Opinion
1973-30/A.
Decided March 31, 2010.
Harris Beach, LLP, Pittsford, New York, Attorneys for Petitioner.
Williams Williams, Rochester, New York, Attorney for Objectants Office of the Attorney General.
State of New York-Charities Bureau, New York, New York, Attorneys for Ultimate Charitable Beneficiary.
This is a contested proceeding to judicially settle the final accounting of JP Morgan Chase Bank, N.A. (formerly Lincoln First Bank of Rochester [the Bank]), as co-trustee of a trust created under the will of Blanche D. Hunter (decedent) for the benefit of Pamela Townley Creighton (Pamela), decedent's granddaughter, for the periods March 27, 1973 through August 13, 1996 (the intermediate account) and August 14, 1996 through January 17, 2003.
From June 22, 2009 through July 1, 2009, the court conducted a trial on the amended verified objections to the accounting which were filed and/or adopted by Margaret Hunter (Pamela's mother) and Pomona College, as testamentary appointees under Pamela's will, and the Office of the New York State Attorney General (the AG), on behalf of the charitable beneficiaries (collectively, objectants).
Background
Pursuant to Article EIGHTH(A) and (B) of her will ( Ex. P-253), decedent established identical trusts for her granddaughters Alice Creighton (Alice) (the A Trust), and Pamela (the B Trust). Each trust was funded with one-half of decedent's residuary estate for the income benefit of each granddaughter during her life. The remainder of each trust was to be disposed in accordance with the exercise of a power of appointment granted to the income beneficiary, and failing the exercise of the power, the beneficiary's remainder would pass to the surviving granddaughter's trust. On December 29, 1972, the date of the decedent's death, Kodak common stock was valued at $148.30 per share.
In January 1973, decedent's will was admitted to probate, and James W. Cook (Cook) and the Bank were appointed co-executors and co-trustees of the two trusts. On March 27, 1973, the Bank and Cook funded each trust with about $40,000.00 in cash. Over the course of the next four years, in five installments, they transferred 13,035 Kodak shares, with a total inventory value of $961,749.51, from the decedent's estate to the B Trust ( Ex. O-38). The inventory value per share on the date of acquisition by the trustees ranged from $127.19 to $70.00. Schedule A of the intermediate account sets forth these five distributions but does not state the dates on which they occurred nor the values of the shares on the dates of acquisition. Instead, the Bank ascribes a blended rate of $59.98 per share as the Schedule A inventory value for all shares received by the trust, including shares received after the first five installments.
In April 1976, the Bank and Cook commenced a proceeding to judicially settle their final account as co-executors of decedent's estate ( Ex. O-10). Pamela filed objections solely to the amount of counsel fees sought by the Bank's attorneys. After Pamela's objections were resolved, on June 1, 1977, the court executed a decree (1977 decree) settling the final account of the co-executors for the period January 4, 1973 to April 15, 1977.
In March 1980, Alice died, without issue and without having exercised her power of appointment. Schedule A of the intermediate account reflects that, on March 28, 1980, the Bank and Cook transferred all of the A Trust's assets, including 12,981 Kodak shares with a value, as of that date, of $598,424.10 ($46.10 per share), to the B Trust, bringing the total number of Kodak shares in the B Trust to 26,016 with a value of $1,560,498.13 ( Ex. O-38; Ex. P-40).
In July 1981, the Bank and Cook commenced a proceeding to settle their account as co-trustees of the A Trust. Pamela executed a waiver and consent to the relief requested in the accounting petition. On December 11, 1981, the court executed a decree (1981 decree), settling the final account of the A trust from March 21, 1973 to May 2, 1980. The Bank and Cook continued to act as co-trustees of the B Trust, until Cook's death in 1996.
In November 1997, the Bank commenced this proceeding to settle its intermediate account. In February 1998, after the Bank's agent had obtained a waiver from Pamela, the court executed a decree (1998 decree), judicially settling the account. Subsequently, Pamela moved to vacate the 1998 decree and withdraw her waiver. In February 2002, following a hearing, this court determined that the Bank had not demonstrated that Pamela's waiver was properly obtained and vacated the waiver and the 1998 decree (February 2002 order) (see Matter of Hunter, 190 Misc 2d 593).
In May 2002, Pamela filed objections to the intermediate account, claiming, that the Bank had acted improperly, as co-executor and as co-trustee of the A Trust and B Trust. She alleged that the Bank should not have retained such a high concentration of Kodak shares in the estate and the trusts from 1973 through the early 1980's, when there was a precipitous decrease in the value of those shares. Pamela sought a surcharge against the Bank for breaching multiple fiduciary duties, including its failure to object, as co-trustee of the B Trust, to the accountings which resulted in the 1977 and 1981 decrees.
By decision and order dated December 31, 2002 (December 2002 order), this court dismissed certain of Pamela's objections which sought to surcharge the Bank for improprieties as co-executor of decedent's estate and/or as co-trustee of the A Trust. However, the court did not dismiss those of Pamela's objections which sought to surcharge the Bank for its failure, as co-trustee of the B Trust, to object to any of its actions as co-executor of the estate and as co-trustee of the A Trust.
