Decided on June 25, 2004
|Matter of Dumont
|2004 NY Slip Op 50647(U)
|Decided on June 25, 2004
|Surrogate's Court, Monroe County
|Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
|This opinion is uncorrected and will not be published in the printed Official Reports.|
Surrogate's Court, Monroe County
In the Matter of the Judicial Settlement of the Second Intermediate Account of Chase Manhattan Bank, as Trustee of the Testamentary Trust established under will of Charles G. Dumont, Deceased.
Harris Beach LLP, Paul J. Yesawich, III Esq. and Gregory J. McDonald, Esq., for Chase Manhattan Bank, petitioner-trustee.
Williams & Williams, Mitchell T. Williams, Esq.; Prof. Kenneth Joyce, Esq., of counsel, for Margaret S. Hunter, University of Rochester, Rochester Institute of Technology and American Red Cross, objectants-beneficiaries.
New York State Attorney General, Audrey Cooper, Esq., Assistant Attorney General, Statutory Representative of Ultimate Charitable Beneficiaries
Edmund A. Calvaruso, J.
Charles Dumont ("Dumont", "testator"), a widower, executed his last will and testament on June 1, 1951. After providing for a few small trusts for favored employees, a small demonstrative bequest and a small general bequest, he left the remainder of his estate to a trust set up under Article Fifth of his will. This residuary trust was to pay income primarily to his daughter Blanche Hunter during her lifetime, but the trustee had "sprinkle powers": the discretion to distribute the income among Blanche's descendants if it wished to do so. After Blanche's death, income was to go to her daughter Margaret. After Margaret's death, the trust was to cease and pay over the principal to Margaret's issue; or, if she died without issue, to the following charities: University of Rochester, Rochester Institute of Technology and American National Red Cross. In June of 1951, Margaret was twenty-seven years old. Margaret's daughter Alice was born in May of 1955. Margaret's daughter Pamela was born in May of 1957. The record shows that Margaret also had a daughter, Angela, but does not reveal when Angela was born, only that she was deceased by the time the accounting period began (Affidavit of John F. Teegardin, March 3, 2000, par. 6). Charles Dumont passed away on February 21, 1956, after Margaret had started her family. Dumont had made no changes to his testamentary plan.
After the dispositional provisions, the testator added an extensive paragraph "LASTLY", wherein [*2]he set forth the powers of the nominated fiduciaries, notably the power to "administer. . . sell, transfer and dispose" of the stock. Additionally, buried within this paragraph is an interesting notation that the testator's estate would be primarily comprised of a single security: the stock of Eastman Kodak Company ("Kodak"). Further along in this final paragraph, Charles Dumont included the following language:
It is my desire and hope that said stock will be held by my said Executors and by my said trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said trustee shall dispose of such stock for the purpose of diversification of investment and neither they or it shall be held liable for any diminution in the value of such stock.
Finally, and most importantly, he concluded his retention language with the following language (the "exception phrase"), which remains the crux of this litigation:
The foregoing provisions shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of Eastman Kodak Company in case there shall be some compelling reason other than diversification of investment for doing so.
Petitioner's predecessor, Lincoln First Bank, (the "bank", "petitioner") was appointed by this court as testamentary trustee under Dumont's will on February 27, 1956. The trust was funded on June 17, 1958 with 4746 shares of Eastman Kodak Company and 375 shares of Socony Mobil Oil Corporation. For fourteen years, the composition of the trust corpus changed little. On December 29, 1972, Blanche Hunter died. Petitioner thereafter filed its first intermediate accounting, showing a continued retention of the Kodak stock. No objections were filed to this accounting and petitioner received a decree of judicial settlement, settling its account. Petitioner continued to retain a near exclusive concentration of the Kodak stock in the trust's portfolio for over twenty years, despite a precipitous drop in value during the 1970's.
At the beginning of the accounting period, the bank employees responsible for the Dumont trust were R. A. Lewis and Thomas Brown. Lewis served as the trust administrative officer, Brown was the portfolio manager/investment officer. (The term "trust officer" will be used generically to refer to either of these positions). As explained at trial, the trust administrators held primary responsibility for communicating with beneficiaries, forwarding income to recipients, and making judgment calls where trusts allowed discretionary authority such as the "sprinkle" provision in the Dumont trust. Portfolio managers were responsible for knowing the needs of the beneficiaries, the time horizon of the trust, and choosing investments accordingly.
In 1973, Margaret Hunter was the income beneficiary of the trust. Lewis was the primary contact at the bank for her. This remained true even after his formal responsibilities with the trust ended, sometime around 1978 (the record is unclear as to the exact date). When Lewis ceased to have trust administrator responsibility for the Dumont trust, John F. Teegardin assumed those duties. Teegardin had been serving as the portfolio manager for the Dumont trust since 1976, having succeeded Thomas Brown. After taking over Lewis's administrative duties for the Dumont trust, Teegardin was singularly responsible for the management of the trust and remained so for almost [*3]twenty years. After Teegardin's resignation in 1997, the trust was again handled by dual officers: John Fitzpatrick as portfolio manager and Russell Mandrino as trust administrator.
Shortly after Fitzpatrick and Mandrino assumed responsibility for the trust, they were approached by Richard Holderman, counsel to Margaret Hunter, regarding potential sale of Kodak stock. An agreement amongst all parties to sell the stock was briefly pursued but never executed. In December of 1997, in response to a letter from Mr. Holderman urging them to do so (Exhibit P189), Fitzpatrick and Mandrino requested an in-house legal opinion regarding the terms of the trust, specifically seeking a more thorough definition of "compelling reason" contained within the exception phrase. However, despite their prompt receipt of a legal analysis of the trust's terms, the trust officers took no action regarding the sale of stock and the matter was dropped. A few months thereafter, a compulsory accounting proceeding was commenced by Margaret Hunter and her remaining daughter Pamela (Alice had died in March of 1980). In response to this, the bank filed a petition for the judicial settlement of its second intermediate account on August 31, 1998. Margaret Hunter and Pamela Creighton promptly filed objections to this account. They sought damages in excess of $39 million due to losses sustained because of bank's alleged improper retention of a near 100% concentration in Kodak stock and overall mismanagement of the trust estate.
Throughout the early litigation, the bank continued to hold the stock. In December of 2001, the bank determined that compelling reason to sell the Kodak stock did indeed exist, based purportedly upon Eastman Kodak's lack of presence in the new digital market. Sale of 95% of the stock was recommended. It was encouraged to occur over the course of thirteen months, so as to spread out over three tax years the substantial capital gains tax which would be incurred. The actual sale of Kodak stock was expedited, and took place over the course of nine months. The bank filed a supplemental accounting after the sale. The official accounting period before the court is December 30, 1972 to September 15, 2003.
The court issued summary judgment decisions in the summer of 2002, denying the motion of the objectants as well as the cross-motion of the bank. In December of 2002, Pamela Creighton passed away, extinguishing her interest in the trust. The interests of the charitable beneficiaries suddenly became substantial and relatively assured. Margaret's daughters had always been the presumptive remainderholders of this trust, even though their status to inherit the corpus was contingent upon their survival of Margaret. All three pre-deceased her. Because none of Margaret's daughters ever had children, Margaret was left with no descendants. Upon Pamela's death, the charities became the presumptive remainderholders. These three charitable remainderholders, as well as the New York Attorney General, joined Margaret Hunter in her suit. Trial was held in late January, 2004.
Objectants' theory of the case is that at the beginning of the accounting period two compelling reasons existed to sell the Kodak stock: the low income yield that Kodak was producing, and the [*4]high risk and volatility created by the almost exclusive Kodak holding within the trust portfolio. Therefore, it was imprudent for the bank to have retained it. Objectants argue that a Kodak holding amounting to more than 5% of the portfolio represented an improper and imprudent concentration of Kodak and ought to have been eliminated on or before January 31, 1973. Objectants argue that the petitioner fell far below the threshold of fiduciary duty in managing this trust, averring that the bank gave little credence to a proper interpretation of the will's terms, and held few, if any, discussions with the beneficiaries regarding the management of the estate.
