincoln First Bank of Rochester)(Formerly Known As Lincoln Rochester Trust Company) as Trustee Under Paragraph 22(b)(4) of the Will of Alvah G. Strong for the Benefit of Marjorie Strong Wehle (Who Died January 8, 2004)
JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank)(Successor by Merger to Chase Lincoln First Bank, N.A.)(Successor in Interest to Lincoln First Bank, N.A.)(Successor by Consolidation to Lincoln First Bank of Rochester)(Formerly Known As Lincoln Rochester Trust Company) as Trustee Under Paragraph Fourth of the Will of Alvah G. Strong for the Benefit of Marjorie Strong Wehle (Who Died January 8, 2004)
JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank)(Successor by Merger to Chase Lincoln First Bank, N.A.)(Successor in Interest to Lincoln First Bank, N.A.)(Successor by Consolidation to Lincoln First Bank of Rochester)(Formerly Known As Lincoln Rochester Trust Company) as Trustee Under Paragraph Tenth of the Will of Marjorie H. Strong for the Benefit of Marjorie Strong Wehle (Who Died January 8, 2004)
2006-1463
Paul J. Yesawich, Esq., Laura Smalley, Esq., Svetlana K. Ivy, Esq. and Kara Stoddart, Esq. (Of Counsel Harris Beach LLP.) for Petitioner and Trustee, JP Morgan Chase, N.A. Mark Grannis, Esq., Jared Marx, Esq., Thomas G. Connolly, Esq. and Mark Davis, Esq. (Wiltshire & Grannis, LLP.) for the Objectants, Charles Wehle and Henry Wehle individually as remaindermen and as Co-Executors for the Estate of Marjorie S. Wehle.
Edmund A. Calvaruso, J.
These proceedings were commenced in 2006 by JP Morgan Chase ("the Trustee") filing petitions seeking Final Judicial Settlement of its accounts as Trustee in each of the four above-captioned trusts. While three of the proceedings were initially filed in Wayne County Surrogate's Court, they were transferred to this Court by an Order dated May 31, 2007.
The Objectants filed their objections to each Account and subsequently all four proceedings were joined. After extensive discovery and both parties substituting their counsel, (for the Objectants out of necessity due to the passing of their original counsel Mitchell William, Esq.) a trial was held in January, 2013. The parties have submitted stipulated findings of fact and on those matter not agreed to, their respective proposed findings of fact.
FACTS
As the trusts at issue in this dispute span two generations, and many of the facts are undisputed by the parties, only the facts at issue shall be recited here. Prior to delving into the objections levied against the Trustee, it is worth discussing both the genesis and operation of each trust as well as setting forth the nomenclature uniformly adopted by the parties and this Court during trial.
I.Formation and Funding of the TrustsA. Trust ITrust I, identified by this Court's file number as 2006-1463, was initially established by Alvah G. Strong pursuant to an Agreement dated May 23, 1932 with Lincoln Alliance Bank and [*2]Trust as the Trustee. Upon several mergers and consolidations, JP Morgan Chase Bank is the successor to the original Trustee. Trust I was originally funded with 8,889 shares of Kodak stock received from the estates of Alvah's father, Henry G. Strong, and grandfather, Henry A. Strong, who was one of George Eastman's original partners and served as Kodak's president from 1884 to 1919.
A Supplemental Agreement to the Trust was later executed by Alvah Strong on April 27, 1933, yet none of its provisions are related to issues raised in this proceeding. Several years later, Alvah Strong purportedly released his power over the trust investments (December 26, 1946) and thereafter surrendered his power to invade the trust principal (August 26, 1948).
In addition to the 8,889 shares of Kodak, the Settlor augmented the Trust corpus when he assigned his vested rights in both his grandfather's testamentary trust and his mother's estate to the Trustee. The corpus was then divided into four equal parts, one share for his spouse, Marjorie H. Strong, and the other shares set apart for each of his three children. After Alvah Strong passed away on May 20, 1966, the Trust continued to pay out income to his spouse. The other three shares held for the Alvah's children were gradually paid outright as each attained a certain age.
Under Paragraph First (1)(b) of the Agreement, Alvah Strong gave his wife, Marjorie Strong, a testamentary power of appointment over the principal of her trust share. Mrs. Strong released her general power of appointment on May 29, 1946. She later exercised the remaining power of appointment in her Will, which was probated by Wayne County Surrogate's Court. In doing so, she directed the remainder of her trust share among three separate and equal trusts for the benefit of her daughters and their respective issue. The Petitioner was named Trustee for each Trust. One of these appointive trusts, referred to as Trust I in this proceeding, was established for Marjorie S. Wehle on August 2, 1976, and initially funded with 15,430 shares of Kodak stock. The terms of the Trust permit Mrs. Wehle to receive the entire net income, plus discretionary invasions of principal for the support, welfare, and education of Mrs. Wehle and her children. Upon Mrs. Wehle's death, the remainder of Trust I is to be divided equally among her children, per stirpes.
The Trustee filed an Intermediate Account for the period of May 23, 1932 to October 23, 1975, which was judicially settled by Monroe County Supreme Court on June 15, 1976. Trust I received 15,430 shares of Kodak stock on August 2, 1976 and an additional 3,506 shares of Kodak common stock on June 4, 1987. The Trustee's Account for Trust I lists the inventory value for the 15,430 shares at $82,560.00 and the inventory value for the additional 3,506 shares at $169,432.00.
B. Trust II
Trust II, identified by this Court's file number as 2006-1463/A, was created under Paragraph Twenty-Second (B)(4) of Alvah Strong's Will, which was admitted to probate by Wayne County Surrogate's Court on June 8, 1966. The Trust was funded with one-third of the remainder of a Marital Trust, also created under Will, that ceased to exist upon the passing of Alvah's wife, Marjorie Strong, in 1975. Alvah Strong appointed the predecessor of JP Morgan Chase as Trustee for the resulting Trust, referred to as Trust II in this proceeding.
The terms of Trust II directed the Trustee to pay the net income to Marjorie Wehle, and granted the Trustee discretion to pay principal to her and her children for their comfortable care, support, general welfare, and education. Upon the death of the Mrs. Wehle, the remainder is to paid outright to her children, per stirpes.
Prior to funding Trust II, the Trustee filed an Intermediate Account of the Marital Trust that covered the period from August 8, 1968 to May 5, 1976. This Account was Judicially Settled by [*3]Wayne County Surrogate's Court Decree on May 26, 1976. Out of the Marital Trust, Trust II was funded with 5,668 shares of Kodak stock on July 21, 1976. The inventory value for these shares as stated in the Trustee's Account for Trust II is $442,448.59.
C. Trust IIITrust III, identified by this Court's file number as 2006-1463/B, is a second testamentary trust created under paragraph Fourth of Alvah Strong's Will for the benefit of Marjorie Wehle. Trust III was initially funded with 1000 shares of Kodak stock on July 20, 1966, and Strong directed that the entire income be paid periodically to his daughter, Marjorie Wehle. The corpus was to be held, managed, invested and reinvested by the Trustee. Upon the death of the Marjorie Wehle, the remainder was payable in equal parts to her then living children, together with an equal part to the then living issue of any pre-deceased child of hers.
The approximate inventory value for the shares of Kodak received by the Trustee is $132,000.00.
D. Trust IVTrust IV, identified by this Court's file number as 2007-2911, was one of three trusts established pursuant to Paragraph Tenth the Will of Marjorie Strong. Under the provisions of her Will, the residue of her estate was divided into three separate and equal sprinkle trusts, one for each of her daughters and their issue.
Consistent with the other two testamentary trusts, the Trustee was directed to pay the entire income to Marjorie Wehle, her children and more remote issue, and allowed discretionary invasions of principal. Furthermore, the Trust provided Marjorie Wehle the right, in any calendar year, to withdraw from the principal the greater of $5,000 or five percent of the market value of the trust principal in the last day of the calendar year in which such withdrawal is requested. The Will also granted Marjorie Wehle a power of appointment for the remaining principal, and in the absence of the exercise of such appointment, the remainder would pass to her issue, per stirpes.
Marjorie Wehle exercised the power of appointment on December 20, 2003, and directed the remainder of Trust IV to her six grandchildren in equal shares. However, when the Trustee offered its Account for Trust IV to be judicially settled, only two of the six grandchildren consented. The other four failed to appear in this proceeding after service of process was effectuated and were subsequently held in default. While an application was made to allow for the four grandchildren of Marjorie Wehle to adopt the Objections made against the Account, this Court denied the request in a Decision issued on January 2, 2013. As a result, while Marjorie Wehle and her sons (the Objectants), were income beneficiaries of this Trust, they have chosen not to seek damages on the Objections offered against the Trustee's Account for Trust IV. Therefore, Trust IV will not be substantively discussed in this Decision.
II.Trust Terms and Beneficiaries
It is undisputed that for each Trust, the Trustee had sole investment authority and none of the trust instruments obligated the Trustee to obtain the consent of any of the beneficiaries prior to making investments. Furthermore, there were no restrictions on the Trustee with respect to the investment of the corpus, nor were there any mandates requiring the Trustee to retain specific assets for any of the four Trusts. Throughout the life of each Trust, the Trustee held itself out as a professional investor. [*4]
Marjorie Wehle passed away January 8, 2004. As income beneficiary for each of the four Trusts, her passing precipitated the termination of each of the four Trusts. In June and July of 2006, the Trustee rendered Accounts of each Trust for Final Judicial Settlement.
