Opinion
2008-2623.
Decided June 28, 2011.
Davis Gilbert LLP (Neal H. Klausner, Esq., of counsel) for Frieda Tydings, petitioner.
Slade Newman LLP (Ira L. Slade, Esq. and Louis I. Newman, Esq., of counsel) and Ruskin Moscou Faltischek, P.C. (C. Raymond Radigan, Esq., of counsel) for Ricki Singer, objectant.
James T. Reynolds, Esq., Guardian Ad Litem, for Daniel Singer.
A bench trial was held on the issues raised in objections filed by the grantor/beneficiary (the objectant) to the petitioner-trustee's account for the Ricki Singer Grantor trust (the trust) for the period from November 1, 1993, the date the trust was established, to December 31, 1996, the date the petitioner resigned as trustee. The trust agreement provides that the grantor is to receive income for life and permits invasions of principal at the discretion of the trustee. The remainderman is the grantor's son Daniel. The issues raised in the 50 objections were tried over a one-week period.
Although the parties agree that one of the primary purposes of the trust was to protect the objectant's assets from Daniel's father, they disagree as to its ultimate goal. The objectant contends that the trust was intended to provide her with sufficient income for life, while the petitioner asserts that the primary purpose was to provide the objectant with income for a limited period to assist her in acquiring skills she needed to become gainfully employed. It appears that another reason for the creation of the trust was to protect the objectant's assets in the event that she suffered a relapse in her battle with drug addiction.
The trust agreement contains numerous provisions granting broad discretion to the trustee to retain non-income producing assets and limiting her liability for any losses incurred by the trust. Apparently these provisions were included because the trust corpus initially consisted primarily of closely-held family owned businesses or investments in which the trustee, who is the objectant's cousin, and four other family members, presently own equal shares. Specifically, the trust agreement authorizes the trustee: (1) to retain an original investment for any length of time without liability for such retention; (2) to join or participate in a corporation, partnership, joint venture or any other business association and to contribute capital to any such venture; (3) to make loans in such amount and upon such terms to any such venture; and, (4) to act on behalf of both the trust and herself or another entity with regard to any transaction in which both the trustee and the trust or the other entity have an interest. The trust agreement further provides that the trustee shall not be responsible for any loss unless such loss results from bad faith or fraud on the part of the trustee, and the trustee shall not be disqualified from acting because the trustee holds an interest in any property or entity in which the trust also holds an interest. The objectant, as grantor, retained the right to revoke the trust upon the consent of the petitioner.
The thrust of the objections are based on the trustee's: (1) use of the trust principal to make gifts to family members including the objectant's son; (2) making of interest free loans to Romulus Holdings, Inc. (Romulus), a family owned business; (3) transfer of profits or benefits received from a trust investment in TWA bonds to Romulus or family members other than the objectant; and, (4) failure to keep adequate records to substantiate the trust transactions. Only the major objections are highlighted in this decision. Specifically, although the court has considered every issue raised in the pleadings in connection with the proof adduced at the trial, some of those issues are not discussed herein either: (1) because no or insufficient proof was adduced to support fixing an appropriate surcharge even if it is assumed, arguendo, that the petitioner breached a fiduciary duty with regard to that issue; or, (2) because the issue raised was cumulative to the court's grant or denial of the objections seeking to deny the trustee statutory commissions.
The witnesses for the petitioner were herself and Steven Singer, the objectant's brother who became the successor trustee. The witnesses for the objectant were herself, the petitioner's mother Norma Brandes, and Dean Surkin, an expert witness on certain TWA security transactions. Portions of the depositions of the petitioner and the objectant were also read into the record.
The objectant, who graduated from Hofstra College in 1980, testified that thereafter she suffered from substance abuse for approximately a decade between 1982 and 1992. Prior to returning to New York with her boyfriend with whom she was residing at or about the beginning of 1993, she resided in California where she completed a drug rehabilitation program. While in California, the objectant was the owner and operator of an Australian import retail store for approximately six or seven months until it went out of business. Since the objectant moved from California she has had no problem with substance abuse except for a three-month relapse arising from her use of pain medication that was prescribed in January, 1994 when Daniel was born.