Petitioner states that objectants' argument completely ignores the retention language in the will. Petitioner argues that it was unable to remove the concentration of Kodak stock within the portfolio without diversifying the portfolio, something which the testator by his language had prohibited the bank from doing. Petitioner also argues that it carefully monitored the trust and at all times kept a diligent level of communication with the beneficiaries, as they were known to be at the time. Petitioner further argues that the low income yield of Kodak stock in 1973 did not constitute a compelling reason for sale, because the income beneficiary had more than enough income at her disposal, being a net saver of over a hundred thousand dollars per year.
Legal Requirement to Diversify
The accounting period before the Court spans two different legal standards for trust administration. From the beginning of the accounting period until December 31, 1994, the trustee's actions are governed by the Prudent [Person] Rule ("PPR"), as originally set forth in New York State in King v. Talbot, 40 N.Y.76 (1869), and was later codified in EPTL 11-2.2:
A fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent men of discretion and intelligence in such matters, who are seeking a reasonable income and preservation of their capital.
The PPR itself did not require a trustee to diversify an estate, but diversification was a factor in the determination of prudence. See, Matter of Newhoff, 107 A.D.2d 417 (1985); Durant v. Crowley, 197 A.D. 540 (1921). Liability for lack of diversification is based upon a breach of a fiduciary's duty to prudently manage the estate. In Re Estate of Janes, 165 Misc.2d 743 (1995). To determine whether such a breach of duty occurred, the Court must evaluate the fiduciary's actions along with relevant factors which affected or ought to have affected the fiduciary's decisions; for instance, the performance of the market, the corpus of the estate (both in size and composition), the situation and needs of the beneficiaries, potential tax consequences, the time (investment) horizon of the estate, the terms of the governing instrument (EPTL 11-2.2) and the intent of the settlor:
The court's job in overseeing the administration of a testator's estate is to implement the testamentary plan the testator intended, determining intent from the words used in the will and construing them according to their everyday and ordinary meaning". In re Estate of Walker, 64 [*5]N.Y.2d 354, 357 (1985) (citations omitted).
In this extensive and non exclusive list, the terms of the governing instrument are highly important because the terms of the instrument itself can set the stage for the weight to be applied to the other factors, and can completely reframe the fiduciary's perspective in monitoring the interplay between them.
The Prudent Investor Act ("PIA"), which took effect on January 1, 1995, was the first time that New York statutorily required diversification. Even this requirement was not absolute, however. Under the PIA, a trustee is required to "diversify assets unless . . . 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)(c), emphasis added). The PIA therefore 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 himself/herself directed a different course of action.
For purposes of this case, the primary difference between the Prudent Person Rule and the PIA is whether diversification is the default requirement or not. They are similar in that both standards encourage diversification while allowing for the fact that the terms of the governing instrument have an important role to play in the fiduciary's decision whether or not to diversify. Because both of the standards give such deference to a testator, and because Mr. Dumont did in fact exercise his ability to direct his fiduciary on diversification decisions, the existence of two different standards over the course of the accounting period will have little practical effect. Mr. Dumont's specific instructions will carry the most weight in this litigation, not to supersede a prudence determination under the statute, but to guide and develop the concept of prudence to which the trustee will be held.
In post-trial papers, objectants have argued that a trust clause which mandates an investment strategy that would normally be deemed imprudent (such as the retention of a 100% concentration of a stock) effectively eliminates the standard of prudence and thus violates EPTL 11-2.7. The Court disagreed with this argument at summary judgment and continues to do so now. Prudence is a conclusion; a determination reached after an evaluation of relevant factors, one of which is the terms of the governing instrument. Objectants are putting the cart before the horse, presuming an action's imprudence and then arguing against the authorizing clause's validity.
It is clear that a fiduciary must use good faith and prudence to carry out its duties (EPTL 11-2.7), and that a retention clause cannot trump the application of prudence in the management of an estate. In Re Hubbell, 302 NY 246 (1951). The Hubbell case holds that where a retention clause conflicts with the legal duty of prudence imposed upon a fiduciary, the clause must lose. The Hubbell case clarifies the fact that a retention clause cannot eliminate the requirement of prudence, and in so doing also supports the idea that a balancing between the terms of a retention clause and prudent financial management is possible, because it removed the possibility of [*6]stalemate between the two. There are three voices to which the fiduciary must listen: the settlor (his/her intent and strength of wording); the beneficiaries (regarding their economic situation and expressed desires); and the market (the realities of the financial world and composition of the trust corpus). Proper fiduciary diligence and attention paid to this triad should be sufficient to keep the proverbial floodgates of liability from swinging open.
Ultimately, the question is not a blind, "Did the trustee's actions constitute prudent management?" but rather, "Did the trustee's actions constitute prudent management in light of the terms of the governing instrument?" In order to properly answer this question, the Court must first review the Dumont will to determine a uniform interpretation of Mr. Dumont's language.
Judicial Construction of "Compelling Reason"
In a will construction, the first step to take is to ascertain the intent of the testator from the document itself. In re Larkin, 9 N.Y.2d 88 (1961); In re Colbert, 210 A.D.2d 616, 619 (1994). Openness of definitions or slight ambiguity of a phrase do not remove the requirement of the Court to take a "sympathetic reading" of the document as a whole. Matter of Fabbri, 2 N.Y.2d 236, 239 (1957). A testator's failure to specify an "exact contingency" does not remove the court's ability to give effect to testator's intent or implied purpose. In re Thall, 18 N.Y.2d 186 (1966). See also, In re Bellows, 103 A.D.2d 594 (1984); In Re Harms, 171 A.D.2d 868 (1991); In re Larkin, 9 N.Y.2d 88 (1961). Therefore, before defining any particular phrase, the Court must first glean from the totality of the will the intent of Charles Dumont.
It has been written that "no will has a twin", In re King, 200 N.Y. 189, 93 N.E. 484 (1910), and Mr. Dumont's will is no exception. The testator's paragraph "LASTLY" encompassed directives quite infrequently found, and used language that was rarer still. Richard Crawford, Objectants' expert, testified at trial that in his years of experience he had not encountered language such as that which Charles Dumont used. (Crawford, T-104). The bank has admitted the will's uniqueness (Teegardin, T-876 and T-912). Dumont's use alone of the disputed provisions sets his will apart. The fact that he elected to incorporate language regarding the composition of his estate and the retention of stock indicates that a distinct vision existed in his own mind. Furthermore, the extent to which he discussed this also reveals the depth of importance he placed upon it. Trust management was important enough to Mr. Dumont that he directed an entire page out of a seven page will to discussing the composition of his estate and his preferred management scheme.
Mr Dumont dedicated much verbiage in his paragraph "LASTLY" to discuss the fact that his estate would be comprised of a single security and that he preferred that it remain so. It was to be transferred in-kind to his trustee after his estate was settled, and hopefully eventually to the ultimate beneficiaries under his residuary trust. Mr Dumont also requested his fiduciaries to purchase more Kodak stock if more should become available to them. This section of the will provides the reader with a clear understanding that the testator had a strong affinity for Eastman [*7]Kodak [FN1], and that he ultimately wished to create a legacy of that affinity for his distant progeny once he passed away.
However, despite this proclivity, Mr. Dumont was also extraordinarily clear that his fiduciaries would have full authority to sell Eastman Kodak stock and manage the corpus of the trust itself:
My [fiduciaries] are hereby given full power to administer and control my estate and the several trust estates with full power to sell, transfer and dispose of the same . . . it being intended hereby to give to my said [fiduciaries] full and complete authority to hold, administer, sell and invest the whole and every part of my estate and said trust estates . . . (Dumont will, par. "LASTLY")
There is no disputing the fact that the language which authorizes the sale of stock is worded much more strongly than the language which urges retention. In fact, the empowerment language is written using mandatory terms whereas the retention language which relies upon the phrase "it is my desire and hope" is clearly precatory. Precatory phrases are not binding on a fiduciary (see discussion in Warren's Heaton on Surrogate's Courts, §187.02[a]), and Dumont's words "desire and hope", have even less proverbial teeth than precatory phrases at issue in prior cases. See, In re Flanagan, 55 NY Supp.2d 200 (1945).
