Opinion
2000 LT 00007/B.
Decided January 5, 2011.
Chamberlain, D'Amanda, Oppenheimer Greenfield, LLP (Edward C. Radin, Esq. of Counsel) attorney for Bank of America, N.A., Trustee and Petitioner herein. Wolford Law Firm (Michael R. Wolford, Esq. of Counsel) attorney for University of Rochester, Trust Donee and Respondent herein. Office of New York State Attorney General (Audrey Cooper, Esq. Asst. Attorney General) pursuant to EPTL § 8-1.4.
Bank of America as Trustee seeks a determination by this Court as to whether the Agreement, established to benefit the Psychiatry Department at the University of Rochester, permits the investment of Trust assets in the University of Rochester's long term investment pool (LTIP). For the reasons set forth below, this Court finds that the proposed investment of Trust corpus in the LTIP would frustrate the intent of the settlor, contradict the terms of the Agreement, and violate the standards and provisions set forth in the Prudent Investor Act (EPTL § 11-2.3).
BACKGROUND
The subject trust was established by Helen Rivas pursuant to a Deed of Trust and Agreement (hereinafter referred to as the Agreement) dated January 25, 1945 in which Security Trust Company of Rochester was named as Trustee and the University of Rochester as the donee. Bank of America, N.A., as the successor in interest to the Security Trust Company of Rochester, presently serves as Trustee. On the same date that the settlor executed the Agreement, she also made an outright gift of $2,153,934 to the University of Rochester (hereinafter, the University). These gifts were interrelated and resulted in the establishment of the Helen Woodward Clinic at the University and provided dedicated space that to this day house the many teaching, research, education and support programs that take place under the auspices of the Department of Psychiatry.
Under the terms of the Agreement, the settlor directed that income generated from the Trust be used to operate and maintain the Clinic. By a Decree of this Court February 24, 2000, the Trustee was authorized to annually pay out to the donee an amount equal to the greater of net accounting income of the Trust or 5% of the net fair market value of the principal trust assets. Additionally, the Court, by a decree dated May 26, 2006, allowed for the invasion of principal of $2,400,000 for the purchase of additional physical space as in keeping with the settlor's intention to establish a clinic to deliver quality mental health services to the community.
Additionally, paragraph Seventh of the Agreement created an Investment Advisory Committee consisting of three individuals, two to be named by the University and one by the Trustee. Article Seventh of the Trust Agreement further provides:
The Committee shall have sole and exclusive power and control over the investments making up this trust fund, the sale of securities, and the reinvestment of any funds at any time in the trust estate, and shall communicate its decisions and directions with respect to sales, investments and reinvestment of trust funds to the Trustee in written form as above provided. The Trustee shall be charged with no responsibility or duties with respect to the investment or reinvestment of trust funds, other than to carry out the written directions or communications received by it from the Committee.
Additionally, Article Eighth provides:
The Committee may direct the Trustee to continue to hold any securities deposited herewith or such portions of them as it may from time to time deem advisable in its sole discretion, and the Committee may direct the Trustee to invest in any forms of property, income producing investments, stocks or securities, in such amounts and in such proportions as the Investment Advisory Committee may determine proper and desirable, without restriction to investments which are legal to trust funds.
Since 1945, it is apparent that the Trustee and Investment Advisory Committee have worked together in the stewardship of the corpus and perpetuation of the Trust. However, during a meeting held on April 20, 2009, the Advisory Committee adopted a motion (that passed by a majority, not unanimously) in which the Advisory Committee directed the Trustee to invest all of the trust assets in the University's long-term investment pool (LTIP).
In response to the stated concerns of the Trustee, the University drew up a contract between itself and the Trustee that outlined the terms and responsibilities of the parties pursuant to the proposed investment in the LTIP. The proposed contract confers sole discretion upon the University for the investment of all trust assets, limits the withdrawal of assets by the Trustee to 10% as of the effective date, provides for a mandatory contractual term, allows for the University to dictate the custodian of the assets, and in the event either side terminates the contract, provides for a 3-year scaled remittance of the assets back to the Trustee.
The Trustee seeks an interpretation of the Agreement to determine whether the proposed investment is consistent with the settlor's intent and the provisions of the Agreement.
The Trustee asserts that investing with the University's LTIP would frustrate the settlor's intent in her creation of the Trust. Furthermore, the investment would necessitate the transfer of custody of Trust assets from the Trustee to another trust company with which the Trustee does not and would not have either a contractual or fiduciary relationship. In addition to violating EPTL § 11-2.3, the Trustee also argues the proposed investment and contract is effectively an impermissible delegation of fiduciary responsibilities from the Trustee to the University.
