Court Opinion

ID: 2772409
Source: CourtListenerOpinion
Date Created: 2015-01-22 22:05:38.233618+00
Date Added: 2024-06-11T11:27:46.642925
License: Public Domain

J-A27038-14

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

TIMOTHY MEHRTENS AND LAWRENCE             :       IN THE SUPERIOR COURT OF
LITVAK, Successor Co-Trustees of the      :             PENNSYLVANIA
Elizabeth Ackerman Trust Under            :
Agreement Dated December 18, 1967,        :
                                          :
                    Appellants            :
                                          :
            v.                            :
                                          :
FIDUCIARY TRUST COMPANY                   :
INTERNATIONAL,                            :
                                          :
                    Appellee              :            No. 92 WDA 2014

                 Appeal from the Order entered on May 24, 2013
                 in the Court of Common Pleas of Mercer County
                     Orphans’ Court Division at No. 2012-452

BEFORE: FORD ELLIOTT, P.J.E., SHOGAN and MUSMANNO, JJ.

MEMORANDUM BY MUSMANNO, J.:                       FILED JANUARY 22, 2015

      Timothy Mehrtens and Lawrence Litvak, Successor Co-Trustees of the

Elizabeth Ackerman Trust Under Agreement Dated December 18, 1967,

(collectively “Trustees”) appeal from the Order granting the Preliminary

Objections filed by Fiduciary Trust Company International (“Fiduciary

Trust”), and dismissing the Trustees’ Complaint with prejudice.1 We affirm

in part and reverse in part.

      Elizabeth W. Ackerman, now known as Elizabeth Werner (“Elizabeth”),

created an irrevocable trust (“Trust”) under an Agreement of Trust (“Trust

1
  The trial court dismissed all of the Trustees’ claims except for their aiding
and abetting a breach of a fiduciary duty claim. However, as noted infra,
the Trustees voluntarily dismissed the remaining claim to file the instant
appeal.
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Agreement”) on December 18, 1967. The Trust Agreement named Elizabeth

as the settlor of the Trust and First Seneca Bank and Trust Company (“First

Seneca”) as the trustee. Elizabeth is alive and the Trust continues to benefit

her.

       The purpose of the Trust was to manage property held in the trust for

the benefit of Elizabeth and, after her death, her children.       The Trust

Agreement provides that the trustee pay the net income of the Trust to

Elizabeth during her lifetime. The Trust Agreement also provides the trustee

with discretionary authority to access the principal of the Trust for

“maintenance, support, medical and surgical care of [Elizabeth], her spouse

and children, and for the complete education of [Elizabeth] and her

children.” Trust Agreement, 12/18/67, at 2. However, the Trust Agreement

also states that the trustee “shall not, during [Elizabeth’s] lifetime, make

any distributions of income or principal to or for the benefit of any person

other than [Elizabeth] unless [Elizabeth] shall have authorized the same by

written authorization filed with the [t]rustee.”       Id. at 3. The Trust

Agreement grants Elizabeth the power and authority to nominate and

appoint a new trustee(s) in the event of a vacancy. The Trust Agreement

additionally provides that the Trust should be construed, regulated, and

administered in Pennsylvania and that the venue for all purposes regarding

the Trust shall be in Mercer County and that the Orphans’ Court of Mercer

County shall have exclusive jurisdiction over the Trust.

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      In March 1998, First Seneca resigned as trustee, and Elizabeth

appointed her son, Jeffrey Ackerman (“Ackerman”), as successor trustee.

On July 11, 1998, Ackerman, as trustee, entered into a Custody Agreement

(“Custody Agreement”) with Fiduciary Trust, wherein Fiduciary Trust acted

as an agent for the Trust.    As part of the Custody Agreement, Ackerman

deposited approximately $10 million in trust assets with Fiduciary Trust.

Ackerman identified himself as one of the managers of the account and

authorized Fiduciary Trust to rely on his oral or written instructions.    The

Custody Agreement also stated that any instructions given by Ackerman

would be in accordance with the governing instrument and applicable law.2

The Custody Agreement stated that Fiduciary Trust’s “responsibilities are

solely as stated in this agreement and will be performed with reasonable

care and in accordance with relevant trade practices.” Custody Agreement,

7/31/98, at 2 (unnumbered). The Custody Agreement provides that it would

be “governed by the laws of the State of New York (without regard to any

laws that might otherwise apply under principles of conflicts of law).” Id. at

3 (unnumbered).