The placement of language itself within the will is further illuminating as to Mr. Dumont's testamentary intent. All discussion of fiduciary powers comes at the tail end of the trust description, the tail end of the will itself. It is also interesting that within this final paragraph, the powers of sale granted to the fiduciary are discussed first, the precatory retention language is discussed afterward. Foremost in his will, Charles Dumont discussed beneficiaries, specifically his family. In fact he, in his second sentence, referenced the reason for the execution of his June 1,1951 will as being
because of a change in his family circumstances: the death of his granddaughter Patricia. Charles Dumont first busied himself with setting forth whom the will is designed to benefit: when, how much, and how; and then discussed the administrative how-to. This reveals that the first focus of Charles Dumont was not to create a trust to retain Kodak stock, but rather to create a trust to benefit the Dumont family and preserve their standard of living. Therefore, it is fair to glean that Mr. Dumont's residuary trust was set up first to benefit his family members, specifically his daughter and granddaughter, and secondarily to provide his descendants with a piece of their economic "heritage", an in-kind distribution of the very stock for which he had expressed such an affinity.
With this intention of the testator at the forefront, the next step is to construe the most critical sentence of the entire will:
The foregoing provisions shall not prevent my said executors or my said trustee from disposing of all or part of the stock of the Eastman Kodak Company in case there shall be some compelling reason other than diversification of investment for doing so." (court's emphasis).
Mr. Dumont never defined compelling reason, nor gave any examples of what it might constitute. What Dumont did do was provide his fiduciaries with an example of what "compelling reason" is not: Mr. Dumont required his fiduciary to have a "compelling reason other than diversification" in order to sell Kodak stock. This wording reveals that Dumont himself would have normally deemed diversification a "compelling reason" to sell off part or all of a stock concentration, but in this instance, directed his fiduciary to do otherwise. This suggests to the court two things (1) Mr. Dumont was well aware of the basics of prudent financial management and, (2) he sought to give his fiduciary more leeway than the investment guidelines for fiduciaries would normally have afforded at that time [FN2]. Fitting this phrase in with the testamentary intent of the will, it seems quite likely that Charles Dumont included the compelling reason phrase to encourage his fiduciary to manage his estate with the air of sentimentality toward Kodak that he himself possessed. The language urging retention of Kodak stock plus the language authorizing sale for compelling reason, taken in light of the language of the entire will, suggests that the fiduciary was to hold Kodak stock as long as was feasible, ideally until the end of the trust's term, as long as the trust's primary purpose, the benefit of Dumont's family, was being accomplished. Prudent management of the trust would dictate that the trustee was not to blindly manage the corpus but rather hold the Kodak stock, keeping an eye on the Kodak company, the market, and the needs of the beneficiaries, to continually ensure that the trust was accomplishing its purpose. Sale was not prohibited, just not to be pre-emptively or lightly undertaken.
Petitioner's position is that sale of the Kodak stock based solely upon the preservation of the trust corpus would have been a sale for diversification, something which it was prohibited from doing by the terms of the instrument. The court does not adopt this characterization of diversification, and does not believe that petitioner's position mirrors the intent of Charles Dumont. Black's Law Dictionary defines diversification as a removal of risk presented by a concentration:
Diversification: The act of investing in a wide range of companies to reduce the risk if one sector [*9]of the market suffers losses (Black's Law Dictionary, 7th edition, 1999).
Diversification, therefore is pre-emptive. Diversification is the receipt of a concentrated portfolio, and selling off the majority of the concentration before any hint of problems with the company or stock is received. Diversification is a sale which is done even when the subject company's value is climbing. Conversely, a sale to preserve the value of a trust corpus and ideally to remedy a suffered loss is not the same. Although such a sale could result in a diversified portfolio, diversification would not be the reason for sale, and therefore such an action would be within the ability of the fiduciary under Dumont's directives.
Petitioner argues that its employees properly interpreted the document, thus maintaining that its own definition(s) of compelling reason should be adopted here. The court declines to do so. The bank never developed a uniform definition of this phrase at any time throughout the accounting period. Until 1997, no legal advice as to its meaning was even sought. As such, each employee who picked up the Dumont will was free to make his or her own evaluation of the instrument's terms. Most did so. These opinions of the language ran the gamut from "very subjective" (Deposition of Mandrino,T-453) to "black and white" (Teegardin,T-646), suggesting even more strongly that a legal opinion was needed because there was room for disagreement in interpretation. R. A. Lewis's testimony revealed that he basically treated the Kodak stock as untouchable. John Fitzpatrick testified that "compelling reason" meant changes in Kodak's business fundamentals. Later he added in the income generated for Margaret Hunter as a consideration (Fitzpatrick,T-1098). John Teegardin's definition was similar to Fitzpatrick's, although he did give lip service to the names of the remainderholders (Teegardin, T-687). Teegardin's actions, supported across the record, show no true concern that the remainderholders' interests were preserved.
The Court does not adopt the bank's definition(s) of "compelling reason". Not only were the definitions ad hoc, informal and not uniform, but they were troubling because they focused upon the Eastman Kodak company and not the beneficiaries of the trust. The bank's definition's emphasis on the Kodak company itself is problematic because the trust was set up to benefit the testator's family, and compelling reason for sale should likely be linked to some compromise of the trust's ability to provide such benefit, not the status of Kodak itself. The bank's focus upon Kodak suggests to the court that the bank adhered to the proposition that the Kodak retention itself was the purpose of the trust.
Furthermore, in regard to the beneficiaries themselves, the bank's compelling reason definition(s) were clearly legally insufficient. A definition of compelling reason which includes the needs of a life income beneficiary but not those of the remainderholders is on its face a breach of fiduciary duty. A trustee has a duty of impartiality among classes of beneficiaries (Restatement of Trusts, 2nd, §232; In Re Woodin's Estate, 118 N.Y.S.2d 465, 469 (1952); In Re Kilmer's Will, 18 Misc.2d 60, 69 (1959)), and therefore any favoritism between them is a not only highly improper, but a significant breach of that fiduciary duty. The bank's primary witness was aware of this duty (Teegardin, T-922-923). The bank's own legal counsel acknowledges that the compelling reason [*10]phrase cannot be construed to alleviate the duty of care (deposition of Smith, T-979), and Mandrino acknowledged this, too (deposition of Mandrino,T-1005), yet this is exactly what the bank did by developing a very one-sided concept of the exception phrase. Proper upholding of fiduciary duty demands equal consideration among beneficiaries as well as consideration of the instructions of the testator.
Deductively, then, "compelling reason" can better be defined as: any factor which should indicate to the fiduciary that the interest of any beneficiary is not being reasonably maintained or protected by the trust, or that the interest of any beneficiary would not continue to be reasonably maintained or protected by the trust, if the trustee were to continue to retain the stock. This definition advances the purposes of the testator as expressed throughout the will and incorporates a balance between his desires and his mandates. It also is equally concerned with income beneficiaries as well as remainderholders. The bank's conduct over the accounting period will now be evaluated with the above standards in mind.
Conduct of the Bank
It is well settled that a fiduciary's prudence is a test of conduct, not performance. Matter of Bank of New York, 35 NY2d 512 (1974); Matter of Banker's Trust Co., 219 A.D.2d 266 (1995); EPTL § 11-2.3(b)(1)). Prescience is not required of fiduciaries; good faith, diligence and loyalty are. In Re Hubbell, 302 NY 246 (1951). A fiduciary cannot alter the actions of the beneficiaries, the terms of the governing instrument or the realities of the market. A fiduciary must work with what s/he is given. However, it is most certainly clear that a fiduciaries's duty is not absent just because one of the three sides of the trust triangle poses a difficult challenge. High needs beneficiaries, restrictive trust terms, or a depressed market do not offer excuses for a fiduciary to shirk at his tasks, but rather present a heavier challenge attributed to the mantle of fiduciary which s/he has agreed to assume. Here, the two primary areas in which the court has concern are: (1) the bank's definition of "compelling reason" and its manner of interpreting unique trust terms, and (2) the administration of the trust, specifically its actions in regard to communications with the beneficiaries and the management of the Kodak stock.
