Opinion
703-1993
08-23-2011
In the Matter of the Judicial Settlement of the First and Final Account of Proceedings of Jeffrey Scott Lasdon as Co-trustee and Preliminary Executor of the Estate of Gene Lasdon, deceased Co-trustee, of the Trust Created for the Benefit of Michael B. Abrams under Article FIFTH of the last Will and Testament of Stanley S. Lasdon, Deceased. In the Matter of the Judicial Settlement of the First and Final Account of Proceedings of Jeffrey Scott Lasdon as Co-trustee and Preliminary Executor of the Estate of Gene Lasdon, deceased Co-trustee, of the Trust Created for the Benefit of Daniel A. Abrams under Article FIFTH of the last Will and Testament of STANLEY S. LASDON, Deceased. In the Matter of the Judicial Settlement of the First and Final Account of Proceedings of Susan Lasdon Abrams as Co-trustee of the Trust created for the Benefit of Michael B. Abrams under Article FIFTH of the Last Will and Testament of STANLEY S. LASDON, Deceased. In the Matter of the Judicial Settlement of the First and Final Account of Proceedings of Susan Lasdon Abrams as Co-trustee of the Trust created for the Benefit of Daniel A. Abrams under Article FIFTH of the last Will and Testament of STANLEY S. LASDON, Deceased.
For Michael Abrams and Daniel Abrams: Llorca & Hahn LLP (Richard Hahn, Esq., of counsel) For Susan Lasdon Abrams: Putney, Twombly, Hall & Hirson LLP (Lansing Palmer, Esq., of counsel) For Jeffrey S. Lasdon: Holland & Knight LLP (Charles Gibbs, Esq. & Brian Corrigan, Esq., of counsel).
For Michael Abrams and Daniel Abrams: Llorca & Hahn LLP (Richard Hahn, Esq., of counsel)
For Susan Lasdon Abrams: Putney, Twombly, Hall & Hirson LLP (Lansing Palmer, Esq., of counsel)
For Jeffrey S. Lasdon: Holland & Knight LLP (Charles Gibbs, Esq. & Brian Corrigan, Esq., of counsel).
Kristin Booth Glen, J.
In these long-litigated, final trust accountings, the court must identify the appropriate measure of surcharge against co-trustee Jeffrey Lasdon for his failure to authorize timely distribution of the remainders to Michael Abrams and Daniel Abrams, at termination of their respective trusts. Attorneys' fees are also at issue.
The two trusts in question were established for the benefit of Michael and Daniel, respectively, under the will of Stanley Lasdon, who appointed his wife, Gene Lasdon, his daughter, Susan Abrams (the mother of Michael and Daniel), and his son, Jeffrey Lasdon, as co-trustees. Gene Lasdon served until her death in December of 2006. Under the instrument, each trust terminated when its beneficiary reached the age of 35. In the case of Michael's trust, the termination date was August 20, 2004; in the case of Daniel's, it was March 2, 2007. Susan sought to make final distribution accordingly, but Jeffrey withheld his authorization to do so. It was not until March 4, 2008, after the beneficiaries sued to compel his accounting as co-trustee, that Jeffrey authorized distribution of the trusts' substantial holdings of Pfizer Incorporated stock, consisting of some 40,950 shares in Michael's trust and 41,000 shares in Daniel's. Other, smaller stock holdings remain undistributed to date.
As objectants in the accountings, Michael and Daniel sought to surcharge Jeffrey for the decline in value of the Pfizer stock and other stock holdings between the time when they should have been distributed and the date on which they were actually distributed (or, if undistributed, to the date of trial). On the parties' cross-motions for partial summary judgment, the court ruled in objectants' favor on the issue of breach of fiduciary duty (Matter of Lasdon, NYLJ, June 29, 2010, at 36, col 6). The decision reserved for trial the open factual issue on which a calculation of surcharge depended, i.e., the precise dates on which distributions should have been made.
