Opinion
No. 2921/89.
2012-06-7
In the Matter of the Accounting of Edward D. KORN, as Executor of the Will of Edith R. Korn, Deceased co-Trustee, and Edward D. Korn, as co-Trustee of the Marital Trusts under the Will of Robert Korn, Deceased.
Bryan Cave LLP, New York, N.Y. By Karin J. Barkhorn, Esq., Suzanne M. Berger, Esq., David P. Kasakove, Esq., for Petitioner, Edward D. Korn. Herzfeld & Rubin, P.C., New York, N.Y. By: Edward L. Birnbaum, Esq., James S. Kaplan, Esq., Scott Hur, Esq., for Respondent, Robert B. Korn.
Bryan Cave LLP, New York, N.Y. By Karin J. Barkhorn, Esq., Suzanne M. Berger, Esq., David P. Kasakove, Esq., for Petitioner, Edward D. Korn. Herzfeld & Rubin, P.C., New York, N.Y. By: Edward L. Birnbaum, Esq., James S. Kaplan, Esq., Scott Hur, Esq., for Respondent, Robert B. Korn.
TROY K. WEBBER, J.
A bench trial was held before me on May 10, 2010 and ended on May 20, 2010.
Robert B. Korn, a legatee (the objectant)filed objections to the petitioner-trustee's account for three trusts (the Marital Trust) for the period from May 19, 1989 to December 31, 2009. In essence, the objections to the accounting are grounded upon the assertion that imprudence pervades the trustee's administration of the Marital Trust. The objectant contends that the trustee was negligent, breached his fiduciary duties, and failed to exercise reasonable skill in overseeing three trusts, to the detriment of the objectant.
This followed the trial held before me, Matter of Edith R. Korn, from October 20, 2009 to November 5, 2009.
On September 18, 2009, the objectant filed fifteen (15) objections to the Amended and Restated Petition for a Voluntary Accounting, covering the period May 19, 1989 through August 31, 2007. On March 19, 2010, objectant filed twenty-four (24) supplemental objections to the Supplemental Petition for a Voluntary Accounting for the period covering September 1, 2007 through December 31, 2009, for a total of thirty-nine (39) objections to the first and final accounting filed by Edward K. Korn, the trustee and objectant's brother (the trustee). Prior to trial, the objectant withdrew eight of these objections (numbered 1, 3, 5, 7(a), (b),(f),(g), (h),(I), 8, 10(a), (c), (d),(f),(g),(h), (I), 11, 14
Objection 14 was withdrawn by stipulation dated March 2, 2010, and objectant's counsel stated on the record that the issue pertaining to the income was settled.
The objectant also withdrew 14 supplemental objections, (numbered 1, 2, 3, 4, 5, 6, 7, 10, 11, 12, 14, 18, 23, 24)
Objections numbered 1, 3, 5, and 11 were withdrawn by stipulation dated March 22, 2010; objections 2, 4, and part of 6 (portion pertaining to accountants' professional fees) were withdrawn by stipulation dated April 30, 2010; 7a, 7b, 7f, and 7h were withdrawn by stipulation dated January 25, 2010; 7c, 7d, 7e, 9, and 14 were withdrawn during the trial; 7g, 7h, 7i, 10f, 10g 10h 10i, 14, and 15 were withdrawn by stipulation dated March 2, 2010; 8, 10a, 10c, and 10d were withdrawn by stipulation dated May 27, 2010.
Supplemental Objections numbered 1, 2, 3, 4, 6, 7, 11, 14, 23, 24 were withdrawn by stipulation dated April 12, 2010. Supplemental Objections numbered 5, 10, 11, 18, withdrawn by stipulation on May 10, 2010. Supplemental Objection numbered 12 was withdrawn by stipulation dated April 30, 2010. Supplemental Objection 21 was withdrawn on May 20, 2010, on the condition that the interest on the principal will be paid.
At trial, both the trustee and the objectant appeared by counsel. A total of eight (8) witnesses testified. The trustee testified, and called as his witnesses: (1) Karin J. Barkhorn, Esq. (Barkhorn), of Bryan Cave LLP; (2) Richard J. Bowler Esq., (Bowler); (3) Morris Mondschein Esq.,(Mondschein), of Borenkind, Mondschein & Bliss; (4) William A. Korn; and (5) Harry L. Curtis, III (Curtis), president of Management Planning, Inc. (MPI). The objectant called as his witnesses: (1) Andrew W. Albro (Albro), principal at Standard Valuation Services; and (2)Christina Yaccarino (Yaccarino), senior manager at Holtz, Rubenstein & Reminick. Several exhibits were received into evidence.