Interpretation of the Terms of the Trust
Petitioner received letters of trusteeship on February 27, 1956. It was thereafter bound to follow the terms of the document. Petitioner itself asserts this fact (Teegardin, T-908), using it as an argument for why it should not have sold the 95% of the stock on January 31, 1973 (petitioner's post-trial memorandum, pg 6). The problem with the bank's argument, however, is that it allows no room for disagreement as to what the terms of the document meant. Testimony on the record shows a lack of uniformity amongst the trust officers' perceptions of the clarity of the phrase, a red flag that a legal opinion was needed. Instead, the bank's employees downplayed or even ignored the exception phrase. Most seemed unclear as to whose job it would have been to even raise the issue.
From 1973 to 1976, the trust was managed by R.A. Lewis and Thomas Brown. Lewis testified that he did not recall forming a definition of compelling reason, and did not forward the trust for [*11]an external evaluation. Thomas Brown was never even presented for testimony, despite his critical nature to this proceeding and the strong suggestion in the record that the bank was well aware of his whereabouts (Lewis, T-520). This suggests that he would have nothing to offer in the bank's defense. Lewis testified that during the early years of the accounting period, trusts went through an annual, formal review process but that he had no recollection of whether this was documented. There is no evidence in the record that either Lewis or Brown attempted to glean a legal opinion of the language in the will, and no testimony that Lewis ever even noted the exception phrase and/or formed his own definition of when it might need to be invoked. From Lewis's testimony, he seemed content with Margaret Hunter's "preference" for retention of Kodak stock (Lewis, T-520), and his adopted default interpretation that the will unequivocally directed retention (Lewis, T-506). Most tellingly, throughout this three year period, there are no copies of correspondence, no copies of review forms, no internal memos regarding the trust's terms, no documentation whatsoever as to the investment strategy of the trust or the performance of Eastman Kodak.
The complete lack of documentation alone is itself a breach of trust. Matter of John D. Rockefeller, Jr. NYLJ, March 1, 2004, at 31. See also, In Re Reckendorfer's Estate, 307 NY 165 (1954). Objectants' expert Loren Ross testified to the extreme importance of keeping records as a part of prudent monitoring of a portfolio (Ross, T-180-181). Taken in conjunction with the testimony from Lewis, it shows a lack of due consideration paid to this trust by the bank. Coupled with the lack of any testimony from Brown, it suggests that portfolio management of the Dumont trust during Brown's tenure was negligible at best and certainly below the standard of care required of a fiduciary.
John F. Teegardin, the primary witness for the bank, testified that he first read the Dumont will when he assumed responsibility for the trust in 1976. Teegardin was one of only two trust officers who testified to seeking, of his own accord, additional opinions on the meaning of "compelling reason". Russell Mandrino had informally asked Don Easterly, a colleague who had a legal education, for his opinion. (deposition of Mandrino, T-450). Teegardin said that he sought out opinions on the matter from "superiors" (Teegardin, T-689), some of whom were legally trained. Teegardin's testimony, however, is contradictory. He testified that "compelling reason" was not normal language in a trust instrument, and that the language was carefully scrutinized (Teegardin, T-638-639). However, he testified even more strongly that he believed the document to be without ambiguity: "the language was right there, in black and white" (Teegardin, T-646), and that the will clearly laid out an investment plan (Teegardin, T-656), suggesting that he truly felt that the will required no detailed scrutiny at all. From the testimony of Teegardin, it is apparent that he believed strongly in his own ability to unilaterally interpret the trust and was moved only to seek supervisory validation of his own opinion, not a true external evaluation (Teegardin, T-916). After discussing the matter with his supervisors, Teegardin was no more moved to explore the compelling reason language further (Teegardin, T-694), and thus the exception phrase became again a non-issue in the day-to-day administration of the trust. Whether the banks' lack of concern over the exception language was encouraged by Teegardin's [*12]superiors [FN3] or whether it was a result of an under-emphasized scenario from Teegardin himself (his own actions revealed his personal belief that the Kodak stock was effectively not ever to be sold, T-908), or possibly an issue of wording as he asked for advice (Teegardin, T-914-916), the record does not reveal. However, it is clear that neither Teegardin himself, nor the bank as an institution saw any need to obtain a different interpretation of compelling reason, than the very narrow and legally insufficient one which Teegardin had adopted.
The arrival of John Fitzpatrick as the Dumont trust's portfolio manager provided little change to the prior lack of concern which the bank exhibited toward the uniqueness of the trust's language. Fitzpatrick testified that the language was a "straightforward matter" (Fitzpatrick, T-1094), yet he admits that he did not give the will a thorough attentive read, in fact quite possibly upon assuming the helm, did not even read the entire trust (Fitzpatrick, T-1089). He had no discussions with Teegardin regarding prior administration or management (Fitzpatrick, T-1085), and did not of his own accord seek legal opinion of its terms. Fitzpatrick's testimony does show that he diligently monitored Eastman Kodak, but because he was operating from the presumption that retention of Kodak stock was unequivocal (Fitzpatrick, T-1094), this translated into no major portfolio changes for the trust. Russell Mandrino, trust administrator during Fitzpatrick's tenure, also did not earmark the trust for external review. Mandrino was not presented for testimony at trial, but from his transcripts alone, Mandrino offered no unique approach to this trust and was vocal about the fact that he believed trust interpretation on this issue was not his responsibility (deposition of Mandrino, T-1006).
For the first three years of this accounting period, there is a complete dearth of evidence that the bank's employees truly even noticed this trust. Then, for over nineteen years, the bank gave complete and utter responsibility for this trust to one, non-legally trained and rather fresh-on -the field man. Teegardin was only five years out of college when he assumed responsibility for the Dumont trust. This trust was the most "significant" account of his tenure with the bank. (Teegardin, T-691). Throughout most of the accounting period, Teegardin had exclusive authority for forming a legal opinion as to the trust's terms, complete discretion over the execution of these terms, and complete and unilateral control over communicating any and/or all of this information to the beneficiaries or to his superiors. The final few years of the accounting period returned this trust to a regime where it was managed by two separate officers, but unfortunately even this return to a review by two pairs of eyes did the trust no better than prior treatment.
The bank's answer to the exclusive or near-exclusive authority of its trust officer(s) is the existence of the Investment Review Committee ("IRC"). This committee existed to give annual [*13]reviews to every trust over which it had fiduciary responsibility. All of the trust officers in testimony cited to this "formal" annual review, and it was presented by the bank as being an in-depth evaluation of all circumstances involving the trust, by a various mix of professionals within the bank, at least once per year.
In truth, the IRC was a rubber-stamp process and was ill-equipped to handle unique accounts, or even to identify them. After 1976, the record includes copies of the forms submitted to the IRC. These forms were usually prepared by the trust administrator and signed by the portfolio manager and provided to the IRC at the time of the annual presentations. In the name of disclosure, each form in the record had the appropriate box checked to indicate the existence of a concentration within the Dumont trust, with the simple explanation "Instrument Directs Retention", or something nearly identical. At no place on any of the IRC forms over the entire accounting period, was there any hint that Charles Dumont's language was not absolute. None of the trust officers even hinted to the committee that there was any type of discretionary or interpretive issue involved. Before he became portfolio manager of the Dumont trust, John Fitzpatrick sat on the Investment Review Committee. He testified that he recalled no conversation at any IRC meeting regarding the compelling reason phrase of the Dumont trust. (Fitzpatrick, T-436).