Prior to the scheduled trial, however, the parties entered into a stipulation as to the dates in question. With respect to Michael's trust, the parties stipulated that the 40,950 shares of Pfizer common stock should have been distributed on November 19, 2004, when the share price was $27.44. With respect to Daniel's trust, the parties stipulated that the 41,000 shares of Pfizer common stock should have been distributed on May 18, 2007, and they have further stipulated that the share price at that later date was also $27.44. The share price on the date of actual distribution of the Pfizer stock from both trusts was $22.24. The tax basis of the shares was $3.86. The parties further stipulated that the trusts' other assets represented reasonable reserves to meet wind-up expenses until December 22, 2004, in the case of Michael's trust, and July 5, 2007, in the case of Daniel's trust. Having eliminated these central factual questions, the parties made certain motions in limine presenting issues of law as to calculation of the surcharge and whether interest should be made payable on the surcharge, and those motions are the chief subject of this decision.
Under the stipulation, the parties further agreed to submit to the court, on their papers, the issue of reasonable legal fees.
The parties have confirmed that this stipulated "fact" was not a product of mere typographical error. Although the court might take judicial notice of the statistical unlikelihood of the proposition that the shares sold at the exact same price although on dates that were years apart and might also take judicial notice of the actual prices of this publicly traded stock on the dates in question (see Matter of Wood, 177 AD2d 161 (2d Dept1992), the court will instead defer to this aspect of the parties' chosen terms as embodied in the stipulation.
One other motion addresses whether the court should consider an expert report in deciding these motions. Michael and Daniel have cross-moved to strike the affidavit of Charles Scott, Esq., offered by Jeffrey, as a submission that "does not concern a proper subject of expert testimony." The court agrees. The affidavit, which reads like a memorandum of law, is not designed to inform a factual question (the usual province of expert testimony), but instead provides only case law analysis on the pure question of law as to how damages are to be calculated in this instance. The expert's report accordingly is stricken from the record on these motions (Meason v Greenwich and Perry Street Housing Corp., 268 AD2d 156 [1st Dept 2000] ["Expert testimony as to a legal conclusion is impermissible."]; Russo v Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, 301 AD2d 63, 68-69 [1st Dept 2002]; Franco v Jay Cee of NY Corp., 36 AD3d 445, 448 [1st Dept 2007]).
The present motions proceed from the same basic principle: where, as here, a loss is not occasioned by self-dealing, the surcharge should place the beneficiary only where he would have been had the fiduciary obligation not been breached (Matter of Janes, 90 NY2d 41 [1997]; Matter of Rothko, 43 NY2d 305 [1997]). Furthermore, the parties also agree as to the first operation in calculating an appropriate surcharge, i.e., subtraction of the securities' value on the date of actual distribution (or, in the case of securities yet to be distributed, on the date of trial) from their value on the date that distribution should have been made, with the difference constituting the basic surcharge. Jeffrey contends, however, that the basic surcharge must be reduced by tax on the capital gain that would have been carried out to the beneficiary with the distribution that should have been made, on the assumption that a beneficiary would have at some point sold the securities and that their worth to him would thus have been net of the tax on the realized gain.
It is noted that, by logical extension, if such a speculative tax were to be deemed an appropriate offset to the fair market value of the shares, it would have to factor in the surcharge calculation not once, as Jeffrey appears to presume, but twice (imputation of a sale by the beneficiary, if appropriate as to the hypothetical distribution, being no less so as to the actual distribution). In other words, the tax would reduce not only the deemed value of what the beneficiaries should have received, but also, the deemed value of what they thereafter actually received (or, in the case of undistributed shares, the value on the date of trial or stipulation). Thus, an actual or imputed gains tax at the later point would offset the imputed gains tax at the earlier point, thereby minimizing the effect of the tax issue on the surcharge. In any event, it is concluded that gains tax is not an appropriate factor in the calculation of surcharge here. See discussion at pp. 5-6, infra.