In March 2004, the Appellate Division, Second Department modified the December 2002 order by dismissing Pamela's objections which sought to surcharge the Bank for its failure, as co-trustee of the B Trust, to object to its own actions as co-executor of decedent's estate and as co-trustee of the A Trust (see Matter of Hunter , 6 AD3d 117 [2d Dept 2004]). The Court of Appeals affirmed (see Matter of Hunter , 4 NY3d 260 ).
During the pendency of the appeal of this court's December 2002 order, Pamela died, the Bank filed its supplemental account, Margaret Hunter and Pomona College filed amended objections, and the AG filed objections to the accounts. After disclosure and motions for summary judgment, the court rendered a decision and order dated December 22, 2008, dismissing numerous objections filed by the objectants and the AG.
As a result of that order, the primary issue at trial was the Bank's liability for the alleged retention of a concentration of common stock in Eastman Kodak Company (Kodak shares) in the trust. At the trial, objectants and the AG called James Lieb, the Bank's administrative officer for the B Trust from 1993 through mid-1997 (Lieb), and John Teegardin, the Bank's investment officer for the B Trust from 1977 to 1997 (Teegardin) as adverse witnesses; Loren Ross, as their liability expert (Ross), and Frank Torchio, as their damages expert. The Bank called two witnesses: William J. Wilkie, the Chief Fiduciary Officer for Banker's Trust Company, as its liability expert (Wilkie) and William Schwert, as its damages expert.
Burden of Proof
In a contested accounting proceeding, a fiduciary has the initial burden of proving that it has fully accounted for all of the assets of the trust and that the accounting itself is complete and accurate (see Matter of Schnare, 191 AD2d 859 [3d Dept], appeal denied 82 NY2d 653; see also Matter of Anolik, 274 AD2d 515 [2d Dept 2000]). Once the accounting party has made such a prima facie showing, the burden shifts to an objectant to come forward with sufficient evidence to establish that the account is inaccurate or incomplete ( Matter of Schnare, 191 AD2d at 860; see also Matter of Mann, 41 AD2d 861 [3d Dept], appeal denied 33 NY2d 517). Upon such a showing by an objectant, the burden of going forward shifts back to the accounting party to prove, by a fair preponderance of the evidence, that the account is, in fact, accurate and complete ( Matter of Schnare, 191 AD2d at 860).
Following a review of the account, and upon hearing the parties' proof, SCPA 2211(1) grants the court broad discretion to make "such order or decree as justice shall require" ( Matter of Acker, 128 AD2d 867 [2d Dept 1987]). The court may fashion any remedy appropriate to redress an objectant, including, but not limited to the denial of all or some commissions and the imposition of a surcharge ( Matter of Kaskawits , 25 Misc 3d 1228 [A] [2009]).
Inventory Value
Before reaching the issue of concentration, the court must address objectants' argument that, under Schedule A of the account, the Bank improperly applied a blended rate as the inventory value of the Kodak shares. Objectants posit that the use of a blended rate was intended to mislead the persons interested in the estate by diluting losses.
In its account, the Bank arrived at the blended rate of $59.98 as its inventory value for the Kodak shares by dividing the aggregate value upon acquisition of all Kodak shares acquired either from decedent's estate or the A Trust ($1,560,498.13) by the total number of shares acquired (26,016). It then used this inventory value of $59.98 consistently for the remainder of its accounting period until all Kodak shares were sold, adjusting the value appropriately for stock splits and stock distributions.
Objectants' rely upon EPTL 11-2.1(c)(1) and/or (o)(4) to support their position that the value ascribed to the shares is both improper and misleading. Their reliance, however, is misplaced. EPTL 11-2.1(c)(1), which provides that an asset becomes subject to the trust ". . . as of the date of death of the testator even though there is an intervening period of administration of the testator's estate," concerns the date by which a trust beneficiary's interest arises, not the inventory value of the assets placed into the trust. Nor does EPTL 11-2.1(o)(4), which defines "inventory value" as "the cost of property purchased by the trustee and the market value of other property at the time it was made subject to the trust," support objectants' contention that the date of death value must be used as the inventory value for stock acquired by a trustee (see2 Waldorf, New York Practice Guide: Probate and Estate Administration § 41.02[1][c][ii], at 41-13 [1996]).
Moreover, objectants have not provided any authority to establish that the Bank's use of a blended value of $59.98 as the inventory value assigned to the 26,016 Kodak shares, or its failure to include the tax cost basis information pertaining to its sales of Kodak shares, was inappropriate. In fact, objectants' own trial exhibit ( Ex. O-72), provides, in pertinent part, that the "carrying value of an asset should reflect its value at the time it was acquired by the fiduciary" and that "when such a value is not precisely determinable, the figure used should reflect a thoughtful decision by the fiduciary . . ." (see National Fiduciary Accounting Standards and Model Account Formats, promulgated in 1984 by the American College of Trust and Estate Counsel ["ACTEC Standards"]).
The court rejects objectants' contention that the Bank's accounting is misleading, deceptive and erroneous because it failed to use date of death value for its acquisitions and sales of Kodak shares. Although 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], citing EPTL 11-2.1[c][1] [dismissing objections that trustee wrongfully retained stock and finding that, where there was a 16 year gap between probate of estate and funding of trust, "acquisition value" of shares, presented as market value at and/or prior to date of decedent's death, was not proper inventory value]).