In 1993, while the objectant was pregnant and in her mid thirties, her relationship with her boyfriend began to deteriorate and her father, primarily, but also her brother, began discussions about establishing a trust to protect her assets. Her father died on October 26, 1993, and the trust was executed during the shiva period on November 1, 1993. Although the objectant conceded that she selected the petitioner, her cousin as well as a friend since childhood, to be the trustee for her trust, she asserted that she did not read the trust provisions until shortly prior to the commencement of the instant litigation. Furthermore, she had no recollection of discussing the terms of the trust with the attorney-drafter, who apparently represented other members of her immediate family as well as herself over an extended period of time. Similarly, the objectant testified that she was not aware of the extent of her assets and assumed that she received the assets from her father. Essentially, the objectant testified that she blindly followed the advice of her father and other family members that the trust was a good vehicle to protect her assets from the father of her then nascent son Daniel.
The petitioner and Steven testified similarly with regard to the events leading up to the establishment of the trust. Both indicated that prior to the establishment of the trust, the objectant discussed its provisions with family members and the attorney who drafted the instrument. The objectant's brother Steven, an attorney, gave the first instructions for the preparation of the trust to the attorney-drafter who previously prepared a will for the objectant. Steven recalled discussing the trust with the objectant prior to its establishment and being present during a discussion between the objectant and the attorney-drafter about the trust document. Steven also testified that the objectant met with the attorney-drafter alone on at least one occasion about the trust provisions.
The petitioner testified that she agreed to become the trustee at the urging of both the objectant's father and the objectant due to her friendship with the objectant from childhood. The petitioner carefully read every provision of the trust, including the exculpatory clauses, before undertaking the responsibility of serving as the trustee.
It appears that the objectant was satisfied with the petitioner's services as trustee until some time in the second half of 1996. The objectant and the petitioner testified similarly with respect to the manner in which the trust funds were expended for the petitioner's benefit. The petitioner, on a regular basis, transferred a limited sum of money from the trust assets in her sole control to a checking account. Although this checking account was considered a trust account by the parties, the objectant was the sole party who could draw checks on the account, and she also made withdrawals from this account using an ATM card. The petitioner also paid some of the objectant's fixed monthly expenses directly from the trust assets and paid other expenses after the objectant submitted bills to her. The petitioner claimed, and the objectant did not dispute, that the petitioner expended approximately $10,000 a month from the trust assets for the objectant's benefit during the period of this accounting.
The relationship between the objectant and the petitioner deteriorated during the last six months that the petitioner served as the trustee because, by that time, the objectant was of the opinion that the petitioner was much too controlling. It appears that the final straw was when the petitioner initially refused to use trust funds to enable the objectant to purchase a home in Tenafly, New Jersey. Although the petitioner ultimately succumbed to the objectant's request to use trust funds to purchase the home, the petitioner, at the objectant's request, was apparently happy to resign as trustee on December 31, 1996.
In most respects the objectant, her brother Steven and the petitioner testified similarly with regard to gifts made from the objectant's trust to a trust for the benefit of the children of the objectant's brother Gary and to a trust for the benefit of the objectant's son Daniel. On two occasions, third parties made $30,000 gifts to the objectant's trust. Shortly thereafter, the petitioner transferred $60,000 to the checking account from which the objectant could withdraw funds. Thereafter, as a result of checks drawn by the objectant on this account, a $30,000 gift was made to the trust for Gary's children on December 22, 1993, and a separate gift in the same amount was made on January 3, 1994. It appears that Gary had financial problems at that time, and Steven suggested to the objectant that her trust be used to make gifts in trust for Gary's children. The objectant testified that the gifts were made shortly prior to the time that she gave birth, so she did not focus upon the details of the transactions.
Steven also suggested that the objectant follow the example of other family members and make a gift to her minor son to save on estate taxes, and had extensive conversations with the objectant about making such a gift. Thereafter, sufficient funds were transferred from the objectant's trust to the checking account and, on September 11, 1995, the objectant signed a $600,000 check and gifted that amount to a trust that had been established for her son's benefit. The objectant also signed a gift tax return for that transaction. The objectant complained that when she made the gift to the trust for her son she was not told that the trustee of her son's trust, Steven, had discretion to make distributions to relatives other than her son; however, no such distributions have been made to date. Although the objectant testified that she is not seeking to set aside the gift made to that trust, she is seeking to surcharge the objectant for the total principal amount of the gift, plus interest at the statutory rate from the date of the gift.