Marjorie is survived by her two sons, Charles Wehle and Henry Wehle ("the Objectants"). She was predeceased by her son, John Wehle, Jr., who was survived by his daughters Elizabeth Ann Wehle and Carolyn Wehle. These four individuals are Marjorie Wehle's issue, and for purposes of Trusts I, II, and III, they are the remaindermen. In the proceedings for Trusts I, II and III, Elizabeth Ann Wehle and Carolyn Wehle consented to the judicial settlement of the Accounts as submitted. Charles and Henry filed objections to each of the Accounts for Trusts I, II, and III.
III.Objections
Generally speaking, the Objectants allege that the Trustee failed to invest the assets of the Trusts in a manner required of a corporate fiduciary of discretion and intelligence seeking reasonable income and preservation and increase of capital, in accordance with New York State's Estate, Powers and Trust Law. The Objectants claim that during the administration of each Trust, the Trustee retained an imprudent concentration of Kodak stock, and that the Trustee's failure to diversify the holdings of each Trust left each corpus vulnerable to losses when the market value of the Kodak stock securities fell significantly, demonstrating a failure on the part of the Trustee to exercise reasonable care and diligence in managing the Trusts. The Objectants argue that the Trustee failed to undertake a formal analysis of each Trust and its assets, and neglected to establish investment objectives and a strategy to achieve those goals including the implementation of a plan to diversify the holdings of each Trust. In addition, the Objectant's allege that the Trustee also acted in contravention to its own internal policies during the relevant times, failed to adequately communicate with the beneficiaries, and placed the interests of the income beneficiary over those of the remaindermen.
The Objectants also allege that the Trustee used an incorrect tax-basis when paying taxes on the sales of the Kodak stock due to the Trustee's misunderstanding of the impact of the exercise of certain indentures by both Alvah and Marjorie Strong that would arguably allow for a step up in tax-basis. It is argued the Trustee's alleged failure to assert the two step-ups in the annual fiduciary tax returns resulted in an overpayment of capital gains taxes by Trust I.
Additionally, the Objectants' claim that the Trustee engaged in self-dealing and deliberately misled the Objectants in its Accounts for Trusts I and II, and as a result should be surcharged for damages using a market index damages calculation. The Objectants argue that the Trustee created a conflict between its own business interests and the best interests of the beneficiaries whereby the bank's portfolio managers and investment officers were encouraged to focus on developing new business with the income beneficiary and remaindermen. The Objectants allege that this dynamic deprived the beneficiaries of the Trustee's honest judgment about the prudent investment of the Trust assets. It is also alleged that the Trustee deliberately used incorrect and misleading inventory values and valuation dates of the Kodak stock with the intent to deceive the beneficiaries.
As recompense for these alleged transgressions by the Trustee, the Objectants seek damages in excess of $25,000,000.00, forfeiture of the Trustee's commissions and fees, and payment of their own legal fees.
In response, the Trustee argues that upon considering the quality of the holdings, the tax consequences of any sales, and the best interests of all the beneficiaries, it did implement a [*5]diversification plan, albeit slow, to sell off the Kodak stock concentration in each of the Trusts. The Trustee maintains that the diversification plan was both reasonable and prudent under all of the standards of care governing the Trustee's conduct during the administration of the Trusts. The Trustee argues that hindsight, in which a different method of investing Trust assets might have been more beneficial to each portfolio, is not legally sufficient to find that it breached its fiduciary duty.
Furthermore, the Trustee maintains that even if the Court finds that the Trustee breached its fiduciary duty by maintaining a high concentration of Kodak stock, there can be no surcharge against it, as the Trusts, if evaluated as a single portfolio, experienced no financial loss. Stated differently, it is argued that although there was a risk of having such a large position of Kodak stock, that risk was properly managed and no financial loss took place, therefore there can be no surcharge. The Trustee also maintains that the Objectants' proposed calculations for damages are contrary to the prevailing law of New York State as set forth by the Court of Appeals in Matter of Janes (Janes III), 90 NY2d 41 (1997).
The Trustee argues that the complaint of inadequate record-keeping and the alleged deviation from its own internal review policies are insufficient to support the Objections, and that much of the difficulty in obtaining documentation is attributable to the Objectants' delay in challenging the Trustee's actions. The Trustee claims that the 1976 Intermediate Accounting for Trust I made the Objectants aware of the high concentrations of Kodak stock, and that the Objectants were also aware of the high concentration held in Trust II. This alleged knowledge of the part of the Objectants forms the basis of the Trustee's argument that the Objections should be barred by the doctrine of laches.
Furthermore, the Trustee argues that the Decree settling the Trustee's Intermediate Account for Trust I precludes the Objectants' argument regarding the alleged overpayment of capital gains taxes on Trust I, and that such claim is barred by res judicata and judicial estoppel. It also maintains that said Decree forecloses any argument of imprudent retention of Kodak stock as the Objectants' failed to make any argument in that proceeding.OPINION
I.Burden of Proof
In a contested accounting proceeding, the fiduciary has the initial burden of proving that it has fully account for all the assets of the trust and that the account is accurate and complete. Matter of Schnare, 594 N.Y.S.2d 827 (3d Dep't 1993).While the party challenging the account bears the burden of coming forward with evidence to establish that the account is inaccurate or incomplete, upon satisfaction of that burden, the fiduciary must prove, by a fair preponderance of the evidence, that the account is accurate and complete. Id.
Upon reviewing the account and proffered proof, SPCA §2211(1) grants the court broad discretion to craft an appropriate remedy that may include, but is not limited to, the denial of all or some portion of commissions and the imposition of a surcharge in order to fully compensate the beneficiaries for any losses or unrealized gains they suffered as result of a trustee's negligence. Matter of Kettle, 434 N.Y.S.2d 833 (4th Dep't 1980).
II.Laches
Before reaching the issue of whether the Trustee prudently managed the assets of Trusts I, II and III, the Court must first address the Trustee's assertion that the Objectants' claims are barred by the doctrines of laches.
The Trustee alleges that the Objectants' claims should be barred by the doctrine of laches as [*6]they waited "decades" before expressing their concerns regarding the concentration of Kodak stock held in the Trusts, and that delay has prejudiced the Trustee. "The doctrine of laches is an equitable doctrine which bars enforcement of a right where there has been an unreasonable and inexcusable delay that results in prejudice to a party." Skrodelis v. Norbergs, 272 AD2d 316, 317 (2d Dep't 2000); citing Matter of Barabash, 31 NY2d 76, 81-82 (1972). Laches must be pleaded and proved by the party asserting it. Matter of Linker, 23 AD3d 186, 190 (1st Dep't 2005). The crux of the laches doctrine defense is that the delay is prejudicial to the opposing party. Matter of Anglin, 270 AD2d 853 (4th Dep't 2000). Mere delay, however long, is not sufficient to establish laches. Weiss v. Mayflower Doughnut Corp., 1 NY2d 310 (1956); Marcus v. Mamaroneck, 283 NY 325 (1940). In addition, there must be a change in circumstances making it inequitable to grant the relief sought. Augustine v. Szwed, 77 AD2d 298 (4th Dep't 1980). Prejudice maybe established by a showing of injury, change in position, loss of evidence, or some other disadvantage resulting from the delay. Vickery v. Saugerties, 106 AD2d 721, 723 (3d Dep't 1984); aff'd 64 NY2d 1161.
The Trustee argues that the trial testimony demonstrates that the Objectants knew of the concentration of Kodak stock in Trust I as early as 1976 during the Intermediate Judicial Settlement proceedings in Monroe County Supreme Court. As part of that proceeding, the Objectants were served with process (Trial. Ex. 201) and a Petition for Judicial Settlement with intermediate account attached (Trial Ex. 201, 202). The same argument is made for Trust II, as the Objectants were necessary parties in the accounting proceeding that funded that Trust as well. See, Trial Ex. 247, 248, 250, 82. With regard to Trust III, nothing has been provided to demonstrate that the Objectants were aware of the concentration of Kodak stock in Trust III prior to the Accounting proceeding in 2006.
Furthermore, the Trustee argues that evidence was adduced at trial that established that the Objectants were made aware of the high concentration of Kodak stock in the subject Trusts on several occasions in the 1990's, and even met with the Trustee's representatives on various occasions to discuss proposals to reduce the Kodak concentration. Lewis Trial Tr. 251:8-254:6; Trial Ex. 92; Martin Trial Tr. 510:22-511:11. On December 15, 1997, Paul Lewis, a Portfolio Manager, and Patricia Burns, a Trust Administrator, convened a meeting with Mrs. Wehle and her three sons, two of whom are the Objectants, to discuss the Trustee's plan to diversify the Trust holdings. Trial Ex. 72, 73; Lewis Trial Tr. 253:1-254:8. Despite ample opportunity to do so, the Trustee alleges the Objectants never complained of the Trust's position in Kodak stock. Martin Trial Tr. 530:13-531:8.
Moreover, the Trustee alleges that its ability to defend itself against the objections was hampered by the delay due to its inability to locate certain records, particularly for Trust III, in which there are almost no records relating to the Trustee's management for a ten year period. The Trustee argues that the loss or destruction of records "critical to determining the issues" might well constitute or contribute to prejudice. Matter of Linker, 23 AD3d 186, 189-90 (1st Dep't 2005); Romero v. Smith, 63 AD3d 644, 645 (1st Dep't 2009).