It was not inappropriate here for the Bank to ascribe a blended rate as the inventory value for the Kodak stock if the Bank could not attribute the sale of any individual share or block of stock to the receipt of specific shares being sold. As 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. Objectants have not established that the use of a blended value, as opposed to acquisition values, under or overstated the gains or losses from the sales of Kodak shares or that they were otherwise damaged by the manner in which the acquisition and subsequent sale of Kodak shares was reported for accounting purposes. Accordingly, applying the law to the facts established at the trial, the court dismisses objections five, nine and twelve.
Diversification / Retention of Kodak Shares
Objectants allege that the Bank negligently retained Kodak by failing to:
(1) exercise reasonable diligence, care, skill and caution in its management and administration of the B Trust;
(2)(a) undertake a formal analysis of the B Trust and properly establish any investment objectives and an investment plan for the benefit of Pamela and/or the trust's remaindermen; (b) follow its own internal trust review protocol; (c) conduct periodic reviews of the trust's holdings without considering alternative investment choices; and (d) exercise the due care and skill it held itself out as possessing as a corporate fiduciary;
(3) divest the trust of an imprudent concentration in non-productive assets;
(4) properly consider the interests of Pamela, the income beneficiary, and/or objectants, as remaindermen and inform or advise Pamela and the remaindermen of the risk of maintaining a concentration of Kodak shares; and
(5)(a) establish investment goals and formalize an investment plan and objectives for Pamela and/or the remaindermen; and (b) communicate with Pamela on a regular basis.
Objectants contend that, as a result of the Bank's imprudence, they have sustained compensatory damages in a sum not less than $9 million as of January 17, 2003, plus prejudgment statutory interest, compounded annually.
Investment of Trust Assets — Applicable Law
The accounting here spans two different legal standards for trust administration. Prior to January 1, 1995, New York followed the prudent person rule of investment (see EPTL 11-2.2), which mandated that a trustee employ diligence and prudence in the care and management of a trust equivalent to that of a prudent person of discretion and intelligence in managing his or her own affairs ( Matter of Janes, 90 NY2d 41, 50, rearg denied 90 NY2d 885, quoting King v Talbot, 40 NY 76, 85-86 [1869]; see also Matter of Saxton, 274 AD2d 110, 118; Matter of Rowe, 274 AD2d 87, 90-91, appeal denied 96 NY2d 7007 [2001]). This standard "dictates against any absolute rule that a fiduciary's failure to diversify, in and of itself, constitutes imprudence, as well as against a rule invariably immunizing a fiduciary from its failure to diversify in the absence of some selective list of elements of hazard" ( Matter of Janes, 90 NY2d at 50). Instead, the inquiry is "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 Janes, 90 NY2d at 51).
In making this determination, the court should be mindful that while prescience is not required of a fiduciary, good faith, care, diligence and prudence are required ( Matter of Hubbell, 302 NY 246). The court must perform a "balanced and perceptive analysis" of the fiduciary's consideration and action "in light of the history of each individual investment, viewed at the time of its action or its omission to act'" ( Matter of Donner, 82 NY2d 574, 585, quoting Matter of Bank NY, 35 NY2d 512, 519). Thus, while a court should not view each act or omission aided or enlightened by hindsight ( Matter of Bank of NY, 35 NY2d at 519), it may, nevertheless, examine the fiduciary's conduct over the entire course of the investment in determining whether it has acted prudently (see Matter of Janes, 90 NY2d at 50; Matter of Donner; 82 NY2d at 585). Indeed, liability for lack of diversification is based upon a breach of a trustee's duty to prudently manage a trust in its charge (see Matter of Janes, 90 NY2d at 50). In determining whether such a breach of fiduciary duty has occurred, the court must evaluate the fiduciary's actions along with relevant factors that affected or ought to have affected the fiduciary's decisions, including the size of the trust/estate, the performance of the market, the situation and needs of the beneficiaries and/or remaindermen, any potential tax consequences, and the marketability of the investment (see Matter of Janes, 90 NY2d at 51; Restatement [Second] of Trusts § 227, comments e, o).
For a trustee's investments made or held on or after January 1, 1995, the prudent investor rule (see EPTL 11-2.3[a]) 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" (EPTL 11-2.3[b][3][C]). The diversification mandate of the prudent investor rule is generally consistent with the diversification standards developed by the courts under the prudent person rule (see Matter of Janes, 90 NY2d at 49-50; Matter of Saxton, 274 AD2d at 118). Whether a trustee has acted in conformity with the prudent investor rule is a determination made in light of all surrounding facts and circumstances (see EPTL 11-2.3[b][1]). Thus, the prudent investor rule puts diversification at the forefront of the fiduciary's obligations, but allows leeway for the fiduciary to opt out if the beneficiaries require otherwise or if the testator/settlor directed a different course of action (see Matter of Dumont, 4 Misc 3d 1003(A), revd on other grounds 26 AD3d 824 [4th Dept 2006]). Notably, an entity that holds itself out as having special investment skills, such as a bank, is held to a higher standard — that of a prudent investor "of discretion and intelligence having special investment skills" (EPTL 11-2.3[b][6]; see also Matter of Hyde , 44 AD3d 1195 [3d Dept 2007], appeal denied 9 NY3d 1027).