The committee never questioned this black and white interpretation, even when provided with an excerpt of the will for reference. This could partially be because the presentation to the committee was revealed to be less a presentation than a submission of forms for quick authorization. Teegardin testified that his annual presentations to the committee lasted about twenty minutes, and that on average, he presented eight to fifteen accounts each time (Teegardin, T-834-835). No meaningful discussion could be had on the nuances of Dumont's language or the existence of external circumstances possibly warranting sale, in the mere two minutes of average attention the Dumont trust received from the IRC once per year. The IRC was not equipped to review interpretation of the trust, the needs of the beneficiaries, the business dealings of Eastman Kodak or the realities of the market. This is not so much due to problems with the forum itself or its professional composition as it was due to the manner and the lack of frequency in which the trusts were presented. The IRC was little more than a reason for the trust officers to pick up the file, and possibly to communicate to each other in order to generate paperwork for an amalgamation of superiors to almost blindly sign their approval. As such, the actions of the IRC were far from the adequate attention which the bank asserts that it paid, either to the exception phrase of the trust or the external factors which could trigger it.
The bank's overall approach to the terms of this trust was problematic for several reasons. First and foremost was the fact that the employees responsible for its management were given near exclusive control on document interpretation with no true check on their actions. This allowed for the development of a default management plan whereby no active involvement on the bank's behalf was required. The precedent which precipitated, a "maintain Kodak stock at all costs" mindset, allowed the bank to avoid performing any portfolio management while still collecting [*14]its standard fiduciary commissions [FN4]. Although there was no evidence of bad faith or willful malfeasance on the part of the bank's employees, each's interpretation that the trust required no portfolio intervention created an on-going, self-perpetuating atmosphere of neglect.
Richard Crawford, one of objectants' experts, testified that the proper way to address unique terms of a trust would be first to utilize a "team resolve" approach wherein a group of the bank's own employees would meet to determine a uniform resolution to a trust's phraseology (Crawford, T-107). If no consensus was reached, the matter should then be forwarded to counsel for preparation of a legal opinion. Finally, if necessary, a request for a judicial construction would be in order. The record shows that the IRC was no "team approach" and the bank had no other adequate version of this methodology. Despite the fact that counsel was available to the trust officers throughout the entire accounting period (deposition of Richard Smith, T-962), no opinion on the exception phrase was requested until demanded by the beneficiary. Despite the fact that the bank could have sought a judicial determination of the phrase, and that a construction could have greatly aided the bank and also significantly reduced potential liability in this matter, a court proceeding was never suggested by any employee.
The second problem with the bank's approach is that within its own internal structure, it did not clearly specify whose job it was to handle questions of document interpretation on management directives. Trust Administrators primarily had responsibility of document interpretations and making discretionary calls when it came to payments, but in no way touched the actual investment decisions of the trust. Portfolio Managers, accustomed to freedom in investment decisions based solely on the needs/ages of the beneficiaries, were not typically called upon to perform constructions. The result of this was that where two separate officers were responsible for the trust, they each assumed the task of interpreting an investment provision belonged to the other. Communication between the two was apparently infrequent, and rather than working as a unit to address the trust, they each went their separate ways. Their hindsight response was to point fingers (Deposition of Mandrino, T-1006, T-1010; Fitzpatrick, T-996). Since after the passage of an entire generation and much litigation, it is still not clear whose job it was to interpret Dumont's exception phrase, apparently the bank had holes in its personnel coverage of duties as well as an imperfect review procedure.
Thirdly, the bank never attempted to prospectively define any triggering criteria which would raise a red flag for the trust officer in charge to raise the necessity of an immediate and more in-depth review. Good practice would dictate that upon the occurrence of a pre-determined significant event (such as a precipitous decline in stock value) the trust would undergo some form of intensive review to make sure that fiduciary duty is being properly upheld. Good [*15]practice would dictate a before-the fall type of analysis to attempt to identify proper triggers which would call for such a review. Good practice would dictate complete documentation of all of these processes (Fitzpatrick, T-1124). It took legal advice (memorandum of law, Smith to Mandrino, December 1, 1997, Exhibit 18), begrudgingly requested, nearly forty years after the funding of this trust and twenty-four years after the accounting period began, for the bank to appreciate this.
The bank's lack of proper address of the unique terms of this trust would be unacceptable for any corporate fiduciary. Petitioner, however, had held itself out as pre-eminent in the field of trust management, advertising itself as offering a special expertise in this area. (Teegardin, T-920). Petitioner's own marketing brochure, admitted into evidence (Exhibit 27) advertised itself as "offering more than cookie-cutter solutions" to trust management. Petitioner's assertions that it had special skills in this particular area further raised the standard of care to be applied to its actions (EPTL § 11-2.2(a)(1); Restatement of Trusts 2nd §174), a standard which it failed to meet.
Communications with the Beneficiaries
The death of Blanche Hunter on December 29, 1972 represented a change in the life income beneficiary of the Dumont trust and became a convenient end date for the first accounting period [FN5]. The bank was unavoidably aware of Blanche Hunter's death, since the bank had fiduciary responsibility in administering her estate and subsequent testamentary trusts. There was overlap between the officers who managed the Dumont trust as well as those who administered the Blanche Hunter estate. (Lewis, T-481). The bank argues that the death of Blanche Hunter specifically triggered little for the Dumont trust because Margaret Hunter was receiving all of the trust income, pursuant to the sprinkle authority, prior to Blanche Hunter's death. According to the bank, Margaret Hunter's receipt of the trust income in 1973 was no different than her receipt of its income in 1972: "the income from the Dumont trust was being distributed to Margaret Hunter even during Blanche Hunter's lifetime. So, nothing changed". (Teegardin, T-658-659). Such an argument does not aid the bank's defense that it was indeed prudently monitoring this trust.
The death of Blanche Hunter was a triggering event for the trust, in that afterward Margaret Hunter became the sole measuring life by which the investment horizon would be determined. Upon Blanche Hunter's death, the powers of the trustee became much more limited with regard to the distribution of income- the sprinkle authorization in place during Blanche Hunter's lifetime ceased at her death, and the trustee was thereafter obligated to distribute all income to Margaret Hunter. There can be no argument over the fact that the trust would need to be managed in a different manner after Blanche Hunter's death than before, since the needs of an entirely new beneficiary had been introduced. Although Margaret Hunter received income prior to Blanche [*16]Hunter's death, this was pursuant to a discretionary provision and she had no right to expect, rely upon or affect the amount of this income stream, even if she had been destitute otherwise.
The death of Blanche Hunter should have turned the bank's attention to Margaret Hunter as income beneficiary of the trust, and should have immediately initiated discussions between the trust officers and Margaret Hunter as to the trust's terms, the performance of Eastman Kodak and the general market, and the needs and desires of Margaret Hunter for her own income stream. Objectants' expert testified that this was the appropriate strategy to take. (Crawford, T-106). The change in discretionary authority upon Blanche Hunter's death should have prompted a discussion with Margaret Hunter, to notify her of the change in her status from future interest holder to present interest holder, and the corresponding changes in management this would precipitate. No such communication was had (Deposition of Hunter, T-606). The bank's view that Blanche Hunter's death created no real change in the trust could only exist if the trust was receiving no meaningful and thorough review, as if the decision to forward the trust's income to Margaret Hunter had not been re-evaluated or even re-addressed since 1958, when it was first made. It also reveals that the bank was not actively comparing the income yield to the needs of the beneficiary entitled to receive it. The bank's argument that Blanche Hunter's death changed the trust little completely ignores the fact that Margaret Hunter's status changed immensely upon the death of her mother. After December 29, 1972, Margaret Hunter had a right to receive income, and with it, a right to demand a reasonable yield from the trust.
The precedent of inadequate communication which was set upon the change of generations was continued throughout the accounting period. When Teegardin assumed the role of portfolio manager he gradually began to take over as Margaret Hunter's primary contact at the bank. While the record shows an increase in the overall amount of communication between Margaret Hunter and the bank during Teegardin's tenure, this communication was not frequent. Furthermore, when communications did occur, the record shows that time and time again the Dumont trust had little or no bearing on the topic of discussion. Most of the communications between the bank and Margaret Hunter instead dealt with the other accounts held by the Dumont/ Hunter family, or the performance of Kodak in general. It is unsurprising that for many years Margaret Hunter was not looking at the individual performance of her distinct sources of income, since the bank tended to lump it all together when discussing it with her. The bank's lack of specificity is underscored by Margaret Hunter's deposition testimony, where when she was repeatedly questioned regarding the conversations between her and the trust officers, each time she responded that the topic was simply, "money". (Deposition of Hunter, T-606-607).