The principal issues at trial, were the accuracy of the accounting, and the prudence and propriety of the trustee's investment strategy. Specifically, the objectant pointed to three examples of the trustee's alleged imprudence and negligence: (1) the trustee's alleged 1991 failure to purchase an additional 51.666% co-tenancy interest in the fee simple estate known as 245 East 19th Street, New York, New York (the Florida Flats) for $2,531,666.30; (2) the trustee's breach of his fiduciary duties with respect to the trusts' Colorado real estate, located at 208 West 8th Street, Leadville, Colorado; and (3) the misallocation of excessive legal fees to Bryan Cave LLP related to the Florida Flats litigation against the trustee. Certain supplemental objections were also addressed during the trial.
At the conclusion of trial, the trustee requested dismissal of all remaining objections. The objectant requested a ruling in his favor as to all remaining objections, and a surcharge against the trustee for failing to meet his fiduciary obligations. The Court reserved decision, and post-trial memoranda and responses were submitted and have been reviewed by the Court.
Findings of Fact
A. Background
Decedent Robert Korn (Robert Sr.), died in 1989, survived by his wife, Edith Korn, and his three sons, William A., Edward D., and Robert B., and two granddaughters, Rebecca M. and Emily D. Korn. Under the terms of his last will and testament, dated April 6, 1989, a Marital Trust was created, naming Edith and Edward as co-trustees. Edith served until her death on November 12, 2001. Consequently, Edward became the sole trustee. The Marital Trust was divided into three (3) separate trusts: Marital Trust No.1, Marital Trust # 2 and Marital Trust # 3. According to the terms of the Marital Trust, the net income of the trust was payable to Edith Korn for her life. After Edith's death
, the principal of the trust was to be paid equally to Edward, Robert, and William, with the remaining one-fourth in trust for Rebecca and Emily.
The marital trusts were included in the Estate of Edith R. Korn for estate tax purposes.
On September 2, 2008, the trustee filed and submitted for judicial settlement, a second amended petition and a second amended account covering the period from May 19, 1989 to August 31, 2007. On March 12, 2010, the trustee also filed a supplemental accounting covering the period from September 1, 2007 through December 31, 2009. Finally, on September 18, 2009, as noted above, Robert filed fifteen (15) objections to the accounting and on March 19, 2010, filed twenty-four (24) supplemental objections.
B. Evidence at Trial
1. The Florida Flats Property
Florida Flats consists of real property located at 329–343 Second Avenue and 243–245 East 19th Street, New York, New York. In objection 12, the objectant asserts that the co-trustees were negligent when the Trust failed to purchase additional portions of the Florida Flats real estate that was offered to members of the tenancy-in-common on December 5, 1991. Pursuant to a tenancy-in-common agreement,(“TIC”), executed in 1964, Florida Flats was owned 11.67% by Edith and Robert Sr., each held a 5.833% interest, and 88.33% was held by members of the extended Korn family as tenants-in-common. On December 5, 1991, members of the Korn extended family entered into a contract to sell their collective 51.66% co-tenancy interests (the Durlach/Mayer interests) to 245 East 19th Street Associate L.P. As required by the tenancy-in-common agreement, the Marital Trust was offered the option of purchasing the additional 51.66% tenancy-in-common interest for approximately $2.5 million. Under the terms of the tenancy-in-common agreement, the Marital Trust had fifteen (15) days to accept or decline the offer. The co-trustees ultimately declined the offer.
The objectant testified that the co-trustees' failure to purchase the additional Florida Flats real estate was imprudent. According to objectant, the 51.66% tenancy-in-common interest was worth more than $2.5 million. In support, Albro, the objectant's expert, testified that in 1991, the value of the interest was $3,350,000. Similarly, Yaccarino, another expert witness, testified that the proposed real estate interest had a value of $3.3 million. Albro further testified that the failure to purchase the additional portion deprived the Marital Trust of at least $800,000. This testimony was rebutted by the testimony of Curtis, the trustee's expert, who testified that the fair market value of the interests was not $3.3 million, but within a range of $2,216,813 to $1,241,175.
The trustee's proof specifically addressed the factors which entered into the co-trustees' determination.
