Court Opinion

ID: 4081757
Source: CourtListenerOpinion
Date Created: 2016-10-07 23:29:17.231457+00
Date Added: 2024-06-11T07:45:23.636505
License: Public Domain

SUPREME COURT OF THE STATE OF NEW YORK
           Appellate Division, Fourth Judicial Department

987
CA 14-01754
PRESENT: CENTRA, J.P., PERADOTTO, LINDLEY, WHALEN, AND DEJOSEPH, JJ.

IN THE MATTER OF JP MORGAN CHASE BANK, N.A.
(SUCCESSOR BY MERGER TO THE CHASE MANHATTAN
BANK) (SUCCESSOR BY MERGER TO CHASE LINCOLN
FIRST BANK, N.A.) (SUCCESSOR IN INTEREST TO       MEMORANDUM AND ORDER
LINCOLN FIRST BANK, N.A.) (SUCCESSOR BY
CONSOLIDATION TO LINCOLN FIRST BANK OF ROCHESTER)
(FORMERLY KNOWN AS LINCOLN ROCHESTER TRUST
COMPANY), AS TRUSTEE UNDER THE TRUST AGREEMENT
DATED MAY 23, 1932 BY ALVAH G. STRONG, DECEASED
AND PURSUANT TO THE EXERCISE OF THE POWER OF
APPOINTMENT UNDER PARAGRAPH NINTH OF THE WILL OF
MARJORIE H. STRONG, DECEASED, FOR THE BENEFIT OF
MARJORIE STRONG WEHLE, DECEASED (WHO DIED JANUARY 8,
2004), PETITIONER-APPELLANT-RESPONDENT.
(PROCEEDING NO. 1.)
-----------------------------------------------------
IN THE MATTER OF JP MORGAN CHASE BANK, N.A.
(SUCCESSOR BY MERGER TO THE CHASE MANHATTAN
BANK) (SUCCESSOR BY MERGER TO CHASE LINCOLN
FIRST BANK, N.A.) (SUCCESSOR IN INTEREST TO
LINCOLN FIRST BANK, N.A.) (SUCCESSOR BY
CONSOLIDATION TO LINCOLN FIRST BANK OF ROCHESTER)
(FORMERLY KNOWN AS LINCOLN ROCHESTER TRUST
COMPANY), AS TRUSTEE UNDER PARAGRAPH 22(b)(4) OF
THE WILL OF ALVAH G. STRONG, DECEASED, FOR THE
BENEFIT OF MARJORIE STRONG WEHLE, DECEASED (WHO
DIED JANUARY 8, 2004),
PETITIONER-APPELLANT-RESPONDENT.
(PROCEEDING NO. 2.)
---------------------------------------------------
IN THE MATTER OF JP MORGAN CHASE BANK, N.A.
(SUCCESSOR BY MERGER TO THE CHASE MANHATTAN
BANK) (SUCCESSOR BY MERGER TO CHASE LINCOLN
FIRST BANK, N.A.) (SUCCESSOR IN INTEREST TO
LINCOLN FIRST BANK, N.A.) (SUCCESSOR BY
CONSOLIDATION TO LINCOLN FIRST BANK OF ROCHESTER)
(FORMERLY KNOWN AS LINCOLN ROCHESTER TRUST
COMPANY), AS TRUSTEE UNDER PARAGRAPH FOURTH OF
THE WILL OF ALVAH G. STRONG, DECEASED, FOR THE
BENEFIT OF MARJORIE STRONG WEHLE, DECEASED (WHO
DIED JANUARY 8, 2004),
PETITIONER-APPELLANT-RESPONDENT.
(PROCEEDING NO. 3.)
---------------------------------------------------
IN THE MATTER OF JP MORGAN CHASE BANK, N.A.
(SUCCESSOR BY MERGER TO THE CHASE MANHATTAN
                                 -2-                           987
                                                         CA 14-01754

BANK) (SUCCESSOR BY MERGER TO CHASE LINCOLN
FIRST BANK, N.A.) (SUCCESSOR IN INTEREST TO
LINCOLN FIRST BANK, N.A.) (SUCCESSOR BY
CONSOLIDATION TO LINCOLN FIRST BANK OF ROCHESTER)
(FORMERLY KNOWN AS LINCOLN ROCHESTER TRUST
COMPANY), AS TRUSTEE UNDER PARAGRAPH TENTH OF
THE WILL OF MARJORIE H. STRONG, DECEASED, FOR
THE BENEFIT OF MARJORIE STRONG WEHLE, DECEASED
(WHO DIED JANUARY 8, 2004),
PETITIONER-APPELLANT-RESPONDENT.
(PROCEEDING NO. 4.)
---------------------------------------------------
CHARLES WEHLE AND HENRY WEHLE,
OBJECTANTS-RESPONDENTS-APPELLANTS.
(APPEAL NO. 4.)

