Opinion
04-0026.
Decided May 15, 2008.
LUSTBERG FERRETTI, Robert M. Lustberg, Esq., of counsel Attorneys for Individual Trustees and Trust Beneficiaries.
SUGARMAN LAW FIRM Samuel Vulcano, Esq., of counsel Attorneys for Trustee, M T.
On December 28, 1938 David Small established the David Small Trust for the benefit of his children. He designated himself as the sole trustee and served as such until April 12, 1968 at which time he was permitted to resign by order of the Supreme Court which also appointed his wife Florence and Merchants National Bank and Trust Company of Syracuse as successor trustees. Merchants eventually became Manufacturers and Traders Trust Company (hereinafter M T). On November 1, 1968 the settlor's son James D. Small was appointed as a co-trustee by an order of the Supreme Court. Similarly by an order of Supreme Court the settlor's daughter Patricia Small Kellett was appointed as an additional trustee on December 5, 1984. Florence Small died on August 26, 2000.
Pursuant to the trust terms the trustee was to pay the net income from time to time to the surviving children of David Small. The duration of the trust was to be measured by the lives of his daughters Jean and Jane the only children alive at the time of the creation of the trust. The Smalls eventually had six children all of whom have survived to the present. Upon the termination of the trust the corpus is to be divided into as many equal shares as the number of children born to David and Florence Small and then distributed to said children and/or the surviving issue of any deceased child.
On June 18, 2002 the individual trustees James Small and Patricia Kellett (hereinafter "James" and "Patricia") and all the beneficiaries of the trust commenced an action in Supreme Court, Westchester County against M T seeking damages from M T for alleged breaches of its fiduciary duties with respect to the trust as well as an accounting and its removal as co-trustee. M T interposed a counterclaim in this action against the individual co-trustees.
On January 6, 2004 M T petitioned this Court for permission to resign as co-trustee, judicial settlement of its account and discharge from further liability as to all matters contained in its account. The individual trustees and all the trust beneficiaries filed objections to said account. M T interposed an answer with counterclaim in response thereto. In a Decision and Order dated June 4, 2004, Supreme Court, Westchester County (Tolbert, J) found that common issues of fact and law made these actions ripe for joinder and removed and referred the Westchester County Supreme Court action to this Court.
Previously, in response to a petition filed by M T seeking the advice and direction of this Court pursuant to SCPA 2107, it was decreed that the language of Paragraph First (f) of the trust which provides:
In the event that during the term of the trust and after the deaths or resignations as Trustee of both David Small and Florence Jane Small, the income payable to a child or the issue, taken collectively, of a deceased child, in any calender year, including the year in which the survivor of David Small and Florence Jane Small shall die or resign, shall be less than $10,000.00 the Trustee is authorized and directed to pay to such child or to the issue, taken collectively, of a deceased child, a sum, out of principal, equal to the deficiency between such income and the sum of $10,000.00.
was applicable to the Small children whether or not they were minors thereby requiring the payment to each of them at least the minimum of $10,000.00 annually. This determination was affirmed by a Memorandum and Order of the Appellate Division, Fourth Judicial Department ( In re Manufacturers Traders Trust Co., 42 AD3d 936[2007]).
Trial of these actions commenced on November 7, 2007. At the outset the parties agreed that those causes of action in the Supreme Court complaint seeking the removal of M T as trustee were moot in light of that aspect of its Surrogate's Court petition seeking permission to resign as trustee which is hereby granted.
With respect to those causes of action in the Supreme Court complaint alleging breach of its fiduciary duties, negligence and mismanagement of the trust by M T and the objections interposed in Surrogate's Court to the account alleging failure to properly invest trust assets and keep them invested, failure to properly manage zero coupon bonds held by the trust, and failure to employ prudent and permissible trust management practices the Court finds as follows:
Paragraph 11 of the objections filed in Surrogate's Court states that from 1968 to 1972 the Small co-trustees did not challenge any of the investment recommendations and decisions made by M T Bank. The verified complaint at paragraph 56 alleges that beginning in or about the 1970's and continuing to the present defendant failed to conduct reasonably prudent or necessary reviews of the portfolio and the investment strategy employed by M T with respect thereto. Accordingly the disputed accounting period before the Court is subject to two different legal standards with respect to the administration of the trust. Those actions complained of during the period prior to January 1, 1995, are governed by the standards set forth in EPTL § 11-2.2, the so-called Prudent Man Rule, whereas after January 1, 1995, EPTL § 11-2.3, the Prudent Investor Act is applicable.