The trustee testified that his mother had final say over whether to purchase the additional interest in the Florida Flats property. He pointed to Article 11(J) of the Will of Robert Korn which provides that:
“Notwithstanding anything herein to the contrary, whenever my Executors, or, as the case may be, my Trustees, are evenly divided with respect to the decision of any question, I direct that the position of those Executors or Trustees which shall include my wife, Edith R. Korn, shall prevail and become effective.”
Thus, it was the trustee's understanding that if there was a disagreement, his mother would prevail.
The trustee also testified that value was but one factor in determining whether the additional interest should be purchased. In order to evaluate the offer, the co-trustees had extensive conversations between themselves and other family members
, and analyzed the amount of monies available both within the trust, and outside the trust, to make the purchase. The co-trustees reviewed an appraisal of the asset, which had been prepared for Robert Sr.'s estate tax filing. While the co-trustees did not obtain a formal appraisal for a partial portion of the proposed offering (the Durlach/Mayer interests), it was clear to them that an appraisal would be futile since the Marital Trust had inadequate financial resources to accept the offer. At that time, Marital Trusts # 2 and # 3 had approximately $2.4 million in liquid assets available (Petitioner's Exhibit 146 and 147, Brokerage Account Statements).
Edward testified that his mother telephoned the family members involved in the tenancy-in-common agreement.
The trustee testified that he and his mother as co-trustees investigated the feasibility of borrowing against other properties owned by the Marital Trust, but determined that the cost of borrowing $2.5 million measured against the expected annual income of $61,999 from the property interest would have resulted in the vast majority of the Marital Trust's income used to pay the interest incurred by this loan. Objectant's expert, Albro, conceded that fractional real estate interests are not acceptable for a mortgage loan.
Additionally, the trustee testified that the co-trustees were concerned about the increased concentration of the Marital Trusts' assets in New York City real estate and the lack of diversification, as the Marital Trust already owned a significant amount of New York real estate. As well, the trustee testified that the co-trustees were concerned about the future tax implications behind the purchase. Specifically, they considered whether the Marital Trust's assets were sufficiently liquid for covering the tax liability that would be incurred after his mother's death. The co-trustees estimated that the trusts would be responsible for approximately $2.75 million in estate taxes.
On a practical level, the co-trustees determined that the return on the additional investment in the property for the first 13 years would be merely 2.4% per year, less than the return on a treasury bill. In 1991, the prime rate was 7.5%, and the rate for a conventional 30–year home mortgage was 8.7%. They determined that the low rate of return would negatively impact the trustee's mother who was the income beneficiary.
Moreover, the 51.66% tenancy-in-common interest would not have been a controlling interest since the key element of control is the power to sell. The tenancy-in-common agreement contained a super-majority sale provision, thus requiring at least a 66% ownership interest. Also in 1989, Robert Sr.'s 5.56% interest was valued at $140,000. They calculated that the 51.66% interest would be valued at $1.3 million. Accordingly, paying $2.5 million would not have been financially prudent.
2. The Colorado Real Estate
In Supplemental Objection 13, as to Marital Trust # 3, objectant objects to the maintenance expenses for the house and lot located at 208 West 8th Street, Leadville, Colorado (an asset of Marital Trust # 3 and the residence of William and his family since 1989). William, a licensed real estate broker, had been appointed by the trustee to manage the properties and had been managing the properties before Robert Sr.'s death.
The receipts for the maintenance expenses were introduced into evidence as Petitioner's Exhibit 23. William testified that these were ordinary and necessary maintenance expenses, including the painting of the house, and replacing the cabinets and dishwasher.
3. Legal Fees
In objections 2 (Marital Trust # 1), 4 (Marital Trust # 2), 6 (Marital Trust # 3), objectant objects to the failure of the trustee to include affidavits of services for professional fees, and upon review of such affidavits of service, reserves the right to object to all professional fees, except for professional fees related to Standing & Landsman (accountants).
The record indicates that objectant received a copy of the affidavit of legal services, and billing reports. The affidavits and reports were admitted into evidence at trial. (Petitioner's Exhibit 118). After trial, the objectant also received an amended and supplemental affidavit of legal services. As such, the portions of the objections seeking the affidavits of services are dismissed.
In objection 10(b), the objectant objects to the payment of legal fees to Bowler, who served as the trustee's attorney. In objection 10(e), the objectant objects to the amount of legal fees to the law firm of Bryan Cave in the amount of $35,073.47.