Many of the facts are similarly not in dispute with regard to the loans made to Romulus. From its inception, the trust held a pre-existing $1,198,440.10 interest free loan to Romulus. That loan was repaid without interest during the period of the accounting. Nonetheless, during the same period, the petitioner made three additional non-interest bearing loans totaling $812,000 from the trust to Romulus as follows: $137,000 on July 16, 1995; $175,000 on July 18, 1995; and, $500,000 on August 18, 1995. At the end of the accounting period, the sum of $485,440.10 was still owed on these loans. It appears that the first and most of the second of the above loans were re-paid on or about September 11, 1995, and that the balance of the second loan and $14,559.10 of the $500,000 loan was re-paid on or about September 18, 1995. It also appears that the balance due on this loan was paid after the accounting period.
The petitioner testified that she kept the objectant apprised of the trust transactions in general terms. Although the petitioner stated that she reviewed all trust transactions, it appears that the trust's records were maintained by the petitioner's father, who at that time, was also the president of Romulus. The petitioner did not testify about any specific conversations she had with the objectant regarding the trust loans to Romulus, and the objectant testified that she had no knowledge or information about any of the trust's investments or financial transactions. In any event, the petitioner could not recall who requested the additional three interest free loans to Romulus. The petitioner opined that it was in the objectant's best interest to make the loans because Romulus was providing benefits to all of the family members including the objectant. Specifically, the petitioner testified that from Romulus or an entity owned by it, the objectant received the following: use of a car, a gas card, credit cards, payment of health insurance for her immediate family and the employment of her husband for a period of time after this accounting period. The objectant essentially testified that none of the benefits she received were significant.
Dean Surkin, an attorney qualified as an expert in tracing assets in trust accounting proceedings, testified on behalf of the objectant about the trust transactions involving TWA Securities. The trust originally purchased 1,040 units of a TWA bond for $200,000. While TWA was in bankruptcy the trust's original TWA investment was converted into four separate types of securities, namely: 22,715.68 shares of common stock; 3,236.69 shares of 12% senior preferred shares, 1,781.62 ticket vouchers, each with a face value of $50; and, 8,909 equity option rights. Although the trust made a profit of $174,000 on its original $200,000 investment, the objectant seeks surcharges because the trust did not receive anything for either the equity option rights or the ticket vouchers.
The objectant's brother Steven testified that he was the point person with regard to the TWA investment. He told the petitioner that he did not think it was prudent to exercise the TWA equity options. The petitioner also testified that she did not think that the exercise of the equity option rights would be a good investment for the trust. Nonetheless, the trust records reflect that on September 29, 1995, the trust received the sum of $37,306.44 from Romulus and, on October 4, 1995, the trust expended the exact same sum to exercise its options. The shares received from the exercise of the equity option rights were sold on February 22, 1996 and the net amount of $135,272.97 received from the sale was deposited into a trust account. Thereafter, on March 1, 1996, the sum of $135,272.97 was transferred from the trust to Romulus. The petitioner and Steven testified that the sale of the TWA equity option rights was always intended to be a Romulus transaction, but the transaction had to be effectuated through the trust because the equity option rights were held in the trust's name.
Mr. Surkin testified that on the date the equity option was exercised a share of stock could be sold for approximately $2.00 more than the option price for a share. Mr. Surkin also testified that based upon the value given to each of the four securities that were received in exchange for the original bond units, the trust did not use the proper basis when the transactions were reported for tax purposes. According to Surkin, the ticket vouchers had a total value of $26,035.68. Although he characterized the value as the fair market value, his valuation appears to have been based upon a formula rather than the amount the vouchers would have actually sold for on any particular date. In any event, it is clear that the trust made no attempt to sell the vouchers, as the petitioner and Steven both testified that the vouchers were transferred out of the trust for no consideration and were made available to all family members who could use them at face value. The petitioner and Steven also testified that the objectant was aware of this transaction and also used some of the vouchers. The objectant did not deny that she knew that these vouchers, as well as vouchers obtained by family owned entities, were available for use by any family member, but she indicated that if she ever used a voucher, it was on only one occasion.
