Estate of Donner, Matter of
| Decision Date | 20 December 1993 |
| Citation | 82 N.Y.2d 574,606 N.Y.S.2d 137,626 N.E.2d 922 |
| Parties | , 626 N.E.2d 922 In the Matter of the ESTATE OF CARROLL DONNER, Deceased. SQUIRE N. BOZORTH et al., Appellants; MILLS COLLEGE, Respondent; ROBERT ABRAMS, as Attorney-General of the State of New York, Respondent. |
| Court | New York Court of Appeals Court of Appeals |
The central issue in this case is whether, given the executors' role and responsibility with respect to the assets of the estate, Surrogate's Court abused its discretion in concluding that they breached their fiduciary duty, and in imposing a surcharge for investment losses incurred by the estate on the coexecutors and in reducing the commission of the coexecutors. We conclude that there was no abuse of discretion.
The coexecutors, who were paid handsomely for their services before and after the decedent's death, failed to concern themselves as special experts with the investments through a period of precipitous decline. They were invested with personal and professional knowledge that should have guided their actions in fulfillment of fiduciary duties. They failed to act prudently within the framework of the obligation to preserve assets under the circumstances of this case and thus violated their fiduciary responsibilities to this estate.
Carroll Donner, a resident of New York City, died on February 4, 1984 leaving a gross estate of more than $12.5 million. Her last will, dated May 27, 1983, was admitted to probate. By her will, the decedent bequeathed more than $2 million to several individuals and the Santa Barbara Museum, and the residuary to her alma mater, Mills College, in Oakland, California. The decedent appointed her longtime attorney and drafter of the will, Squire N. Bozorth, and her longtime, personal financial advisor, Duncan Miller, as coexecutors. Bozorth also served as attorney for Miller in Miller's role as executor of the estate. The coexecutors received preliminary letters testamentary for the estate on March 26, 1984 and full letters testamentary on May 22, 1984.
The major asset of the decedent's estate was an inter vivos trust, which had been created on November 20, 1920 by her grandfather, of which Wilmington Trust Company (WTC), a Delaware corporation, was the trustee. The decedent was the income beneficiary of the trust and had a general testamentary power of authority over the principal. By her will, the decedent exercised that power of authority "by appointing all the property subject thereto to [her] Executors to be blended with [her] own estate and to pass as a part thereof." On the date of her death, the 1920 trust had a value of $8,224,662. The decedent's assets also included another trust, created by her grandfather on March 16, 1932, of which WTC also acted as the trustee. The 1932 trust instrument provided that the decedent would receive the income from the trust during her life, and that on her death three quarters of the trust principal was to pass to her brother. The decedent had testamentary power of appointment over the remaining one quarter of the principal, and she exercised that power by "appoint[ing] the property subject thereto to [her] Executors, to be applied by them towards the payment of [estate, inheritance, legacy, succession or transfer] taxes." At the time of the decedent's death, approximately 80% of the 1920 trust and the 1932 trust consisted of interest-sensitive securities.
In addition to being the financial advisor for the decedent during her lifetime, since 1965, coexecutor Miller had unlimited powers to direct the purchase and sale of the assets of the 1920 and 1932 trusts. Furthermore, although WTC, as trustee of the two trusts, charged full services and fees, coexecutor Miller acted as investment director and received compensation from WTC for that service. After the decedent's death, coexecutor Miller continued to receive compensation for his role as investment director of the trusts.
After the decedent's death, the value of the securities in the trusts declined significantly due to a downward turn in the stock market. In addition, the decedent's brother contested the decedent's right to the property in the
trusts. WTC commenced two separate proceedings in the Delaware Court of Chancery for instructions regarding the distribution of the property. By orders issued in July and August 1985, the court determined that the coexecutors were entitled to the entire principal of the 1920 trust and to one eighth of the value of the minority accumulation fund of the 1932 trust, and ordered WTC to provide the coexecutors with accountings for both trusts for the period from 1965 through 1984. Pursuant to the court orders, the coexecutors proceeded to collect the assets of the trust. WTC distributed the balance of the 1932 trust but stated that it would retain at least $2 million of the 1920 trust unless and until the coexecutors provided it with general releases from liability for any misconduct for both trusts. WTC also continued to pay itself commissions and administrative expenses on the $2 million it retained.