In Supplemental Objection # 20, the objectant objects “to the amendment to Schedule J to the Original account to the extent that there are payments of $114,561 to Bryan Cave and $24,082 to Borenkind, Mondschein & Bliss. In particular to the lack of affidavit of services and as to why there was a payment to his brother William's counsel and not to the objectant's counsel. As stated earlier, petitioner provided the objectant with a copy of the affidavit of services.
Overall, the objectant contends that 1) there was a misallocation of legal fees from the Florida Flats litigation to his detriment, resulting in an entitlement to a $29,520 credit for the amount charged to him in the Estate of Edith Korn with regard to his share of the fees incurred in his father's estate 2) there were unnecessary legal fees incurred in connection with litigation over distributions and misrepresentations over the amount of reserves that were necessary for estate tax purposes, 3) the attorneys sought excessive fees for incorrectly advising the petitioner to accept a $1 million offer to withdraw their appeal in Florida Flats, when in fact the $2.4 million premium obtained was due to the objectant and his counsel's insistence on rejecting the initial $1 million offer.
It should be noted that in July of 2005, 245 Associates filed a motion to compel the Korn interests to be sold at the price set in the Purchase and Sale Agreement (PSA) pursuant to the super-majority sale provision in the tenancy-in-common agreement. Petitioner, in turn, on August 2, 2005, attempted to exercise the estate and Marital Trust's right of first refusal pursuant to the tenancy-in-common agreement. Justice Carol Edmead of the Supreme Court issued an Interim Order, dated October 14, 2005, directing the sale of the estate and Marital Trust's interests in Florida Flats. Petitioner appealed Justice Edmead's Interim Order to the Appellate Division, First Department. While the appeal was pending, 245 Associates and the Korn brothers engaged in several rounds of negotiations. In March 2006, 245 Associates offered $1 million for both interests, William and Edward agreed and signed the PSA, Robert however refused. Subsequently, in May/June 2006, the negotiations resumed and petitioner obtained a premium of approximately $2 million dollars for the Marital Trust's interest.
The objectant also included the trustee's alleged failure in not obtaining the $2.4 million premium for the Estate of Edith Korn. However, this issue was previously addressed in the Court's prior decision dated May 27, 2011.
Petitioner argues that the objectant's claim for the $29,520 credit concerns the Estate of Edith Korn and is not properly before the court, this Court agrees.
As to the issue of legal fees, Bryan Cave LLP has acted as litigation counsel for the trustee since November 2002. The trustee states his counsel has taken the following actions which have benefitted the Trusts:
1) settled a lawsuit commenced by 245 East 19th Street Associates, LLC wherein they questioned Edward's right to transfer the Marital Trust's respective interests to the intended beneficiaries without first offering the interests to the other tenants-in-common pursuant to the right of first refusal provision under the tenancy-in-common agreement; 2) monitored another lawsuit that sought to enjoin the Korn relatives from proceeding with the arbitration hearing regarding the rent reset; 3) settled another lawsuit commenced by 245 Associates who had filed an action against all TIC owners seeking to enjoin the arbitration on several grounds, and alleging irreconcilable differences sought a partition and order directing the sale of Florida Flats solely to 245 Associates.
Mr. Bowler, represented the co-trustee, Edward. Acting as estate counsel, he assisted with the preparation for the accounting for the Estate of Robert Korn and the Trusts under the Will of Robert Korn. He also worked with Bryan Cave, who acted as litigation counsel. Mr. Mondschein represented William during the Florida Flats litigation.Thus, the trustee maintains that the fees were appropriately paid by the trusts.
4. Supplemental Objections
In Objection 9, as to Marital Trust # 2, the objectant objects to Schedule J referring to various Schedules to the extent no detailed Schedules were attached. Petitioner has agreed to amend Schedule J to reflect all amendments that have been made.
In Objection 16, the objectant “objects to Schedule A–2 of “Rent” in the amount of $3,144, dated February 15, 2008, December 2, 2009, June 30, 2009 and in addition to the amount of $2,392.93. The trustee agreed to amend the rent schedule with respect to 208 West 8th Street, Leadville, Colorado. Petitioner further states that this objection will be withdrawn as the parties have recently agreed on an amendment to the Account to address this objection.