      From 1998     to 2010, Fiduciary Trust, at Ackerman’s direction,

transferred approximately $9 million in trust assets to Ackerman.          The

numerous transactions were made without Elizabeth’s authorization or

2
  According to the Complaint, Fiduciary Trust was familiar with the terms of
the Trust Agreement, including the provision prohibiting the trustee from
distributing trust principal to anyone other than Elizabeth without her written
authorization. Complaint, 9/10/12, at 4.

                                  -3-
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knowledge. In September 2010, Ackerman resigned as trustee of the Trust.

Elizabeth thereafter appointed the Trustees.

      In June 2011, the Trustees filed an action against Fiduciary Trust

seeking $9 million in Surrogate’s Court in Westchester County, New York.3

On January 11, 2012, the Surrogate’s Court dismissed the action, finding

that jurisdiction for the Trustees’ claims lies with the Orphans’ Court in

Mercer County.

      On September 10, 2012, the Trustees filed a Complaint against

Fiduciary Trust alleging breach of contract, breach of fiduciary duty,

negligence, conversion, unjust enrichment, aiding and abetting a breach of

fiduciary duty, and aiding and abetting a conversion.    Fiduciary Trust filed

Preliminary Objections, claiming, inter alia, that the Trustees’ claims were

legally insufficient.   Fiduciary Trust also sought to stay the proceedings

pending final resolution of the Massachusetts bankruptcy proceedings. The

trial court granted Fiduciary Trust’s Preliminary Objections and dismissed all

of the Trustees’ causes of action except for the aiding and abetting a breach

3
  The Trustees had filed an action against Ackerman, his wife, and his
attorneys in the Superior Court of Middlesex County, Massachusetts.
Ackerman filed a bankruptcy petition in the United States Bankruptcy Court
for the District of Massachusetts. The Trustees subsequently brought an
adversary proceeding in the Bankruptcy Court to determine the
dischargeability of Ackerman’s debt to the Trust.

                                  -4-
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of fiduciary duty claim.4 The trial court also denied Fiduciary Trust’s Motion

to Stay.

      The Trustees filed a Motion for Leave to Amend Complaint, seeking to

file an amended complaint with additional allegations of facts.     Fiduciary

Trust filed a brief in opposition to the Trustees’ Motion.    The trial court

denied the Trustees’ Motion.   As a result, the Trustees filed a Praecipe to

discontinue the aiding and abetting a breach of fiduciary duty claim.

Thereafter, the Trustees filed a Notice of Appeal and a court-ordered

Pennsylvania Rule of Appellate Procedure 1925(b) Concise Statement.

      On appeal, the Trustees raise the following questions for our review:

      A. Did the trial court err in sustaining the demurrer to, and
         refusing to allow an amendment to, the Trust’s breach of
         contract claim against Fiduciary Trust because the Trust has
         alleged all of the elements of a contract claim and the facts
         alleged must be accepted as true at the pleading stage?

      B. Did the trial court err in sustaining the demurrer to, and
         refusing to allow an amendment to, the Trust’s breach of
         fiduciary duty claim against Fiduciary Trust because the Trust
         has alleged all of the elements of a breach of fiduciary duty
         claim and the facts alleged must be accepted as true at the
         pleading stage?

Brief for Appellants at 5.

            Our standard of review of an order of the trial court
      overruling or granting preliminary objections is to determine
      whether the trial court committed an error of law.      When
      considering the appropriateness of a ruling on preliminary

4
  The trial court found, and the parties agreed, that New York substantive
law and Pennsylvania procedural law govern this case. Trial Court Opinion,
5/21/13, at 2.

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      objections, the appellate court must apply the same standard as
      the trial court.

             Preliminary objections in the nature of a demurrer test the
      legal sufficiency of the complaint. When considering preliminary
      objections, all material facts set forth in the challenged pleadings
      are admitted as true, as well as all inferences reasonably
      deducible therefrom.      Preliminary objections which seek the
      dismissal of a cause of action should be sustained only in cases
      in which it is clear and free from doubt that the pleader will be
      unable to prove facts legally sufficient to establish the right to
      relief. If any doubt exists as to whether a demurrer should be
      sustained, it should be resolved in favor of overruling the
      preliminary objections.

Joyce v. Erie Ins. Exch., 74 A.3d 157, 162 (Pa. Super. 2013) (citation

omitted).