The validity of several of the objections depends upon: (1) the extent to which the objectant is to be charged with understanding all of the terms of the trust, including the exoneration clauses; and, (2) the extent to which the court may enforce the exoneration clauses. The court has no reason to doubt the objectant's testimony that at the time of the creation of the trust, she was mourning the loss of her father and, shortly thereafter, she was preoccupied with the imminent birth of her child. Nonetheless, the proof adduced falls far short of establishing that the objectant should be treated as a person suffering from a disability which diminished her capacity to comprehend and consent to transactions into which she freely and voluntarily entered while she was free from any substance abuse. To the contrary, prior to the creation of the trust, the objectant obtained a college degree and was engaged in business ventures.
The court gives more weight to the recollection of the objectant's brother Steven, than it does to the objectant's recollection, with regard to whether the attorney who drafted the trust instrument went over its terms with the objectant. The fact that the objectant might have relied heavily on the advice of her father and her attorney-brother in creating the trust does not form a basis to hold that the petitioner, whose services as trustee were solicited by the objectant, is not entitled to rely upon the plain meaning of all enforceable terms of the trust. Accordingly, the court finds that the objectant shall be held to the well established rule that a person who has the ability to understand the meaning of a document cannot avoid the consequences of a document she signed because she did not take the time or trouble to both read and understand its provisions (see Pimpinello v Swift Co., 253 NY 159; Bishop v Maurer, 33 AD3d 497, affd 9 NY3d 910; Martino v Kaschak, 208 AD2d 698, lv denied 86 NY2d 703).
Exculpatory clauses relieving a testamentary trustee from liability "for failure to exercise reasonable care, diligence and prudence" are void as against public policy (EPTL 11-1.7 [a] [1]). Notwithstanding the absence of a statute declaring void similar exoneration clauses limiting the liability of trustees of lifetime trusts, there are some limitations upon the enforceability of such clauses. A trustee of a lifetime trust who is guilty of wrongful negligence, impermissible self-dealing, bad faith or reckless indifference to the interests of beneficiaries will not be shielded from liability by an exoneration clause (see Boles v Lanham, 55 AD3d 647; O'Hayer v De St. Aubin, 30 AD2d 419; Matter of Cowles, 22 AD2d 365, affd 17 NY2d 567). Moreover, where an attorney is the drafter of a lifetime trust under which that attorney is the trustee, exoneration clauses limiting the trustee's liability to bad faith acts are void as against public policy (see Matter of Shore, 19 Misc 3d 663). Nonetheless, it is clear that where, as here, a trustee was neither directly nor indirectly involved in drafting or creating the trust, and may be presumed to have relied upon the explicit provisions of an exoneration clause contained in a lifetime trust instrument before agreeing to serve as fiduciary, generally the trustee will not be held liable for acts specified in the exoneration clause (see Matter of Cowles, 22 AD2d at 378; see also Boles v Lanham, 55 AD3d at 647; O'Hayer v De St. Aubin 30 AD2d at 419).
Here, the objectant signed the checks to effectuate the $600,000 gift to the trust established for her son Daniel and the two $30,000 gifts to the trust for her brother Gary's children. The objectant also signed a gift tax return for the gift to Daniel's trust. With regard to all of the gifts it was not the petitioner who suggested that the gifts be made, instead, it was the objectant's brother Steven. Where, as here, the objectant-beneficiary knew that trust funds were to be used to make gifts to the trusts of her son and her nieces and nephews and consented to the transactions as established by her signature on the checks and a gift tax return, and the objectant did not complain about these transactions until many years later, she is now estopped from objecting to those transactions (see Matter of Levy, 69 AD3d 630, lv denied 14 NY3d 711; Matter of Bloomingdale, 48 AD3d 559; Ellinger v Brooklyn Trust Co., 248 App Div 897; Matter of Bunker, 183 Misc 523). To the extent the objectant alleges the gifts to the trust for Gary's children amounted to an improper scheme to avoid taxes or to enable more people to utilize the annual gift tax exclusion, the objectant consented to the gifts, signed the checks thereto and is in para delicto with the others involved in the scheme. Thus, she cannot profit from her own wrongful acts (see
Butterfield v Cowing, 112 NY 486; Campbell v Thomas, 73 AD3d 103), and she is estopped from complaining about those transactions (see Bogert, Law of Trusts and Trustees § 688; 106 NY Jur Trusts, §§ 370, 418, 419).