Even if the bank had offered evidence of copious communications with Margaret Hunter over the accounting period, the fact that most did not touch upon the trust entity subject to this lawsuit deems them only marginally relevant. Discussions regarding Margaret Hunter's personal holdings, her daughters' accounts, or the latest local puffing of Kodak do not stand as evidence that the trustee and the beneficiary were in communion on the trustee's interpretation of the trust or the needs of Margaret Hunter.
Furthermore, many of the communications in the early years seemed to take the form of the trust officer "informing" Margaret Hunter of the bank's inability to sell Kodak stock: "I told her that her grandfather specifically requested, directed in his will, that the Eastman Kodak be retained." (Teegardin, T-650). The fact that the trust officers put forth their own informally-made understanding of "compelling reason" as an institutional mandate by the bank was deceiving and improper. Margaret Hunter testified that she had been under the belief that the Kodak stock in the Dumont trust could not be sold (Deposition of Hunter, T-614). The bank accepted Margaret Hunter's initial lack of argument as a consent to retain Eastman Kodak and pursued the matter with her no further. Not surprisingly, her later retention of counsel and eventual litigation seemed to have caught the bank off guard.
The bank's communications, when they occurred, with the remainderholders followed a similar vein. On one occasion, Pamela telephoned Teegardin, concerned by a drop in Kodak stock. Teegardin informed her that she had nothing to worry about. (Deposition of Creighton, T-444). Teegardin did not discuss long-term needs with Alice Creighton (Teegardin, T-410), even though he was portfolio manager for nearly four years before she died and she had reached the age of majority. Although his communications with Pamela had been relatively regular after she reached the age of majority (deposition of Creighton, T-442-443) these discussions were notably initiated by Pamela herself; rarely, if ever addressed the Dumont trust (Deposition of Creighton, T-445); and never addressed the trust's exception language (Deposition of Teegardin, T-419). John Fitzpatrick spoke with Pamela, but never about the Dumont trust (Fitzpatrick, T-1089).
Ironically, although Margaret Hunter did not receive much attention from the bank in her role as Dumont trust beneficiary, she received a great deal of attention in her individual capacity. The weight of evidence in the record shows that the bank was not so focused upon the Dumont trust as it was upon Margaret Hunter herself. Margaret Hunter represented a great source of potential revenue for the bank and the bank therefore courted her as an individual client [FN6]. At the beginning of the accounting period, Margaret Hunter had had a simple custodial account with the bank into which the income from the Dumont trust was deposited. This account earned the bank $500 in fees per year (Teegardin, T-848). Despite the bank's own concession that Margaret Hunter had not wanted her personal holdings of Kodak to be "managed" (Teegardin, T-668), Teegardin convinced Margaret Hunter to switch her custodial account to an investment management account, whereby the bank continued to retain Kodak stock per Margaret Hunter's directives, but now received over $5000 annually in fees.
Possibly to Teegardin's credit (vis-a-vis Margaret Hunter), he was attempting through the [*18]establishment of the Investment Management Account, to convince Margaret Hunter to diversify some of her own Eastman Kodak holdings. His intent was that if the Dumont trust itself could not be divested of Kodak stock, Margaret Hunter could (Teegardin, T-848). This is one of the bank's primary defenses in this lawsuit, the idea being that it did what it could to diversify the "situation" and thus acted prudently. The problem with this argument and the thought process behind it is that Margaret Hunter is not the only Dumont trust beneficiary to whom the bank held a duty of care. In the quest to manage Margaret Hunter's holdings, the concept that the Kodak stock in the Dumont trust was untouchable became more deeply entrenched into the bank's approach, and eventually any type of management of the funds in the Dumont trust seemed to be forgotten altogether.
Breach of Fiduciary Duty
The bank was charged with upholding the terms of the trust: "In making investments of trust funds the trustee is under a duty to the beneficiary to conform to the terms of the trust" In Re Goebel's Estate, 177 Misc.2d 553, 554 (1941). As such, the bank ought to have diligently explored the meaning and the intent behind the words Charles Dumont used. This is especially true given the uniqueness of the terms of the trust, and the fact that the document directed a course of fund management which goes against the grain. Retention clauses are valid even though they advocate a holding strategy which has been deemed imprudent in the absence of such a clause (In re Estate of Janes, 165 Misc.2d 743 (1995)), and which has not been encouraged by current statutory directives (Prudent Investor Act, EPTL 11-2.3). However, it is also clear that their validity does not authorize a "do nothing" strategy (In Re Hubbell, 302 N.Y. 246 (1951)), and does not insulate the fiduciary from liability where the fiduciary's actions were imprudent.
Where a fiduciary is administering an estate under directives of a retention clause, it is incumbent upon that fiduciary to develop a uniform understanding of the testator's words, basing such a definition on the input of an experienced team of industry professionals, preferrably under the guidance of in-house legal advice. It is also critical
that the fiduciary's actions reflect an understanding that a retention clause does not exculpate itself from poor judgment and laziness, but instead that a retention clause almost requires a greater level of diligence and work, as prudent management of the estate will demand a delicate balancing act.
The Dumont trust was awkwardly worded. Admittedly, the paragraph "LASTLY" presents a large challenge to a fiduciary desirous of direction on a prudent course of action. Nevertheless, such impediments to ease of management ought not to be considered impediments to prudent management. The failure of the bank to properly interpret the trust, to even properly try to address it, and the bank's complacent adoption of a default meaning that was the least work intensive and yet the most profitable is not excused by the trust's terms. The activities of the bank in this regard represent a breach of fiduciary duty.
Furthermore, because the Dumont trust contained an exception clause that authorized sale of the Kodak stock if necessary to protect the interests of the beneficiaries, it was imperative that the bank engage in regular discussions with those beneficiaries to ensure that the trust was fulfilling its purpose and to verify that compelling reason did not exist. The bank could not prudently manage this trust without acquiring such information, since input from the beneficiaries was necessary to determine that the trust's terms were carried out. Because the bank did not perform the frequent content-relevant communications it would have needed to do in order to ascertain that the trust was being properly administered, the failure to do so also represents a breach of fiduciary duty.
Thirdly, the bank also had the duty to treat beneficiaries impartially. Its adoption of a one-sided definition of compelling reason, addressing only the needs of the life income beneficiary, is a clear breach of this duty. Likewise, so was the incorporation of a financial strategy to diversify Margaret Hunter's holdings rather than to address the difficult retention language in the trust.
Existence of Compelling Reason and Causation of Loss
This case provides an interesting bifurcation on the issue of liability. Even though the court has found that the bank breached its fiduciary duty to the beneficiaries, this breach will not necessarily indicate personal liability without a finding that compelling reason for sale existed. Objectants claim the existence of two compelling reasons which should have prompted the bank to sell most of the Kodak stock by January 31, 1973. The first is the low yield of Kodak stock during this time frame. The second is the risk presented to the remainderholders by the concentration itself. The latter will be addressed first.
Risk of the Concentration, Preservation of the Corpus
Objectants propound that the risk created by the concentration was itself a compelling reason to justify sale of the stock on or before January 31, 1973. Although objectants have based a great deal of trial testimony on supporting this argument, the court does not adopt it. Charles Dumont knew when he was creating his will that he was creating a concentration in stock. The family's wealth was and had been deeply entwined with the Eastman Kodak company. Faith on the performance of one singular company was not a new concept to Charles Dumont. Furthermore, if the Kodak concentration alone was a compelling reason to sell the stock in 1973, it would have been also a compelling reason to sell the stock in 1958, when the trust was funded. Under this logic, Charles Dumont's retention directives would have been meaningless, as "compelling reason" to sell the Kodak stock would have existed the second the trust was funded. As Loren Ross testified, volatility (risk) can be positive as well as negative, as there is always a "risk" of the stock appreciating in value (Ross, T-177).