      In their first claim, the Trustees contend that they properly stated a

valid breach of contract claim against Fiduciary Trust. Brief for Appellants at

24, 33.     The Trustees argue that there is no dispute that the Custody

Agreement is a valid and binding contract between the Trust and Fiduciary

Trust, that Fiduciary Trust breached its contractual obligations, and that the

Trust suffered damages.      Id.   The Trustees claim that Fiduciary Trust

breached its contractual obligations under Paragraph 8 of the Custody

Agreement by failing to perform its responsibilities with reasonable care and

in accordance with relevant trade practices.      Id. at 24-25, 29, 33.      The

Trustees argue that the trial court failed to recognize that Fiduciary Trust

breached the Custody Agreement because of how it performed the duties

required of it by failing to use reasonable care or adhere to relevant trade

practices. Id. at 25; see also id. at 25-26, 30 (wherein the Trustees assert

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that the trial court’s interpretation of this clause rendered it meaningless).

The Trustees assert that because the terms “reasonable care” and “relevant

trade practices” are not defined in the Custody Agreement, New York law

allows courts to consider extrinsic evidence, i.e., Fiduciary Trust’s internal

policies and procedures, to explain the terms. Id. at 26-28. The Trustees

further assert that contrary to the trial court’s finding, they did not need to

be aware of or rely on Fiduciary Trust’s internal policies and procedures to

prove that they were terms of the contract. Id. at 28-29.

      The Trustees specifically allege that

      despite its knowledge of Ackerman’s suspicious activities, and
      the unreasonableness of relying upon his representations,
      Fiduciary Trust failed to undertake reasonable efforts to
      scrutinize his purpose and authority to make distributions from
      the Trust and to hypothecate the Trust’s assets; failed to
      exercise due diligence; failed to investigate unusual and/or
      suspicious activity and transactions; ignored violations of the
      terms of the Trust; failed to seek explanations of transactions;
      failed to establish and/or measure Ackerman’s actions against a
      baseline of account activity; and failed to communicate with
      [Elizabeth].

Id. at 29-30. The Trustees claim that the trial court improperly found that

Fiduciary Trust could blindly follow Ackerman’s directives “regardless of how

unreasonable or out-of-line with relevant trade practices those instructions

may have been[.]”     Id. at 31.    The Trustees point out that in separate

instances in 2004 and 2006, Fiduciary Trust stated that the Trust Agreement

necessitated Elizabeth’s written authorization for the hypothecation of trust

assets. Id. at 31-32. The Trustees contend that this conduct demonstrated

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that Fiduciary Trust took steps to act with reasonable care and in accordance

with normal trade practices on occasion. Id. at 32.5

     “The essential elements of a breach of contract cause of action are the

existence of a contract, the plaintiff’s performance pursuant to the contract,

the defendant’s breach of his or her contractual obligations, and damages

resulting from the breach.”     Canzona v. Atanasio, 989 N.Y.S.2d 44,

47 (N.Y.A.D. 2d Dep’t 2014) (citation and quotation marks omitted). “[T]he

plaintiff’s allegations must identify the provisions of the contract that were

breached.” Id. (citation omitted).

     “[A] written agreement that is complete, clear and unambiguous on its

face must be enforced according to the plain meaning of its terms.” Kolbe

v. Tibbetts, 3 N.E.3d 1151, 1156 (N.Y. 2013) (citation omitted). “[A] court

should not read a contract so as to render any term, phrase, or provision

meaningless or superfluous.” Givati v. Air Techniques, Inc., 960 N.Y.S.2d

196, 198 (N.Y.A.D. 2d Dep’t 2013). “Instead, the entire contract must be

5
  We note that in their brief, the Trustees cite to facts and allegations
contained in the “Amended Complaint.” However, as noted above, the trial
court granted Fiduciary Trust’s Preliminary Objections to the Trustees’
Complaint and denied the Trustees’ Motion for Leave to Amend Complaint.
The Trustees have not raised an argument related to the trial court’s denial
of their Motion for Leave to Amend Complaint. Thus, as the Trustees are
appealing the trial court’s grant of the Preliminary Objections on the
Complaint, and no Amended Complaint was filed, we are constrained to
review the Trustees’ allegations based upon the Complaint. See Albert v.
Erie Ins. Exch., 65 A.3d 923, 928 (Pa. Super. 2013) (stating that “[i]n an
appeal from an order granting preliminary objections in the nature of a
demurrer we accept as true all well-pleaded material facts in the complaint,
as well as all reasonable inferences deducible therefrom.” (citation and
quotation omitted)).