In its Answer, the University agrees that the settlor's intent is paramount and avers that the proposed investment is not only consistent with the provisions of the Agreement, but also within the statutory standards imposed upon the Trustee. While the proposed investment in the LTIP is a departure from the historic allocation of trust assets, the University maintains the Advisory Committee is not bound to specific guidelines and has the authority under the Agreement to direct changes to the allocation of trust assets at any time. What is more, the University alleges the decision by the Advisory Committee is not irreversible and can be modified.
The University states its LTIP contains its own endowment and assets from approximately 15 other charitable remainder trusts of which the University is the sole remainder beneficiary and other investors include several charitable foundations whose sole beneficiary is the University. According to the University, the LTIP invests in a wide array of assets, is well diversified, and managed by 85 firms. Investors are given individual accounts from the University's custodian bank, the Northern Trust Company. Additionally, the University does not charge a fee to any entity that invests in the LTIP other than the pro-rata management costs and the University does not receive a financial incentive through new investments or returns. A breakdown offered by the University suggests that as of June 30, 2009 and net of all fees, the LTIP outperformed the Trust in both three-year (-1.5% for the LTIP and-5% for the Trust) and five-year ranges (4.2% and .8% respectively).
The Office New York State Attorney General, in its role as representative for charitable beneficiaries pursuant to EPTL § 8-1.1(f) filed a notice of appearance, however did not submit papers for consideration.
DECISION
The Deed of Trust and Agreement names the Trustee, creates the Advisory Committee, and designates the University as beneficiary of the Trust. Under Articles Seventh and Eighth of the Agreement the Advisory Committee wields considerable control over the assets of the trust. This qualification of the Trustee's fiduciary authority has been found permissible on the principal of a donor may generally do what he wishes with his own assets. As Judge Cardozo eloquently stated, "the gifts and devises were acts of bounty merely. The testator was free to withhold them altogether, or subject them to conditions, whether sensible or futile. The gift is to be taken as it is made or not at all." Oliver v. Wells, 254 NY 451 (1930); quoted by Matter of Rubin, 143 Misc 2d 303 (Sur. Ct. Nassau Co. 1989). The Restatement 2nd of Trusts states that a trustee is ordinarily under a duty to comply with the directions of an advisor. The advisor, in turn, is conferred the status of a co-trustee and fiduciary obligations attach, a point conceded to by the University. Restatement 2nd § 105; Matter of Rubin 143 Misc 2d 303 (Sur. Ct. Nassau Co. 1989). If there is reason to suspect the advisor is violating its fiduciary duty, the trustee is not under a duty to abide by the advisor and may be liable if it does. Matter of Langdon, 154 Misc. 252 (Surr. Ct. Westchester Co. 1935).
Despite the settlor's declaration that "the Trustee shall be charged with no responsibility or duties with respect to the investment or reinvestment of trust funds, other than to carry out the written directions or communications received by it from the Committee," accountability is an essential element of all fiduciary relationships which cannot be waived. EPTL § 11-1.7, which has been held to apply to inter vivos trusts such as the one before this Court, recognizes that an attempt to render a fiduciary completely unaccountable is inconsistent with the nature of a trust and void as such exoneration is against public policy. Matter of Malasky, 290 AD2d 631 (3rd Dept. 2002); Estate of Frances E. Francis, 239 N.Y.L.J. 50 (Surr. Ct. Westchester Co. 2008).
As the Trustee is now concerned that following the directions of the Advisory Committee may result in a breach of fiduciary duty, the Trustee is required to come before the Court for instruction, just as in a case where two fiduciaries do not agree upon how to administer an estate. Matter of Rubin 143 Misc 2d 303 (Sur. Ct. Nassau Co. 1989). It is worth noting that the Trust has been in existence for more than 60 years and this is the first occasion wherein a controversy has arisen from a power-sharing arrangement that is rather unconventional, even by today's standards of Trust and Estate practice.
It is clear from the instrument that the settlor established the Trust to build and equip the Clinic and to apply the trust income toward funding its operation and maintenance. Both parties agree as to the purpose, but differ on effectuating that purpose and roles of the Trustee and Advisory Committee in carrying out the Trust. Therein lies the need for construction of the Trust; to determine whether the proposed investment in the University's LTIP, as directed by the Advisory Committee, would frustrate the intent of Helen Rivas.