However, the cases cited by the Trustee to support this argument are distinct from the matter before this Court. The parties in the Linker and Romero cases both had a corporate policy to destroy files within a set number of years after they had been closed. The Trustee cannot argue that its own inability to preserve its own records (or those of its predecessors) for three Trusts of such high value forecloses the ability of the Objectants to challenge how those Trusts were administered. This argument is contrary to well-settled case law that a trustee must maintain accurate records. See, Matter of Camarda, 63 AD2d 837 (4th Dep't 1978); Matter of HSBC Bank USA (Knox I), 30 Misc [*7]3d 1201(A) (Surr. Ct. Erie Co. 2010) (modified on other grounds); Groppe et al., Harris 5th Edition New York Estates: Probate, Administration and Litigation § 12:34. There is ample evidence that the Trustee did not meet this responsibility. Even ten years prior to the initiation of the instant action, the records were insufficient. Paul Lewis, the portfolio manager who replaced John Jeffery, testified that "there was very little paperwork that came with the trusts" when he inherited them in 1997. Lewis Trial Tr. 233:21 - 234:7. Also, many of the internal review records that are present were clearly never completed in the first instance, with entire pages left blank and unanswered. See, e.g. Trial Ex. 49, at JPM 4167; JPM 3982; JPM 3667; JPM 3330.
The Trustee also alleges its defense to the objections has been prejudiced in that many of the individuals involved in the management of the Trusts during the early years are either deceased or have health issues that prevented them for contributing to the preparation of the Trustee's case. The Court is unpersuaded. None of the witnesses appearing at trial asserted that their age or health affected their ability to respond to questions during examination. The Trustee has identified two people who were unavailable to appear at trial who allegedly would have contributed to the defense against the claims. One of them, John Wehle, is deceased, and is alleged to have communicated with the Objectants regarding the administration of the Trusts. P. Wehle Trial Tr. 577:10-579:21. However, even if John Wehle were to testify about conversations he had with the Objectants as to how the Trusts were managed, that testimony would not be dispositive, and certainly would not be sufficient in and of itself to warrant dismissal of any of the Objections. The other is Robert McDonough, who, prior to his passing in 2010, worked for the Trustee and allegedly would have been called as a witness. However, the Trustee makes no claim as to the relevance of his testimony. At trial, the testimony of John Jeffery and Paul Lewis, who were Investment Officers for the Trustee and managed the portfolios of the Trusts, offered ample evidence as to how the subject Trusts were managed during the relevant period. See, Jeffery Trial Tr. 100: 20 -101:4 and generally thereafter; Lewis Trial Tr. 229:6-7, 233:10-13, and generally thereafter.
Regardless of the existence or frequency of the Trustee's communications with the Objectants regarding the concentration of Kodak stock, the Objectants admittedly did not then nor at trial comprehend the significance of the concentration of Kodak stock in each of the Trusts. H. Wehle Trial Tr. 29:8-30:19. As laymen with scant investment skills, the Objectants put their trust and confidence in the Trustee's professional expertise. They had no reason to question the Trustee's assurances that its diversification plan was proceeding without any need for their concern. See, H. Wehle Trial Tr. 22:2-23:19. As remaindermen, the Objectants were "entitled to rely upon a fiduciary's skill without the necessity of interrupting a continuous relationship of trust and confidence by instituting suit." Golden Pac. Bancorp v. FDIC, 273 F.3d 509, 519 (2nd Cir. 2001); People v. Ben, 55 AD3d 1306 (4th Dep't 2008).
Furthermore, the Trustee did not repudiate its fiduciary role until it offered its Accounts for Judicial Settlement, and as the Court of Appeals has held, "a fiduciary is not entitled to rely upon the laches of his beneficiary as a defense, unless he repudiates the relation to the knowledge of the beneficiary." Matter of Barabash, 31 NY2d 76, 82 (1972) (internal citations omitted); Knobel v. Shaw, 90 AD3d 493 (1st Dep't 2011). This is true despite any alleged discussions the Trustee had with the Objectants with respect to the concentration of Kodak stock and subsequent plans to diversify in Trusts I and II. Matter of Baird, 58 AD3d 958 (3d Dep't 2009). [*8]
The first time the remaindermen had a full opportunity to review, with counsel, the actions of the Trustee in toto was in 2006 when they received the Accounts from the Trustee. See, H. Wehle Trial Tr. 29:3-7. The Objectants filed Objections to the Accounts shortly thereafter. Prior to that, the failure of the Objectants to make an independent investigation cannot imply a lack of reasonable diligence or acquiescence in the Trustee's actions, as the Objectants were entitled to assume the Trustee would administer the Trusts is a prudent manner. Tydings v. Greenfield, Stein, 11 NY3d 195 (2008); Matter of Contresty, 27 Misc 2d 810 (Surr. Ct. New York Co. 1960).
Based on the foregoing, the Court finds the Objectants' claims are not precluded by laches. Furthermore, it is noted that the Objectants are challenging the Trustee's actions for the entire scope of the accounting period, not just the early years in which the Trustee claims it is prejudiced by the delay.
III.Res Judicata
The Trustee asserts that the objections to its accounting for Trust I are precluded by the 1976 Monroe County Supreme Court's Judicial Settlement Decree (Trial Ex. 81), which settled the Trustee's intermediate account spanning the period of May 23, 1932 through February 27, 1976. Trial Ex. 249. It is argued that the doctrine of res judicata precludes the Objectants' argument that the deaths of Alvah Strong and Marjorie Strong should have caused the Kodak stock held in Trust I to receive a step up in tax-basis, reducing the amount of capital gains taxes paid by the Trust. The Trustee argues that since the Objectants were served or appeared in the Supreme Court proceeding, and did not object to the Trustee's assessment of the tax-basis of the stock at that time, they are now precluded from making the argument.
While the merits of the arguments regarding the step up in tax-basis of the Kodak stock in Trust I are more fully discussed below, the Court finds that the Objectants are not precluded from making that objection to the Trust I accounting.
Under res judicata, a valid final judgment bars future actions between the same parties on the transaction. Parker v. Blauvelt Volunteer Fire Co., 93 NY2d 343 (1999). A party cannot relitigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. As the Trustee posits in citing the Court of Appeals, res judicata applies not only to the claims actually litigated, but also to those that could have been raised in the prior proceeding. Matter of Hunter, 4 NY3d 260 (2005). "While simply stated, the doctrine often eludes ready application because of difficulty determining whether there is the requisite identity between an earlier cause of action and a later one." Hodes v. Axelrod, 70 NY2d 364, 373 (1987).
It is well settled that a Surrogate's decree settling an account can be res judicata only as to matters embraced in the account against every person of whom jurisdiction was obtained. Matter of Williams, 1 AD2d 1022 (2d Dep't 1956); Matter of Seaman, 275 A.D. 484 (3d Dep't 1949); Matter of Schaefer, 18 NY2d 314 (1966). However, the effect of such decree is limited in its operation to the matters that were actually before the Court and has no effect on matters not considered or passed on in the proceeding in which the decree was made. Matter of Seaman, 275 A.D. 484 (3d Dep't 1949). "What concerns us now was not before the surrogate then or involved in any of the facts as to which the decree is conclusive." Van Rensselaer v. Van Rensselaer, 113 NY 207, 214-15 (1889).
The burden of proof is on the Trustee to show clearly that the issue of the proper calculation [*9]of the tax-basis of the stock in Trust I was litigated and determined by the Supreme Court in the intermediate account proceeding. Rudd v. Cornell, 171 NY 114 (1902); Matter of Ryan , 291 NY 376 (1943); Matter of Long Island Loan & Trust, 92 A.D. 1 (2d Dep't 1904); First Trust & Deposit Co.,272 A.D. 958 (4th Dep't 1947). This Court has reviewed both the Decree (Trial Ex. 81) and the Account (Trial Ex. 249) from the 1976 Intermediate Account proceeding and finds no evidence that the Trustee reported the tax-basis of the Kodak stock in the Trust. Schedule F of the Intermediate Account details capital gains tax payments totaling $956.33 with $874.19 payable to the Internal Revenue Service and the balance to the New York State Income Tax Bureau for the years 1952 and 1953. Yet there is no break down as to which assets had gains resulting in liability, nor is there a reported basis for Kodak stock held by the Trustee. Without this information, nothing in the Intermediate Account or the Decree settling the same indicates that the Trustee or the Court addressed the possibility of stepping up the tax-basis of the Kodak stock after the deaths of either Alvah Strong in 1966, or Marjorie Strong in 1975. The Trustee has not met its burden in showing that the tax-basis was clearly litigated and decided in the prior proceeding, and as such the Objectants cannot be estopped from making the argument in this proceeding. Rudd v. Cornell, 171 NY 114 (1902).
Furthermore, the 1976 Supreme Court Decree settling the Trustee's Account applied only to the Trustee's actions as they related to the administration of the 1932 Trust created by Alvah Strong from its inception until the death of Marjorie Strong, who was the measuring life of the 1932 Trust. The remainder of the 1932 Trust funded Trust I and two other identical trusts for the benefit of Marjorie Wehle's sisters. While the Decree arguably exonerates the Trustee for the period covering the Account (from May 23, 1932 to October 23, 1975), the Objectants correctly argue that the Decree does not prospectively exonerate the Trustee from its actions that it took subsequent to that accounting period which include retaining the original tax-basis and maintaining the concentration of Kodak stock in Trust I.
It is also noteworthy that despite being a necessary party under SCPA §2210(9), Objectant Henry Wehle was never properly served with process in the Intermediate Account proceeding. At trial, Mr. Wehle credibly testified that he was stationed on an uninhabited island in the Aleutian archipelago off the coast of Alaska while working for the United States Fish and Wildlife Service. H. Wehle Trial Tr. 65:22-66:6. When presented with an affidavit of service purporting to show he was served by mail with an Order to Show Cause, Henry Wehle stated the signature on the receipt card was not his and that the address was incorrect. H. Wehle Trial Tr. 60:13-6 to 62:23; Trial Ex. 202. Henry Wehle has no recollection of receiving or ever being notified of the intermediate account proceeding for Trust I in 1976, and there is insufficient proof to establish that he was properly served, leading to the necessary conclusion that the Supreme Court did not have proper jurisdiction over all necessary parties when it issued its decree. H.Wehle Trial Tr. 66:7-66:21.