                                 -8-
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reviewed and particular words should be considered, not as if isolated from

the context, but in the light of the obligation as a whole and the intention of

the parties as manifested thereby. Form should not prevail over substance

and a sensible meaning of words should be sought.” Id. (citation, brackets,

and quotation marks omitted).

      In relevant part, the Custody Agreement states the following:

      Custody Agreement for Account Entitled “The Elizabeth W.
      Ackerman Trust 12/18/67 – Jeffrey R. Ackerman, Trustee”

      1. Custody Account.         Please maintain, as agent for the
         undersigned [Ackerman as trustee], a Custody Account in the
         name specified above and receive and hold all assets that are
         delivered to you for the Account (“Account Assets”). We will
         deliver to you only assets owned solely by us in the capacity
         specified with our signatures (“our legal capacity”).

                                     ***

      3. Instructions. We authorize you to rely on oral or written
      instructions or notices received from us or from such person(s)
      as we may designate to you in writing as the manager(s) of the
      Account (Investment Manager”).           Please comply with the
      following special instructions: … Jeffrey R. Ackerman. …

      4. Administrative Provisions.

      (a) Income. Please Remit case income as follows: Per my
      written instructions ...

                                     ***

      (d) Purchase and Sales. Whenever possible, please effect
      such Account trades as our Investment Manager or we direct
      from time to time. …

      (e) Proxies. Please dispose of proxies received with respect to
      securities in the Account as follows: Deliver to the investment
      manager.

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                                    ***

      5. Our Warranties. We each warrant that:

      (a) any instructions given or rights granted to you by us under
      this Agreement are or will be in accordance with the governing
      instrument and applicable law;

      (b) we are the only persons legally authorized to act for the
      Account in our legal capacity;

                                    ***

      (d) we have accurately listed below the information specified
      with respect to each beneficiary to whom income or principal is
      or may be currently distributable and each relevant trustee,
      executor, custodian under Uniform Gifts to Minors Act, trust and
      estate:

      Elizabeth Werner
      Jeffrey R. Ackerman

                                    ***

      8. Your Responsibility. Your responsibilities are solely as
      stated in this Agreement and will be performed with reasonable
      care and in accordance with relevant trade practices.

      9. General Indemnification. We agree to indemnify you for
      any expense or liability (including attorney’s fees) incurred by
      you with respect to the Account when acting in accordance with
      this Agreement.

                                    ***

Custody Agreement, 7/31/98, at 1-3 (unnumbered).

      The trial court addressed the Trustees’ breach of contract claim as

follows:

      In Count I of their Complaint, [Trustees] allege a breach of
      contract, claiming that Fiduciary Trust breached paragraph 8 of

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     the Custody Agreement.         In quoting paragraph 8 in their
     Complaint and their Brief in Opposition to [Fiduciary Trust’s]
     Preliminary Objections, [Trustees] consistently quote paragraph
     8 as requiring that Fiduciary Trust “perform all duties ‘with
     reasonable care and in accordance with relevant trade
     practices.’” [Trustees] thus ignore the entirety of paragraph 8
     which, in fact, states: “[Fiduciary Trust’s] responsibilities
     are solely as stated in this Agreement and will be performed
     with reasonable care and in accordance with relevant trade
     practices.” The first part of paragraph 8, “[Fiduciary Trust’s]
     responsibilities are solely as stated in this Agreement,”
     completely undercuts [Trustees’] position, which depends on
     using “will be performed with reasonable care and in accordance
     with relevant trade practices” to import additional, extra-
     contractual[] obligations into the Custody Agreement itself. In
     other words, “will be performed with reasonable care and in
     accordance with relevant trade practices” delineates how the
     specific, limited duties set forth in the Custody Agreement “will
     be performed,” it does not delineate what those duties are.

                                     ***

     More broadly, [Trustees’] position would require [the trial c]ourt
     to simply ignore other provisions of the Custody Agreement.
     The gravamen of [Trustees’] Complaint is that Fiduciary Trust
     owed a duty … to the beneficiaries of the Trust (or the Trust
     itself) that required Fiduciary Trust to stop the Trustee from
     looting the Trust. However, the Custody Agreement explicitly
     stated that “[Jeffrey R. Ackerman, Trustee] authorize[d]
     [Fiduciary Trust] to rely on oral or written instructions or notices
     received from [him].…” Further, [Jeffrey R. Ackerman, Trustee,]
     warranted that … any instructions given … by [him] … under [the
     Custody Agreement] are or will be in accordance with the
     governing instrument and applicable law” and that [Jeffrey R.
     Ackerman, Trustee,] [was] the only person[] legally authorized
     to act for the Account in [his] legal capacity.” [Trustees] have
     failed to identify any contractual provisions that would require
     Fiduciary Trust to do more than carry out the request of the
     Trustee.