It is important to note at the outset that EPTL § 11-2.2(a)(1) provides:" . . . nothing in this subparagraph shall limit the effect of any will, agreement, court order or other instrument creating or defining the investment powers of a fiduciary. . . ." (emphasis added). Similarly EPTL § 11-2.3(a) states: "[a] trustee has a duty to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined by this section, except as otherwise provided by the express terms and provisions of a governing instrument. . . ." (emphasis added). The highlighted language in both statutes makes it abundantly clear that these statutes set forth default standards which are subordinate to the terms of the governing instrument. Thus as this Court has previously noted "in a conflict between the governing instrument and [the statute], the governing instrument reigns supreme" ( Matter of Mulroy, Surr Ct, Onondaga County, Oct. 20, 1997, Wells, Surr., File No. 94-2313).
It is crystal clear from the terms of the Small trust that the trustee(s) was given wide ranging investment authority. Paragraph FOURTH of the instrument provided:
The trustee and his successors shall have the power and authority to invest the trust estate in stocks, common, preferred or of any other class, in bonds, secured or unsecured, and in other securities or other properties of any kind. . . .
Moreover paragraph FIFTH(b) authorized the trustee
[t]o sell for cash or on credit secured or unsecured any securities or other properties of any kind, real or personal, at any time constituting a part of the trust estate for such prices, in such manner and upon such terms and conditions as the Trustee may determine.
In light of the broad scope of investment powers set out in the trust agreement the Court concludes that objectants failed to sustain their burden of proof to establish that any purchase or sale of stocks, bonds or any other investments as incorporated in the account were unreasonable or outside the powers granted in this regard. As pointed out by the Court of Appeals "Obviously 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. Our Courts do not demand investment infallibility, nor hold a trustee to prescience in investment decisions" ( Matter of Bank of NY, 35 NY2d 512,519[1947]).
Objectants assert that M T mismanaged the trust by retaining cash in the account. Such contention overlooks the terms of trust paragraph FIFTH(i)granting the trustee the authority: "[t]o hold a part or all of the trust estate in cash for reasonable periods from time to time." No credible proof was presented that any such retention by M T was unreasonable or otherwise negligent.Objectants contend that the acquisition of temporary investment funds (TIFs) by M T was also a breach of its fiduciary duties and assert that TIFs were in essence the same as cash. To equate TIFs with cash is groundless. The credible testimony established that TIFs are in fact investment vehicles which generated income for this trust at interest rates varying from a low of 4.4% to a high of 17.2%. Pursuant to the terms of the trust this income was properly distributed to the beneficiaries. In any event, as previously noted, the trust terms specifically permitted cash holdings. Granted that TIFs are not mentioned specifically in paragraph FOURTH of the trust. However the Small trust came into existence in 1938 at a time when TIFs were nonexistent. Given the broad investment powers set forth in the trust instrument the Court finds their purchase was reasonable and proper. It is implicit that both the Prudent Investor Rule as well as the Prudent Investor Act mandate that a trustee investor keep current and consider beneficial investment opportunities that become available during the duration of a trust.
As illustrated by the testimony of the individual trustees, as well as that of their expert, Charles Porten, each of these objections is based upon the belief that the distributions of the trust income, as opposed to its retention and reinvestment, were violative of the trust purposes and the fiduciary obligations of M T. Indeed trustee James Small opined "that the objective of the trust was to provide for our children [grantor's grandchildren] at the end of the day." However the trust itself recites that it was being established by the grantor "in consideration of his love and affection for his children born and to be born. . . ."(emphasis added).
That distribution of income was paramount to the grantor is reflected in paragraph FIRST a) providing that the trustee was "[t]o pay the net income therefrom in equal shares to the (sic) from time to time then surviving children and the then surviving issue . . . of deceased children". The depth of decedent's desire with respect to adequate distributions to the trust beneficiaries is further reflected in paragraph FIRST e) which provided that while either the grantor or his wife was acting as trustee, "[i]n the event that the income from the trust estate shall . . . be deemed insufficient for the comfort, care, maintenance and/or support of the children . . . Trustee is authorized and empowered . . . to pay . . . out of principal . . . such additional amount thereof as he or she shall deem necessary. . . ."
