Judges: Thomas
Filed Date: 12/30/1998
Status: Precedential
Modified Date: 10/19/2024
OPINION OF THE COURT
In this contested trustee’s accounting, the beneficiaries of the trust have filed objections to the account on the basis of the trustee’s failure to diversify a portfolio consisting of a high concentration of the common shares of stock in a single corporation.
The executors’ final account and the final decree of judicial settlement in the estate dated January 25, 1962 contained, among other assets, 1,575 shares of International Business Machines (IBM) common stock valued at $569,853.50 which were turned over to the named trustee to administer pursuant to the terms of the testamentary trust set forth in the decedent’s will.
The decedent’s surviving spouse, Anna E. Saxton, died on March 12, 1993 thus terminating her life estate. The Manufacturers and Traders Trust Company, successor in corporate interest to the original named corporate trustee, the Endicott Trust Company, filed its final accounting as trustee on November 4, 1993, showing on hand as of March 12, 1993 among other assets, 53,692 shares of IBM stock with a market value of $2,986,617.50.
The two daughters of the decedent holding the remainder interest filed their objections to the account of the trustee on December 28, 1993, alleging a breach of the trustee’s fiduciary duty, loyalty, and impartiality, loss of income and principal because of its failure to diversify the corpus of the trust in maintaining the stock portfolio entirely in IBM for a period of over 30 years, despite extensive knowledge within the financial community of the deterioration of IBM’s financial condition, failure to exercise reasonable prudence in the management of the trust, and failure to liquidate the IBM stock in order to sustain its own trustee’s commission. They seek to surcharge the trustee on account of the damages incurred, to deprive the trustee of its commissions, and assess all attorneys’ fees and costs in connection with the defense of the objections against the bank.
The principal defense to the objections and the document upon which the trustee fundamentally bases its justification for retaining the high concentration of IBM stock is an invest
Prior to the preparation of the investment direction agreement (hereinafter IDA), on October 2, 1959, Mr. Cooper, then assistant vice-president and trust officer of the Endicott Trust Company, wrote to R. K. Fox, the vice-president of Hanover Bank, the then parent corporation of Endicott Trust Company, seeking his advice on the validity of a letter of indemnification from the beneficiaries regarding the holding of IBM stock and its ability to relieve the Endicott Trust Company from liability of a possible future surcharge. Additionally, Mr. Cooper asked if such a letter would have any tax consequences upon the trust (irrelevant in this proceeding). Respondent’s exhibit 9 is a letter in response from R. K. Fox addressed to Mr. Cooper, dated October 7, 1959, which states among other things: “The trustee appears to have full power of retention under will and any approvals by the beneficiaries would appear to be a gratuitous indication of their satisfaction and we believe would bar them against future criticism. However continued retention at some subsequent date could conceivably be much less attractive and could require reaffirmation of the approvals to continue holding. In short, we do not believe that you can get an approval of this kind that would place the burden of revocation of the approval upon the beneficiaries.” Mr. Fox then concludes by addressing the tax question raised by Mr. Cooper.
Commencing in 1984, the daughters began to meet with the then trust officer William Nesbitt on an annual basis. It was in that period of time that they began to discuss diversification with Nesbitt and continued to do so during 1986. Crittenden averred that the trust officer, Nesbitt, insisted that as long as IBM was on the Irving’s buy list (Irving being the then parent corporation of the Endicott Trust Company) that the bank would continue to hold 100% IBM in the corpus of the trust. In the fall of 1986, the value of the portfolio had reached $7 mil
At the same time that two of the three beneficiaries of this trust were demanding diversification, Nesbitt was taking the position that his hands were tied as long as there was not a unanimous written revocation of the IDA. The bank’s own policy, set forth in an internal memorandum dated April 29, 1987, provides on the second page under III, Diversification, at subparagraph C (see, respondent’s exhibit 3), the following statement: “Large concentrations of IBM stock — It should be noted that there are several large accounts where we are asked to hold IBM stock, exonerated from holding these stocks as original investments, and yet we have the power to sell them should circumstances dictate. Therefore, these accounts should also be carefully scrutinized and this is one of the reasons for our special review of IBM stock as a corporation holding. At least once a year, a complete review of IBM is presented to the Directors’ Trust Committee meeting. These accounts with large concentrations include the Saxton account #243” (emphasis added). It is abundantly clear from anyone sitting through the trial and listening to the testimony of Nesbitt, that in addition to his blind reliance upon a nearly 30-year-old IDA he was obsessed with the concept that the remaindermen in this trust should take the IBM stock in kind at the death of the life tenant, hold the stock for their entire life, run the stock through their own estates, permitting their heirs to pick up a stepped-up basis. He failed to take into consideration the needs or desires of the majority of the beneficiaries of this trust, he violated his own bank’s policy, and seemed to have no conception in what a dangerous position he was placing his employer by not at least responding to the beneficiaries’ demands with a comprehensive diversification plan.
In October of 1987, in a general market decline, the trust lost over $4 million.
The court has previously noted the distinction between the case at bar and Matter of Janes (supra), but except for the existence of the IDA, and the inter-relationship between the beneficiaries and the trustee, the cases are strikingly similar. In
The bank held itself out to this family as a professional fiduciary, an expert and superior to an individual trustee. That, in this court’s view, is an important reason it cannot shift the responsibility for its imprudence upon the beneficiaries by a strict interpretation of an ancient IDA.