Trial Court Opinion, 5/21/13, at 3-4 (citations and some emphasis omitted).

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      Here, the Trustees argue that Fiduciary Trust failed to use “reasonable

care” or act “in accordance with relevant trade practices” in following

Ackerman’s instructions with regard to the Trust. However, under the terms

of the Custody Agreement, Fiduciary Trust was obligated to follow

Ackerman’s instructions. Custody Agreement, 7/31/98, at ¶¶ 3, 4(a), (d),

(e). Furthermore, under the Custody Agreement, Ackerman warranted that

his instructions would be in accordance with the governing instrument (the

Trust Agreement) and relevant law.           Id. at ¶ 5.    Fiduciary Trust had no

decision-making    authority   or     responsibility   to    monitor   Ackerman’s

instructions, as it was limited to the plain terms of the Custody Agreement.

Id. at ¶ 3. Thus, the Custody Agreement contemplated that Fiduciary Trust

would carry out Ackerman’s instructions and would make no decisions

regarding the Trust assets.

      The Trustees have not properly alleged, nor presented a sufficient

factual basis to allege, that the Trustees failed to perform their duties under

the Custody Agreement, with reasonable care or in accordance with relevant

trade practices, where Fiduciary Trust was obligated to follow Ackerman’s

instructions under the plain terms of the Custody Agreement. Indeed, the

Trustees do not allege that Fiduciary Trust disregarded any instructions

provided by Ackerman, or failed to carry out Ackerman’s instructions with

reasonable care or in accordance with relevant trade practices.         While the

Trustees point to Fiduciary Trust’s internal policies, in their Amended

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Complaint, to demonstrate that Fiduciary Trust failed to act reasonably or in

accordance with relevant trade practices, as noted above, the trial court

never allowed the Trustees to file the Amended Complaint.       In any event,

the Trustees have not demonstrated that Fiduciary Trust’s internal policies

were legally incorporated into the Custody Agreement or that Fiduciary Trust

was not required to rely on Ackerman’s instructions based upon these

policies. See Trial Court Opinion, 11/4/13, at 4 n.2 (wherein the trial court

points out that the Trustees failed to allege that Ackerman knew of or relied

upon Fiduciary Trust’s internal policies when entering into the Custody

Agreement on behalf of the Trust).

      Accordingly, under the Custody Agreement, Fiduciary Trust was

required to execute the directives it received from Ackerman, and to do so

with reasonable care and in accordance with relevant trade practices.

Additionally, the Custody Agreement imposed no obligation upon Fiduciary

Trust to ensure that Ackerman’s instructions regarding the Trust’s assets

met the requirements of the Trust Agreement. Based upon the foregoing,

we conclude that the Trustees’ allegations, accepted as true, failed to state a

claim for breach of contract. See Lamm v. State Street Bank and Trust,

749 F.3d 938, 945 (11th Cir. 2014) (applying New York law and concluding

that motion to dismiss was properly granted for a breach of contract claim

against a custodial bank, where under the custody agreement, the bank held

the customer’s assets, carried out investments according to instructions

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from an agent, assumed no responsibility for supervising investments or

making investment recommendations, and limited its duties to those set

forth in the agreement); see also New York Cmty. Bank v. Snug Harbor

Square Venture, 749 N.Y.S.2d 170, 171 (N.Y.A.D. 2d Dep’t 2002) (stating

that “the documentary evidence that forms the basis of the defense must

resolve all factual issues as a matter of law, and conclusively dispose of the

plaintiff’s claim.”).

      In their second claim, the Trustees contend that the trial court

improperly dismissed their breach of fiduciary duty claim against Fiduciary

Trust. See Brief for Appellants at 33-34, 43-44. The Trustees argue that

Fiduciary Trust owed a fiduciary duty to the Trust, as it was declared an

agent for the Trust and was entrusted with $10 million of the Trust’s assets.