In Objection 17, the objectant objects to Schedule A–2 in the amount of $3,741.78 for “balance adjustments.” Objection 17 concerns the rent schedule. The accounting should indicate “rent” instead of “balance adjustments” and will be amended by the trustee. The parties have agreed that once the accounting is amended, the objection will be withdrawn.
In Objection 22, the objectant objects to Schedule J referring to various Schedules to the extent no detailed Schedules were attached. Edward has agreed to amend Schedule J to reflect all the amendments that have been made.
Conclusions of Law
A. Burden of Proof
In a contested accounting proceeding, a fiduciary has the initial burden of proving that he or she has fully accounted for all of the assets of the trust and that the accounting itself is complete and accurate ( see Matter of Schnare, 191 A.D.2d 859 [3d Dept 1993], appeal denied82 N.Y.2d 653 [1993];see also Matter of Anolik, 274 A.D.2d 515 [2d Dept 2000] ). Generally, the filing of the account, which is supported by an affidavit attesting to its accuracy, makes a prima facie showing of completeness and accuracy (Matter of Schnare, 191 A.D.2d at 859, 860). Once the accounting party has made such a prima facie showing, the burden shifts to the objectant to come forward with sufficient evidence to establish that the account is inaccurate or incomplete ( Matter of Rudin, 6 Misc.3d 1015(A), *6 [Sur Ct, N.Y. County 2000] citing Matter of Schnare, 191 A.D.2d at 859;see also Matter of Curtis, 16 AD3d 725 [3d Dept 2005] ).
Upon this showing by an objectant, the burden of going forward shifts back to the accounting party to prove, by a fair preponderance of the evidence, that the account is, in fact, accurate and complete (Matter of Schnare, 191 A.D.2d at 860). Following a review of the account, and upon hearing the parties' proof, SCPA 2211(1) grants the court broad discretion to make “such order or decree as justice shall require” (Matter of Acker, 128 A.D.2d 867 [2d Dept 1987] ). The court may fashion any remedy appropriate to redress an objectant, including, but not limited to the denial of all or some commissions and the imposition of a surcharge ( Matter of Carner, 25 Misc.3d 1228[A], 2009 N.Y. Slip Op 52317[U] [Sur Ct, Westchester County 2009] ).In the instant case, the trustee met his initial burden by submitting an Accounting Affidavit of Accounting Party, together with his verified account. The burden then shifted to the objectant to submit evidence in proper admissible form, to support the allegations in his objections. Mere conjecture or suspicions are insufficient ( see Matter of Rudin, 6 Misc.3d 1015[A] at * 6). B. The Objections
The accounting here spans two different legal standards for trust administration. Prior to January 1, 1995, New York followed the prudent person rule of investment ( seeEPTL 11–2.2), which mandated that a trustee employ diligence and prudence in the care and management of a trust equivalent to that of a prudent person of discretion and intelligence in managing his or her own affairs (Matter of Janes, 90 N.Y.2d 41, 50 [1997],rearg. denied90 N.Y.2d 885 [1997], quoting King v. Talbot, 40 N.Y. 76, 85–86 [1869];see also Matter of Saxton, 274 A.D.2d 110, 118 [3d Dept 2000] ).
In making its determination, this Court is mindful that while the power to see the future is not required of a fiduciary, good faith, care, diligence and prudence are required (Matter of Hubbell, 302 N.Y. 246 [1951] ). The Court must perform a “balanced and perceptive analysis” of the fiduciary's consideration and action “in light of the history of each individual investment, viewed at the time of its action or its omission to act” ‘ (Matter of Donner, 82 N.Y.2d 574, 585 [1993], quoting Matter of Bank NY, 35 N.Y.2d 512, 519 [1974] ). Accordingly, a court may examine the fiduciary's conduct over the entire course of the investment in determining whether it has acted prudently ( see Matter of Janes, 90 N.Y.2d at 50;Matter of Donner, 82 N.Y.2d at 585).
In determining whether such a breach of fiduciary duty has occurred, the court must evaluate the fiduciary's actions along with relevant factors that affected or ought to have affected the fiduciary's decisions, including the size of the trust/estate, the performance of the market, the situation and needs of the beneficiaries and/or remaindermen, any potential tax consequences, and the marketability of the investment ( see Matter of Janes, 90 N.Y.2d at 51;Restatement [Second] of Trusts § 227, comments e, o).