Both Janes and Dumont concerned the Bank's retention of a concentration of Kodak stock. Unlike our decedent, in Dumont, the testator directed in his will that the trustee retain the Kodak stock absent some compelling reason, other than diversification, to sell. The Appellate Division, Fourth Department, reversed the trial court's determination that, as of January 31, 1974, there existed a compelling reason to sell the stock because such holding was inconsistent with the finding that no such compelling reason existed one year earlier on January 31, 1973. Moreover, the court found that the Surrogate made a determination of imprudence based upon a "composite, unpleaded theory of imprudence."
In Janes, the Court of Appeals found the Bank liable, as an executor, for its imprudent retention of a high concentration of Kodak stock from July 1973 through February 1980. More specifically, the Court of Appeals found that the Bank violated certain "critical obligations of a fiduciary in making investment decisions under the prudent person rule," to wit: (1) its failure to consider the investment in Kodak stock in relation to the entire portfolio of the estate, i.e., whether the Kodak concentration itself created or added to the investment risk; (2) its failure to pay sufficient attention to the needs and interests of the testator's widow and life beneficiary of the testamentary trust; and (3) its failure, in managing the estate's investments, to exercise due care and the skill it held itself out as possessing as a corporate fiduciary. As to the last obligation, the Court found proof in the record that the Bank had failed to: (1) initially undertake a formal analysis of the estate and establish an investment plan; (2) follow its own internal trustee review protocol during its administration of the estate, which advised special caution and attention in cases of portfolio concentration of as little as 20%; and (3) conduct more than routine reviews of its holding of Kodak in the estate, without considering alternative investment choices, over a period of steady decline in the value of the stock.
Here, objectants maintain that the Bank is liable for its breach of fiduciary duty to them by failing to divest the corpus of the B Trust of at least 95% of its Kodak concentration during July, August and/or September 1987. More specifically, objectants argue that the Bank failed to diversify the portfolio upon receipt of blocks of Kodak stock, then neglected the resulting mountain of risk from the continued concentration of stock through the final sale in October 2000. They further argue that such neglect rose to the level of recklessness in the summer of 1987 when the Bank was presented with a unique opportunity to recoup prior losses and again failed to diversify. The Bank counters that objectants' selected date, the summer of 1987, is based solely on a spike in the market price for Kodak stock during that period and, therefore, objectants' analysis is based purely on hindsight and speculation.
Assuming imprudence is found, the court may then determine, within the applicable accounting period, the reasonable time within which the fiduciary should have divested itself of the investment (see Matter of Weston, 91 NY 502, 510-511 [1883]; see also Matter of Janes, 90 NY2d at 54; Matter of Donner, 82 NY2d at 586). There is no fixed standard for what constitutes a reasonable time for divestment, and such a finding will be measured by the diligence and prudence of prudent and intelligent [persons] in the management of their own affairs" ( Matter of Weston, 91 NY at 511). The date selected for divestiture must be supported by the pleadings and/or proof offered at trial (see Matter of Dumont, 4 Misc 3d at 22).
Retention of Kodak Shares — Underlying Facts
The facts and circumstances here establish that the Bank violated the prudent person rule and prudent investor act by maintaining a concentration of Kodak stock for over 20 years.
The Bank's internal investment policy is set forth in a memorandum dated March 18, 1974 regarding: "Trust and Estate Investment Policy" ( Ex. O-11). In that memorandum the Bank describes the ideal investment objective which is to produce a reasonable rate of return with the lowest possible risk. Diversification is a desired policy because it reduces financial risk. The Bank recognizes in the memorandum that maintaining a concentration of any one stock could lead to greater instability of income and principal. Concentration is considered acceptable if the income is adequate, held in a top quality stock (which included Kodak), is closely followed by the Investment Department, and all concerned parties are satisfied with the portfolio ( Ex. O-11).
From 1973 through April 15, 1977, the trust was funded with 1,507 shares of Kodak, and on April 15, 1977, another 11,412 shares were transferred to the trust. Thus, in 1977, close to 100% of the trust assets consisted of Kodak shares. At such point, the Bank had an obligation to undertake a formal analysis of the trust and establish an investment plan. Thereafter, in administering the trust, the Bank was required to abide by its internal review protocol to pay special caution and attention to a portfolio concentration of as little as 20% ( Ex. O-36, Tab 1); conduct more than a routine review of its Kodak holdings; ascertain the needs of the beneficiaries; and consider alternative investment choices by monitoring any period of decline in the stock (see Matter of Janes, 90 NY2d at 54).
As noted, in 1977, the trust held 12,919 shares of Kodak. Thereafter, on June 1, 1977, 116 shares of Kodak were transferred to the trust, and on March 21, 1980, 12,981 shares were transferred from the A Trust bringing the total shares to 26,016. The Bank's first sale of the stock, 70 shares, occurred on April 22, 1980. Between 1980 and May 30, 1985, there were three sales totaling 155.5 shares ( Ex. O-38). Such sales represented less than one percent of the portfolio.
Two subsequent stock splits on May 17, 1985 and October 19, 1987 increased the total shares to 50,254.
Lieb testified about the creation of the account and the accuracy of the use of a blended rate as addressed above. Teegardin was the sole witness to establish the Bank's diversification plan. In support of its position that it engaged in an ongoing analysis of the concentration, the Bank relies upon investment review forms, reports of annual meetings held by an investment review committee ( Ex. O-36), and Teegardin's testimony. Teegardin either prepared and/or approved of the investment review forms.