IV.Liability of the Trustee
A. Standard of Care
The Prudent Investor Act (EPTL 11-2.3) originated as a common-law rule which provided that a trustee was "bound to employ such diligence and such prudence in the care and management, as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs." King v. Talbot, 40 NY 76, 85—86 (1869). In 1970, this rule was codified in EPTL 11-[*10]2.2(a)(1), stating that "a fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent [persons] of discretion and intelligence in such matters who are seeking a reasonable income and preservation of their capital." Matter of Janes (Janes III), 90 NY2d 41, 49 (1997).
The rule was clarified and expanded in 1984 and again in 1995 to require that trustees with special investment skills be held to a higher standard of care, and to require trustees to "exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument." EPTL 11—2.3(b)(2). The current statute includes a list of requirements for trustees, including pursuing an overall investment strategy, considering tax consequences of decisions, considering general economic conditions, attempting to diversify assets, and determining whether to retain or dispose of initial assets within a reasonable time. EPTL 11—2.3(b)(3). Under the expanded standard, trustees are also authorized to consider related trusts, other resources of the beneficiaries, and an asset's special relationship to the beneficiaries. EPTL 11-2.3(b)(4)(B). The statute continues to hold trustees with specialized investment skills to a higher standard, requiring them to "exercise such diligence in investing and managing assets as would customarily be exercised by prudent investors of discretion and intelligence having special investment skills." EPTL 11-2.3(b)(6).
The Trusts in this case span the history of this standard, but under each iteration of the standard, "the test is prudence, not performance, and therefore evidence of losses following the investment decision does not, by itself, establish imprudence." Matter of Janes (Janes II), 223 AD2d 20, 27 (4th Dep't 1996). The Court may not view alleged acts or omissions aided by hindsight, but instead must view the fiduciary's actions "in light of the history of each individual investment." Matter of Donner, 82 NY2d 574, 585 (1993).
The Objectants in this case argue that the Trustee violated this standard in a number of ways, including failing to properly step up the tax-basis of the Kodak stock held in the Trusts, failing to diversify the concentrated holdings of the Kodak stock, and failing to do adequate periodic reviews of the Trust holdings and investment strategies. In response, the Trustee argues that it acted in a prudent manner given the information available at the time regarding the strength of Kodak stock, the tax ramifications of diversification, and the perceived needs and desires of the income beneficiary as well as the perceived relationship the beneficiaries had with the Kodak company.
B. Failure to Step Up Tax-Basis
Generally, a stockholder pays capital gains tax only on the difference between the price of a security at purchase and at sale. The price at purchase is referred to as the tax-basis.' However, when a security is includable in an estate, the tax-basis of the security "steps up" to the market value on the date of the owner's death, even without being sold. 26 U.S.C. §1014; see, generally, Hahn v. C.I.R., 110 T.C. 140, 151 (Tax Ct. 1998).
With regard to Trust I, the Objectants argue that the 1932 Indenture provided for two step ups in the tax-basis of the Kodak stock that the Trustee failed to account for: one at the death of Alvah Strong in 1966, and one at the death of Marjorie Strong in 1975. The failure to adjust the tax-basis upon these two events allegedly resulted in the Trust paying excess capital gains taxes. In [*11]response, the Trustee alleges that the 1932 Indenture was modified after its execution, and those modifications required the tax-basis of the stock held within the Trust to remain unchanged.
The relevant analysis surrounds whether the 1932 Indenture ultimately alienated the stock from the Settlor, Alvah Strong. When an irrevocable lifetime trust does not completely alienate an asset from a settlor, the asset is treated as part of the settlor's estate at death, causing a step up in basis at that time. See, 26 U.S.C. §1014; Estate of Cochran v. C.I.R., 9 T.C. 242, 243 (Tax Ct. 1947). In Paragraph Eleventh of the 1932 Indenture, it states:
During the life of the Settlor [Alvah Strong], the Trustee may, upon the written request of the Settlor and the written consent of the Settlor's wife, and after having determined, in its discretion, that to do so would substantially further the general interests of the beneficiaries hereunder, advance to the Settlor such amounts of principal from the trust estate as may, in its judgment, be necessary or advisable for the proper support and maintenance of the Settlor and his wife and family or for the proper education of the Settlor's children or for other emergency or contingency, the advance of principal for which may be deemed by it in the best interests of the beneficiaries generally.
1932 Trust Indenture at Paragraph Eleventh (Trial Ex. 11, at Ex. A).
Cases interpreting Federal tax law have outlined a general rule that an asset so described shall be includable in a settlor's estate if an external standard is established by the instrument by which the trustee must evaluate the request for payment and distribution from principal. Estate of Toellner v. C.I.R., 6 T.C. 832, 837 (Tax Ct. 1946). The evaluation of whether the payment of principal would "be necessary or advisable for the proper support and maintenance of the Settlor and his wife and family or for the proper education of the Settlor's children or for other emergency of contingency," may qualify as such an external standard, necessitating the Kodak stock to be included in Alvah Strong's Estate.
However, this Court need not examine the 1932 language due to Alvah Strong subsequently executing two written releases relinquishing his power to consent to changes of investments held in the Trust, and his power to request invasion of principal. These releases were executed in 1946 and 1948 respectively, and therefore applied prior to his death in 1966. Therefore, the tax-basis of the stock at issue properly remained at the 1932 level after the death of Alvah Strong. This conclusion was supported by the IRS after an audit of the accounting of the estate in 1969. See, Semmler Trial Tr. 478:16-479:18; Trial Ex. 233 at Schedule G.
The Objectants argue that documentary evidence of the existence of these releases is insufficient. While it is true that there remains little documentation of the releases, the Court is unpersuaded that it must necessarily conclude that they did not exist and were not valid due to there being sufficient evidence of their execution and implementation. The Trustee made a decision not to step up the tax-basis of the stock based on the facts and applicable law at the time. After a review of those facts and that law, the Court cannot conclude that the Trustee's decision was imprudent. "Our courts do not demand investment infallibility, and a fiduciary is neither insurer nor guarantor of the value of a trust's assets." Matter of Janes, 223 AD2d 20, 27 (4th Dep't 1996).
The Objectants further argue that even if the tax-basis did not step up after the death of Alvah Strong, then it should have after the death of Marjorie Strong in 1975 because she was given a [*12]general power of appointment over the remainder of the Trust set up by her husband in 1932. The Internal Revenue Code provides that general powers of appointment are includable in a decedent's gross estate unless the "general power of appointment created on or before October 21, 1942 has been partially released," and "such partial release occurred before November 1, 1951." 26 U.S.C. § 2041(a)(1)(B)(I). It is undisputed that Marjorie Strong renounced her general power of appointment on May 29, 1946, retaining only a limited power of appointment. The issue is solely whether the typewritten signature of Mrs. Strong that appears on the Release is valid. The Objectants do not raise any allegation of fraud, just an unsupported argument that the signature as it appears is invalid. However, according to long standing New York law, "[t]he term signature includes any memorandum, mark or sign, written, printed, stamped, photographed, engraved or otherwise placed upon any instrument or writing with intent to execute or authenticate such instrument or writing." McKinney's General Construction Law § 46.
Accordingly, this Court finds that there is no liability arising from the Trustee's failure to step up the tax-basis of the Kodak stock held in Trust I after the deaths of Alvah and Marjorie Strong. Therefore, the payment of capital gains taxes as a result of past sales of Kodak stock was appropriate and necessary. The low tax-basis of the Kodak stock also forms part of the Trustee's defense of its failure to diversify, but that argument will be addressed separately below.
C. Failure to Diversify
Holding one stock in a high concentration has long been understood by New York case law to be risky. There are many cases in which liability has been imposed upon a trustee for "negligence in respect of want of diversification." Matter of Curtis, 25 N.Y.S.2d 819, 820 (2d Dep't 1941), aff'd, 286 NY 716 (1941); Matter of Saxton, 274 AD2d 110 (3d Dep't 2000); Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010); Matter of Janes (Janes III), 90 NY2d 41, 49 (1997). The Prudent Investor Act requires a trustee "to diversify assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes and terms and provisions of the governing instrument." Matter of Janes (Janes III), 90 NY2d 41, 49 (1997); citing EPTL 11—2.3(b)(3)(C). The prior iterations of the prudent investor standard were not as explicit, but still required a fiduciary to make a careful examination of whether maintaining a concentration was advisable. Janes III, 90 NY2d at 49. The inquiry was "simply whether, under all facts and circumstances of the particular case, the fiduciary violated the prudent person standard in maintaining a concentration of a particular stock in the [trust's] portfolio of investments." Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205[A] (Surr. Ct. Westchester Co. 2010), quoting Janes III, Id. Similar to the facts of Janes, the investments decisions at issue in this case occurred prior to the enactment of the current Prudent Investor Act in 1995. Janes III, 90 NY2d at 49-50,
While in this case, both parties generally agree on the benefits of diversification, the Trustee argues now that circumstances existed unique to these Trusts that could have lead a reasonable trustee to delay or avoid diversification for an unspecified period of time. However, the Trustee acknowledged multiple times, beginning in its pretrial memorandum that it "recognized the risk" posed by concentration, and "developed a plan for eliminating it." Jeffery Trial Tr. 103:14 - 104:2. Even the Trustee's expert witness testified at trial that a prudent fiduciary would have recognized a concentration immediately upon the funding of the Trusts in this case, and made a plan to "address [*13]the concern." Rodgers Trial Tr. 708:23-709:1. However, various investment professionals that managed the Trusts testified that they each, in turn, failed to diversify the large Kodak concentration. See, e.g. Jeffery Trial Tr. 133:6-25; Young Trial Tr. 193:8-15.