He further directed in paragraph FIRST f) that when neither he or his wife was no longer serving as trustee "[i]n the event the income payable to a child . . . in any calendar year . . . shall be less that $10,000.00 the Trustee is authorized and directed to pay to such child . . . a sum, out of principal, equal to the deficiency between such income and the sum of $10,000.00." In paragraph SIXTH the grantor even provided that any dividend payable in the stock of a corporation shall be treated as trust income.
In light of all of these provisions it is clear that the intent and goal of the grantor was distribution of the trust income to the beneficiaries not its retention and reinvestment. That the Smalls wanted the trust to adopt a new approach in 1981 and become growth-oriented, as opposed to distributing trust income, did not change the intent of the grantor as expressed in the trust instrument. As the Appellate Division has previously observed in this case "while we acknowledge that such distribution will deplete the corpus of the trust, the trust is unambiguous in that respect". ( In re Manufacturers Traders Trust Co., 42 AD3d 936).
Objectants further contend that the actions of M T with respect to the zero coupon bonds purchased on behalf of the trust were improper and at variance with its fiduciary duties. As to this issue the Appellate Division remanded the same to this Court to determine whether the David Small Trust required the ". . . distribution of an amount equal to the annual fixed appreciation in value of the original issue discount bonds. . . ."( id.)
Original issue discount bonds, commonly referred to as zero coupon bonds, are investment vehicles which are sold at a discount from their face value and during the life of which the owner thereof receives no ordinary interest payments. As a result of the discount a purchaser can invest a reduced sum of money that increases up to the stated face value at maturity. Such appreciation in value is referred to as phantom or accreted income.In view of the credible evidence adduced at trial and the law applicable thereto this Court now determines that accreted income was income that was distributable. This conclusion is reached in reliance upon EPTL 11-A4.6(b) which states in part:
The increment in value of a bond or other obligation for the payment of money bearing no stated interest but payable or redeemable at maturity or at a future time at an amount in excess of the amount in consideration of which it was issued is income.
This statutory description of income is precisely what occurs with zero coupon bonds.
To determine whether a trustee's distribution of trust assets was proper, the settlor's intent controls ( see Matter of Chase Manhattan Bank , 6 NY3d 456, 460). Furthermore, "the trust instrument is to be construed as written and the settlor's intention determined solely from the unambiguous language of the instrument itself" ( Matter of Chase Manhattan Bank, 6NY3d at 460, quoting Mercury Bay Boating Club, 76 NY2d, 256, 267). Accordingly the accreted income was properly distributed to the beneficiaries inasmuch as paragraph FIRST a) of the Small trust mandates the trustees "[t]o pay the net income . . ." to the beneficiaries.
As to all the allegations relating to M T's exercise of its fiduciary duties with respect to these matters it is important to note that the trust instrument states in part at paragraph SEVENTEENTH: Whenever and so long as the trustee herein shall be composed of a corporation and two individuals any decision made or action taken jointly by the corporate trustee and one of the individual trustees shall be the decision or action of the trustee and shall have the same force and effect in all respects as if all three had joined therein.
There was no credible evidence that M T acted without the input of at least one of the co-trustees. James and Patricia were far from passive trustees. To the contrary, there was evidence that certain proposals put forth by M T were not agreed to by the individual trustees, and others were questioned by them. However, there was no evidence whatsoever that M T ever undertook any purchase or sale of any trust asset without the written approval of at least one of the individual trustees. Where, as here, a fiduciary has the means to know of a co-fiduciary's acts and has acquiesced to them, the fiduciary is bound by these acts. ( Matter of Bloomingdale, ___AD3d___, 2008 NY Slip Op 01339[2d Dept 2008]).
After January 1, 1995, pursuant to the Prudent Investor Act, M T as a corporate trustee was required to exercise such diligence as would be exercised by one having special investment skills. EPTL § 11-2.3(6). Noteworthy is the testimony of individual trustee Patricia as to her extensive background in investment matters. She stated that she had served as Treasurer of the Board of Regents of California in which position she had the responsibility for investing and managing its portfolio with respect to both its pension and endowment funds. During her tenure in this office the value of the portfolio increased from approximately twenty-five billion dollars to fifty-eight billion dollars. Thus she certainly was far from being a neophyte with regard to investment matters. Indeed in light of her sophistication in this area it was agreed by all the trustees in 1983 that thereafter all suggestions relative to the Small trust investments would initiate with her. James also has a banking and financial background.