The exculpatory clauses in the trust also relieve the petitioner from any liability for the gifts made to other trusts because the trustee did not act in bad faith by making trust funds available to the objectant to effectuate those gifts (see O'Hayer v De St. Aubin, 30 AD2d at 419; Matter of Cowles, 22 AD2d at 365). Moreover, as the petitioner had discretion to either invade principal or terminate the trust at the objectant's request, it cannot be concluded that the gifts to other trusts improperly diminished Daniel's remainder interest in the trust.
To the extent that the objectant is not satisfied with some of the terms of the trust established for her son, she primarily has herself to blame for failing to read and understand its terms at the time the objectant made the gift (see Pimpinello v Swift Co., 253 NY at 159; Bishop v Maurer, 33 AD3d at 497; Martino v Kaschak, 208 AD2d at 698). Furthermore, there is no evidence that the petitioner drafted the trust instrument or suggested that the objectant make the gift. Under all of the circumstances, including that the objectant testified that she does not seek to set aside the $600,000 gift to the trust for her son, it would be inequitable to permit the objectant to make a $600,000 gift from her trust to her son's trust while also permitting her to recover $600,000 plus interest from the petitioner, individually. Accordingly, all of the objections relating to the gifts made to these other trusts are dismissed.
Turning to the $1,198,440.10 interest free loan to Romulus that was an asset of the trust from its inception, the following trust provisions are relevant: (1) the petitioner was authorized to retain an original investment for any length of time without liability for such retention; (2) the petitioner was authorized to act on behalf of both the trust and herself or another entity in which she had an interest with regard to any transaction in which both the trust and the trustee or the other entity had an interest; and, (3) the petitioner was not responsible for any loss absent bad faith or fraud. Although improper self-dealing will not come under the umbrella of protection afforded by an exoneration clause (see Matter of Cowles, 22 AD2d at 378), the rule of undivided loyalty due from a trustee "may be relaxed by a settlor by appropriate language in the trust instrument . . . which . . . either expressly or by necessary implication, recognizes that the trustee may have interests potentially in conflict with the trust" (O'Hayer v De St. Aubin, 30 AD2d at 423).
Here, it cannot be said that the petitioner was engaged in any improper self-dealing with regard to the loan that preexisted the establishment of the trust, where the trust explicitly exonerated the petitioner from liability for her retention of original assets for any length of time and authorized her to manage assets in which both she and the trust had an interest. Furthermore, the preexisting loan was paid in full during the petitioner's tenure as trustee. Under these circumstances, to hold the petitioner, who is not a professional trustee, liable for loss of income on this sum would be equivalent to allowing the objectant to profit from inducing the petitioner to serve as trustee by including trust provisions expressly relieving the petitioner of any liability for the retention of the loan, absent bad faith or fraud. In making this observation, the court does not imply that the objectant tricked the petitioner into serving as trustee with the intent or plan to thereafter hold her liable for her acts as trustee. Nonetheless, under all of the circumstances surrounding the creation and execution of the trust, it would be inequitable to hold the trustee liable for any loss of income on the prexisting loan. As the proof adduced did not establish any fraud, bad faith or reckless indifference by the trustee in retaining this original trust asset, the terms of the trust explicitly shield the petitioner from liability with regard thereto (see O'Hayer v De St. Aubin, 30 AD2d at 419; Matter of Cowles, 22 AD2d at 378).
The interest free loans that the petitioner made as trustee to Romulus must be viewed in a different light than the interest free loans that were trust assets from inception. The petitioner, for reasons best known to herself, did not identify who requested that she make the loans to Romulus and never inquired of anyone as to why it was appropriate for the objectant's trust to make the loans instead of some other family member who might have had significantly greater financial resources than the objectant. At the time that the three interest free loans totaling $812,000 were made to Romulus in July and August 1995, the petitioner had been administering the trust for more than 20 months. By that time, the petitioner was aware that the objectant was expending approximately $10,000 a month, an amount that greatly exceeded the monthly income from the trust. Even if it is to be assumed, arguendo, that the petitioner had a good faith belief that Romulus, to the extent that it had the ability, would provide financial assistance to any family member, including the objectant and the members of her immediate family, it was incumbent upon the petitioner to make some type of inquiry as to why it was appropriate or fair to use such a substantial portion of the trust assets to make a non-interest bearing loan for an unspecified period of time. In effect, the petitioner conceded that whenever some unidentified family member, on behalf of Romulus, requested an interest free loan from the trust, she granted the request. The court concludes that such conduct shows a complete indifference to the best interests of the objectant, mandating that the petitioner be surcharged for the income lost by these interest free loans to Romulus (see O'Hayer v De St. Aubin, 30 AD2d at 419). In essence, the exoneration clauses in the trust relieved the petitioner of liability for good faith mistakes in the exercise of her power or discretion as trustee, but did not relieve her of liability where, as here, she made no attempt to ascertain whether there was any justification to make such substantial interest free loans of trust assets to Romulus.