While the Objectants did proffer an expert whose purpose was to offer testimony on the propriety of the Trustee's investment decisions, the Court only permitted his testimony as to diversification generally, not what constitutes prudent fiduciary conduct under New York law. Dr. Jerold Warner, an economics professor, testified that while he was knowledgeable in the area of investment philosophy generally, he was unfamiliar with the specifics of New York law as it relates to the obligations of a fiduciary investor. Warner Trial Tr. 424:6-9. "[T]he qualification of a witness to testify as an expert is a matter that rests in the discretion of the trial court, subject to review only if the Judge has made a serious mistake, committed an error of law or abused the discretion." Pringle v. Pringle, 296 AD2d 828, 829 (4th Dep't 2002) (internal citations omitted); see Werner v. Sun Oil Co., 65 NY2d 839 (1985).
However, testimony was adduced, by the Trustee's own representatives, that demonstrated a pattern of negligence within the institution requiring no special knowledge or additional evidence to identify. On numerous occasions, discussed more fully below, the Trustee's employees reviewed the highly concentrated holdings of the subject Trusts, recognized the need to diversify, and then failed to follow any cohesive plan for divestiture. From this pattern of internally unsupported inaction, a conclusion of negligence can be drawn necessitating a surcharge. While the Court may not evaluate the Trustee's conduct enlightened by hindsight, it may examine the conduct "over the course of the investment in determining whether [the Trustee] has acted prudently." Matter of JP Morgan Chase Bank, 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010), aff'd. Matter of Hunter, 100 AD3d 996 (2d Dep't 2012). "A fiduciary will be surcharged for losses resulting from negligent inattentiveness, inaction, or ill-consideration." Matter of Janes (Janes II), 223 AD2d 20, 35 (4th Dep't 1996); citing Matter of Donner, 82 NY2d 574, 586 (1993).
The case law warns against using hindsight, but due to the Trustee's documented pattern of negligence and inaction, the Court in this case must only hold the Trustee to its own determined standard. "In determining whether to impose a surcharge a court must look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently take place." Matter of Hahn, 93 AD2d 583 (4th Dep't 1983) (internal citations omitted). "No precise formula exists for determining whether the prudent person standard has been violated in a particular situation; rather, the determination depends on an examination of the facts and circumstances of each case." Janes III, 90 NY2d 41, 50 (1997).
Trust I was funded in August, 1976 with approximately 99 percent Kodak stock. In his initial review on August 31, 1976, Ellison Patterson recognized the problematic concentration but did not specify any action to be taken. Trial Ex. 49, at JPM 4171. In his next review on December 31, 1976, Patterson again acknowledged the concentration, and noted, "We plan to meet with Mrs. Wehle to discuss partial diversification each year." Trial Ex. 49, at JPM 4169. However, when John Jeffery, the Investment Officer from 1990 to 1997, reviewed the file for Trust I when he took over in 1990, he could tell that no diversification plan had been in place, and any sales of Kodak stock that had occurred were simply due to the Trustee "needing cash to pay expenses." Jeffery Trial Tr. 110:18-111:15. Upon Mr. Jeffery taking over the Trust, he quickly created a program for [*14]diversification because he was concerned about the concentration. Jeffery Trial Tr. 113:10-25. However, this plan was inexplicably abandoned after 1993, with no more shares being sold until 1998. Trial Ex. 11, 43-44; Jeffery Trial Tr. 126:10-127:21.
Trust II was also funded in 1976 with approximately 87 percent Kodak stock. Investment Officer Ellison Patterson testified that after taking over Trust II in September, 1976, he conducted a review after which he concluded that a plan was necessary to diversify the concentration of Kodak stock "over a number of years." Patterson Depo. Tr. 169:5-10; Trial Ex. 49, at JPM 3987; see also, Young Trial Tr. 204:16-205:9. However, between that time and January, 1979, only about 0.2 percent of the Kodak holdings in Trust II were sold. Then, without further documented discussion of a diversification plan, all of the Kodak stock was suddenly sold on January 19, 1979. Mr. Patterson testified that he did not know why the concentration was held untouched for almost three years (Patterson Depo. Tr. 159:22-25; 188:9-14), or why all the stock was then sold on one day (Patterson Depo. Tr. 160:1-3).
In Trust III, which was funded in July, 1966 with 100 percent Kodak stock, there is no record of any annual review of the Trust for the next ten years, and the Trustee is unable to even identify which employee was assigned to manage the Trust. There were also no significant sales of Kodak stock from the Trust during that time. Stip. 141. The first time there is a record of any review of Trust III is in January, 1977, during which Ellison Patterson recommended that half of the Kodak stock should be sold immediately, with the other half likely to be sold the following year. Trial Ex. 49, JPM 3669. Approximately half of the Kodak stock was sold in February, 1977, and the other half was sold two years later, in January, 1979. Patterson Depo. Tr. 133:13 - 133:18; Trial Ex. 14.
As in Janes and Hunter, the record here clearly establishes that the Trustee: 1) failed to undertake an adequate analysis of the Trusts by creating an investment plan; and 2) failed to conduct more than a superficial review of the Trusts and consider alternative investments. Matter of Janes (Janes I),165 Misc 2d 743, 751 (Surr. Ct. Monroe Co. 1995); Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205[A] (Surr. Ct. Westchester Co. 2010).
Throughout the litigation, the Trustee attempted to shift the blame for its own inaction and negligence to the Trust beneficiaries, arguing that the income beneficiary communicated a desire to retain the high concentration of Kodak stock in order to avoid taxes. However, two of the three Investment Officers in charge of the Trusts testified that they never even met Mrs. Wehle or her sons, the remaindermen. Young Trial Tr. 193:20-195:10; Jeffery Trial Tr. 108:9-21. Further, on any occasion on which the Trustee misguidedly requested the consent of the beneficiaries for a sale of Kodak stock, the consent was given. Lewis Trial Tr. 253:7-12; 273:4-13; Young Trial Tr. 195:20 - 196:4; see also H. Wehle Trial Tr. 16:20-25 ("Q. Did you ever have any personal affinity for Kodak stock versus any other stock? A. No.").
John Jeffery testified that based on his analysis of the risk of the concentration, he would have recommended a much faster pace of divestiture, but did not due to a fear of offending Mrs. Wehle due to her perceived attachment to the Kodak stock. Jeffery Trial Tr. 115:16-116:25. However, the Trustee supplied no evidence of any instrument, letter, or even a record of a telephone conversation in which this preference for Kodak stock was communicated. Furthermore, the Trustee acknowledged that even if such a preference had been communicated, it would not have supplanted their sole investment authority over the Trusts. See, e.g. Jeffery Trial Tr. 118:3-10; Matter of Janes [*15](Janes I) 165 Misc 2d 743, 751 (Surr. Ct. Monroe Co. 1995) ("The Court is unwilling to strain itself to equate her "love" for EK for consent [to the concentration]").
Furthermore, the Trustee's argument that a slow pace of diversification was appropriate given the low tax-basis of the Kodak stock in the Trusts seems disingenuous in light of the evidence. As discussed above, this Court cannot even analyze the prudence of a possible staged divestiture tax-saving plan for diversification, because one was never put in place by the Trustee. It is impossible to believe that the small, sporadic sales of Kodak stock that did occur in the Trusts were actually part of an undocumented, extremely slow diversification plan by the Trustee. Particularly in light of the testimony of Ellison Patterson that even the longest "multi-year diversification programs" he was familiar with never lasted more than a few years (Patterson Depo. Tr. 172:14-25), and the testimony of John Jeffery that it was obvious to him that the small sales of stock from Trust I were designed only to pay the Trustee's own expenses. (Jeffery Trial Tr. 110:18-111:15).
Paul Lewis, the portfolio manager who ultimately enacted the first written diversification plan for the Trusts in 1997 testified that "too many bad decisions have been made by letting the tax consequences override the investment consequences." Lewis Trial Tr. 250:21 - 251:7. Ellison Patterson shared this belief, stating, "I mean, taxes aren't the worst. They're a hindrance and you've got to pay them, but they shouldn't be an overriding factor." Patterson Depo. Tr. 109:7-10.
The 100 percent concentration of Kodak stock held in Trust III could have been sold soon after the Trust was funded without incurring any capital gains tax, but was instead left almost entirely untouched for ten years. Patterson Depo. Tr. 143:20 - 144:7. Also, with regard to Trust II, while Ellison Patterson initially suggested diversification over a number of years, instead, the Trustee seemingly ignored the Trust entirely for three years, and then sold all of the Kodak stock at once.
Both sides rely heavily on the applicable case law, and while instructive, any analysis of the Prudent Investor standard places a heavy focus on the circumstances of both the beneficiaries and the investment holdings themselves, and is necessarily unique. The Fourth Department recently heard a somewhat similar case, Matter of HSBC Bank (Knox), 98 AD3d 300 (4th Dep't 2012),and declined to find liability for a failure to diversify, relying heavily on the special relationship between the beneficiaries and the stock, and the terms of the governing instrument that called for the retention of the original stock. Knox, 98 AD3d at 314-19.