Teegardin testified that "it was the plan from the inception that the Eastman Kodak trust would be diversified considering that we had little to no tax consequences and" . . . there was adequate exposure to Eastman Kodak in other parts of the family" (Teegardin Tr. at 593). He defined diversification to mean not having a concentration in any one asset in a portfolio and ". . . that diversification would be fulfilled with probably less than ten percent of an asset represent[ed] in the portfolio" (Teegardin Tr. at 546). According to Teegardin, a diversification plan was established by himself and Cook prior to funding the trust (Teegardin Tr. at 531). The plan was that Kodak would be diversified over time (Teegardin Tr. at 533).
As of 1977, Teegardin had not met Pamela. During the following 20 year period he handled the trust's investments, Teegardin met with Pamela at most three times (Teegardin Tr. at 520).
There is no written investment plan for the trust. According to Teegardin, the plan was to reduce the concentration of Kodak to a normal weighting which would be five to ten percent. It appears from the record that remained the Bank's plan for the next 20 years. Teegardin also testified that he did not think a 100% concentration of Kodak stock represented a "high risk" to the trust (Teegardin Tr. 566-567) and considered an 85% retention of the stock (as existing in the mid 1980s) to be a "moderate risk" (Teegardin Tr. 565). While Teegardin believed that Kodak was a high quality stock as reported by market analysts, he did not produce copies of any reports by such analysts, or identify the analyst or analysts whose opinions he actually relied upon. Teegardin conceded that Kodak was not the only sound stock available to the trustees as an investment (Teegardin Tr. 557-558).
The Bank conducted a formal review of the trust once a year (Teegardin Tr. 514, 517), such review consuming about three minutes (Teegardin Tr. 517-520) of a review committee's time. Teegardin testified that the review committee also considered the opinion of investment analysts. Objectants point out that the Bank failed to proffer any proof, beyond Teegardin's testimony, that the investment review committee considered the opinion of any investment analyst at the time it reviewed the investments of the trust.
The committee's review sheets and investment data sheets reveal that throughout the administration of the trust, the Bank was well aware of the concentration of Kodak stock. On the January 31, 1977, it is noted on the review sheet that "EK [Eastman Kodak] customer preference but we hope to diversify" ( Ex. O-36, tab 1). Upon the 1978 review sheet, it is written "EK will be diversified in the future" ( Ex. O-36, tab 2). Noted on an undated review sheet is the following: "no changes recommend (sic) at this time. We continue to monitor the Kodak concentration and will make further diversification moves in the future" ( Ex. O-36, tab 3 page 1). On March 7, 1980, the following is noted: "[f]amily has strong attachment to EK but we have talked about diversification and will be pursuing it in the future. Had meeting with co-trustee recently. Concentration" ( Ex. O-36, tab 3, page 2).
Investment data sheets were submitted for most years between 1985 through 1997 ( Ex. O-36, tab 3). Noted on the investment data sheet dated April 30, 1985, under the heading "CONCENTRATIONS" is the following: "co trustee will be acceptable to making sales at more favorable levels." At that time, the trust's portfolio consisted of 83% of Kodak stock. Below, under the heading "NON-GUIDANCE ISSUES," is written the following: "I mentioned to John that I thought it would be desirable to strongly encourage the moderate diversification of their account's large Kodak holding."
Letters from Teegardin to Cook, written between February, 1986 through March 6, 1995, were admitted into evidence ( Ex. O-36, tabs 14-23). In each letter Teegardin makes note of the continued concentration of Kodak, he refers to the company's struggles or improvement, and expresses the Bank's intention that the stock be sold at favorable prices. For example, in the letter dated February 28, 1986, Teegardin writes "[w]ith the general markets being up strongly for the past year or more, Kodak has finally begun to participate. Since the position is so dominant in this portfolio and we have wanted to diversify the position, the recent strength gives us the opportunity to work toward that goal. . . . We have, for some time, believed Kodak was modestly valued relative to other issues but also set a target of $55.00 per share as a first sell point" ( Ex. O-36, tab 14). In March, 1986, the Bank sold 5,000 shares at $57.15 per share ( Ex. O-30).
On March 27, 1987, Teegardin wrote "[a]s you no doubt are aware, it certainly has been a great year to date in the equity markets. It has been enjoyable but also concerning since so much has occurred so quickly. The goal over many years has been diversifying the portfolio and now with Kodak at more favorable prices, it is prudent to make a significant move." ( Ex. O-36, tab 15). On April 14, 1987, the bank sold 10,000 shares of Kodak at $80.07 per share ( Ex. O-30). Following this sale, the Kodak shares still represented 74% of the value of the trust portfolio (Ross Tr. 167).
The court finds Teegardin's testimony self-serving and insufficient to prove the existence of a plan or that the Bank acted prudently by retaining a concentration of Kodak shares. Rather, Teegardin's testimony, together with the investment data sheets and his letters to Cook, demonstrate only that the Bank aspired to sell Kodak at some indefinite time, which it hoped would coincide with an increase in price.