In both the Supreme Court and the Surrogate's Court actions the objectants contest the entitlement of M T to receive any fees or commissions as a result of its alleged breaches of its fiduciary duties. It appears that M T took commissions from time to time at the varying statutory rates in existence at the time the commissions were paid. Prior to the involvement of this Court in this matter, and in an attempt to resolve this entire dispute, M T reimbursed the trust for all the commissions it had taken. Since a resolution was not achieved M T now seeks a determination as to the proper calculation of its commissions.
Like all other issues between the parties the trust provisions are controlling. The compensation set forth in the trust instrument ordinarily limits a trustee who accepts the trust to the terms specified therein. The Small trust at paragraph EIGHTEENTH states in part:
The corporate trustee shall be compensated at the rates provided by the laws of the State of New York for a sole testamentary trustee. Commissions on principal shall be payable on deduction, one-half when the property is received and one-half when it is paid out. Such principal shall be computed at its fair or market value on the date of payment. Commissions on income shall be computed on an annual basis and shall be payable by deduction from the income.
Notwithstanding the fact that M T was a corporate trustee of an inter vivos trust the trust terms limited it to receiving compensation at the statutory rates payable to a sole testamentary trustee. The direction that "the corporate trustee" is to be compensated at rates for "a sole testamentary trustee" is construed to mean that corporate commission rates are not the measure to be applied, but rather rates for individual trustees are.
It must be reiterated that the document before the Court is an inter-vivos trust established on December 12, 1938. Although the trust document provides that the trustee is entitled to commissions at the same rate as that of a testamentary trustee, the triggering date for commissions from an inter-vivos trust is the date of establishment of the trust which in this case is December 28, 1938, not the death of the grantor. The date of the grantor's death is irrelevant with respect to calculation of commissions in this case. Accordingly the provisions of SCPA § 2312 are inapplicable and those of SCPA § 2308 govern since the Small trust was a lifetime trust created prior to August 31, 1956.
Objectants contend that if M T is entitled to any commissions the statutory rates in existence in 1938 are controlling throughout the duration of the trust. Objectants have not met their burden of proof in this regard. The Court concludes that the above recited trust language ". . . at the rates provided by the laws of the State of New York . . ." means according to the controlling law from time to time and not as the law provided when the trust was created ( see Bogert, The Law of Trusts and Trustees § 976[Rev 2d ed]).
M T is therefore directed to amend its account to set forth its commissions in compliance with this determination. In its calculations M T should be mindful of the determination by the Court that the accreted income attributable to the zero coupon bonds is income. Moreover pursuant to the trust terms commissions on principal are payable only when principal is received and/or paid out. Commissions on income are to be computed on an annual basis and payable only from income generated during that year. M T is further cautioned ". . . that commissions from income for any given trust year shall be allowed and retained only from income derived from the trust during that year and shall not be supplied from income on hand in respect of any other trust year" (SCPA 2308(4)).The fact that M T returned all the commissions received in an attempt to settle this matter during mediation does not mean that said reimbursement amount is not an available source to fund properly calculated commissions in accord with this decision. If the calculation of commissions as directed herein results in a sum less than the reimbursement amount, the difference shall be retained by the trust and M T surcharged interest thereon at the statutory rate set forth in CPLR § 5004.
Objectants have also alleged fraud on the part of M T for failure to communicate with the beneficiaries and to maintain proper records. However the record is replete with letters, memoranda, financial statements, and e-mails between and among the parties. Much is made in support of this objection of the failure of M T to forward a copy of a document labeled an interim accounting (Exhibit 22) to the beneficiaries. This document was prepared by M T in early 1981 in preparation for a meeting with James to address concerns he had raised concerning the trust. The credible evidence revealed that Exhibit 22 was a compilation in one document for the convenience of M T personnel of information that had been previously sent to the Smalls in the form of periodic financial statements. In short the Smalls had received the information contained in Exhibit 22 but not in that format. Furthermore there was no proof of any damages flowing from any alleged fraudulent acts.
This proof, coupled with the fact that no meaningful transactions were ever undertaken by M T without the written consent of at least one of the individual trustees, leads the Court to conclude that M T has rebutted the presumption of fraud that arises in the context of a fiduciary or other confidential relationship where one party possesses superior knowledge ( Matter of Paul, 105 AD2d 928). Indeed the evidence disclosed that M T did not possess superior knowledge to Patricia in investment matters. The Court concludes that the fraud allegations are without merit.
Any objections or parts of objections not specifically addressed herein are dismissed for failure of objectants to sustain their burden of proof with respect thereto. ( Matter of Curtis, 16 AD3d 725[2005]).
This Decision shall serve as the Order of this Court.