For a trustee's investments made or held on or after January 1, 1995, the prudent investor rule ( seeEPTL 11–2.3[a] ) requires a trustee “to diversify assets unless the trustee reasonably determines that 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][3][C] ). Whether a trustee has acted in conformity with the prudent investor rule is a determination made in light of all surrounding facts and circumstances ( seeEPTL 11–2.3[b][1] ).
1. Florida Flats
After a review of all the evidence elicited at trial, as well as the post trial memoranda, the Court finds that the objectant failed to satisfy his burden of demonstrating that the decision not to purchase the additional Florida Flats interests was an abuse of discretion or imprudent.
As the standard of prudence looks to the fiduciary's actions, good faith is critical, mere errors in judgment are free from surcharge:
“[T]he distinction between negligence and mere error of judgment must be borne in mind. ‘Trustees acting honestly, with ordinary prudence and within the limits of their trust, are not liable for mere errors of judgment.’ “
(Matter of Clark, 257 N.Y. 132, 137 [1931];see also Matter of Kilmer, 18 Misc.2d 60 [Sur Ct, Broome County 1959] ).
The objectant must prove that the losses resulted from the trustee's negligence or failure to exercise “that degree of care which ‘prudent men of discretion and intelligence in such matters, employ in their own like affairs' “ (Matter of Hahn, 93 A.D.2d 583, 586 [4th Dept 1983][internal citation omitted] ). As Hahn holds, the elements of fiduciary investment liability are similar to a simple tort case. If an objectant pleads that a fiduciary negligently managed the corpus, the fiduciary can be surcharged to offset the objectant's loss, provided that the objectant has proved the necessary elements of investment negligence: a breach of duty causing a loss to the beneficiary. Proof of investment negligence is objectant's burden to bear (Matter of Cuddeback, 168 Misc. 698 [Sur Ct, Orange County 1938] ).In the present case, the objectant has failed to meet that particular burden. As the option to purchase occurred in 1991, the applicable legal standard is the prudent person rule, which is governed by the standards set forth in EPTL 11–2.2.
Under EPTL 11–2.2, the fiduciary was subject to the “prudent person rule” and could invest the estate funds:
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, provided, however, that nothing ... shall limit the effect of any will, agreement, court order or other instrument creating or defining the investment powers of a fiduciary, or shall restrict the authority of a court of proper jurisdiction to instruct the fiduciary in the interpretation or administration of the express terms of any will, agreement or other instrument or in the administration of the property under the fiduciary's care.
The prudent person rule of investment ( seeEPTL 11–2.2), mandates that a trustee employ diligence and prudence in the care and management of a trust equivalent to that of a prudent person of discretion and intelligence in managing his or her own affairs (Matter of Janes, 90 N.Y.2d at 50, quoting King v. Talbot, 40 N.Y. at 85–86;see also Matter of Saxton, 274 A.D.2d 110 at 118;Matter of Rowe, 274 A.D.2d 87, 90–91 [2000],appeal denied 96 N.Y.2d 7007 [2001] ).
Prudence is tested at the time of the investment decision, not from the vantage point of hindsight (Matter of Hubbell, 302 N.Y. 246 [1951];Matter of Bank of New York 35 N.Y.2d 512 [1974] ). A fiduciary should not be surcharged if he has exercised such prudence and diligence in their care and management as prudent men employ in their own affairs ( see Matter of Donner, 82 N.Y.2d at 574). The fiduciary must be cautious and avoid risk and does not have a license to speculate (Matter of Janes, 165 Misc.2d 743 [Sur Ct, Monroe County 1995] citing Restatement [Second] of Trusts § 174). A fiduciary who acts prudently will not be held liable for mere errors of judgment ( Matter of Romano, 8 Misc.3d 1010(A) [Sur Ct, Nassau County 2005] citing Matter of Cohen, 13 Misc.2d 694 [1958],modified by9 A.D.2d 916 [1959];Matter of Bunker, 184 Misc. 316 [1944] ).
In order to determine whether the prudent person rule has been violated, the court must examine the facts and circumstances ( see Matter of Janes, 90 N.Y.2d at 41). In Janes, 90 N.Y.2d at 41, the Court of Appeals discussed the various factors to be considered in determining whether a fiduciary's conduct was prudent, such as:
the amount of the trust estate, the situation of the beneficiaries, the trend of prices and the cost of living, the prospect of inflation and deflation (Restatement [Second] of Trusts 227, comment [e] ). Other pertinent factors are the marketability of the investment and possible tax consequences ( id., comment [o] ). The trustee must weigh all of these investment factors as they affect the principal objects of the testator's or settlor's bounty, as between income beneficiaries and remainder persons, including decisions regarding whether to apportion the investments between high-yield or high growth securities.