The Bank responded to objectants' proof by suggesting that it evaluated the trust's assets in relation to the family's holdings. This contention appears to be made to support an argument that the concentration was not as great as it appears from the account. For example, the Bank held another account for Pamela which did not contain a concentration of Kodak. Reference to other assets held by family members has no relevance to the Bank's conduct in retaining a concentration of stock in the trust before this court.
In addition, the Bank offered Wilkie, the Chief Fiduciary Officer for Banker's Trust Company, as an expert to support the position that it acted prudently by retaining a concentration of Kodak. As a general proposition, Wilkie opined that "[a] prudent fiduciary acts prudently by diversifying a concentration over time." (Wilkie Tr. at 184). While conceding that diversification reduces risk (Wilkie Tr. At 198), Wilkie went on to testify that "great wealth . . . is only achieved by concentration" (Wilkie Tr. 198). The facts of this case do not support such theory. Wilkie's comment diminished his credibility as an expert on the management of a trust portfolio by a professional trustee.
In Wilkie's opinion selling 95% of Kodak in 1977 would not have violated "prudent investing" standards, but he believed such sale would have been a "bad investment strategy" (Wilkie Tr. at 201, 212, 227-229). Wilkie believes that the stock should have been sold over time. He adopted the Bank's indefiniteness as to an appropriate period for such sale or sales. In Wilkie's opinion, the Bank acted prudently because it had a "strategy [of] anticipating a better price level in the future supported by investment research" (Wilkie Tr. at 169-170), which allowed the Bank "to sell [the stock] over a period of time at different prices and reinvest the proceeds at market levels that were different levels so, he is averaging out of the [Kodak] stock and averaging into other investments" (Wilkie Tr. at 178). "How long a period would vary, but not a knee-jerk reaction, not taking into consideration all other portfolio factors, that would not have been done. . ." (Wilkie Tr. at 204-205).
Wilkie believes the Bank was prudent because it "was monitoring Eastman Kodak closely, looking at investment research and formulating a conclusion on a daily basis that the stock was worth retaining in the expectation of higher values in the future" (Wilkie Tr. at 62). However, there was no proof beyond Teegardin's testimony, that the Bank reviewed investment research. Notwithstanding the absence of such proof, throughout the trial, and during its direct examination of Wilkie, the Bank repeatedly relied upon reports rendered by Value Line, an investment survey company, which indicated that Kodak was a viable company and had a bright future (Wilkie Tr. 74-90).
Wilkie's opinion that the Bank was prudent relies in large part on assumptions which the Bank failed to establish: that there was an investment plan; that Teegardin constantly monitored the trust assets to ascertain the appropriate time to sell Kodak; and that the Bank considered the view of professional analysts as to the strength of Kodak. His opinion that the Bank had a 23 year plan to diversify the concentration in Kodak shares was not supported by the record. Under these circumstances, the court does not credit Wilkie's expert opinion in making this determination.
Objectants' expert, Ross, views a portfolio investment plan as having four stages: 1) the establishment of investment objectives to address the need for income and possible risk; 2) the selection of specific investments to meet such objectives; 3) execution of such objectives; and 4) maintaining flexibility to address uncertainties and risks as they arise (see Ross Tr. 112-113). Ross believes an investment plan should be memorialized in a designated folder, which is updated as changes are made. Such memorialization enables the professional fiduciary to create a record and provides guidance for future investing (Ross Tr. 114). Ross is of the opinion that the notes made by Teegardin on the investment data sheets and in letters to Cook do not reflect an investment plan. Rather, Ross considers such comments as ". . . observations about certain events, sales of Eastman Kodak stock that occurred over a long period of time, in bits and pieces" (Ross Tr. 408). "What you see are sales and purchases" (Ross Tr. 411). The court concurs with Ross's description of the investment review sheets.
Ross defines a concentration of stock to mean ". . . a disproportionate amount of shares that you own in any kind of portfolio, particularly a trust, [which] means that there is a mountain of risk that you start off with. That mountain is on your back and negatively could affect the attainment of the investment objectives and the management of the portfolio and all its possibilities of generating income, diversifying the risk" (Ross Tr. 128)" . . . it jeopardizes the future . . . value of the trust and the future benefits to the beneficiaries" (Ross Tr. 129). Ross believes that the Bank should have diversified 95% of the portfolio in 1977 which would have given it the opportunity to diversify the funds into other "very, very good, hopefully good, securities with different yield and income characteristics, all of which allows you to fulfill the investment objectives of the trust" (Ross Tr. 129).
According to Ross, holding a concentration of a single equity for 10 to 15 years was imprudent. Objectants have established that it took the Bank 14 to 15 years, from 1973 to 1987, before Kodak recouped its price. As Ross reports, there came a "unique opportunity to recoup the unrealized loss in [the] trust, [which occurred] during 1987, but particularly July, August . . . and September" (Ross Tr. 131, 215). In Ross's opinion, under the circumstances here where the Bank had already held onto a concentration of Kodak shares for more than 10 years, a prudent fiduciary would have sold 95% of Kodak stock in the summer of 1987 (Ross Tr. 195). The court accepts and credits Ross's testimony.