Id. at 34, 36-39; see also id. at 34-35 (wherein the Trustees contend that

under New York law, a party may raise distinct breach of contract and

breach of fiduciary duty claims even where the same facts give rise to

liability under both claims). The Trustees further point out that under the

Custody Agreement, Fiduciary Trust agreed to perform its obligations with

reasonable care and in accordance with trade practices, and that it was

aware that Elizabeth’s express written authorization was needed for

transactions involving the Trust’s assets. Id. at 36-37, 38; see also id. at

42 (wherein the Trustees argue that Fiduciary Trust failed to follow its

internal policies and procedures in distributing the Trust assets).       The

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Trustees assert that Fiduciary Trust breached its duties by failing to question

Ackerman’s orders in light of its knowledge of the Trust’s requirement that

Elizabeth give written authorization to distribute Trust assets and its own

internal policies and procedures, and this breach caused the Trust damages.

Id. at 39-40, 42.    The Trustees claim that the trial court’s finding that

Fiduciary Trust would have violated its duties as an agent had it disregarded

Ackerman’s directions contradicts New York law, which recognizes that,

where a principal’s directives are unreasonable, an agent is not bound to

follow them. Id. at 40.

      The elements of a cause of action to recover damages for breach of

fiduciary duty are

      (1) the existence of a fiduciary relationship, (2) misconduct by
      the defendant, and (3) damages directly caused by the
      defendant’s misconduct. A fiduciary relationship exists between
      two persons when one of them is under a duty to act for or to
      give advice for the benefit of another upon matters within the
      scope of the relation. Such a relationship may exist where one
      party reposes confidence in another and reasonably relies on the
      other’s superior expertise or knowledge, but an arms-length
      business relationship does not give rise to a fiduciary obligation.
      The core of a fiduciary relationship is a higher level of trust than
      normally present in the marketplace between those involved in
      arm’s length business transactions.

Faith Assembly v. Titledge of New York Abstract, LLC, 961 N.Y.S.2d

542, 552-53 (N.Y.A.D. 2d Dep’t 2013) (citations and quotation marks

                                 - 15 -
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omitted).6

      Here, under Paragraph 1 of the Custody Agreement, Fiduciary Trust

was an agent with Ackerman, and by extension, the Trust as its principal.

See Custody Agreement, 7/31/98, at 1; Complaint, 9/10/12, at 4, 11-12;

see also Trial Court Opinion, 5/21/13, at 7 (stating that under Paragraph 1

of the Custody Agreement, Fiduciary Trust was an agent and Ackerman or

the Trust was the principal); Brief for Appellee at 26 (wherein Fiduciary Trust

concedes that it was an agent of either Ackerman or the Trust as the

principal). Under New York law, there is a fiduciary relationship between an

agent and their principal. Cristallina S.A. v. Christie, Manson & Woods

Int’l, Inc., 502 N.Y.S.2d 165, 171 (N.Y.A.D. 1st Dep’t 1986); see also

Sokoloff v. Harriman Estates Dev. Corp., 754 N.E.2d 184, 188-89 (N.Y.

2001).

      “Agency is a fiduciary relationship which results from the manifestation

of consent of one person to allow another to act on his or her behalf and

subject to his or her control, and consent by the other so to act.” G.K. Alan

6
  As noted by the trial court, under New York law, the Trustees can maintain
both a breach of contract claim and a breach of fiduciary duty claim. See
Trial Court Opinion, 5/21/13, at 6; Meyers v. Waverly Fabrics, Div. of F.
Schumacher & Co.,479 N.E.2d 236, 239 n.2 (N.Y. 1985) (stating that “a
contracting party may be charged with a separate tort liability arising from a
breach of duty distinct from, or in addition to, the breach of contract”); see
also GLM Corp. v. Klein, 665 F.Supp. 283, 286 (S.D.N.Y. 1987) (stating
that under New York law, “[i]f a contract establishes a relationship of trust
and confidence between the parties, such as that between agent and
principal, then a fiduciary duty arises from the contract which is independent
of the contractual obligation.”).

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Assoc. Inc. v. Lazzari, 887 N.Y.S.2d 233, 238 (N.Y.A.D. 2d Dep’t 2009)

(citation and brackets omitted). “The duties of an agent are defined by the

terms of the agreement that gave rise to the agency.”             Id. (citation

omitted); see also Mickle v. Christie’s, Inc., 207 F.Supp.2d 237, 244

(S.D.N.Y. 2002) (stating that the fiduciary duties “of an agent may be

defined and circumscribed by agreement between principal and agent.”).