While faintly instructive, the Knox case is distinguishable from the instant case for a number of reasons. In the instant case, despite the historical connection between the Strong/Wehle family and the Kodak company, none of the relevant governing instruments call for the retention of the Kodak stock, and no proof was adduced at trial indicating that any of the Trust beneficiaries ever communicated a preference for the retention of the Kodak stock. See, e.g., Jeffery Trial Tr. 108: 3-24; Young Trial Tr. 190: 20-25; Young Trial Tr. 196:13-21; cf. Matter of HSBC Bank (Knox), 98 AD3d at 296. Further, the Trustee's representatives acknowledged that they understood that the beneficiaries had no authority to direct investments within the Trusts. Jeffery Trial Tr. 107:16-22; Young Trial Tr. 201:13-20. In Knox, the Fourth Department noted, "This case is unique in that it involves a trust that had no precipitous decline in any particular stock." Matter of HSBC Bank, 98 AD2d at 307. This was not the case here, where Kodak stock lost value rapidly during years of [*16]inaction, particularly in light of the high rate of inflation during the relevant time period. See, Schwert Trial Tr. 632:2-22.
The Court of Appeals has held that a corporate fiduciary's failure to follow "internal trustee review protocol ... and undertake a formal analysis of the estate" is relevant to a finding of liability. Matter of Janes (Janes III), 90 NY2d 41, 54 (1997); see also, Matter of Rowe, 274 AD2d 87, 92 (3d Dep't 2000); Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010) (holding that a trustee is required to abide by its own internal review protocol to pay special caution and attention to a portfolio concentration.'). As far back as 1976, the Trustee was aware that a stock concentration was a matter of concern requiring remediation, as evidenced by its Trust Investment Committee Review Sheet for Non-Estate Fiduciary Accounts, which asks the portfolio manager to ascertain if there is "stock positions in the portfolio representing 20% or more of the entire trust," and then requiring an explanation "if anything can be done, has been done, or will be done in order to improve diversification." See, Trial Ex. 49, at JPM 4170-71.
The evidence demonstrates that the Trustee did not meet its own internal guidelines, and when the sporadic and cursory internal reviews of the Trust holdings did occur, the Trustee did not act upon its own recommendations. The Fourth Department has held that the failure of the investment managers to adhere to their own recommendations is a factor in a finding of imprudence. Matter of HSBC Bank (Knox), 98 AD3d 300, 301 (4th Dep't 2012) ("[P]etitioner's portfolio manager conceded that the balance of Woolworth stock should have been sold once the stock was removed from the hold list. We thus conclude that the ... petitioner acted imprudently.").
While the prudent person rule of investment does not contain any mandate of diversification, the determination of whether a fiduciary has acted prudently "is a factual determination to be made by the trial court." Matter of Janes, 90 NY2d 41, 50 (1997). Based on the record in this case demonstrating that the Trustee failed to adequately review the holdings of the Trusts or act upon its own recommendations, this Court concludes that the Trustee acted imprudently as a fiduciary with resultant losses to the beneficiaries requiring the imposition of damages.IV.Calculation of Damages
A. Self-Dealing and the Damages Calculation
Prior to trial, this Court permitted the amendment of the Objections to include allegations that the Trustee intentionally set aside the best interests of the beneficiaries in the hope of expanding their business relationship with the income beneficiary. In addition to the claim of self-dealing, the Objectants also allege that a conflict of interest existed due to an overlap of in the Boards of Directors of Kodak and the Trustee, and that the Trustee intentionally altered the values of Kodak stock in each of the Accounts in an effort to mislead the Objectants as to the performance of the Trusts. As discussed more fully below, proof of any of these allegations could significantly increase the potential damages surcharge in this case by allowing the use of a market index damages calculation.
The market index damages calculation method that the Objectants advocate for in this case compares the actual portfolio against an alternative hypothetical portfolio that was managed properly during the same time period. See, Matter of Rothko, 43 NY2d 305 (1977). This method attempts to turn back the clock and calculate the outcome of the trust management that allegedly should have [*17]occurred. However, the Rothko case upon which this calculation method is based concerned fiduciaries that sold assets that they should have retained, as opposed to retaining assets that they should have sold. Matter of Rothko, 43 NY2d at 321. Additionally, the fiduciaries in Rothko engaged in a long pattern of flagrant self-dealing. Matter of Rothko, supra, see also Matter of Janes (Janes II), 223 AD2d 20, 35 (4th Dep't 1996). The Objectants argue that the Trustee's behavior goes beyond mere negligence, arising to a level of misconduct and self-dealing allowing this method of damages calculation.
The Trustee counters that the proper measure of damages, if any, must be limited to lost capital, as calculated by the Court of Appeals in Janes. Where a fiduciary's imprudence consists solely of negligent retention of assets it should have sold, the proper measure of damages is the value of the lost capital. See, Matter of Janes (Janes III), 90 NY2d 41 (1997). "It is only where an objectant establishes a breach of a fiduciary duty which extends beyond mere negligence that an award for lost profits or a market measure of damages may be granted." Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010); citing Matter of Rothko, 43 NY2d at 321 (1977).
"While [a trustee] is administering the trust he must refrain from placing himself in a position where his personal interest or that of a third person does or may conflict with the interest of the beneficiaries" Matter of Rothko, supra; citing Bogert, Trusts [Hornbook Series 5th Ed.], p . 343. Most of the cases involving self-dealing by a fiduciary involve specific and deliberate action with an intent to gain personal advantage at the expense of the beneficiaries. See, e.g., Matter of Eisenberg, 93 AD3d 413 (1st Dep't 2012); Matter of Kinzler, 195 AD2d 464 (2d Dep't 1993). Leading up to trial, the Objectants alleged that the Trustee repeatedly failed to divest the Kodak stock due to a fear that upsetting the income beneficiary would decrease the likelihood that the Wehle family would expand its relationship with the bank.
However, here, as in Janes, the Objectants have failed to adequately prove that the Trustee engaged in self-dealing sufficient to require market index damages. Patrick Martin, Marjorie Wehle's attorney and financial advisor, testified that Mrs. Wehle told him she thought that the trust managers "were always trying to get her to expand the relationship with the bank." Martin Trial Tr. 561:13-23. The Court finds this testimony to be unpersuasive and insufficiently related to the state of mind of the trust managers to warrant a finding of self-dealing or a conflict of interest. Mr. Martin even acknowledged that he did not know if any solicitation was occurring, just that Mrs. Wehle had that "perception." Martin Trial Tr. 561:19-23. Further, despite these advances, she was uninterested in the Trustee's overtures. Martin Trial Tr. 561:23.
John Jeffery, the Investment Officer, testified that he only met with Mrs. Wehle once, and never spoke to her about developing new business. Jeffery Trial Tr. 108:9-12; 153:16-24. Paul Lewis, the Investment Officer for the Trusts from 1997 to 2004, flatly denied ever approaching the remaindermen to generate new business and further denied there being any incentive to retain Kodak stock in the Trusts. Lewis Trial Tr. 289:22-24; 270:15-23. Plainly stated, the record is devoid of any evidence that the Trustee forestalled its diversification plan or managed the Trusts in a way that placed their own interests (i.e. business development) above that of the beneficiaries. [*18]
The contention that a conflict of interest existed due an alleged overlap of the boards of directors for Kodak and the Trustee is speculative and unavailing. No evidence was received by the Court to establish the overlap, but even so, any overlap that may have existed is likely attributed to the natural consequence of doing business in a small community, and cannot by itself sustain a conclusion of self-dealing. See, e.g., Ellenville v. Searles, 235 AD2d 692 (3d Dep't 1997). Ellison Patterson, a twenty year employee of the Trustee, testified at deposition that any overlap between the boards did not influence the administration of the Trusts or investment decisions made by the Trustee, and that the trust department was considered a "separate entity" from the rest of the bank. Patterson Depo. Tr. 114:4-115:2. The Objectants offered nothing at trial to prove that the Trustee was operating under a conflict of interest.
The Objectants' also claim that the Trustee attempted to mislead them by overstating the performance of Kodak stock held in Trust I and Trust II. When initially funded on August 2, 1976, the value of the 15,430 shares of Kodak stock received by Trust I was $1,492,853 (roughly $96.75/share). In its final Account, the Trustee lists the inventory value as $82,560.20 for those 15,430 shares, or $5.35 per share. Stip. 43-45. The fair market value of the 5,668 shares of Kodak received by Trust II on July 7,1976 was $555,464 ($98.00/share), yet the accounting for Trust II lists the inventory value as $442,448.59 ($78.06/share). Stip. 54-55. It is alleged that the inventory values were used to mislead the Objectants into believing that, cumulatively between the two Trusts, the Kodak stock gained $1.6 million more than actually realized.
In response, the Trustee claims it was adhering to an accepted industry practice by calculating the inventory value using the market value of the stock when it was received into both trusts. See, Hamilton Trial Tr. 755:17-24. Furthermore, the Trustee states that the inventory value represents the fair market value of the stock at various times the Trustee received Kodak shares into Trust I and II. Though trust assets are typically inventoried at their value on the date of acquisition, here, the use of a blended rate as the inventory value of Kodak stock is not inconsistent with principles of fiduciary accounting. See, 2 Waldorf, New York Practice Guide: Probate and Estate Administration § 41.02[1][c][ii], at 41-13 [1996]; see also, Matter of Pollock, NYLJ, Sept. 17, 1998, at 24, col. 4 (Surr. Ct. Nassau Co.); citing EPTL 11-2.1[c][1].