The foregoing proof demonstrates that at no time during the administration of the trust did the Bank formulate any investment plan, let alone establish a plan to diversify its concentration of Kodak. The Bank acted contrary to its internal policies to restrict its holding of any one stock to certain circumstances, none of which were presented here. Following the enactment of the Prudent Investor Act, on January 1, 1995, the Bank continued to hold a concentration of Kodak shares in violation of the statutory requirement 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" (EPTL 11-2.3 [b][3][C]). The record is clear that, after January 1, 1995, the Bank continued to hold a concentration of Kodak shares in the trust. The Bank failed to rebut such proof and establish that it took steps to determine whether it was in the interests of the beneficiaries not to diversify in relation to the purposes and terms of the trust and under the provisions of the governing instrument.
In addition, the Bank failed to consider the best interests of the persons interested in the trust. The proof establishes that the Bank paid limited attention to the needs of the income beneficiary and virtually no attention to the remainder interests. Teegardin makes reference to the income beneficiary, the family's purported desire to hold onto the stock, and in one letter, noted the existence of potential tax consequences. The record is devoid of any proof that the Bank was proactive by assessing the volatility resulting from the concentration of Kodak and the benefit to selling and diversifying the portfolio, obtaining Pamela's written consent to retaining Kodak stock, ascertaining the tax consequences, if any, to Pamela and determining whether the concentration jeopardized the remainder interest.
As in Janes, notably absent here is any proof that the Bank considered the increased risk to the trust portfolio by its continued concentration of one security in the portfolio. Also consistent with Janes, the record here establishes that the Bank: 1) failed to undertake a formal analysis of the trust by creating an investment plan; and 2) failed to conduct more than a superficial review of its holding of Kodak shares and consider alternative investments.
Introduced into evidence is a graph ( Exs. O-36 and P-284) upon which the market price for Kodak stock during the period 1960 through August 2008 is shown on one side together with the dates when the trust was funded with the stock and the dates when the Bank sold its Kodak shares. The graph provides a useful depiction of the volatility of Kodak stock.
Between the initial funding of the trust in 1977, and the distribution from Trust A in 1980, the value of Kodak shares fell. Thereafter, the stock experienced an increase in its
value in the early 1980s followed by another decrease in value in the mid-1980s and then began a steady climb to a peak in July, 1987. Teegardin acknowledged that in mid 1987, the Bank was aware that the price of Kodak was on the rise and testified that in July and August, 1987, the stock was "fairly valued" (Teegardin Tr. at 572). Yet, Teegardin made a deliberate decision in the summer of 1987 not to sell the Kodak shares (Teegardin Tr. at 571).
Kodak suffered significant losses in value when the market turned in October, 1987. Not until August 17, 1989, did the Bank next sell stock, 5,000 shares and then on November 20, 1991, the Bank sold 6,100 shares. Thereafter, the Bank sold shares of Kodak during most of the years from 1989 through October 25, 2000, during which period there were gains and some losses.
Contrary to the Bank's assertions, the proof demonstrates that it considered the price of Kodak stock to be the determinative factor on whether to sell. 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. The court's evaluation must be based upon the Bank's conduct in comparison with an experienced, careful investor. Here, objectants proved imprudence, and the Bank failed to rebut such proof. Moreover, such argument is only supported where the sales are evaluated in relation to the Bank's blended inventory value, not against the date by which it should have sold the Kodak shares.
Under the circumstances here, an experienced, careful investor should have seen that in the early summer of 1987, the market for the sale of Kodak shares had improved to the point that it was prudent to sell at least 95% of the Kodak shares, in order to eliminate the concentration in the portfolio and recoup the unrealized loss in the trust (Ross Tr. 131, 215). As noted, the Court of Appeals held in both Janes and Saxton that once imprudence is established, the court may designate a reasonable time within which divestiture should have occurred ( Matter of Janes, 90 NY2d at 54; see also Matter of Saxton, 274 AD2d at 120). Giving the Bank a reasonable period to implement the sale of Kodak, the court finds that the Bank should have sold 95% of the Kodak shares on July 30, 1987.
Damages
Objectants' contend that the proper measure of damages for the Bank's negligence (which included the alleged deceptive accounting practices) should be an award of appreciation or market index damages based on the performance of an alternative hypothetical portfolio (see Matter of Rothko, 43 NY2d 305). Alternatively, objectants contend that, by reason of the Bank's imprudent retention of Kodak stock, they are entitled to damages for lost capital plus prejudgment statutory interest compounded annually (see Matter of Janes, 90 NY2d at 56). Objectants further contend that the Bank's method of obtaining Pamela's waiver [objection 16] was misleading and evidenced a degree of self-dealing and moral turpitude which requires the award of punitive damages.
The Bank contends that the proper measure of damages must be limited to lost capital, as set forth in Janes, as its liability is grounded merely in its alleged negligent retention of Kodak shares.
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, 90 NY2d at 55; Matter of Garvin, 256 NY 518, 521 [1931]). 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 ( see Matter of Rothko, 43 NY2d at 321 ["lost profit" measure of damages appropriate where fiduciary's misconduct consisted of "deliberate self-dealing" with trust property]; see also Scalp Blade, Inc., v Advest, Inc. 309 AD2d 219, 232 [4th Dept 2003] [plaintiffs may recover "market index" or "lost appreciation damages" where facts showed "unauthorized trading" of funds and "speculative and otherwise unsuitable investment decisions" engaged in for fiduciary's own benefit]).