As this is a proceeding of an equitable nature, the rate of interest and date from which it is to be computed is in the court's discretion (see CPLR 5001 [a]). Accordingly, interest at the rate of 5% per annum shall be charged from the date the loans were made to the date of payment or to the date that the petitioner resigned as trustee, whichever date is earlier, as follows: (1) on the sum of $137,000, from July 16, 1995 to September 11, 1995; (2) on the sum of $149,559.90, from July 18, 1995 to September 11, 1995; (3) on the sum of $25,490.10 from July 18, 1995 to September 18, 1995; (4) on the sum of $14,559.90 from August 18, 1995 to September 18, 1995; and, (5) on the sum of $485,440.10 from August 18, 1995 to December 31, 1996.
Turning next to the TWA equity options, the petitioner's testimony that she was of the opinion that it would have been a bad investment for the trust to exercise its option is not supported by the evidence presented on this issue. The petitioner allowed Romulus, without paying any consideration, to use the trust as a conduit to exercise options of which the trust was the owner of record and, upon the sale of the shares acquired by exercising the option, transferred the net amount received to Romulus. Thus, it was Romulus, instead of the trust, that made a profit of $97,966.53 (the net amount received from the sale of shares acquired by exercise of options [$135,272.97] minus the cost of exercising the option [$37,304.44]). As Romulus owed approximately $485,000 to the trust for interest free loans it had received from the trust on the date it transferred $37,304.44 to the trust so that the options could be exercised, it cannot be concluded that Romulus had the funds to exercise the option while the trust did not.
Assuming, arguendo, that exercising the options and holding the shares acquired was too risky an investment for the trust, but not for Romulus, this still does not explain why the trust did not exercise the options and immediately sell the shares on any day when the option price was lower than the market price for a share, or alternatively, receive compensation from Romulus for selling the options to it. The uncontroverted testimony of the expert witness is that on the day the rights were exercised, the shares acquired could have sold at a profit of $2.00 per share. Consequently, with regard to this transaction, it can only be concluded that the petitioner was more concerned with the welfare of Romulus, in which she had a one-sixth interest, than she was about her obligations as a trustee. Under these circumstances, the exoneration clauses contained in the trust do not bar the objectant from recovering for the profit made by Romulus from this transaction (see O'Hayer v De St. Aubin, 30 AD2d at 419).
Where, as here, the trustee is guilty not only of negligence but of a "breach of trust [that] consists of a serious conflict of interest" in that the petitioner permitted Romulus, an entity in which she has an interest, to use a trust asset for no consideration and, thereafter, make a substantial profit from the transaction, the trust can recover the lost profit from the trustee (see Matter of Rothko, 43 NY2d 305, 321). Moreover, there is no documentation to support a finding that, in fact, the TWA equity options were transferred to Romulus. Accordingly, the petitioner must be surcharged for the profit of $97,966.53 that Romulus made from the sale of the equity options of which the trust was the record owner. The objectant is also entitled to recover interest on this sum at the rate of 9% per annum from February 22, 1996, the date of the receipt of the net proceeds of the shares acquired by the exercise of the options, to the settlement date of the decree to be entered hereon (see CPLR 5001, 5004).
With respect to the TWA ticket vouchers, no proof was adduced that they could have been sold on a specific date for a fixed sum of money. Moreover, it appears that the objectant was aware that the ticket vouchers obtained both by the trust and Romulus were available to all family members and she acquiesced in such use of the vouchers and might have used a voucher on at least one occasion. Accordingly, the objections with regard to the ticket vouchers are dismissed. As to the objectant's argument that TWA securities were improperly valued for tax purposes, there was no proof of any damages to the trust thereby.