HARRIS BEACH PLLC, PITTSFORD (A. VINCENT BUZARD OF COUNSEL), FOR
PETITIONER-APPELLANT-RESPONDENT.

HARRIS, WILTSHIRE & GRANNIS LLP, WASHINGTON, D.C. (MARK A. GRANNIS OF
COUNSEL), FOR OBJECTANTS-RESPONDENTS-APPELLANTS.

     Appeal and cross appeal from a judgment of the Surrogate’s Court,
Monroe County (Edmund A. Calvaruso, S.), entered April 21, 2014. The
judgment, inter alia, granted objectants money damages of
$3,711,262.55.

     It is hereby ORDERED that the judgment so appealed from is
unanimously modified on the law by dismissing the objections to the
petitions seeking judicial settlement of the accounts of Trust I,
Trust II, and Trust III and vacating the third through sixth decretal
paragraphs and as modified the judgment is affirmed without costs.

     Memorandum: Petitioner-appellant-respondent (petitioner) served
as trustee for, inter alia, three trusts that were established for the
benefit of Marjorie Strong Wehle. Trust I was funded on August 2,
1976 with 15,430 shares of Kodak stock. The stock originally was
placed in trust by Henry Alvah Strong, who was one of George Eastman’s
original partners and who served as Kodak’s first president, for the
benefit of his grandson, Alvah G. Strong. Alvah Strong assigned his
remainder interest to an inter vivos trust he established in 1932 for
the benefit of his wife, Marjorie H. Strong. In her will, Marjorie
Strong directed that the principal of the trust be divided into three
trusts for the benefit of her daughters, one of whom was Wehle, with a
remainder interest for their respective issue, per stirpes. Trust I
received additional shares of Kodak stock from two stock splits and
from the estate of Alvah Strong’s father, Henry Griffin Strong. Trust
II was created in 1966 in the will of Alvah Strong for the benefit of
his wife, and he directed that, at his wife’s death, the remaining
principal be placed into trusts for each of their three daughters,
including Wehle, with a remainder interest to their respective issue,
per stirpes. It was funded with 5,668 shares of Kodak stock. Trust
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                                                         CA 14-01754

III also was created in Alvah Strong’s will, for Wehle’s benefit, with
a remainder interest for her issue, per stirpes. It was funded with
1,000 shares of Kodak stock.

     It is undisputed that petitioner had sole investment authority
over the three trusts and that none of the trusts provided for any
restrictions regarding investment decisions (cf. Matter of Chase
Manhattan Bank, 26 AD3d 824, 825-826, lv denied 7 NY3d 824, rearg
denied 7 NY3d 922). The three trusts were entirely divested of Kodak
stock by January 2002. Petitioner sold 8,400 shares held in Trust I
between June 1993 and January 1998, 16,199 shares between May 1999 and
April 2000, and the remaining 2,000 shares in January 2002.
Petitioner completely divested Trust II of Kodak stock in two sales
that occurred in 1978 and 1979, respectively. Petitioner sold small
amounts of the Kodak stock held in Trust III between January 1968 and
July 1972, approximately one-half of the remaining shares in February
1977, and the balance of the shares in January 1979.

     Following Wehle’s death in 2004, petitioner filed petitions on
June 26, 2006, seeking judicial settlement of the accounts of the
three trusts. The respective petitions alleged that Trust I had a
gross value of assets, including principal and income, totaling more
than $4.5 million, that Trust II had a gross value of assets totaling
more than $3 million, and that Trust III had a gross value of assets
totaling more than $718,000.

     Objectants-respondents-appellants (objectants), Wehle’s two
surviving sons, filed objections to each account, alleging with
respect to each account, inter alia, that petitioner had failed to
prudently invest trust assets, including failing to adequately
diversify the investment portfolios; that petitioner failed to
exercise reasonable diligence, care, and skill in the management and
administration of the respective trusts; that petitioner failed and
neglected to establish investment objectives for the respective trusts
and to formulate strategies to accomplish those objectives; and that
petitioner failed to communicate with the beneficiaries with respect
to management of the trust and the risk of maintaining a concentration
of Kodak stock. Objectants sought compensatory damages, a return of
petitioner’s commissions, and legal fees.