There is ample authority for the proposition that a court, in the exercise of its equitable powers, may control the administration of a trust so as to effectuate its avowed purpose, particularly when changing circumstances would otherwise defeat it. In re Herzog, 301 NY 127 (1950); SCPA § 209(6).
In a construction proceeding, the efforts of the court should always be directed toward the discovery of the intent of the settlor as it is expressed in the instrument. Matter of Thall, 18 NY2d 186 (1966). When such intent is ascertained and it is adequately expressed in the language of the document, it is to be carried out unless contrary to public policy or law. Only in the event that the language is ambiguous, vague, or unclear, will the Court report to the canons or rules of construction in determining the intent of the testator at the time he made the will. Matter of Hoffman, 201 NY 247; Matter of Barrett, 141 Misc. 637(Surr. Ct. Jefferson Co. 1931).
Notwithstanding Paragraphs Seventh and Eighth, it is a cardinal rule of construction that Helen Rivas' intent must be collected from the whole Agreement taken in its entirety, in view of all the facts and circumstances under which the provisions of the Agreement were framed, not in detached portions alone. Matter of Title Guarantee Trust Company, 195 NY 339 (1909). Stated differently, the substance of the Agreement must not be destroyed in deference to the naked word. In re Herzog, 301 NY 127 (1950). If the Court were to allow for the University's argument that Articles Seventh and Eighth are dispositive and control the entire Agreement, there would be little sense in having Bank of America serve as trustee, only be subservient to an Advisory Board dominated by representatives named and employed by the University, and directed to invest the entire corpus in an investment vehicle controlled by the University. Helen Rivas could have gifted the securities as an accompaniment to her other monetary gift made the same day as the Trust was established; instead, she chose to execute a Deed in Trust with her gift of the securities to be held in trust by the Trustee, with input on investment of principal to be provided the Advisory Committee. The Trust Agreement should not be read to contradict itself. Crozier v. Bray, 120 NY 366 (1890).
Upon reading the entire Agreement, the Court construes that the Advisory Committee and Trustee must work in concert to promote the goals of Helen Rivas, i.e., fund the operation of the Psychiatric Department. Matter of Fabrii, 2 NY2d 236 (1957). Any other construction would defeat the Trust.
While the Agreement confers broad authority upon the Advisory Committee, that power is not unlimited and must not be used in contravention of the state purpose of the Trust. Carrier v. Carrier, 226 NY 114 (1919). The Trustee and the Advisory Committee, as a de facto co-trustee (see Matter of Rubin, supra), have a shared responsibility to invest and manage the assets while maintaining an allegiance to Helen Rivas' desire to have income from the trust fund the Psychiatry Department.
Allowing for the investment of the Trust assets in the LTIP would effectively remove both the Trustee and the Advisory Committee from having any role in administering the Trust. The custody of the funds would be transferred to the University's custodian bank, who would have no fiduciary obligation to the Trust. The Trust funds would be managed by some 85 different investment management firms situated throughout the world and overseen not by any party to the Agreement, but rather by a subcommittee of the University's Board of Trustees who would have unfettered control and discretion as to the investment of the Trust corpus. Once the Trust's funds are placed in the LTIP, neither the Advisory Committee nor Trustee would have input as to asset allocation, nor would they have the discretion to select, retain or sell off any individual assets, those decisions would effectively be made by the University.
Additionally, the proposed limitation on withdrawal of principal from the LTIP (not exceed 10%) may impede the goal of the Agreement. While Trustee does not have ability to invade principal, it has sought and received permission from this Court to pay out principal in the past to effectuate the intent of Helen Rivas of providing adequate funding for the Psychiatry Department. With a value of $1.5 billion, the investment of the Trust corpus (estimated at $28,000,000) would be less than 2% of the holdings of the LTIP.
As two of three members of the Advisory Committee are employed by the University of Rochester, there may be an occasion whereupon the loyalties to the University's Department of Psychiatry, as the beneficiary, and to the University are conflicted, or at the very least divided. The members of the Advisory Committee, with a conferred fiduciary status, owe a duty of undivided and undiluted loyalty to those whose interest's interest the fiduciary is to protect. This rule is sensitive and inflexible." Milea v. Hugunin, 24 Misc 3d 1211A (Surr. Ct. Onondaga Co. 2009); see also Meinhard v. Salmon, 249 NY 458 (1928). However, those two members of the Advisory Committee also have a duty of loyalty to their employer, the University. Compsolve, Inc. v. Neighbor, 2007 NY Slip Op 52403U (Sup. Ct. Erie Co. 2007) citing Restatement [Second] of Agency § 387.