The objectant seeks to surcharge the petitioner in the sum of $7,761.37 which is labeled as a "Suspense Account" in Schedule G of the account and that amount is deducted from the cash on hand. The petitioner explained that although neither she nor the accountants who prepared the account could trace this sum to a particular item or items, no money was ever expended other than for a valid trust purpose. Consequently, according to the petitioner, Schedule G accurately reflects the cash on hand at the end of the accounting period. It is understandable that the petitioner had problems in obtaining and reconstructing records where, as here, she was not requested to account until more than six years had elapsed from the date that she resigned as trustee. Furthermore, it appears that when the petitioner resigned as trustee, none of the parties contemplated that she would be required to judicially account. Nonetheless, the court cannot accept an accounting based upon a "trust me" defense that either this sum was never credited as a deposit or was debited from an account for a legitimate purpose. Accordingly, the objection to this item in Schedule G is sustained, and the petitioner is surcharged in the sum of $7,761.37, without interest (see CPLR 5001 [a]).
The court finds no basis to surcharge the petitioner with regard to any other objection or specific transaction. The transactions complained about include, inter alia, that the trust continued to pay maintenance on an apartment after the objectant no longer occupied the apartment and that the objectant paid more in taxes than she had to on the sale of her own cooperative apartment. With regard to these and other remaining complained of transactions, the exoneration clauses in the trust relieve the trustee from any liability. Moreover, it was the objectant herself who had or should have had knowledge about many of these transactions, and it appears from the evidence that the objectant did not supply any information to the petitioner about these transactions until the instant proceeding was commenced, long after the petitioner resigned as a trustee. With regard to many of the other objections that are not specifically noted in this decision, the objectant, in essence, conceded that those objections do not form a basis to impose a monetary surcharge, and that they were interposed solely to provide additional reasons to deny the petitioner commissions.
The petitioner and the guardian ad litem for Daniel also contend that Daniel was injured by the acts of the petitioner. As Daniel only has an interest in any principal that remains in the trust upon the objectant's death, his interests are protected by the objections sustained herein. Moreover, as this trust may be terminated by the objectant and the trustee, the use of $600,000 from this trust to make a gift to the trust primarily for Daniel's benefit did not adversely affect Daniel.
The remaining issues relate to the propriety of statutory commissions and the respective right of the petitioner and the objectant to recover legal fees and other expenses incurred in this proceeding. As a general rule, although not every surcharge results in a denial of statutory commissions, fiduciaries are denied commissions where their acts involve bad faith, a complete indifference to their fiduciary obligations or some other act that constitutes malfeasance or significant misfeasance (see Ellis v Kelsey, 241 NY 374, remittitur amended 242 NY 495; Matter of Saxton, 274 AD2d 110; Matter of Drier, 245 AD2d 787, lv denied 91 NY2d 812; Matter of Israel, 176 Misc 120).
Here, it appears that the petitioner did not intend to take any commissions until she was compelled to account. In any event, the court holds that the petitioner must be denied annual commissions under SCPA 2309 (2) because she did not establish that she furnished an annual statement to the objectant or that the objectant waived her right to receive the statement (see SCPA 2309). Furthermore, the petitioner failed to establish that she retained sufficient income in any specific trust year to pay herself income commissions for that year (see SCPA 2309).
Although the petitioner did not waive her right to the commissions allowed under SCPA 2309 (1), it must be determined whether her conduct bars her right to receive such commissions. Even though the court finds that the petitioner conscientiously undertook the portion of her fiduciary responsibilities requiring her to exercise discretion in determining whether or not to grant the objectant's requests for trust funds, unfortunately, the petitioner's overall management of the trust finances was not nearly as conscientious. Notwithstanding that the trust did not incur any loss from the petitioner's failure to ensure that all of the assets listed in Schedule A of the trust were, in fact, placed in the name of the trust, this omission is part of a pattern establishing that the petitioner was lax with regard to managing the financial aspects of the trust. The court does not conclude that the petitioner intentionally acted in bad faith with regard to any financial transaction; however, as the evidence establishes that the petitioner as the trustee gave substantial, interest free loans to Romulus and permitted Romulus to profit from the trust TWA equity options, it concludes that the petitioner was indifferent to the objectant's needs as the beneficiary of the trust whenever Romulus made a financial request of the trust. The fact that the petitioner, in good faith, might have believed that Romulus and other family members would always financially provide for the objectant, does not provide any legal basis for favoring Romulus over the objectant with regard to trust assets. To the contrary, the petitioner's conduct with regard to these transactions must be viewed more harshly because she benefitted from the transactions as a result of her own one-sixth interest in Romulus. Furthermore, no proof was presented establishing that the petitioner, from her own assets, ever made such substantial interest free loans to Romulus or permitted Romulus to profit from assets owned by her.