Initially, the Court notes that the objectant failed to offer any evidence addressing the factors considered by the co-trustees in evaluating the purchase of the additional Florida Flats property. Nor did the objectant offer any evidence to rebut the trustee's evidence that it would have been plainly imprudent to have made the purchase from trust funds. Additionally, the objectant failed, in his post-trial memorandum, to demonstrate that the co-trustees should have considered the possible deferral of taxes permitted under IRC section 6166.In examining the trustee's conduct, this Court finds that there is no evidence of imprudence. The trustee was able to prove that the decision not to purchase any additional portion of Florida Flats was prudently undertaken in the best interests of the beneficiaries. At the time, the Marital trust had $2.4 million in liquid assets available. The purchase price was $2.5 million which did not include the transaction costs, brokerage commissions and the capital gains taxes. Thus, there were insufficient funds to make the purchase. Further, obtaining a mortgage would have required the majority of the trust's income to pay off the interest.
Although, under the prudent person rule, diversification is not mandated ( see Matter of Newhoff, 107 A.D.2d 417 [1985],appeal denied66 N.Y.2d 605 [1985], the court is still obligated to consider whether the lack of diversification presents an unreasonable risk to the assets of an estate or trust. Here, the court cannot fault the co-trustees' judgment that purchasing additional New York real estate would be imprudent.
The objectant's argument that the estate taxes could have been deferred under §§ 6161 and 6166 of the Internal Revenue Code is unpersuasive.
Rather, it appears that the trusts would have been liable for approximately $2.75 million in estate taxes. Thus, it would have been too speculative for the co-trustees to have considered whether an estate tax deferral would have been available to the future executor of the mother's estate. As stated above, the court must look at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subsequently take place. The court agrees with petitioner “that the prudent course of action was to maintain liquidity to meet potential obligations.”
Presently, Internal Revenue Code (IRC) § 6161 provides decedents' estates that file Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return, the option of securing an extension of time to pay when specific circumstances impede their ability to pay the total tax due by the return due date. IRC § 6166 provides an extension of time to pay Form 706 estate tax in two or more, but not exceeding 10, equal installments. It allows heirs a fourteen year period to pay estate tax attributable to an estate's interest in a closely held business. It grants the estate a deferral period to make “interest only” payments for the first four years.
The Court agrees with the trustee that section 6161 required a showing of hardship, and that it was not certain that in the future, the executor would succeed in making such a showing. With the section 6166 deferral, the estate would have been forced to pay interest on the unpaid balance for the period of the deferral. More importantly, section 6166 election was inapplicable as the estate did not consist of closely-held business interests.
Finally, the objectant's assertion that the trustee had the duty to try to convince his mother that not owning the offered interest was detrimental to the Marital Trust is without merit. Edith had the deciding vote, and Edward had no obligation to try to change her mind. The co-trustees had a duty to use diligence and care to preserve the value of the trust and to prevent its loss. The record reflects that the co-trustees had given due attention and consideration to this matter. The co-trustees considered the size of the trust/estate, the performance of the market, the situation and needs of the beneficiaries and/or remaindermen, any potential tax consequences, and the marketability of the investment ( see Matter of Janes, 90 N.Y.2d at 51). Thus, objectant failed to establish that the co-trustees were negligent or failed to exercise that degree of care which prudent men of discretion and intelligence in such matters employ in their own like affairs ( see Matter of Hahn, 93 A.D.2d at 586).
Moreover, the issues raised by objectant regarding the valuation of the Florida Flats interest is not persuasive. The valuation of these fractional interests is not an exact science.
In 1989, the value of the three marital trusts were $4.67 million and is now valued at $14 million. In viewing the co-trustees' decision at the time it took place, the court can not hold that their actions were imprudent or negligent. The trustee offered a prudent and reasonable rationale for refusing to accept the offer to purchase the additional portion of Florida Flats.