Objectants' argument also fails to address the remainder of Dumont's language: "compelling reason other than diversification". According to the testator, diversification would normally be a compelling reason to sell the Kodak stock, but in this instance Dumont directed that the stock not [*20]be sold for diversification. Objectants' assertion that the risk presented by the concentration was, by itself, a compelling reason to sell the stock, advocates a plan which, although termed differently by objectants, is nothing more than (pre-emptive) diversification, which was not authorized by the document. Objectants' expert, Loren Ross, testified that removing the concentration would only be had by diversifying the portfolio (Ross, T-248). Ross attempted to testify that diversification was not the flipside of concentration, but when asked to more fully explain himself, the options which he listed to remove a concentration all entailed some form of sale to broaden the number or type of investment issues in the portfolio (Ross, T-241). Objectants therefore have not proved, to the court's satisfaction, that there is a way to eliminate the risk presented by a stock concentration without diversifying the portfolio. The court believes that a pre-emptive sale of Kodak (which a sale within a month of the start of the accounting period would have been: two days after the death of Blanche Hunter Kodak stock was at an all-time month end high), based upon the risk of concentration in Kodak alone, was exactly a sale which Charles Dumont directed his fiduciary to avoid.
However, despite the court's rejection of objectants' position that the mere risk of the concentration was compelling reason, the court does not believe that Mr. Dumont wished his trustee to retain the stock despite ongoing, significant losses which jeopardized the value of the corpus. There is a line to be drawn between risk of possible future loss, and the mitigation of substantial, present and continuing loss. The latter should have been recognized and dealt with as a part of protecting the needs of the remainderholders and preserving the testator's intent to benefit his granddaughters, whereas the first is an exercise in speculation which was outright prohibited by the instrument.
The bank argues that it was essentially prohibited from selling the Kodak stock on the basis of the preservation of the corpus, because to do so would have been diversification and was prohibited. This does not convince the court. Taken to its logical extreme, petitioner's argument would claim that petitioner's hands were tied, no matter how far the stock fell in value. The court does not believe that this was the intent of Charles Dumont. Nor does the bank's interpretation pass the test articulated in Hubbell, where a strongly worded retention clause must still be subject to the element of prudence. A trustee has a duty to preserve the corpus of a trust. Restatement of Trusts, 2nd §176. See also, Restatement of Trusts 2nd, §181. A significant drop in stock value such that this duty to preserve is compromised, would dictate that a prudent action by the trustee would be to sell the falling stock and attempt to regain the losses sustained to the corpus. Where prudence dictates sale, a retention clause is superseded. In re Hubbell, 302 N.Y. 246 (1951). There is no colorable argument that the bank's continued retention of Kodak stock despite an ongoing, significant and continual loss in value was at all prudent when it had an exception phrase so clearly placed in the document, presumably to address such a possible circumstance. The risk presented by the concentration itself may not have been compelling reason for sale, but the actual, substantial loss and lack of viable hope of long term gain was. The court finds that if the bank had been prudently monitoring this trust, it would not have continued to retain the near-exclusive concentration of Kodak stock as it did until 2002. Therefore, the failure of the bank to adequately carry out its fiduciary duties directly resulted in objectants' loss.
As a defense, the bank argues that there is no way it could have known, in January 1973, that Eastman Kodak was about to take the loss which it did. It is essentially making an argument that the investment of Kodak stock at that time was a prudent one.
Objectants have sought to bar the bank from making this argument, asking the court to disregard any of the bank's proffered evidence that Eastman Kodak was a good and sound investment. Objectants rely on the doctrine of collateral estoppel and on the premise that this was an issue already decided against the bank in the Janes case. 165 Misc.2d 743 (1995). While the objectants are correct that this case deals with the same bank, the same stock, and the same time frame, the court disagrees that this case involves the same "issue", a requirement for the application of the doctrine. In Janes, the issue was the prudent management of an executor acting under no testamentary direction for fund management. Here, the issue is the prudent management of a trustee acting under a retention clause. There are vastly different standards for prudence between the two, even given the uncanny factual similarities [FN7].
The court agrees with the bank that on January 31, 1973, the bank did not act imprudently in retaining the Kodak stock, given the existence of the retention clause. January 31, 1973 was a mere month after the beginning of the second accounting period, and Kodak was enjoying a great high. After the beginning of 1973, however, the tide quickly turns. For every positive statement toward Eastman Kodak which the petitioner introduced at trial, the objectants introduced a negative. Financial management is an art as well as a science, and eventually there became a point where steeply declining values of stock ($140.88 in January 1973, $136 in August of 1973, and $116 in December of 1973) should have raised a red flag to the trust officers. The losses sustained by the trust early in the year ought to have indicated an on-going problem, and the major drop that November ought to have revealed that compelling reason existed to sell off part of the stock in order to re-generate and hopefully preserve
The last independent report on Kodak which was received at trial was a Valueline report dated January 11, 1974 (Exhibit P264). Compared with the 1973 reports, which show an almost boundless enthusiasm for Kodak, the January 1974 report is so subdued that the absence of copious praise for Kodak suggests a major change in field's perception of the company. Very notably, after January of 1974, the record contains no independent evaluations. The reports submitted were instead generated by the bank's own in-house committee, reports which have little probative value given the fact that the bank was Kodak's transfer agent at the time. It is therefore the court's holding that compelling reason existed to sell off the concentration of Eastman Kodak stock by January of 1974, and that such sale ought to have occurred on or before January 31, 1974.
Low Income Yield
Objectants also argue that the extremely low yield of Kodak stock in January 1973 was a compelling reason for sale. Objectants' expert testified that in January 1973, Eastman Kodak was yielding a 1.06% return in income. Comparatively, the S&P was yielding 2.75%, long term government bonds: 6.75%, and treasury bills "a couple of percent" (Ross, T-200-201). The bank has not argued that under everyday circumstances the extremely low yield of Eastman Kodak was an appropriate yield for a trust. Instead it argues that under the totality of the circumstances, the yield was reasonable and therefore not compelling reason for sale. The bank justifies this by stating that Margaret Hunter had extensive external assets in her own name and therefore was not in need of additional return from the Dumont trust.
It is clear that a fiduciary has a duty to produce a reasonable income for a trust. It is also clear that the bank was operating under a retention clause that forbid sale of the Kodak stock without a compelling reason. However, the extremely low yield of Eastman Kodak in early 1973 should have prompted the bank to engage in a more thorough and frequent review of the trust. The trustee had a duty to produce reasonable income for the trust. This duty is to the trust itself, not the beneficiary, which the petitioner has conceded. As of Blanche Hunter's death, Margaret Hunter had the right to expect a reasonable income percentage from the Dumont trust. Margaret Hunter's right to a reasonable income from the trust was not being adequately met by the trust, since the yield of Kodak was so poor. The yield of Eastman Kodak during this time was so low that it was less than half of the average yield of the S&P. Objectants' expert Richard Crawford testified that a 2% yield was not reasonable for 1973. (Crawford, T-131). Objectants' expert Loren Ross testified that the 1973 Kodak yield was "extremely low" (Ross,T-200). Petitioner's own witness, John F. Teegardin, also admitted that it was a low return (Teegardin, T-463). With no statistical evidence showing otherwise, the court believes that a yield less than half of a "normal" yield is not a reasonable yield. The low yield of Kodak during this "snapshot in time" may not in and of itself have warranted immediate sale of the stock, but it should have prompted the bank to scrutinize the trust and its principal stock to ensure that the trust was meeting the needs of Dumont's beneficiaries. Closer attention paid to this trust should have resulted in the recognition that by January of 1974, the low yield of Eastman Kodak, coupled with a steep decline in Kodak's stock value, represented a compelling reason for the bank to sell part of the stock concentration.