     Following a nonjury trial, Surrogate’s Court determined, inter
alia, that petitioner was negligent in its management of the three
trusts, particularly with respect to its failure to diversify and
divest the trusts of a concentration of Kodak stock. The Surrogate
determined that petitioner should have sold 95% of the Kodak stock
held in each trust within 30 days of the receipt of the stock, i.e.,
by September 1, 1976 and July 4, 1987 with respect to Trust I; by
August 20, 1976 with respect to Trust II; and by August 19, 1966 with
respect to Trust III. The Surrogate employed the lost capital method
set forth in Matter of Janes (90 NY2d 41, 55, rearg denied 90 NY2d
885) to calculate the damages. Specifically, he determined the value
of the stock on the date on which he determined that it should have
been sold and subtracted from that figure the proceeds from the sale
of the stock. He then added compound interest at the statutory rate
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                                                         CA 14-01754

from the date he determined that the stock should have been sold,
i.e., six percent before June 15, 1981 and nine percent thereafter,
and offset that amount by the amount paid to Wehle in dividends, with
compound interest (see id.; see also Matter of HSBC Bank USA, N.A.
[Knox], 98 AD3d 300, 320-321). The Surrogate determined that there
were no damages as a result of petitioner’s management of Trust I,
noting that the stock held in Trust I came from the time of Kodak’s
inception and had not received a step-up in the tax basis in over 80
years, which would have reduced the amount of capital gains tax
liability. The Surrogate therefore determined that, at the two dates
on which he determined that the stock should have been sold, inasmuch
as the hypothetical sale would have resulted in the payment of
significant capital gains taxes, there was a net loss of zero dollars.
With respect to Trust II and Trust III, collectively, the Surrogate
determined that the surcharge amount to be imposed against petitioner
was $3,069,644, plus compound interest. He further determined that
petitioner’s commissions were to be added to the surcharge amount,
with prejudgment compound interest applied at the statutory rate to
the commissions. We conclude that the Surrogate erred in his
determination that petitioner was negligent in the management of the
three trusts and, consequently, in imposing surcharges, and we
therefore modify the judgment by dismissing the objections to the
accounts of each of the three trusts.

     As a preliminary matter, we agree with petitioner that the
Surrogate abused his discretion by directing it to forfeit its
commissions and by awarding prejudgment interest on those commissions.
Trustees “shall be entitled” to annual commissions (SCPA 2309 [2];
2312 [2], [4] [a]) where, as here, the Surrogate “made no finding of
bad faith, fraud or personal enrichment” against petitioner (Matter of
Blodgett, 261 App Div 878, 878, affd 286 NY 602). Indeed, the
Surrogate rejected the objectants’ claim that petitioner acted in its
own self-interest or was disloyal to the beneficiaries (see Matter of
Lasdon, 105 AD3d 499, 500, lv denied 22 NY3d 856). Contrary to
objectants’ contention, our decision in Matter of Janes (223 AD2d 20,
affd 90 NY2d 41, rearg denied 90 NY2d 885), does not support the
forfeiture of commissions. In that case, we concluded that the
trustee “exhibited total indifference” to a “prolonged and steep
decline” in the price of the stock and then misled the beneficiary for
several years to conceal the loss (id. at 32). We denied petitioner
commissions based upon its “nondisclosure, concealment, and
misrepresentation” (id.), none of which is present here. Although
“[t]rustees can be denied commission ‘where their acts involve bad
faith, a complete indifference to their fiduciary obligations or some
other act that constitutes malfeasance or significant misfeasance’ . .
. [,] [t]he denial of a commission . . . should not be ‘in the nature
of an additional penalty’ ” (Matter of Gregory Stewart Trust, 109 AD3d
755, 757). We conclude that, inasmuch as there is no evidence of
malfeasance or significant misfeasance here, the Surrogate’s award to
objectants of petitioner’s commissions constitutes an additional
penalty to petitioner. We note that, although there may be rare cases
in which prejudgment interest on commissions may be appropriate (see
generally Beard v Beard, 140 NY 260, 265-266), this is not such a case
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                                                         CA 14-01754

and, thus, the Surrogate also abused his discretion in awarding
prejudgment interest.