“The basic tenet of a principal-agent relationship is that the principal retains

control over the conduct of the agent with respect to matters entrusted to

the agent, and the agent acts in accordance with the direction and control of

the principal.”     William Stevens, Ltd. v. Kings Village Corp., 650

N.Y.S.2d 307, 308 (N.Y.A.D. 2d Dep’t 1996); see also Maurillo v. Park

Slope U–Haul, 194 A.D.2d 142, 146 (N.Y.A.D. 2d Dep’t 1992) (stating that

an agent, who has a fiduciary relationship with the principal, “is a party who

acts on behalf of the principal with the latter’s express, implied, or apparent

authority.”).

      Moreover, fundamental to the principal-agent relationship, an agent is

under a duty to act with reasonable diligence in fulfilling its fiduciary

obligation.     Leonard Smith, Inc. v. Merrill Lynch, Pierce, Fenner and

Smith, 483 N.Y.S.2d 847, 849 (N.Y.A.D. 3d Dep’t 1985); see also

Sokoloff, 729 N.Y.S.2d at 430 (citation, brackets, and quotation marks

omitted) (stating that “[a]gents must act in accordance with the highest and

truest principles of morality and, as fiduciaries, are forbidden from engaging

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in many forms of conduct permissible in a workaday world for those acting

at arm’s length.”); Blonsky v. Allstate Ins. Co., 491 N.Y.S.2d 895,

897 (N.Y. Sup. 1985) (stating that “an agent is required to exercise good

faith, reasonable diligence and such skill as is ordinarily possessed by

persons of common capacity engaged in the same business.”). “Included in

this duty is the requirement that an agent obey all reasonable instructions

and directions of the principal.” Leonard Smith, Inc., 483 N.Y.S.2d at 849.

“As long as such directions are not unreasonable, the agent is bound to obey

them, even if it appears that some other course of conduct was better than

that which the [principal] chose.” William Stevens, Ltd., 650 N.Y.S.2d at

308.    Under these guiding principles, we must determine whether the

Trustees properly alleged misconduct by Fiduciary Trust, and whether the

Trust suffered damages directly caused by the Fiduciary Trust’s misconduct.

       Here, the Trustees allege that Fiduciary Trust was not bound to obey

Ackerman’s unreasonable instructions as Fiduciary Trust was aware of the

Trust Agreement’s terms; Fiduciary Trust diverted most of the Trust assets

to Ackerman for his personal use without Elizabeth’s written authorization,

Fiduciary Trust transferred funds to individuals and entities who were

strangers to the Trust and Elizabeth; Fiduciary Trust knew the assets were

being diverted to Ackerman for his personal use without Elizabeth’s written

approval; Fiduciary Trust never revealed the diversion of assets to Elizabeth;

and Fiduciary Trust’s actions caused the Trust to lose approximately nine

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million dollars. See Complaint, 9/10/12, at 4-10, 11-12. While the Custody

Agreement provided that Fiduciary Trust was to follow all of Ackerman’s

instructions, and Ackerman warranted that his instructions would be in

accordance with the Trust Agreement, we conclude that the Trustees have

sufficiently pled a breach of fiduciary duty claim.     Indeed, the Trustees

allegations, accepted as true and accorded every possible favorable

inference, demonstrate that Fiduciary Trust failed in its duty to act with

reasonable diligence with the Trust by obeying unreasonable directions from

Ackerman, which resulted in the misappropriation of trust assets.7          See

William Stevens, Ltd., 650 N.Y.S.2d at 308; Leonard Smith, Inc., 483

N.Y.S.2d at 849; see also Takayama v. Schaefer, 669 N.Y.S.2d 656,

659 (N.Y.A.D. 2d Dep’t 1998) (stating that an escrow agent becomes a

representative of anyone with a beneficial interest in the trust, and can be

held to be liable for breach of fiduciary duty as escrowee).

      The trial court attempted to distinguish the holding in Williams

Stevens, Ltd., as follows:

      [I]t does not logically follow that Fiduciary Trust was [] required
      to disregard the “unreasonable” instructions. [The Trustees]

7
   The Trustees state that, in an Amended Complaint, they would have
alleged that Fiduciary Trust second-guessed Ackerman’s instructions relating
to the Trust assets. See Brief for Appellant at 39-40; Amended Complaint at
8-9.    The Trustees would have alleged that Fiduciary Trust directed
Ackerman to obtain written consent and authorization from Elizabeth before
using trust assets as security for the letters of credit and to obtain a legal
opinion letter from a “reputable Pennsylvania lawyer” to show that Ackerman
had the authority to take certain actions. See Brief for Appellant at 39-40;
Amended Complaint at 8-9.