As a defense, the bank argues that Margaret Hunter's external income was so extensively large that under the totality of the circumstances the low Kodak yield was reasonable. In truth, the bank's actions revealed an overconfidence in the fact that Margaret Hunter's individually-owned wealth meant that she was somehow not entitled to a more typical yield. John Fitzpatrick put it bluntly:
"[Because of Margaret Hunter's extensive external assets] I didn't even think more than five seconds about the level of income from the Dumont trust" (Fitzpatrick, T-1099).
The court does not accept this argument. The law protects the wealthy no less than the poor. The duty to produce reasonable income is a duty to the trust itself, not the income beneficiary. The extremely low yield of Kodak stock taken over the course of time, ought to have triggered deeper evaluation by the bank. Only at this point should Margaret Hunter's income become a factor in the evaluation, used possibly to justify a lower than normally-acceptable yield as being yet "reasonable" under the circumstances. Critically, though, this is the second step in the process, not the first, and it is to be taken with input from Margaret Hunter. The bank's suggestion that Margaret Hunter somehow approved of the income generated does not withstand scrutiny. Like in the Janes case, 165 Misc.2d 743 (1995), Margaret Hunter was not truly consulted on the matter and did not give any written direction or waiver to the bank. The bank cannot expect that a handful of statements given by Margaret Hunter to the trust officers could be construed as consent to retain. True consent is informed and freely given. This was neither, nor was it reduced to writing or documented in any way.
The initiation of these discussions was the bank's responsibility because of its status as a corporate fiduciary and skill in the field, and because it was collecting commissions for its services. It was also the bank's responsibility because it was the bank's duty to properly interpret the document, including the phrase "compelling reason". To do so adequately it needed input from the beneficiaries, which it did not do.
The bank's own definition of compelling reason included the needs of Margaret Hunter. However, its procedure for monitoring this trust contained no mechanism whereby it could elicit input as to what her needs were. The court previously discussed and held that this management style was a breach of bank's fiduciary duty. The lack of proper analysis of the trust's terms and lack of communications with Margaret Hunter directly caused it to avoid selling the stock, despite a compelling reason for sale, and therefore caused a loss to the objectants.
The bank argues that objectants' date of January 31, 1973 figures Kodak income yield over the course of only one month. The bank contends that the usage of this date is only a "snapshot in time", is not truly determinative of yield, and therefore should not be used as the date by which to measure damages. The court agrees. Rash actions on the part of fiduciaries are not desired. Income yield is best evaluated over the course of several months to determine an appropriate average. Although discussing the term of time in the context of preservation of principal, Loren Ross testified that his evaluation of the stock would have encompassed a six to nine month period. (Ross, T-224).
Income yield of Kodak, figured over the course of nine months, ought to have elicited the bank to hold more thorough reviews and persuaded the bank to begin engaging in discussions with beneficiaries. Therefore, despite the external assets of Margaret Hunter, the low income yield of Kodak was compelling reason for sale by January 1974 and the bank ought to have divested itself of the Kodak concentration on or before January 31, 1974.
The court held above that the bank ought to have divested itself of the Eastman Kodak concentration on or before January 31, 1974. Of course, concentration has a different meanings to different people. The bank's policy at the time held that any stock comprising more than 20% of a portfolio was a concentration (Teegardin, T-887), objectants' experts testified that this number could be appropriate at 10-15% (Crawford, T-113) but that anything over five percent would traditionally be deemed problematic (Crawford, T-114). Loren Ross testified that he would have sold up to 95% of the Eastman Kodak stock (Ross, T-224). When the bank finally did sell the Kodak stock, it sold 100% of the stock (Exhibit. P1- Second Intermediate Accounting, schedule F). The court finds that at the point where the bank ought to have divested itself of the Kodak concentration, it ought to have sold 95% of the Eastman Kodak stock.
With regard to the factoring of capital gains taxes in the calculation of damages, the Court agrees with the bank that Matter of Saxton, 274 A.D.2d 110 (2000), controls. The proper calculation of damages in this matter must take into account capital gains taxes which would have been incurred in 1974 had the Kodak stock actually been sold. A hypothetical sale of 95% of the Kodak stock on January 31, 1974 would have yielded $4,130,243.10. The capital gains tax which would have been incurred from such a sale would have been $1,402,314.46 [FN8], leaving a net amount of $2,727,928.64.
The award of interest is within the discretion of the trial court. In re Janes, 90 N.Y.2d 41, 55 (1997). Where interest is awarded however it should be offset by the amount of income attributable to the retained assets. Id. The court agrees with objectants regarding the imposition of statutory interest, compounded. This was done in Janes, 223 A.D.2d 20 (1996), and the court feels that it is appropriate here, especially since this case deals with a trust, covering a significant period of time. The court therefore awards objectants statutory interest, compounded annually. The interest computed from February 1, 1974 until September 15, 2003 totals $25,759,431.67. As was stated in Janes, the surcharge amount is to be offset by the dividends received by Margaret Hunter during the accounting period ($3,840,671) and the actual sales proceeds of the Kodak stock ($3,688,386).
Finally, the court believes it is appropriate to grant objectants' request to deny commissions in this matter. Although the court found that compelling reason did not exist to sell the Kodak stock until January 31, 1974, it is clear that the bank's imprudent actions and policies existed by the time the accounting period even began. As such, the court orders that commissions paid to the trustee over the course of the accounting period shall be returned to the corpus of the trust, with statutory interest compounded annually on the same. All requests for legal fees are denied.
Accordingly, the trustee is hereby surcharged $20,958,303.31. Submit order accordingly.
Dated: June____, 2004________________________________
Hon. Edmund A. Calvaruso, Surrogate
Footnote 1:It was established that Charles Dumont had a family history with the Kodak company, and it was Kodak which had created the family's wealth to begin with. Directions to retain are looked upon more favorably by courts when the stock was held by the testator (see Margaret Valentine Turano and C. Raymond Radigan, New York Estate Administration, §14.05, 504 n.6 (2004) for caselaw and discussion) and as such would be even more so here with a long- standing intimate family connection to the company.
Footnote 2:An element of context can be helpful here. In 1951 when this will was written, fiduciaries were bound to hold only those assets on a "legal list". See, Warren's Heaton on Surrogate's Courts, §70.01. The legal list was an administration standard which preceded the PPR. If an asset received by the fiduciary was not on the legal list, the fiduciary was obligated to immediately liquidate this asset and re-invest the proceeds in a "legal" investment in order to avoid liability. Under the law at the time, if Kodak stock was not included within "legal" investments, testamentary authorization such as Dumont's retention language would have been the only way for a fiduciary legally to retain any of it.
Footnote 3:Interpretations which could in any way reflect negatively on Eastman Kodak could very well have been discouraged at the bank. Both were local companies, and there was overlap between the board of Eastman Kodak and the board of the bank, as well as familial connections between the two. (Teegardin, T-823). Also quite significant is the fact that the bank served as the transfer agent for Eastman Kodak during the accounting period. (Teegardin, T-827).
Footnote 4:Adding insult to injury, the bank's interpretation of compelling reason was tightly reigned only when applied to the beneficiaries. The bank had no qualms about defining the payment of its own commissions as a "compelling reason" for sale (Teegardin, T-422) and regularly and routinely sold shares of Kodak stock to pay its commissions throughout the entire accounting period.
Footnote 5:This is standard practice in the trust and estates field, since it timely obtains a release of liability from the estate of the deceased beneficiary (SCPA § 2210(11)), something more difficult to accomplish as time goes on.
Footnote 6:The court recognizes that corporate fiduciaries are often simultaneously managing multiple trusts and multiple individual accounts within the same family or even for the same individual. Any one client can be a grantor, an income beneficiary, a remainderholder and an owner of an individual custodial account. There is certainly nothing wrong with such multi-layer relationships, provided that the fiduciary does not allow an individual business relationship with a beneficiary to cloud its vision of fiduciary duty.
Footnote 7:It is, however, interesting to note that the Janes court, reviewing a period between 1973 and 1978, held that the sale of the Kodak concentration in the Janes estate ought to have occurred on or before August 1, 1973.
Footnote 8:Comprised of federal capital gains tax in the amount of $1,112,509.46 and state capital gains tax in the amount of $289,805.