As Surrogate Scarpino in Matter of Hunter opined:
"[It] is often the case in the banking and brokerage industries, when multiple shares of stock in a particular company are acquired over a period of time, it is difficult, and may be impossible, to trace the sale of any one share back to its acquisition. Under such circumstances, it may be necessary for a trustee to ascribe an average or blended value to the shares of stock for the purpose of reporting gains or losses for tax purposes and with respect to Schedules A-1 and B of the account."
Matter of Hunter, 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010).
The accounts provided by the Trustee adhere to the format widely accepted by the courts of this State. See, SCPA Official Form JA-4. Furthermore, neither Charles Wehle or Henry Wehle ever testified that they were misled by the Trustee in the accounts for Trust I or II. H. Wehle Trial Tr. 63:5-64:22; C. Wehle Depo. Tr. 91:13-18. Objectants have not established that they were damaged by the blended values used by the Trustee to report the acquisition and subsequent sale of Kodak shares during the administration of Trusts I and II. Cf., Matter of Hunter, 27 Misc 3d [*19]1205(A) (Surr. Ct. Westchester Co. 2010).
Based on the foregoing, there is no foundation to the Objectants' allegations of conflict of interest, self-dealing, or the use of inventory values to mislead the Objectants. Therefore, calculation of damages in this case shall be based upon lost capital. See, Janes III, 90 NY2d 41 (1997); cf. Matter of Rothko, 43 NY2d 305 (1977).B. Date of Divestiture
The Trustee argues that the fact that no witness could identify with certainty a specific date during the relevant time period upon which the stock absolutely should have been sold necessitates a complete dismissal of the objections. This logic confounds the issues in this case. The date calculation may be relevant to the calculation of the amount of damages, but is not relevant to the Court's analysis of whether or not diversification should have occurred at some point prior to when it ultimately did, and therefore a finding of liability.
However, the Trustee does raise an important issue, and one that plagues cases in which a violation of the Prudent Investor Rule is alleged. There is no way to turn back the clock, and expert testimony at trial will always be colored by hindsight. This is of particular concern in this case, where the date of prudent divestiture, whatever it might be, is so many years before trial. There is no bright line rule, or controlling statute or regulation. "[N]o fixed standard exists for the time in which divestiture of an imprudently held investment must occur." Matter of Saxton, 274 AD2d 110, 120 (3d Dep't 2000).
The Court of Appeals describes the following fact-dependent process for the trial court in determining the proper date of divestiture: "A court may examine a fiduciary's conduct throughout the entire period during which the investment at issue was held. The court may then determine, within that period, the reasonable time within which divestiture of the imprudently held investment should have occurred. What constitutes a reasonable time will vary from case to case and is not fixed or arbitrary. Matter of Janes (Janes III), 90 NY2d 41, 54 (1997) (internal citations omitted).
As this Court acknowledged in Janes I, "neither the difficulty of the task nor the guaranty of imprecision in results can be the basis of judicial abdication of the responsibility to set reasonable damages in a surcharge case." Matter of Janes (Janes I), 165 Misc 2d 743, 756-57 (Surr. Ct. Monroe Co. 1995). "Once imprudence is determined a court may designate a reasonable time within which divestiture should have occurred." Matter of Saxton, 274 AD2d 110, 120 (3d Dep't 2000); see also Matter of Weston, 91 NY 502 (1883). This reasoning was adopted by the Fourth Department in Janes II: "The cases suggest that, under those circumstances, however difficult it may be to determine the exact date when it became imprudent to retain each share of stock, a court nonetheless may look to the fiduciary's entire course of conduct in order to determine liability, while selecting any date supported by the record upon which to hinge the calculation of damages." Matter of Janes, 223 AD2d 20, 33 (4th Dep't 1996).
At trial, the Objectants' expert, Dr. Jarold Warner, testified that in any circumstance, "diversification should, in general, take place immediately or as soon as possible." Warner Trial Tr. 424:21-23. Warner rejected the strategy of staging the diversification of a concentrated position over a period of time, saying, "The risk is that if you stage, then you have failed to diversify and, therefore, the shares you have not sold, you still have big downside risk." Warner Trial Tr. 427:12-[*20]14. At one point, Mr. Warner memorably likened a held concentration to "a bad tooth," that would be better to remove in one visit to the dentist instead of five. Warner Trial Tr. 436:25.
Mr. Warner's testimony is supported by recent cases addressing concentration and diversification, which, despite having very different facts, each set the date of ideal divestiture quite close to the date the fiduciary knew or should have known of the need to sell. See, e.g., Matter of Janes (Janes I), 165 Misc 2d 743 (Surr. Ct. Monroe Co. 1995) (using the date of the initial investment strategy review); Matter of JP Morgan Chase Bank, 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010) (within a month of the trustee's recognition of a market price peak allowing for sale with less loss); Matter of Saxton, 274 AD2d 110, 120 (3d Dep't 2000) ("We also agree that 30 days would have been sufficient to facilitate notice to the beneficiaries and a proper analysis of the market.")
Each of the three Trusts at issue have slightly different facts, leading to different hypothetical sale dates. It is also noted that both sides operated under the industry and case law supported assumption that diversification of the subject Trusts could be defined as selling 95 percent of the Kodak stock in each Trust, and had their expert witnesses' calculations operate on that assumption. See, e.g. Trial Ex. 444; Trial Ex. 464; Trial Ex. 472; see also, Matter of Janes (Janes III), 90 NY2d 41, 49 (1997); Matter of Saxton, 274 AD2d 110 (3d Dep't 2000); Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010).
1.Trust I
Trust I was funded on August 2, 1976 with 15,430 shares of Kodak stock, and an additional 3,506 shares of Kodak common stock on June 4, 1987. The initial review by Ellison Patterson, on August 31, 1976, appears incomplete, and notes only the concentration, leaving the rest blank. Trial Ex. 49, at JPM 4171. Subsequent reviews indicate that the Trustee intended to consider diversification at some time in the future, but no significant sales occurred. Trial Ex. 49, at JPM 4169, JPM 4163, JPM 4165. "To assert that mere review, analysis, and monitoring satisfies the standard of due care by a prudent person where action and activity are indicated, tests the Court's sense of reason and logic." Matter of Janes (Janes I) 165 Misc 2d 743, 751 (Surr. Ct. Monroe Co. 1995). Investment Officer John Jeffery, who took over the management of Trust I in 1990 testified that upon his initial review in 1990, he could tell there had previously been no diversification plan in place. Jeffery Trial Tr. 110:18 - 112:5.
Upon the Trust's receipt of that volume of Kodak stock on August 2, 1976, the Trustee "had all the information a prudent investor would have needed to conclude that the percentage of Kodak stock in the estate's stock portfolio was excessive and should have been reduced significantly." See, Matter of Janes (Janes III), 90 NY2d 41, 54 (1997).
Therefore, this Court concludes that the hypothetical sale date of 95 percent of the Kodak stock in Trust I should have been September 1, 1976, thirty days after the stock was received. See, Trial Ex. 445; Trial Ex. 462. The hypothetical sale date of the additional 3,506 shares of Kodak stock received on June 4, 1987 shall be July 4, 1987.
2.Trust II [*21]
Trust II was funded on July 21, 1976 with 5,668 shares of Kodak stock. Upon his initial review on September 30, 1976, Investment Officer Ellison Patterson was of the opinion that the Kodak stock in Trust II should be diversified. Patterson Depo. Tr., 169:5-10; Trial Ex. 49, at JPM 3987; see also, Young Trial Tr. 204:16-205:9. There is no proof of any further review of the Trust until 1979. Patterson Depo. Tr., 186:15-21 Patterson testified that he did not know why the stock had not been sold for those three years. Patterson Depo. Tr 159:22-25; 181:9-17.
For the same reasons stated for Trust I, above, this Court concludes that the hypothetical sale date of 95 percent of the Kodak stock in Trust II should have been August 20, 1976, thirty days after the stock was received. See, Trial Ex. 449, Trial Ex. 468.
3.Trust III
Trust III was funded on July 20, 1966 with 1000 shares of Kodak stock, and there is no evidence of any review for ten years. Stip. 143, 145. In February, 1977, the Trustee sold half of the Kodak shares at once, selling the rest in January, 1979. The Trustee is also unable to identify which employee was assigned to manage the Trust for the first ten years after its funding.
Adequate record keeping is a part of a fiduciary's duties under New York state law. Case law has repeatedly held that if a fiduciary "fails to maintain adequate records of its conduct and transactions, all doubts and presumptions are resolved adversely against it." Matter of HSBC Bank USA (Knox), 30 Misc 3d 1201(A) (Surr. Ct. Erie Co. 2010) (modified on other grounds); Matter of Camarda, 63 AD2d 837 (4th Dep't 1978); 1 Harris NY Estates: Probate Admin. & Litigation §13:36 (6th Ed.) ("A corollary to this duty to account is the requirement that the fiduciary maintain written records that reflect the administration of the estate or trust ... If a fiduciary fails to maintain adequate records of conduct and transactions, all doubts and presumptions are resolved against him or her.") Practically speaking, while the Court agrees with the Trustee's contention that it would be unrealistic to expect a file from 1966 to be impeccably preserved, it is similarly difficult to believe that a prudent corporate fiduciary would not generate or retain a single piece of paper pertaining to an account of this size. See, e.g., Matter of Dumont, 4 Misc 3d 1003(A) (Surr. Ct. Monroe Co. 2004), rev'd on other grounds, Matter of Chase Manhattan Bank (Hunter), 26 AD3d 824 (4th Dep't 2006) ("The complete lack of documentation alone is itself a breach of trust.") citing, Matter of Rockefeller, 3/1/2004 N.Y.L.J. 31, col. 2 (Surr. Ct. NY Co.); see also, Matter of Reckford, 307 NY 165, 175-76 (1954).