This is not so say the current arrangement viz a viz the make-up of the Advisory Committee is unworkable. However, if the proposed investment in the LTIP were allowed, the majority of the Advisory Committee would be placed in a tenuous position should they ever question the handling of the funds by the LTIP or discover that the needs of the Rivas Trust are being subsumed by the larger purpose of the LTIP. "The fundamental rule of undivided loyalty to a trust nor of the rule that a trustee shall not place itself in a position where its interest may be in conflict with its duty." In re Title Guar. Trust Co., 291 NY 376 at 404 (1943). Otherwise, any circumstance where even a scintilla of divided loyalties among the majority of the Advisory Committee is evident will result in voiding any transactions in which they may appear. In re Sanford, 297 NY 64 (1947); City Bank Farmers Trust Co. v. Cannon, 291 NY 125 (1943).
The Court of Appeals stated in Meinhard v. Salmon:
"Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."
Meinhard v. Salmon, 249 NY 458 (1928). Therefore, this Court would be hard pressed to allow for the two-person majority of Advisory Committee to direct Trust holdings be managed exclusively by their employer's LTIP. This Court is also not unmindful of possibility of a conflict of interest of the minority member of the Advisory Committee as he/she is employed by the Trustee. However, any possible conflict is presently mitigated by the member's minority status on the Advisory Committee. As the Trust is ongoing, the Court may review the status and composition of the Advisory Committee in future proceedings and exercise its discretion accordingly.
Finally, the Court finds that the proposed investment of the Trust assets in the University's LTIP would run afoul of the Prudent Investor Act. Even if this Court were to accept the assertion by the University that Paragraph Seventh of the Agreement exonerates the Trustee from any investment activity, (which it does not, see above and EPTL § 11-1.7) the Advisory Committee is still bound to the provisions and standards of the Prudent Investor Act. EPTL § 11-2.3(e)(1), (2); Matter of Rubin 143 Misc 2d 303 (Sur. Ct. Nassau Co. 1989).
By its very nature and composition, the Advisory Committee is held to the higher standard enunciated in EPTL 11-2.3(b)(6) to exercise diligence in investing as would be expected of a prudent investor with special investment skills. In re Witherill, 37 AD3d 879 (3rd Dept. 2007). While EPTL § 11-2.3 (c) allows for delegation of the investment and management of Trust assets, the scope of the proposed delegation to the controlling entities of the University's LTIP is too broad and inconsistent with the Agreement. In handing over the entire corpus of the Trust to a different custodian, to be managed by 85 different investment firms taking directives from another governing body, the Trustee and the Advisory Committee would be breaching their duties imposed by the Prudent Investor Act insomuch as upon their delegation, they would be unable to monitor the managers of the LTIP. In re Petition for Judicial Settlement of Intermediate Account of Proceedings by Bankers Trust Co. of New York, 2 Misc 3d 1004(A) (Surr. Ct. New York Co. 2004). Furthermore, and as stated above, delegating the complete and absolute responsibility of investing the Trust corpus to the University's LTIP is inconsistent with the Agreement. EPTL § 11-2.3(c)(1)(B).
Moreover, and equally troubling, upon investing the Trust assets with the LTIP, the University would not be held to the standards of the Prudent Investor Act that govern trustees, but rather to the lesser prudent person standard set forth in N-PCL § 717 and most recently articulated in the newly enacted Prudent Management of Institutional Funds Act. N-PCL § 552(b); see also EPTL § 11-2.3(1) (as amended effective 9/17/10 which specifically excludes institutional funds from the Prudent Investor Act). While the three and five year returns of the LTIP are modest, it is not the performance of the investments, it is the fiduciary's compliance to the Prudent Investor Act that matters most, to hold otherwise "would be in effect be to assure fiduciary immunity in advancing markets." In re Bank of New York, 35 NY2d 512 (1974); see also Matter of Janes, 223 AD2d 20 (4th Dept. 1996).
For the reasons set forth above, this Court cannot allow the proposed investment of the Helen Rivas Trust corpus, as such investment in the LTIP is contrary to the Agreement and the intent of the settlor, may give rise to an impermissible division of fiduciary loyalties among the majority of the Advisory Committee, and would also violate the Prudent Investor Act. The provisions of the Trust shall be executed as set forth by the clear wording of the Agreement, with any future disputes to be brought before this Court for disposition and additional consideration.
This Decision shall constitute and Order of the Court.