The court recognizes that with the volume of trusts held by banks, to require annual reviews of ID As where there are united beneficiaries would be an unreasonable burden to place upon the institutions of this State. When, however, there is demonstrated disagreement on the part of the beneficiaries it seems to this court that the bank has the obligation to advise the beneficiaries in writing of the bank’s own investment policy and seek from them a reaffirmation of their desire to continue to retain a high concentration of one issue without diversification. Failing to receive such unanimous reaffirmation, the bank should revert to its own policy within 30 days by implementation of a plan of diversification. It is noted again, as previously done by this court, that the bank’s own expert testified that the
As to the date which diversification and divestiture should have taken place, the Court of Appeals in Matter of Janes (supra, at 54, citing Matter of Donner, 82 NY2d 574, 585-586) states “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 divesture of the imprudently held investment should have occurred” (citing also Matter of Weston, 91 NY 502). The Court of Appeals continues (at 54), “What constitutes a reasonable time will vary from case to case and is not fixed or arbitrary * * * The test remains ‘the diligence and prudence of prudent and intelligent [persons] in the management of their own affairs’ ”. Injected into this review of the fiduciary’s conduct throughout the entire period of the trust is the existence of the IDA. A fiduciary should be entitled to rely on an investment directive from the beneficiaries in contravention of the normal policy of the bank for a reasonable period of time, or until such time that there is demonstrated disagreement among the beneficiaries, provided however that the bank does not completely abdicate its fiduciary responsibility to periodically advise the beneficiaries of time-tested formulas for protecting their investments from the inroads of a fluctuating market. This is a reasonable and fair standard, particularly when considering the fact that a corporate fiduciary holds itself out as an expert, superior to a layman trustee. This professionalism is recognized
According to Nesbitt’s own testimony, he never met with the respondents until 1984, and that meeting was ¿t their request. Crittenden’s unrefuted testimony shows that it was at these meetings that she began to raise the question of diversification, and that during 1986 she became increasingly concerned and continued to question him relative to diversification. It was during this time that IBM was underperforming the market. On April 29, 1987, the bank revised its trust department’s diversification policy to include a subsection entitled Large Concentrations of IBM Stock, calling for the careful scrutiny of portfolios containing large concentrations of IBM, specifically mentioning the Saxton account which was their No. 243. Finally, on August 7, 1987 there was a clear and documented repudiation of the IDA by Crittenden’s letter in which she explained her refusal to sign Nesbitt’s July 23rd offer for reaffirmation because she and her sister wanted a diversification plan. This letter w.as received by the bank on August 10, 1987, and in the court’s view should have galvanized the bank into action and an immediate diversification plan. Thus, these culminating events, the continuing underperformance of IBM compared to the Dow Jones, the change in the bank policy emphasizing special scrutiny on large concentra
The court rejects the bank’s contention that from any damages assessed there should be subtracted the capital gains tax that would have been generated by a liquidation of 90% of the IBM stock (see, Dobson v Commissioner of Internal Revenue, 320 US 489 [1943]; Matter of Janes, supra).
[5] Respondents also maintain that the bank be denied its commissions as trustee in this proceeding, citing Matter of Junkersfeld (244 App Div 260), In re Mattison’s Will (17 NYS2d 735), and Matter of Janes (supra). In Matter of Junkersfeld (supra), heretofore reviewed by the court on the question of estoppel and ratification, commissions were denied by the
Finally, the respondents seek the direction of this court that the bank’s attorneys’ fees should be charged to it and not. payable from the trust and that the bank be additionally surcharged for respondents’ attorneys’ fees and disbursements.
First, turning to the bank’s attorneys’ fees, it is a generally accepted principle that in a contested accounting where a trustee is found to have been imprudent, the trustee is disallowed payment from the trust of the trustee’s attorneys’ fees incurred in defending the objections (see, Matter of Newhoff, 107 AD2d 417; Matter of Janes, supra; Matter of Rothko, 84 Misc 2d 830, mod on other grounds 56 AD2d 499, affd 43 NY2d 305; Matter of Della Chiesa, 23 AD2d 562). Therefore, the attorneys for the petitioner must look to their client for all fees and disbursements incurred in defending the bank against the objections to the final account. As to the respondents’ attorneys’ fees, it is a general rule that a party is not entitled to recover attorneys’ fees from an opposing party even though the necessity of engaging in litigation was caused by the wrongful acts of the opposing party (see, Matter of Rothko, supra; Alyeska Pipeline Serv. Co. v Wilderness Socy., 421 US 240). It is true that the principal reason for the decline of the assets of this trust was the neglect and imprudence of the trustee, nevertheless the court has found no self-dealing or fraud on the part of
In a recent article in the New York State Banking Journal by Charles F. Gibbs, entitled Corporate Fiduciaries, Diversification, and the Prudent Person Rule, Mr. Gibbs, after analyzing Matter of Janes (referred to there as Matter of Lincoln First Bank), concludes with several words of advice for the corporate fiduciary among which are that professional fiduciaries should make a thorough analysis of the investments that they hold, not only at the beginning but on a continuing basis. He further states that having a concentration in and of itself can be a hazard, and that corporate fiduciaries should ensure that their internal rules and protocols are being followed by their officers. Finally, he advises that beneficiaries should be given meaningful information and advice and not treated casually or ignored.
The bank in this case has throughout the five years of litigation attempted to thrust on the respondents the blame for the decline in the value of the Saxton trust. This bank, and the banking community at large, however, must recognize and understand, as did Mr. Fox from the Hanover Bank when he wrote to Roger Cooper back in 1959, that a professional fiduciary, or indeed, any fiduciary cannot permanently delegate its fiduciary responsibility and authority to the beneficiaries by means of an IDA.
A fiduciary must be as a watchman in the night, ever vigilant and always dedicated to the best interest of the cestui que trust.
[Portions of opinion omitted for purposes of publication.]