Neither party cites square precedent in this regard. This is not to ignore Jeffrey's contention that the Third Department's decision in Matter of Saxton (274 AD2d 110 [3d Dept 2000]) presents such a precedent. In that case, also a final accounting, a trustee had for decades retained an overly concentrated investment in shares of IBM, and the trust had been impaired as the result. The court determined that the trustee should have sold the stock as of a particular date, and it proceeded to determine a surcharge on the basis of that hypothetical sale. Thus, as an initial calculation of lost capital, the Saxton court subtracted the value of the stock at the time it was actually distributed in kind to the remainder beneficiaries from its value at the time that the trustee should have sold it, in accordance with the Janes formula. The court next reduced the difference by a sum representing imputed capital gains tax in respect of the hypothetical sale. Such a determination arguably made sense ( but see Matter of Knox, 30 Misc 3d 1203[A], 2010 NY Slip Op. 52251[U][2010]), Sur Ct Erie County 2010), in view of the purpose of the Saxton surcharge, i.e., to put the trust in no worse — but no better — position than the one it would have occupied if the trustee had duly sold. In other words, there was at least some logic to factoring into the calculation of the surcharge a tax imputed to the trust on its forgone gain.
The Saxton court acknowledged that to this extent its ruling differed from that in Matter of Janes, supra (which did not reduce the surcharge by any imputed gains tax) even though Janes too had involved a fiduciary's failure to divest its overly concentrated holding of securities. In an effort to distinguish Janes, the Saxton court noted that the estate in Janes had been largely distributable to charity and that a tax on gains set aside for charity therefore would not have been suggested to, or considered by, the Janes court as a material element of surcharge (274 AD2d 110, 121 n. 8).
By contrast, the present matter does not involve a finding that the trustee negligently failed to sell and thus does not require a surcharge designed to give the trust what it would have had — but no more than that — if a sale had duly occurred. Accordingly, unlike Saxton and its progeny, there is here no call in logic for an imputed gains tax as a factor in the surcharge (cf. Bamira v Greenberg, 295 AD2d 206 [1st Dept 2002] (damages for conversion limited to the amount by which the property wrongly withheld from plaintiff appreciated after the conversion, without reduction for any imputed capital gains tax). Rather, since objectants' losses arise from the fiduciary's delays in making in-kind distributions, it is wholly speculative to propose that objectants would have at some point sold what they received — and at a taxable gain at that — if it had been timely distributed to them.
The other authorities that Jeffrey cites are equally unavailing to him. Included among them are federal estate and gift tax decisions involving the valuation of closely-held companies owning appreciated property. In each such case, "embedded"capital gains tax (in respect of the appreciated corporate holdings) figured in the companies' valuations, but only in view of the reality that, with liquidation an eventuality for such companies, arms-length buyers would inevitably discount the companies' values to the extent of the unavoidable gains taxes (see e.g. Estate of Jelke v Comm'r of Internal Revenue, 507 F3d 1317 [11th Cir 2007]; Estate of Dunn v Comm'r of Internal Revenue, 301 F3d 339 [5th Cir 2002]; Eisenberg v Comm'r of Internal Revenue, 155 F3d 50 [2d Cir 1998]; cf. Wechsler v Wechsler, 58 AD3d 62 [1st Dept 2008][on equitable distribution, projected capital gains tax factor in valuing husband's interest in closely held corporation, which circumstances would require him to sell annually). In other words, none of those cases involved appreciated marketable securities directly owned by individuals who might opt to retain them, with a possible step-up in basis as the result.
Jeffrey urges another proposition in relation to a totally different type of offset: that the surcharge for the decline in value of Pfizer and other trust assets during the period of delayed distribution be reduced by gains on other trust assets. In other words, Jeffrey seeks to get credit for those of the trust investments that fared better (during the period of delay) than the securities now in question. Jeffrey does not identify whether the gains to which he refers are to be measured only from the beginning of the period of delay or instead from the beginning of the accounting period itself.