As a preliminary matter, the court dismissed objections five, nine and twelve which alleged that the Bank sought to deceive the parties and the court. Furthermore, in vacating the 1998 decree and Pamela's waiver, the court determined that the waiver was not knowingly and intelligently given, not that it was fraudulently obtained. In any event, the court finds that the Bank's actions in obtaining the waiver do not bear on the Bank's administration of the trust assets, and therefore, the waiver issue is not determinative of the choice of damages (see Matter of Janes, 90 NY2d at 55). As in Janes, the proper measure of damages is the value of lost capital, as the Bank's conduct did not consist of deliberate self-dealing and/or rise to the degree of faithlessness as to warrant Rothko damages. Accordingly, the calculation of damages here shall be based upon lost capital.
In addition to assessing damages for lost capital, interest may be recovered from the date on which the subject asset should have been diversified or sold ( Matter of Garvin, 256 NY 518). It is within the court's discretion whether to award interest, and whether to impose interest at the statutory rate or some other rate (CPLR 5001; SCPA 209; see also Matter of Janes, 90 NY2d at 55-56).
The record here demonstrates a pattern of neglect which rises to a breach of fiduciary duty by the Bank for over a 20 year period. Based upon such facts the court awards statutory interest, compounded annually (see Matter of Janes, 90 NY2d at 55-56 [negligent retention justified compounded interest, at statutory rate, on value of shares from date shares should have been sold]).
Accordingly, the proper measure of damages for "lost capital" shall be calculated by: (1) determining the gross value of 95% of the Kodak shares remaining in the B Trust on July 31, 1987, measured by the average of the high and low value of the stock on that day, (2) 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 that date (the rolling balance). (On July 31, 1987, the trust held 22,686 Kodak shares, of which 95% equaled 21,552 shares. [This 95% will be referred to as the share pool]).
From this amount, proceeds received from the sale of Kodak shares shall be credited against the rolling balance on the date of receipt and the shares sold deducted from the share pool. Sale proceeds for the purposes of this calculation shall also be net of capital gains tax liability, if any. Dividends received on the shares held in the share pool shall also be credited against the rolling balance on the date of receipt. Per diem interest at the statutory rate of 9% shall be calculated each year on the rolling balance as adjusted for each dividend received and the proceeds from each sale of stock. 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.
No objection was raised nor was any proof adduced at the trial to support a finding that the retention of the Eastman Chemical shares should be accorded the same treatment as the retention of the Kodak shares. On January 18, 1994, the Bank received 3,982.25 shares of Eastman Chemical as a 1 for 4 stock distribution on their Kodak shares. In one of their damage calculations ( Ex. O-68, tab B), the objectants credit dividends and sale proceeds from Eastman Chemical against the rolling balance on the dates received as though they represented proceeds from the ownership or sale of Kodak shares. This is not supported by the record. Instead, the appropriate treatment is to consider the stock distribution attributed to the share pool as a disposition of Kodak shares and credit the market value of those shares on the date of distribution against the rolling balance on that date. Thereafter, dividends earned from the estate's shareholdings in Eastman Chemical shall be credited to the trust.
To the extent that objectants seek punitive damages for the Bank's conduct, the court declines to award such damages under the circumstances of this case (see Matter of Biblowitz v Greenspan, NYLJ, Feb. 23, 2001, at 24, col. 3 [award of punitive damages is warranted only where there is a high degree of moral culpability or wilful or wanton negligence or recklessness and where subject conduct is directed at the public generally]).Accordingly, objection 16 is dismissed, and objection 15 is sustained to the extent indicated above.
Commissions / Counsel Fees
We turn now to whether the Bank is entitled to receive commissions and/or payment of counsel fees from the B Trust. Objectants seek denial of commissions, for the return of commissions paid to date, denial of attorneys' fees and for the return of a portion of attorneys' fees paid, together with statutory interest from the date such fees were paid. In addition, objectants seek to surcharge the Bank for their legal fees and disbursements related to the application by Pamela to set aside her waiver and to vacate the 1998 decree, and legal fees, disbursements, expert witness fees and disbursements incurred in the prosecution of their objections.
As a general rule, absent a finding of self-dealing or fraud on the part of the fiduciary, commissions are allowed (see Matter of Saxton, 274 AD2d at 121). Here, there has been no showing of self-dealing or fraud. While the Bank imprudently retained a concentration of Kodak shares, the damages imposed herein will make the beneficiaries whole. The Bank administered this trust over the course of a 30 year period, during which time it performed many valuable services for which it is entitled to be compensated. However, because the Bank failed to prudently invest the assets as a fiduciary "having special investment skills," its commissions shall be computed at the trustee rates provided under SCPA 2309, not corporate rates as set forth under SCPA 2312. Any overpayment of such commissions shall be returned to the B Trust within 30 days of the date of the decree to be settled herein.
A determination of counsel fees is premature. Pursuant to an agreement among the parties, no evidence of the propriety of counsel fees was submitted at trial. Accordingly, the court reserves decision on whether to deny petitioners' attorneys' fees and/or surcharge the Bank for objectants' legal fees. The proceeding is restored to the court's calendar on Wednesday, June 2, 2010 , at 9:30 a.m., for further direction concerning the submission of such issues for determination.
Settle decree within 60 days from the date hereof ( 22 NYCRR 207.37 [a]).