2. The Colorado Real Estate
As to the expenditures for the maintenance of the Colorado property, a fiduciary is authorized to make ordinary repairs to the property of the estate or trust ( seeEPTL 11–2.2). The objectant failed to establish that the expenditures made by William to maintain the Leadville, Colorado property were unreasonable. Contrary to the objectant's assertions, the Court finds that the trustee met his fiduciary obligations with respect to preservation of the property ( see Matter of Burke, 129 Misc.2d 145, 147 [Sur Ct, Cattaraugus County 1985] ).
3. Legal Fees
Attorneys for an estate are allowed “such compensation for [their] legal services as appear to the court to be just and reasonable” (SCPA 2307[1] ). Attorneys' fees are evaluated by the Surrogate, who has the responsibility for ensuring that legal fees in estates are within the bounds of reasonableness( see Matter of Middagh, 267 A.D.2d 593 [3d Dept 1999] ). Reasonableness of legal fees is determined by the guidelines outlined in the Matter of Freeman (34 N.Y.2d 1 [1974] ) and Matter of Potts (213 App.Div. 59,affd241 N.Y. 593) line of cases, often referred to as the Freeman/Potts factors. They include: time and labor required, the difficulty of the questions involved, and the skill required to handle the problems presented; the lawyer's experience, ability and reputation; the amount involved and benefit resulting to the client from the services; the customary fee charged by the bar for similar services; the contingency or certainty of compensation; the results obtained; and the responsibility involved (Matter of Freeman, 34 N.Y.2d at 9).
In this case, the burden of showing reasonableness of fees is borne by the attorney ( see e.g. Cohen v. Ryan, 34 A.D.2d 789 [2d Dept 1970] ). Bryan Cave, Mr. Bowler and Mr. Mondschein have provided sufficient proof of reasonableness of the legal fees.
In this case, Mr. Bowler represented the co-trustee, Edward. His services were for the preparation for the accounting for the Estate of Robert Korn and the Trusts under the Will of Robert Korn. Mr. Bowler also handled the estate tax issues concerning Edith Korn's estate. Bryan Cave handled the various lawsuits related to both estates, i.e., the contested probate of the will of Edith Korn, the proceedings brought by 245 East 19th Street commencing in November 2002 which entailed extensive motion practice. Morris Mondschein represented William, and worked alongside the trustee to maximize the benefit to the Marital Trusts.
The record reflects that the fees of both firms were allocated one-half to the estate and one-half to the Martial Trust. The objectant's claim for the $29,520 credit concerns the Estate of Edith Korn and will be addressed in a separate decision. As to the objectant's claim that there were unnecessary legal fees incurred in connection with litigation over distributions, Surrogate Preminger (Order dated December 31, 2003) found that the respondent's demand for a distribution was premature. Moreover, in the objectant's Verified Petition, he did not allege any financial hardship. Further, that it was the objectant who commenced a proceeding against Edward for intentional infliction of emotional distress. This court is mystified by the objectant's argument that Edward caused unnecessary and costly litigation over distributions which engendered bitterness resulting in more unnecessary litigation, in light of the fact that the objectant has retained numerous law firms, and also commenced a proceeding against the trustee for intentional infliction of emotional distress.
Although, this pertains to the Estate of Edith Korn, the objectant filed objections to the probate of Edith Korn's will which were dismissed by the court on September 24, 2004. The First Department upheld Surrogate Preminger's decision, reasoned that the objectant submitted only conclusory and speculative evidence that the petitioner exercised undue influence over the decedent.
The record demonstrates that the compensation sought by the attorneys for the estate is within the bounds of reasonableness, Matter of Freeman, 34 N.Y.2d 1 [1973], given the amount of hours expended, the skill of the attorneys and the nature of the services provided. The record, including detailed affidavits of services, establishes that this complicated estate, made even more complicated by the acrimonious personal relationships among the litigants, warrants a substantial legal fee. The estate was valued at some $14 million, the legal fees were approximately $407,611.24, which equaled approximately 2.9 percent of the value of the estate.
Finally, as to the objectant's claim that the attorneys sought excessive fees for incorrectly advising the petitioner to accept the $1 million offer to withdraw their appeal in Florida Flats, petitioner states that there is no evidence in the trial record as to what advice the petitioner received. The trustee reviewed the bills, and was satisfied with counsel. Accordingly, objections 2, 4, 6, 10(b), 10(e) and supplemental objection 20 are dismissed.
On the basis of the foregoing, the court finds the attorneys' fees fair and reasonable and fixes it in the amount requested.
Settle decree.