Michael and Daniel challenge that proposal in either event, relying on a number of precedents (see Matter of Harmon, 5 Misc 2d 308, 312 [Sup Ct NY County 1956] ["trustee cannot offset gains realized on certain unauthorized transactions against losses occasioned on other unauthorized transactions"]; Matter of Buck, 55 NYS2d 841 [Sur Ct Westchester County 1945]; see also City Bank Farmer's Trust Co. v Evans, 255 App Div 135, 139 [1st Dept 1938]). These cases rest on what is referred to as the "anti-netting rule," as explained in Buck:
"[A] gain realized by the retention of certain securities may not be employed to offset a loss occasioned by the retention of other securities to which objection has been made. A trustee who is liable for a loss resulting from a breach of trust with respect to one portion of the trust property cannot reduce his liability by reason of a gain with respect to another portion of the trust property occasioned by a separate and distinct breach of trust" (Buck, 55 NYS2d at 843-844).The rationale underlying the anti-netting rule is simple enough: as was observed in a leading decision, "The money invested is [the beneficiary's] money; and in respect of each and every dollar ... he has an unqualified right to follow it, and claim the fruits of his investment, and ... the trustee cannot deny it" (King v Talbot, 40 NY 76, at 91). In other words, a trustee who has harmed the trust by a breach of duty cannot be allowed to use to his own advantage investment "fruits" that the terms of the trust have earmarked for the beneficiary (see Matter of Bank of New York (Spitzer) (35 NY2d 512 [1974]); Scott and Ascher on Trusts, § 24.18 [5th ed 2007]).
As noted by the Court of Appeals in Janes, "Codified in 1970 (see L. 1970, c. 321), the prudent person rule's New York common-law antecedents can be traced to King v Talbot (40 NY 76)" (90 NY2d at 49).
Jeffrey argues, however, that the anti-netting rule has been rendered obsolete by the change in standards for fiduciary investments effected by the enactment in 1994 of the Prudent Investor Act ("PIA," effective for investments made or held after December 31, 1994) (see L. 1994, c. 609, as amended, codified in EPTL § 11-2.3).
There is no question that the prudent investor standard applied to the investments made by the fiduciaries of these trusts. Prior to enactment of the PIA, fiduciary investments were judged under a "prudent person" standard, which had focused on the individual merits of such investments (see Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 11-2.2 [2008 ed.]). By contrast, under the PIA, "no particular investment is inherently prudent or imprudent for purposes of the prudent investor standard" (EPTL § 11-2.3[b][4]) and a fiduciary should therefore "implement investment and management decisions as a prudent investor would for the entire portfolio..." (EPTL § 11.2.3[b][2] [emphasis added]). According to Jeffrey, such an approach to investment choices — more balanced and flexible than the prudent person standard — cannot accommodate a rule that in effect compartmentalizes investment results.
The PIA deals with the prudence — or lack thereof — of investments made by a fiduciary and challenged — on the basis of prudence — by a beneficiary. The surcharge to be imposed here is based, not on any imprudence in the fiduciary's choice of investment, but rather on circumstances deemed to have made the fiduciary at some point a guarantor of his investments' performance (whether or not the investments had been prudently chosen). Accordingly, when (as here) a fiduciary's breach has been established, there is nothing to prevent a court from fidelity to the anti-netting precedents by imposing the surcharge without regard to such investment gains as the trustee may have at the same time achieved (see Jeffrey Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 NYUL Rev 52, 97 [1987]) ("[T]he anti-netting rule is not inconsistent with portfolio theory. [T]he rule pertains to balancing losses arising from one or more breaches of trust against gains from any source... . The implication of portfolio theory is only that the determination whether a particular investment amounts to a breach of trust should be made in light of the risk the investment adds to the portfolio" [citation omitted]).
As to the request by Michael and Daniel for an award of interest on the surcharges, the standard in that respect is as follows:
Whether interest is awarded, and at what rate, is a matter within the discretion of the trial court (see, Woerz v Schumacher, 161 NY 530, 538 [1900], rearg deniedIn this connection, all parties agree that the objective of an interest award is to make an aggrieved party entirely whole (see Bamira v Greenberg, 295 AD2d 206, 207 [1st Dept 2002]). All further agree that such an award, if any, should be offset by income realized (during the period of delayed distribution) on the assets whose distributions were unduly delayed. But Jeffrey maintains that no interest award would be appropriate here. According to him, since objectants had requested in-kind distribution, the trust was invested in accordance with their wishes, and they therefore cannot reasonably claim interest as compensation for any income forgone during the period of delayed distribution.