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J-A27038-14

      attempt to transform “As long as such directions are not
      unreasonable, the agent is bound to obey them” into “If such
      directions are unreasonable, the agent is bound to ignore them.”
      The actual version of the statement appears to be for the
      protection of agents who refuse to honor unreasonable
      instructions. [The Trustees’] version attempts to turn agents in
      guarantors that their principals will never be permitted to do
      anything unreasonable.

Trial Court Opinion, 11/4/13, at 5; see also Trial Court Opinion, 5/21/13, at

8 (stating that “whatever the precise nature of Fiduciary Trust’s fiduciary

duties, those duties did not include the duty to second-guess instructions

given to it by [Ackerman].       Indeed, Fiduciary Trust would have been

violating its fiduciary duties under the principal-agent relationship if it

refused to carry out [] Ackerman’s instructions[.]”).

      In Williams Stevens, Ltd., the New York appellate court set forth the

relevant tenet of a principal-agent relationship and concluded that the

principal, an owner of an apartment cooperative, was justified in terminating

an agent where the agent filed an involuntary bankruptcy proceeding against

cooperative’s sponsor, and thereby acted directly contrary to the owner’s

instructions. Williams Stevens, Ltd., 650 N.Y.S.2d at 307-08. The Court

stated that the agent disobeyed the ostensibly reasonable directions of its

principal to pursue a particular course of action. Id. at 308. While the trial

court stated that the relevant statement of law cannot be utilized by any

principal to support an action against an agent, the Williams Stevens, Ltd.

Court does not explicitly limit its holding to prohibit such an application.

Such a limitation would be unwarranted where, as here, an agent, Fiduciary

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Trust,     accepted   unreasonable    instructions   from   a   trustee/principal,

Ackerman, to the detriment of another principal, the Trust.        Moreover, as

noted by the trial court, Williams Stevens, Ltd. allows for “the protection

of an agent who declines to follow unreasonable instructions.”        Trial Court

Opinion, 11/4/13, at 5.

         Here, the Trustees have sufficiently pled that Fiduciary Trust had a

fiduciary relationship with the Trust, that Fiduciary Trust did not exercise

reasonable diligence in fulfilling its responsibilities by following unreasonable

instructions, and, as a result, the Trust suffered damages. Accordingly, we

conclude that the Trustees have pled a breach of fiduciary duties claim and

the trial court erred in granting Fiduciary Trust’s Preliminary Objections as to

this claim.

         Based upon the foregoing, we affirm the trial court’s Order, sustaining

Fiduciary Trust’s Preliminary Objections as to the Trustees’ breach of

contract claim. We reverse the Order sustaining the Preliminary Objections

as to the Trustees’ breach of fiduciary duty claim, and remand for further

proceedings.      Upon remand, the Trustees are free to file an Amended

Complaint with regard to their breach of fiduciary duty and aiding and

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abetting a breach of fiduciary duty claims.8

      Order affirmed in part and reversed in part.        Case remanded for

further   proceedings   consistent   with   this   Memorandum.     Jurisdiction

relinquished.

Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 1/22/2015

8
   We note that the trial court, in granting Fiduciary Trust’s Preliminary
Objections, did not dismiss the Trustees’ claim for aiding and abetting a
breach of fiduciary duty. The Trustees voluntarily discontinued the claim to
file the instant appeal. “A claim for aiding and abetting a breach of fiduciary
duty requires: (1) a breach by a fiduciary of obligations to another, (2) that
the defendant knowingly induced or participated in the breach, and (3) that
plaintiff suffered damage as a result of the breach[.]” Kaufman v. Cohen,
760 N.Y.S.2d 157, 169 (N.Y.A.D. 1st Dep’t 2003).         “A person knowingly
participates in a breach of fiduciary duty only when he or she provides
‘substantial assistance’ to the primary violator.” Baron v. Galasso, 921
N.Y.S.2d 100, 104 (N.Y.A.D. 2d Dep’t 2011) (citation omitted). “Substantial
assistance occurs when a defendant affirmatively assists, helps conceal or
fails to act when required to do so, thereby enabling the breach to occur.”
Kaufman, 760 N.Y.S.2d at 170. “However, the mere inaction of an alleged
aider and abettor constitutes substantial assistance only if the defendant
owes a fiduciary duty directly to the plaintiff.” Id.

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