The petitioner s cavalier attitude of just saying "yes" whenever a request was made by Romulus involving a significant trust asset, resulted in the trust not receiving any income on $812,000 of principal and in Romulus, instead of the trust, making a profit of approximately $98,000 on the TWA equity options. Such conduct constitutes sufficient misfeasance to deny the petitioner any statutory commissions (see Matter of Newhoff, 107 AD2d 417, lv denied 66 NY2d 605; see also Matter of Hildreth, 274 App Div 611, rearg denied 275 App Div 718, affd 301 NY 705). Accordingly, the objections requesting the denial of commissions are sustained and the trust is not obligated to pay those commissions listed in Schedule C-1 of the account as an unpaid administration expense.
The petitioner contends that the trust or the objectant, individually, should pay the legal fees she incurred in bringing this proceeding, while the objectant contends that the petitioner, individually, should pay the legal fees she incurred. SCPA 2309 (1) provides, as a general rule, that on the settlement of the account a trustee of a lifetime trust is entitled to have reasonable and necessary legal expenses incurred on behalf of the trust charged to the trust. This rule does not extend to allowing a trustee to charge to the trust the portion of the legal fee that was incurred for legal services rendered in defending against objections to the account which resulted in the imposition of a surcharge against the fiduciary (see Matter of Newhoff, 107 AD2d at 423; Matter of Hildreth, 274 App Div at 611; Matter of Saxton, 179 Misc 2d 681, 692). Although a fiduciary usually is not held responsible for an objectant's counsel fees in an accounting proceeding where the objections merely establish imprudence on the part of the fiduciary (see Matter of Saxton, 179 Misc 2d at 681), a fiduciary is liable for attorney's fees and other expenses incurred arising from objections where the fiduciary is surcharged for self-dealing or misconduct (see Matter of Marsh, 265 AD2d 253, lv denied 95 NY2d 755, appeal dismissed 95 NY2d 956, cert denied sub nom Lefkowitz v Bank of New York, 532 US 1038; Birnbaum v Birnbaum, 157 AD2d 177, 191).
Here, considering all of the facts the court, in the exercise of its discretion, finds it equitable to require the petitioner and the objectant to each pay for their own respective attorney's fees and other expenses (see Matter of Saxton, 274 AD2d at 121).As noted, the petitioner reasonably believed that she would not be required to account, and was not requested to do so until more than six years after she resigned at the objectant's request. Furthermore, most of the objections interposed herein were not sustained and, ordinarily, the petitioner would be entitled to be compensated from the trust for the legal services rendered in defending against the objections not resulting in a surcharge (see SCPA 2309).
At the other end of the spectrum, the petitioner certainly is not entitled to be reimbursed for legal fees paid for services rendered in defending against objections resulting in a surcharge (Matter of Newhoff, 107 AD2d at 423; Matter of Saxton, 179 Misc 2d at 692), and a strong case could be made for finding the petitioner liable for the legal services and the expense of an expert witness incurred by the objectant in connection with those objections that resulted in the surcharge arising from Romulus profiting from the TWA equity options owned by the trust (see Matter of Marsh, 265 AD2d at 253; Birnbaum v Birnbaum, 157 AD2d at 177). A similar, but perhaps weaker argument, could be made with regard to the interest free loans that the trustee made to Romulus.
Here, under all of the circumstances, the court finds that it is more equitable to require the petitioner to pay for her own counsel for the services rendered to her in this proceeding and that the objectant pay for her own counsel and expert witness fee for the services rendered to her. In summary, the court finds that the objectant vigorously pursued numerous objections involving transactions of which she was aware and approved prior to their occurrence, and the fact that she presently has second thoughts about these transactions does not change the fact that it was Steven, rather than the petitioner, who suggested that the trust make the gifts. On the other hand, the petitioner vigorously defended against some of the transactions with Romulus which were indefensible.
Accordingly, the objections are dismissed except to the extent that they were sustained herein and except for objection 27 (a) which was previously granted (Matter of Tydings, 27 Misc 3d 1208[A], 2010 NY Slip Op 50628 [U]).
Settle a decree judicially settling the account as modified by the determinations set forth herein.