HSBC BANK USA, N.A. v. KNOX, JEAN R. ( 2012 )

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
610
CA 11-00035
PRESENT: SCUDDER, P.J., SMITH, CENTRA, AND LINDLEY, JJ.
IN THE MATTER OF THE JUDICIAL SETTLEMENT OF
THE INTERMEDIATE ACCOUNT OF W.A. READ KNOX,
SUCCESSOR TRUSTEE, AND JEAN R. KNOX AND HSBC
BANK USA, N.A., AS TRUSTEES OF THE TRUST UNDER
ARTICLE SEVENTH OF THE WILL OF SEYMOUR H.
KNOX, III, DECEASED, FOR THE BENEFIT OF
JEAN R. KNOX (MARITAL TRUST) FOR THE PERIOD
JUNE 3, 1996 TO NOVEMBER 3, 2005.
---------------------------------------------- MEMORANDUM AND ORDER
HSBC BANK USA, N.A., PETITIONER-APPELLANT;
JEAN R. KNOX, W.A. READ KNOX, SEYMOUR H.
KNOX, IV, AVERY KNOX AND HELEN KEILHOLTZ,
OBJECTANTS-RESPONDENTS.
(PROCEEDING NO. 2.)
(APPEAL NO. 5.)
HARRIS BEACH PLLC, BUFFALO (RICHARD T. SULLIVAN OF COUNSEL), AND BLAIR
& ROACH, TONAWANDA, FOR PETITIONER-APPELLANT.
DONALD G. MCGRATH, PLLC, WILLIAMSVILLE (DONALD G. MCGRATH OF COUNSEL),
AND DUKE, HOLZMAN, PHOTIADIS & GRESENS LLP, BUFFALO, FOR OBJECTANTS-
RESPONDENTS.
Appeal from an order of the Surrogate’s Court, Erie County
(Barbara Howe, S.), entered February 24, 2010. The order determined
that petitioner had been negligent and that petitioner is liable for
all damages occasioned by its negligence.
It is hereby ORDERED that the order so appealed from is
unanimously modified on the law by vacating that part of the order
holding that petitioner is liable for all damages arising from the
investment of $200,000 in Efdex, Inc. and by denying the amended
objections pertaining to that investment only insofar as they are
asserted by objectants Jean R. Knox and W.A. Read Knox and as modified
the order is affirmed without costs, and the matter is remitted to
Surrogate’s Court, Erie County, for further proceedings in accordance
with the following Memorandum: Petitioner, HSBC Bank USA, N.A.
(Bank), appeals from an order determining that the Bank, as cotrustee
of the testamentary trust at issue in this proceeding, was negligent
in purchasing stock in Efdex, Inc. (Efdex) and that the Bank is
“liable for all damages occasioned by its negligent conduct.” The
trust was created in the last will and testament of Seymour H. Knox,
III (decedent) to provide income to his wife, objectant Jean R. Knox.
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CA 11-00035
Upon the death of decedent’s wife, the principal would be distributed
equally among the remaining objectants. The Bank, under its former
name, was named as a corporate trustee, and decedent’s wife and
brother were named as individual trustees. After decedent’s brother
died, decedent’s son, W.A. Read Knox (objectant Read Knox), was
substituted as a successor individual trustee.
In July 2006, the Bank petitioned to resign as trustee and to
settle the “intermediate account of the proceedings of the Trustees.”
Attached to the petition was an interim accounting showing, inter
alia, an August 2000 investment of $200,000 in Efdex, an Internet-
based “trading platform and information network for the food and
beverage industry.” It is undisputed that the investment was
“worthless” by September 2001. In their amended objections to the
accounting, the five objectants contended that, by investing in Efdex,
the Bank “failed to comply with the prudent investor standard as
provided for in EPTL 11-2.3 (b).”
Following a trial on the objections, Surrogate’s Court concluded
that the Bank had violated the prudent investor standard by failing to
comply with its own internal policies and procedures before investing
in Efdex, a high-risk corporation. The Surrogate determined, however,
that the Bank was liable for all damages occasioned by the investment
in Efdex on the ground that decedent’s wife and objectant Read Knox
were “unsophisticated in the investment area [and] relied on the
expertise of the [Bank].” The Surrogate did not address the amended
objections insofar as they were also submitted by the remaining three
objectants.
The Bank does not dispute that its portfolio manager failed to
comply with the Bank’s internal policies and procedures with respect
to investing in high-risk initial public offerings. The Bank
contends, however, that the exclusionary clause found in article
Twelfth, section J, of the will absolves it of liability. We reject
that contention. That section states that, where there is a
disagreement between the corporate trustee and the individual
trustees, “the decision of the individual [t]rustees shall be final
and [the] corporate [t]rustee shall have no liability for any action
taken in accordance with the decision.” Here, however, there was no
disagreement.