163 NY 610; King v Talbot, 40 NY, at 95, supra; CPLR 5001 [a]; SCPA 2211 [1] [other citations omitted]. Dividends and other income attributable to the retained assets should offset any interest awarded (see, Matter of Garvin, supra, at 521)." Matter of Janes, supra, at 55.
This argument is entirely unpersuasive. Objectants requested in-kind distribution, not deferred distribution (else there would be no surcharge to speak of). To the extent that objectants were denied timely receipt of the property in question, they were thereby denied the opportunity to do with the property thereafter as and when they wished, whether to hold it as a continuing investment, or to hypothecate it, or to reinvest it. An award of interest is the mechanism for compensating parties for just such lost opportunity (see Bamira v Greenberg, 295 AD2d 206, 207, supra). This is not a case in which an interest award would be unwarranted as, for example, a double recovery (id.) (interest inappropriate where award of appreciation damages for converted securities per se made plaintiff whole). In other words, factoring interest into the surcharge here serves the purpose of making objectants whole.
Michael and Daniel, for their part, argue that interest on the surcharge should be imposed at the full legal rate of nine percent (9%) compounded annually (see CPLR 5004). Although acknowledging that the question is one confided to the court's discretion (CPLR § 5001[a]), they nonetheless suggest that an interest award at such level is in this case "virtually mandat[ed]," purporting to rely on Janes and on several cases involving the accountings on the dissolution of partnerships (Sexter v Kimmelman, Sexter, Warmflash & Leitner, 43 AD3d 790, 795 [1st Dept 2007]; Aurnou v Greenspan, 161 AD2d 438 [1st Dept 1990]).
None of these authorities is so categorical, however. Thus, the trial court in Janes awarded annually-compounded interest at nine percent in view of the trustee's inexplicable neglect of its investment duties, amounting to "imprudence, the abuse of its fiduciary position and its violation of a basic standard of conduct," and the trial court's holding in this respect was affirmed on appeal (Matter of Janes, 165 Misc 2d 743, 758 [Sur Ct Monroe County 1995], aff'd as mod. on other grounds 223 AD2d 20 [4th Dept 1996], aff'd 90 NY2d 41 [1997]). Interest at nine percent, compounded annually, was also awarded in the partnership cases cited by objectants, but those cases involved more egregious conduct than is present here (see, e.g., Aurnou v Greenspan, supra, at 440 [defendants failed to account to their partner for 11 years after the partnership dissolved, during which time defendants had enjoyed the benefits of their partner's money and had left their partner to "suffer the consequences of inflation"]; Sexter, supra, at 795 [defendants had failed to account for many years after their partnership dissolved, and they had retained and "enjoyed the benefit of" their former partners' assets]).
Although each party adverts to EPTL § 11-1.5, neither claims that the section applies here. The court notes that EPTL § 11-1.5(e) codifies more specifically what CPLR 5001(a) provides more generally, namely, that a court "may" award interest at the legal rate of 9% where the delay in payment of a "testamentary disposition" was "unreasonable."
Here, by contrast, the delay that is the basis for surcharge was to some extent the product of mixed signals among the trustees, aggravated by the passive role that two of them had played in the trust's management pursuant to an agreement among all three that apparently had been reached in good faith. Under such circumstances, a more moderate, albeit compensatory interest award is warranted. Accordingly, the surcharge in this case is subject to interest at an annual rate of six per cent, compounded annually (net of such ordinary income as was realized on trust assets during the period when they were improperly retained).The final issue arises from objections relating to Jeffrey's attorneys' fees. This court has already determined that each trust must reimburse Jeffrey for the attorney's fees that he reasonably incurred up to the point that jurisdiction was obtained over all necessary parties in these accountings (see Matter of Lasdon, NYLJ, June 29, 2010, supra). The parties have consented to submission of the fee issue on the papers.
The time charges of Jeffrey's counsel, the firm of Holland & Knight LLP, began on February 4, 2008, in response to objectants' petition to compel his account. After the return date for that proceeding (February 19, 2008), Jeffrey authorized the distribution of the Pfizer Incorporated stock from both trusts on March 4, 2008. On or about October 14, 2008, he commenced the present accounting proceedings by filing the accounts, together with petitions for their judicial settlement.