     “ ‘In reviewing a determination made after a nonjury trial, the
power of this Court is as broad as that of [Surrogate’s Court], and we
may render a judgment we find warranted by the facts, bearing in mind
that in a close case, the [Surrogate] had the advantage of seeing the
witnesses’ ” (Matter of Hunter, 100 AD3d 996, 997-998, lv dismissed 21
NY3d 1037, lv denied 22 NY3d 860). We conclude that the Surrogate
erred in sustaining the objections to the three accounts because
objectants failed to sustain their burden of proving that petitioner
failed to diversify the trusts prudently within a reasonable time, and
also failed to establish a reasonable date from which a surcharge
could be calculated. As we explained in Knox (98 AD3d at 308-309),
petitioner was subject to three separate standards of care as trustee:
“[f]rom [1966] until 1970, the standard was the common-law rule, which
provided that ‘the trustee is bound to employ such diligence and such
prudence in the care and management, as in general, prudent [persons]
of discretion and intelligence in such matters, employ in their own
like affairs’ . . . From 1970 to 1995, the standard of care was the
prudent person rule established in EPTL 11-2.2 (a) (1), which provided
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 preservation of their capital’ . . . Effective,
January 1, 1995, the Prudent Investor Act (EPTL 11-2.3 [L 1994, ch
609, § 1]) created a new standard of care by providing that ‘[a]
trustee shall exercise reasonable care, skill and caution to make and
implement investment and management decisions as a prudent investor
would for the entire portfolio, taking into account the purposes and
terms and provisions of the governing instrument’ (EPTL 11-2.3 [b]
[2]). The statute lists various elements of the prudent investor
standard, including: pursuing an overall investment strategy;
considering numerous factors pertaining to the overall portfolio
including, e.g., general economic conditions; and diversifying assets
(see EPTL 11-2.3 [b] [3] [A]-[C]).” Notably, the “Prudent Investor
Act requires a trustee ‘to diversify assets unless the trustee
reasonably determines that it is in the interests of the beneficiaries
not to diversify’ ” (Janes, 90 NY2d at 49 n, quoting EPTL 11-2.3 [b]
[3] [C]; see Knox, 98 AD3d at 310).

     Petitioner’s performance with respect to the three trusts is
assessed under the above standards of care; i.e., Trust I is assessed
by the guidelines contained in the prudent person rule and the Prudent
Investor Act; Trust II is assessed by the guidelines contained in the
prudent person rule; and Trust III is assessed by the common-law rule
and the prudent person rule. Under each of the standards, however,
“[i]n order to warrant a surcharge, ‘the objectant[s] must show that a
financial loss resulted from the trustee’s negligence or failure’ to
act prudently” (Knox, 98 AD3d at 310-311; see Matter of Donner, 82
NY2d 574, 585). Furthermore, “[u]nder all three standards, ‘it is not
sufficient that hindsight might suggest that another course would have
been more beneficial; nor does a mere error of investment judgment
mandate a surcharge’ ” (Knox, 98 AD3d at 309). “Whether a surcharge
                                 -6-                           987
                                                         CA 14-01754

should be imposed . . . depends on ‘a balanced and perceptive analysis
of [petitioner’s] consideration and action in the light of the history
of each individual investment, viewed at the time of its action or its
omission to act’ ” (Donner, 82 NY2d at 585).

     With respect to Trust I, we conclude that the court erred in sua
sponte determining that petitioner was negligent in failing to dispose
of 95% of the stock within 30 days of receipt, i.e., by September 1,
1976 and by July 4, 1987, dates which were neither pleaded nor proved
by objectants (see Chase Manhattan Bank, 26 AD3d at 828). Objectants
presented the testimony of a former portfolio manager, who explained
that, in 1976, Kodak was considered a “top-quality stock” and that the
sale of the stock in Trust I would have resulted in significant
capital gains taxes because of the 81 cents per share cost basis of
the stock held in that trust. Petitioner’s gradual divestiture of the
Kodak stock in 14 sales, each of which involved 250 to 2000 shares,
between the years 1977 and 1993, satisfied the requirements of the
prudent person rule inasmuch as the gradual sale of the Kodak stock in
order to reduce the capital gains tax liability preserved the
principal of the trust and the income paid to Wehle, both of which
would have been reduced if the stock had been sold within 30 days of
receipt (see EPTL 11-2.2 [a] [1]). Indeed, “it is well established
‘that retention of securities received from the creator of the trust
may be found to be prudent even when purchase of the same securities
might not’ ” (Knox, 98 AD3d at 309). “[T]he 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” (Janes, 90 NY2d at 50). The record supports our
conclusion that, in light of the tax implications of the sale of the
stock and the fact that the concentration of the stock in Trust I
provided significant income, “it would be unreasonable to hold that
petitioner acted imprudently in retaining securities that . . . had
appreciated or were appreciating in value and were providing
significant income to [Trust I]” (Knox, 98 AD3d at 318). Indeed, the
objectants neither alleged nor offered proof that a compelling reason
for the sale of the Kodak stock other than diversification existed on
either September 1, 1976 or July 4, 1987. Instead, the record
establishes that the value of the stock continued to rise after 1993
until 1998, at which time petitioner divested Trust I of all but 2000
shares over a two-year period, thereby eliminating a concentration of
Kodak shares from Trust I. Petitioner’s expert explained that the
trust made a cumulative profit of $2,856,763 from the sale of the
Kodak stock, and that if the Kodak stock had been sold within 30 days
of its receipt, the investable base of principal would have been
nearly halved by taxes.