Contrary to the contention of the five objectants, we conclude
that, pursuant to the cofiduciary liability rule (see generally
Zimmerman v Pokart, 242 AD2d 202, 203), all cotrustees are jointly
liable for any damages occasioned by the investment in Efdex. The
cofiduciary liability rule provides that “[c]ofiduciaries are . . .
regarded in law as one entity . . . [and thus one cofiduciary] cannot
prevail in a cause of action against [other] cofiduciaries for breach
of the same obligation” (id.; see Matter of Goldstick, 177 AD2d 225,
238-239, rearg granted on other grounds 183 AD2d 684).
Although the five objectants are correct that “[a] trustee may
delegate the exercise of a trust power to a fellow trustee, especially
where the latter has an expertise in some particular aspect of the
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CA 11-00035
trust management . . ., [such a delegation] does not give a trustee
the right to abdicate his [or her] duty to be personally ‘active in
the administration of the trust’ ” (Goldstick, 177 AD2d at 238).
“[T]rustees cannot be automatically relieved of their responsibility
for properly managing a trust with the excuse that their roles were
merely ‘passive’ in comparison to [those of] their more active
cotrustee” (id.). The five objectants are also correct that there are
exceptions to the cofiduciary liability rule where there is no
evidence that the passive cofiduciaries knew of or participated in
another cofiduciary’s misfeasance or culpable misconduct (see e.g.
Matter of Witherill, 37 AD3d 879, 881-882; Goldstick, 177 AD2d at
239).
Here, however, decedent’s wife and objectant Read Knox were not
passive with respect to the Bank’s investment in Efdex and were not
ignorant of that investment. It is clear from the record that
objectant Read Knox actually “directed” the Bank to make that
investment. In such circumstances, “[e]quity will not permit a
knowing cofiduciary to maintain a suit against another cofiduciary for
a breach of their joint obligations” (Matter of Bloomingdale, 48 AD3d
559, 561; see Matter of McCormick, 304 AD2d 759, 760, lv dismissed 3
NY3d 656, 733; see generally Matter of Niles, 113 NY 547, 557-559,
rearg denied 21 NE 1118).
We reject the Surrogate’s determination that neither decedent’s
wife nor objectant Read Knox was sophisticated in the “investment
area.” Although decedent’s wife “had no formal training in regard to
investments, . . . the evidence revealed that she was far from a
passive trustee” (Matter of Farley, 186 Misc 2d 355, 357). She was a
trustee in several trusts and brought the idea of investing in Efdex
to the attention of the Bank’s portfolio manager. The Surrogate
described objectant Read Knox as having had “a varied career, with
positions primarily in financial lending and real estate mortgage
companies.” In our view, such a description is a gross
mischaracterization of his investment and financial acumen as
established by his deposition testimony, which was received in
evidence at trial. After graduating from Yale University, objectant
Read Knox was a mortgage loan officer and was involved in the mortgage
business “on and off for the last 20 years.” He once owned “a large
mortgage company,” known as Knox Financial Group, and he had
postgraduate experience in “financial businesses” and “in the banking
business.” In addition, objectant Read Knox participated in a special
training program at Safe Deposit and Trust Company, which he described
as “the largest trust department south of Philadelphia.” During his
training, he “went through every department of the trust department.”
Of particular note, he served as “a stockbroker for Legg Mason for a
couple of years” and was involved in several “private ventures.” We
thus cannot agree with the Surrogate that decedent’s wife and
objectant Read Knox had “no special investment skills.” Rather, we
conclude that they were much like the skilled and knowledgeable
cotrustees in Bloomingdale (48 AD3d at 561; see also Matter of Hyde,
44 AD3d 1195, 1198, lv denied 9 NY3d 1027; Witherill, 37 AD3d at 880).
In sum, we conclude that equity cannot permit decedent’s wife,
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CA 11-00035
the cotrustee who served as the driving force behind the investment,
and objectant Read Knox, a highly skilled cotrustee, to recover
damages from the Bank, their cofiduciary, arising from the investment
in Efdex. We therefore modify the order by dismissing the amended
objections insofar as they are asserted by decedent’s wife and
objectant Read Knox, and we remit the matter to the Surrogate for
further proceedings on the petition and the amended objections insofar
as they are asserted by the remaining three objectants.
Entered: June 19, 2012 Frances E. Cafarell
Clerk of the Court