For the foregoing reasons, the Trustee shall be surcharged for Trust III based on a hypothetical sale date of 95 percent of the Kodak stock on August 19, 1966, thirty days after the stock was received. See, Trial Ex. 453, Trial Ex. 470.
C. Calculation of Lost Capital
The "lost capital" method of calculating damages described in Janes, and applied and clarified in subsequent cases is intended to compensate the beneficiaries for a loss of capital that occurred incrementally over time. The damages equal the value of the stock on the date it "should have been sold, minus the value of the shares when they were ultimately sold or transferred, minus any income attributable to the stock retained, plus interest at the legal rate, compounded from the [date on which the stock should have been sold]." Matter of Janes, 223 AD2d 20, 36 (4th Dep't 1996); see also, Matter of Garvin, 256 NY 518 (1931); Matter of JP Morgan Chase Bank (Hunter), [*22]27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010). The compound interest is applied to any dividends received as well, as they were received. Matter of HSBC Bank (Knox), 98 AD3d 300, 321(4th Dep't 2012).
The initial amount of lost capital must be calculated at the time of the breach, net of any capital gains taxes that the fiduciary would have paid in order to reinvest the capital, and subsequent sales of the stock are credited back to the Trustee to reduce damages, but only after capital gains taxes are accounted for. "A determination of the amount of lost capital requires a review of the net after-tax proceeds that would represent the capital available to the trust after sale." Matter of Saxton, 274 AD2d 110, 120 (3d Dep't 2000); see also, Knox, 98 AD3d at 321 (4th Dep't 2012).
Trust I is the only one of the three subject Trusts in this case in which the stock came from the time of Kodak's inception, and did not receive a step up in tax-basis for over eighty years. Due to this unique circumstance, the application of the lost capital calculation method described in Janes with the hypothetical sale occurring net of the significant capital gains taxes, results in no damages for that Trust. See, Trial Ex. 445. This result is however, properly separated from the analysis of liability, as the evidence clearly establishes that the Trustee breached its fiduciary duty in the Trust's administration.
As the Fourth Department clarified in Janes, "a fiduciary's conduct is not judged strictly by the success or failure of the investment." 223 AD2d 20, 27 (4th Dep't 1996); EPTL 11-2.3(b)(1)("The prudent investor rule requires a standard of conduct, not outcome or performance."). The Trustee argues that this Court should conflate the liability and damages portions of this case, and hold that a fiduciary should be insulated from a finding of liability in situations in which the Janes calculation method does not result in a damages surcharge. However, this argument is contrary to statute and case law, and serves "to assure fiduciary immunity in an advancing market." Matter of Morgan Guaranty Trust Co., 89 Misc 2d 1088, 1091 (Surr. Ct. NY Co. 1977)(internal citations omitted).
This argument was recently rejected by the Second Department in Matter of Hunter:
Essentially, the Bank asks the court to consider the net gain to find that there is no liability. While the Bank repeatedly characterizes objectants' arguments as hindsight, it is the Bank that has engaged in hindsight by suggesting that an overall gain in the trust corpus protects it from surcharge. As the courts in King, Donner, Saxton and Janes instruct, the standard measures behavior during the entire course of the administration of the trust and does not turn on investment success or failure. Matter of Hunter, 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010); aff'd Matter of Hunter, 100 AD3d 996 (2d Dep't 2012).
Further, this case involves three Trusts with the same beneficiaries, and the same negligent management resulted in significant damages for Trusts II and III.
D. Taxation of Dividends
Overall, the central focus of the lost capital method is to determine the "net after-tax proceeds that would represent the capital available to the trust" after the hypothetical sale. Matter of Saxton, [*23]274 AD2d 110, 120 (3d Dep't 2000). The Objectants argue that since the rolling damages balance gets reduced as dividends on actually held shares are paid to the income beneficiary, that those dividend payments must be considered net of taxes that the income beneficiary paid on them. However, the taxes paid on the dividends are the responsibility of the income beneficiary, not the Trust, and "the purpose of damages is to replace capital that has been lost by the trust, not by the beneficiaries." Matter of HSBC Bank USA (Knox), 98 AD3d 300 (4th Dep't 2012). As the Trustee points out in its memoranda, if the income beneficiary had, instead of receiving a dividend payment, requested a distribution of principal, that amount would be credited against the damages balance net of any capital gains taxes paid by the Trust. Additionally, no proof was introduced demonstrating what the income beneficiary's income, deductions, or tax filing status was during the years in question. Any money the income beneficiary actually received from the improperly held stock must logically be used to reduce the eventual damages award, but the manner in which she satisfied her individual responsibility to the Internal Revenue Service is outside of the knowledge of this Court, and properly outside of the calculation of the damages award.
E. Rate of Interest
In addition to assessing damages for lost capital, interest shall be awarded from the date on which the stock should have been sold. See, Matter of Garvin, 256 NY 518 (1931). It is within the Court's discretion whether to award interest, and to determine what interest rate is appropriate. CPLR 5001; SCPA 209[1]; see also Matter of Janes, 90 NY2d at 55—56 (1997).
As set forth by the Fourth Department in Knox, while the rate of interest is generally left to the discretion of the Surrogate, the appropriate value of statutory interest for damages occurring before June 15, 1981 is six percent, and nine percent thereafter. Matter of HSBC Bank (Knox), 98 AD3d 300 (4th Dep't 2012); CPLR §5004 (L. 1972, ch. 358). This was also the rate used by the Court of Appeals in Janes. The Trustee suggests that using the U.S. Treasury rate would more accurately reflect the rate of return that the beneficiaries would have received if they had sold the Kodak stock and invested it all in a single risk-free investment. However, "[i]f a successful claimant was able to access a monetary award immediately, the claimant could invest those proceeds in a wide range of prudent investment choices, including money market funds, corporate bonds or reasonably-risked equity funds. Hence, it makes sense to consider a full spectrum of investments—both public and private—in determining an appropriate rate of interest." Denio v. State, 7 NY3d 159, 167 (2006).
The record here demonstrates a breach of fiduciary duty occurring on separate dates for the three Trusts at issue, and therefore, the Court awards statutory interest at six percent prior to June 15, 1981, and nine percent thereafter, compounded annually, from the dates discussed above.
F. Commissions and Attorneys' Fees
The Trustee has, over the course of its management of the three Trusts at issue, received in excess of $400,000.00 in fees and commissions. The Court of Appeals has upheld a Surrogate's exercise of discretion to deny the commissions of a corporate fiduciary that has been found to have acted imprudently. Matter of Janes (Janes III), 90 NY2d 41, 56 (1997); Matter of Donner, 82 NY2d 574 (1993). The denial of the corporate commissions is appropriate in this case. The Trustee held itself out as a fiduciary with special investment skill, and charged as such, but the evidence [*24]demonstrates that the Trust beneficiaries did not receive a level of professional involvement and expertise commensurate with that cost. Therefore, the Trustee must forfeit its commissions and fees relating to trust management. However, attorneys' fees paid by the Trusts in the course of its management were necessary and ordinary expenses associated with the administration of the Trusts and shall not be added to the surcharge.
The Court also declines to direct either party to pay the others' attorneys' fees associated with this litigation. Counsel fees are not generally awarded "where there is no agreement, statute or rule providing for such fees and where the losing party has not acted maliciously or in bad faith." Knox, 98 AD3d at 323 (4th Dep't 2012).
V.Conclusion
In accordance with the analysis above, the damages shall be calculated by determining the gross value of 95 percent of the Kodak shares in each Trust on the hypothetical sale dates, measured by the average of the high and low value of the stock on that day, less any capital gains tax which would have been incurred upon the sale of such shares to obtain the net value of those shares on those dates. This value forms the beginning of the rolling balance. Moving forward, proceeds received from any sale of Kodak stock shall be credited against the rolling balance on the date of receipt, net of capital gains tax. Dividends received on the shares held shall also be credited against the rolling balance on the date of receipt. Per diem interest at the statutory rates shall be calculated each year on the rolling balance as adjusted. The total annual per diem interest shall be added to the rolling balance at the end of each calendar year which shall then constitute the base for calculating per diem interest for the ensuing year. See, e.g., Matter of JP Morgan Chase Bank (Hunter), 27 Misc 3d 1205(A) (Surr. Ct. Westchester Co. 2010); Matter of Janes, 223 AD2d 20, 36 (4th Dep't 1996); Matter of Garvin, 256 NY 518, 521 (1931).
This is the method generally used by the parties' experts as demonstrated by Trial Exhibits 445, 462, 449, 468, 453, 470, with the exception that the Objectants' expert improperly included dividends net of taxes. Based primarily on the testimony and exhibits prepared by Dr. G. William Schwert, the base surcharge value shall be set at $3,069,644.00. The ultimate surcharge shall be reduced to reflect this Court's prior Decision regarding the application of the pro tanto rule, and interest and the value of trustee's commissions paid shall be added to this surcharge amount.
In order to settle the Order, the parties are hereby directed to each file with the Court a proposed Order applying the above calculation within 60 days of the date of this Decision. Any discrepancy in surcharge value will be resolved by this Court based on the record, or after the appointment of a Court Evaluator, costs to be apportioned to the parties. Alternatively, the parties may stipulate to settle the Order within 60 days from the date of this Decision in accordance with 22 NYCRR 207.37.
November 26, 2013Edmund A. Calvaruso
Hon. Edmund A. Calvaruso, Surrogate
ENTER:
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