     We further conclude that petitioner did not violate the Prudent
Investor Act from 1995 to 1998 because it “reasonably determine[d]
that it [was] in the interests of the beneficiaries not to diversify”
(EPTL 11-2.3 [b] [3] [C]). The Valueline rating for safety from
December 1994 through June 1997 was 2, on a scale of 1 to 5, with 1
being the highest rating, and the value of the stock rose steadily
from December 1994 through September 1998. The safety rating dropped
to 3 in September 1997, where it remained until it again rose to 2 in
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                                                         CA 14-01754

September 2000. Petitioner divested Trust I of Kodak stock with eight
sales during the period beginning in January 1998 through April 2000
with a gain in excess of $1.4 million. We also conclude that
petitioner complied with the Prudent Investor Act from 1998 through
2000 by diversifying the remaining concentration of Kodak stock, with
the exercise of “reasonable care, skill and caution” (EPTL 11-2.3 [b]
[2]), “in light of facts and circumstances prevailing at the time”
(EPTL 11-2.3 [b] [1]).

     With respect to Trust II, which we analyze under the prudent
person rule, we likewise conclude that the Surrogate erred in sua
sponte determining that petitioner should have divested the trust of a
concentration of Kodak stock within 30 days, inasmuch as that
determination improperly constitutes an “absolute rule that a
fiduciary’s failure to diversify, in and of itself, constitutes
imprudence” (Janes, 90 NY2d at 50). We further conclude that
objectants failed to meet their burden of establishing that the three-
year period over which petitioner diversified the portfolio was in any
way a violation of its duty to hold and invest securities as would a
prudent person “of discretion and intelligence in such matters who are
seeking a reasonable income and preservation of their capital” (EPTL
11-2.2 [a] [1]). In engaging in “a balanced and perceptive analysis
of [petitioner’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 [,] . . . [and viewing] [petitioner’s] conduct over
the entire course of the investment,” (Janes, 90 NY2d at 50 [internal
quotation marks omitted]), we conclude that petitioner acted prudently
with respect to Trust II. We therefore conclude that the Surrogate
erred in imposing a surcharge with respect to that trust.

     We conclude with respect to Trust III that the Surrogate erred in
determining that 95% of the stock should have been sold within 30
days, i.e., by August 19, 1966, inasmuch as that date was arbitrary,
not supported by the record or, indeed, pleaded by objectants (see
Chase Manhattan Bank, 26 AD3d at 828). At the time the trust was
funded and until 1970, petitioner was obligated “to employ such
diligence and such prudence in the care and management, as in general,
prudent [persons] of discretion and intelligence in such matters,
employ in their own like affairs” (King v Talbot, 40 NY 76, 85-86; see
Knox, 98 AD3d at 308). From 1970 until the stock was sold in two
sales in 1978 and 1979, petitioner was obligated to comply with the
prudent person rule. Although petitioner stipulated that it could not
determine who managed Trust III between 1966 and 1975 and that it did
not have annual review forms for that period, objectants nevertheless
failed to establish that any loss was caused by such failure (see
generally Matter of Hahn, 93 AD2d 583, 587-588, affd 62 NY2d 821;
Knox, 98 AD3d at 311). The record establishes that the Kodak stock
significantly outperformed the Standard & Poor’s 500 Index during the
entire period it was held in Trust III. “Under the facts of this
case, we conclude that it would be unreasonable to hold that
petitioner acted imprudently in retaining securities that, by all
accounts, had appreciated or were appreciating in value and were
providing significant income to [Trust III]” (Knox, 98 AD3d at 318).
We therefore conclude that the Surrogate erred in assessing a
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                                                         CA 14-01754

surcharge with respect to Trust III.

     In light of our determination, we do not address the contention
raised by objectants on their cross appeal.

Entered:   November 20, 2015                    Frances E. Cafarell
                                                Clerk of the Court