Mills College, as residuary legatee of the estate, successfully obtained a reduction in the amount retained by WTC from $2 million to $1 million. WTC distributed the $1 million to the coexecutors who then transmitted it to Mills College. 1
WTC also provided the coexecutors with accountings for the 1920 and 1932 trusts pursuant to the court orders. On May 9, 1988, the coexecutors also filed an accounting of the estate, from the date of the decedent's death to September 30, 1987. Appended to the coexecutors' accounting were schedules, which included the accountings of WTC. The coexecutors asserted that the accountings of WTC were "in order." The coexecutors' accounting reflected combined principal and income on hand of $1,968,570.56 and calculated gains and losses against "inventory values." The coexecutors forwarded copies of their accounting to the Attorney-General 2 and Mills College (the objectors). It was later determined that the "inventory values" were the values of the assets in the estate as of 1985, not as of the date of death, and that the estate had incurred substantially more losses during the period following decedent's death until 1985 than were reflected in the accounting. Using date-of-death values, the objectors calculated that there had been more than $786,000 in losses on the sale of the assets in the estate.
Thus, in August 1989, the Attorney-General and Mills College filed numerous objections to the accounting of the coexecutors. The objectors challenged, inter alia, (1) the failure of the coexecutors to collect the $1 million in estate funds that was retained by WTC, (2) certain expenditures by the coexecutors, including fees paid from estate funds for moving two sculptures, payment to counsel of WTC, fees paid by the estate for payroll services, and disbursements paid by the estate to two law firms, (3) compensation paid by WTC from the assets of the trusts to coexecutor Miller for his role as investment director, (4) losses incurred by the estate resulting from sale of assets by the coexecutors after the decedent's death, and (5) commissions paid to the coexecutors in excess of those authorized by the trust instruments. Exhibit 89 of the objections was a schedule of the individual assets in the trusts, the date-of-death value of each asset, the date of sale, and the net proceeds from the sales. The objectors sought $5,991,587.40 in surcharges, plus interest, costs and allowances.
During discovery, the objectors uncovered memoranda that had been prepared by one of coexecutor Bozorth's senior associates indicating, inter alia, substantial losses in the securities held. The fact that the memoranda were prepared for but never delivered to the Attorney-General and Mills College indicates, as the Surrogate found, an attempt to withhold information. The memoranda stated, inter alia, that (1) the trust accountings with WTC were "directed accountings," i.e., WTC did not have investment responsibilities because Miller, as financial adviser, directed
the investments, (2) before the death of the decedent, the 1920 trust suffered total losses of more $3.7 million, among which were 13 securities, each of which experienced a 100% or virtual 100% loss, causing a total loss of $271,130.45 on those securities, (3) the commissions paid to WTC exceeded the commissions initially authorized by the trust instrument, (4) since the fair market values for the assets in the trust at the beginning and end of the accounting periods were not used in the accountings submitted by WTC, the over-all gains and losses during that period could not be fully evaluated, and (5) the objectors had standing to challenge the payment of Federal income taxes from the principal of the trusts since, if the money had been retained in the principal, it would have passed to Mills College.
After a trial, Surrogate's Court sustained the objections to the accounting, reduced the commission of the coexecutors and surcharged them for various acts of negligence in collecting the assets of the estate. The court, inter alia, (1) limited the coexecutors to a single commission, (2) directed the coexecutors to refund to the estate, with interest from the date of payment, any advance payment of commissions which exceeded the amounts authorized by the trust instruments, (3) ordered the coexecutors to repay to the estate...
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