In this connection, the parties first disagree as to whether Jeffrey should be reimbursed for legal services rendered in relation to the proceeding to compel him to account. According to objectants, such proceeding was by its nature an outgrowth of Jeffrey's breach of duty for which he should be left to bear the legal fees that he incurred in the process. However, in view of the ambiguities surrounding the trusts at the time (as described in this court's June 2010 decision), it cannot be said that Jeffrey's posture in the compel accounting proceeding (including his efforts to avoid the costs and delays of a judicial accounting) was simply a per se wrong and that the trusts therefore derived no benefit from his counsel's services. Jeffrey may, therefore, be reimbursed for his lawyers' fees in that proceeding to the extent that the services in question were reasonable.
Also rejected is the objectants' argument that time was spent by attorneys on "executive/administrative tasks" more properly done by Jeffrey himself.
The next dispute as to fees concerns the date on which jurisdiction in Jeffrey's accountings was obtained over all parties, i.e., the cut-off point for reimbursable services. Jeffrey argues that the date in question was November 25, 2008, the date on which the accounting citations were returnable. Objectants point out, however, that their acknowledgments of service and notices of appearance had been received by the co-trustees' respective lawyers at least several weeks earlier and that Susan's had been received by Jeffrey's lawyers on November 3, 2008. Since these three were the sole necessary respondents, jurisdiction was thus complete on November 3, 2008, after which the fees of Jeffrey's counsel were no longer chargeable to the trusts.
For legal services rendered between February 4, 2008, and November 3, 2008, Holland & Knight's bill is in the sum of $83,308, the product of 185.6 hours at a blended hourly billing rate of $450. The services were performed in relation to a total of five proceedings: the miscellaneous proceeding to compel Jeffrey to account, the two accountings by Jeffrey for the two trusts; and Susan's separate accountings for the trusts. The trusts' combined values amount to $5.6 million.
The standards for determining legal fees to be borne by a trust or estate are well established, although their application may be challenging in a particular case. Among the factors to be considered are "the time spent, the difficulties involved in the matters in which the services were rendered, the nature of the services, the amount involved, the professional standing of the counsel, and the results obtained" (Matter of Potts, 213 App Div 59, 62 [4th Dept], affd 241 NY 593 [1925]; see Matter of Freeman, 34 NY2d 1, 9 [1974]).
The affirmations of services in this case advert to certain difficulties experienced by Jeffrey's counsel in their effort to obtain the information needed to prepare the accounts, including resort to a subpoena, as well as their substantial efforts to resolve the various issues among the parties without extended litigation. It is noted that the estrangement between two of the co-trustees inevitably added to counsel's burdens in terms of information-gathering and issue-resolution. On the other hand, there was nothing especially complicated about the trust holdings in this case during the accounts' 15-year span. The time expended on standard accounting services — a total of approximately 116 hours — appears to have been somewhat excessive. Although there is no question as to the professional standing of counsel or as to the quality of its work product, the accounting tasks involved could have been completed in 25 percent less time than that reported.
On the basis of the foregoing, the court fixes and determines the legal fee in the sum of $70,258. Jeffrey seeks additional reimbursement from the trusts in the sum of $4,410.43 for total costs and disbursements. Under Matter of Herlinger (NYLJ, April 28, 1994, at 28, col 6 [Sur Ct New York County]) and Matter of Anastasio (NYLJ, July 9, 2010, at 38, col 1 [Sur Ct New York County] [following Herlinger]), costs normally considered part of office overhead, such as photocopying, local transportation and facsimile charges, should not be "reimbursed." Discounting the amounts for these requested disbursements, totaling $931.22, the court awards Jeffrey costs and disbursements in the sum of $3,479.21.
None of the parties argues that counsel fees and disbursements should be unequally apportioned between the two trusts. Since the trusts are of substantially similar value and the legal services in question benefited them equally, the fees and disbursements should be split equally between the trusts.
Settle decree on notice.
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SURROGATE