Opinion ID: 2232870
Heading Depth: 1
Heading Rank: 1

Heading: Petitioner's Liability

Text: Petitioner argues that New York law does not permit a fiduciary to be surcharged for imprudent management of a trust for failure to diversify in the absence of additional elements of hazard, and that it relied upon, and complied with, this rule in administering the estate. Relying on Matter of Balfe (152 Misc 739, 749, mod 245 App Div 22), petitioner claims that elements of hazard can be capsulized into deficiencies in the following investment quality factors: (i) the capital structure of the company; (ii) the competency of its management; (iii) whether the company is a seasoned issuer of stock with a history of profitability; (iv) whether the company has a history of paying dividends; (v) whether the company is an industry leader; (vi) the expected future direction of the company's business; and (vii) the opinion of investment bankers and analysts who follow the company's stock. Evaluated under these criteria, petitioner asserts, the concentration of Kodak stock at issue in this case, that is, of an acknowledged blue chip security popular with investment advisors and many mutual funds, cannot be found an imprudent investment on August 9, 1973 as a matter of law. In our view, a fiduciary's duty of investment prudence in holding a concentration of one security may not be so rigidly limited. New York followed the prudent person rule of investment during the period of petitioner's administration of the instant estate. This rule provides that [a] fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent [persons] of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital (EPTL 11-2.2 [a] [1]). [] Codified in 1970 ( see , L 1970, ch 321), the prudent person rule's New York common-law antecedents can be traced to King v Talbot (40 N.Y. 76), wherein this Court stated: [T]he trustee is bound to employ such diligence and such prudence in the care and management [of the trust], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs. This necessarily excludes all speculation, all investments for an uncertain and doubtful rise in the market, and, of course, everything that does not take into view the nature and object of the trust, and the consequences of a mistake in the selection of the investment to be made .     [T]he preservation of the fund, and the procurement of a just income therefrom, are primary objects of the creation of the trust itself, and are to be primarily regarded ( id. , at 85-86 [emphasis supplied]). No precise formula exists for determining whether the prudent person standard has been violated in a particular situation; rather, the determination depends on an examination of the facts and circumstances of each case ( see , Purdy v Lynch , 145 N.Y. 462, 475; see also , Matter of Hahn , 62 N.Y.2d 821, 824). In undertaking this inquiry, the court should engage in `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 N.Y.2d 574, 585 [quoting Matter of Bank of N. Y. , 35 N.Y.2d 512, 519]). And, while a court should not view each act or omission aided or enlightened by hindsight ( see , Matter of Bank of N. Y. , supra , at 519; see also , Matter of Clark , 257 N.Y. 132, 136; Purdy v Lynch , supra , at 475-476), a court may, nevertheless, examine the fiduciary's conduct over the entire course of the investment in determining whether it has acted prudently ( see , Matter of Donner , supra , at 585-586). Generally, whether a fiduciary has acted prudently is a factual determination to be made by the trial court ( see , id. ; see also , Matter of Rothko , 43 N.Y.2d 305, 318; Matter of Hubbell , 302 N.Y. 246, 258). As the foregoing demonstrates, the very nature of the prudent person 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, such as those identified by petitioner. Indeed, in various cases, courts have determined that a fiduciary's retention of a high concentration of one asset in a trust or estate was imprudent without reference to those elements of hazard ( see , Matter of Donner , supra , at 585-586; see also , Matter of Curtiss , 261 App Div 964, affd without opn 286 N.Y. 716; Cobb v Gramatan Natl. Bank & Trust Co. , 261 App Div 1086). The inquiry is simply whether, under all the facts and circumstances of the particular case, the fiduciary violated the prudent person standard in maintaining a concentration of a particular stock in the estate's portfolio of investments. Moreover, no court has stated that the limited elements of hazard outlined by petitioner are the only factors that may be considered in determining whether a fiduciary has acted prudently in maintaining a concentrated portfolio. Again, as commentators have noted, one of the primary virtues of the prudent person rule  lies in its lack of specificity , as this permits the propriety of the trustee's investment decisions to be measured in light of the business and economic circumstances existing at the time they were made (Laurino, Investment Responsibility of Professional Trustees , 51 St John's L Rev 717, 723 [1977] [emphasis supplied]). Petitioner's restrictive list of hazards omits such additional factors to be considered under the prudent person rule by a trustee in weighing the propriety of any investment decision, as: the amount of the trust estate, the situation of the beneficiaries, the trend of prices and of the cost of living, the prospect of inflation and of deflation (Restatement [Second] of Trusts § 227, comment e ). Other pertinent factors are the marketability of the investment and possible tax consequences ( id. , comment o ). The trustee must weigh all of these investment factors as they affect the principal objects of the testator's or settlor's bounty, as between income beneficiaries and remainder persons, including decisions regarding whether to apportion the investments between high-yield or high-growth securities (Turano and Radigan, New York Estate Administration ch 14, § P, at 409 [1986]). Moreover, and especially relevant to the instant case, the various factors affecting the prudence of any particular investment must be considered in the light of the circumstances of the trust itself rather than [merely] the integrity of the particular investment (9C Rohan, NY Civ Prac  EPTL ¶ 11-2.2 [5], at 11-513, n 106 [1996]). As stated in a leading treatise: [t]he trustee should take into consideration the circumstances of the particular trust that he is administering, both as to the size of the trust estate and the requirements of the beneficiaries. He should consider each investment not as an isolated transaction but in its relation to the whole of the trust estate (3 Scott, Trusts § 227.12, at 477 [4th ed]). Our case law is entirely consistent with the foregoing authorities. Thus, in Matter of Bank of N. Y. (35 N.Y.2d 512, supra ), although we held that a trustee remains responsible for imprudence as to each individual investment in a trust portfolio, we stated:  The record of any individual investment is not to be viewed exclusively, of course, as though it were in its own water-tight compartment , since to some extent individual investment decisions may properly be affected by considerations of the performance of the fund as an entity, as in the instance, for example, of individual security decisions based in part on considerations of diversification of the fund or of capital transactions to achieve sound tax planning for the fund as a whole. The focus of inquiry, however, is nonetheless on the individual security as such and factors relating to the entire portfolio are to be weighed only along with others in reviewing the prudence of the particular investment decisions (35 NY2d, at 517, supra [emphasis supplied]). Thus, the elements of hazard petitioner relies upon as demonstrating that, as a matter of law, it had no duty to diversify, suffer from two major deficiencies under the prudent person rule. First, petitioner's risk elements too narrowly and strictly define the scope of a fiduciary's responsibility in making any individual investment decision, and the factors a fiduciary must consider in determining the propriety of a given investment. A second deficiency in petitioner's elements of hazard list is that all of the factors relied upon by petitioner go to the propriety of an individual investment exclusively    as though it were in its own water-tight compartment ( Matter of Bank of N. Y. , supra , at 517), which would encourage a fiduciary to treat each investment as an isolated transaction rather than in its relation to the whole of the trust estate (3 Scott, op. cit. , at 477). Thus, petitioner's criteria for elements of hazard would apply irrespective of the concentration of the investment security under consideration in the portfolio. That is, the existence of any of the elements of risk specified by petitioner in a given corporate security would militate against the investment even in a diversified portfolio, obviating any need to consider concentration as a reason to divest or refrain from investing. This ignores the market reality that, with respect to some investment vehicles, concentration itself may create or add to risk, and essentially takes lack of diversification out of the prudent person equation altogether. Likewise, contrary to petitioner's alternative attack on the decisions below, neither the Surrogate nor the Appellate Division based their respective rulings holding petitioner liable on any absolute duty of a fiduciary to diversify. Rather, those courts determined that a surcharge was appropriate because maintaining a concentration in Kodak stock, under the circumstances presented, violated certain critical obligations of a fiduciary in making investment decisions under the prudent person rule. First, petitioner failed to consider the investment in Kodak stock in relation to the entire portfolio of the estate ( see , Matter of Bank of N. Y. , supra , at 517; 3 Scott, op. cit. ), i.e., whether the Kodak concentration itself created or added to investment risk. The objectants' experts testified that even high quality growth stocks, such as Kodak, possess some degree of volatility because their market value is tied so closely to earnings projections ( cf. , Turano and Radigan, op. cit. , at 409). They further opined that the investment risk arising from that volatility is significantly exacerbated when a portfolio is heavily concentrated in one such growth stock. Second, the evidence revealed that, in maintaining an investment portfolio in which Kodak represented 71% of the estate's stock holdings, and the balance was largely in other growth stocks, petitioner paid insufficient attention to the needs and interests of the testator's 72-year-old widow, the life beneficiary of three quarters of his estate, for whose comfort, support and anticipated increased medical expenses the testamentary trusts were evidently created. Testimony by petitioner's investment manager, and by the objectants' experts, disclosed that the annual yield on Kodak stock in 1973 was approximately 1.06%, and that the aggregate annual income from all estate stockholdings was $43,961, a scant 1.7% of the $2.5 million estate securities portfolio. Thus, retention of a high concentration of Kodak jeopardized the interests of the primary income beneficiary of the estate and led to the eventual need to substantially invade the principal of the marital testamentary trust. Lastly, there was evidence in the record to support the findings below that, in managing the estate's investments, petitioner failed to exercise due care and the skill it held itself out as possessing as a corporate fiduciary ( see , Matter of Donner , 82 NY2d, at 578, supra ; Restatement [Second] of Trusts § 227, Comment on Clause [a]). Notably, there was proof that petitioner (1) failed initially to undertake a formal analysis of the estate and establish an investment plan consistent with the testator's primary objectives; (2) failed to follow petitioner's own internal trustee review protocol during the administration of the estate, which advised special caution and attention in cases of portfolio concentration of as little as 20%; and (3) failed to conduct more than routine reviews of the Kodak holdings in this estate, without considering alternative investment choices, over a seven-year period of steady decline in the value of the stock. Since, thus, there was evidence in the record to support the foregoing affirmed findings of imprudence on the part of petitioner, the determination of liability must be affirmed ( Matter of Donner , 82 NY2d, at 584, supra ).