Estate of Janes, Matter of

• Decision Date: 01 May 1997
• Citation: 659 N.Y.S.2d 165,90 N.Y.2d 41,681 N.E.2d 332
• Parties: , 681 N.E.2d 332 In the Matter of the ESTATE OF Rodney B. JANES, Deceased. Lincoln First Bank, N.A. (Successor by Consolidation to Lincoln First Bank of Rochester), as Coexecutor of Rodney B. Janes, Deceased, Appellant-Respondent; Howard Ullman, as Personal Representative of the Estate of Cynthia W. Janes, Deceased, et al., Respondents-Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 165

659 N.Y.S.2d 165

90 N.Y.2d 41, 681 N.E.2d 332

In the Matter of the ESTATE OF Rodney B. JANES, Deceased Lincoln First Bank, N.A. (Successor by Consolidation to Lincoln First Bank of Rochester), as Coexecutor of Rodney B. Janes, Deceased, Appellant-Respondent Howard Ullman, as Personal Representative of the Estate of Cynthia W. Janes, Deceased, et al., Respondents-Appellants.

Court of Appeals of New York.

May 1, 1997.

Nixon, Hargrave, Devans & Doyle, L.L.P., Rochester (William S. Brandt and Maxine Yi Hwa Lee, of counsel), for appellant-respondent.

Dennis C. Vacco, Attorney General, Albany (Troy J. Oechsner, Barbara G. Billet and Peter H. Schiff, of counsel), for State of New York, respondent-appellant.

Williams & Williams, Rochester (Mitchell T. Williams and Kenneth Joyce, of counsel), for Howard Ullman, respondent-appellant.

Sullivan & Cromwell, New York City (H. Rodgin Cohen, Philip L. Graham, Jr., Basil P. Zirinis, III, Penny Shane and Holly H. Weiss, of counsel), for The New York Clearing House Association and another, amici curiae.

OPINION OF THE COURT

LEVINE, Judge.

Former State Senator and businessman Rodney B. Janes (testator) died on May 26, 1973, survived solely by his wife, Cynthia W. Janes, who was then 72 years of age. Testator's $3,500,000 estate consisted of a $2,500,000 stock portfolio, approximately 71% of which consisted of 13,232 shares of common stock of the Eastman Kodak Company. The Kodak stock had a date-of-death value of $1,786,733, or approximately $135 per share.

Testator's 1963 will and a 1969 codicil bequeathed most of his estate to three trusts. First, the testator created a marital deduction trust consisting of approximately 50% of the estate's assets, the income of which was to be paid to Mrs. Janes for her life. In addition, it contained a generous provision for invasion of the principal for Mrs. Janes's benefit and gave her testamentary power of appointment over the remaining principal. The testator also established a charitable trust of approximately 25% of the estate's assets which directed annual distributions to selected charities. A third trust comprised the balance of the estate's assets and directed that the income therefrom be paid to Mrs. Janes for her life, with the remainder pouring over into the charitable trust upon her death.

On June 6, 1973, the testator's will and codicil were admitted to probate. Letters testamentary issued to petitioner's predecessor, Lincoln Rochester Trust Company, and Mrs. Janes, as coexecutors, on July 3, 1973. Letters of trusteeship issued to petitioner alone. By early August 1973, petitioner's trust and estate officers, Ellison Patterson and Richard Young had ascertained the estate's assets and the amount of cash needed for taxes, commissions, attorneys' fees, and specific bequests.

In an August 9, 1973 memorandum, Patterson recommended raising the necessary cash for the foregoing administrative expenses by selling certain assets, including 800 shares of Kodak stock, and holding "the remaining issues * * * until the [t]rusts [were] funded." The memorandum did not otherwise address investment strategy in light of the evident primary objective of the testator to provide for his widow during her lifetime. In a September 5, 1973 meeting with Patterson and Young, Mrs. Janes, who had a high school education, no business training or experience, and who had never been employed, consented to the sale of some 1,200 additional shares of Kodak stock. Although Mrs. Janes was informed at the meeting that petitioner intended to retain the balance of the Kodak shares, none of the factors that would lead to an informed investment decision was discussed. At that time, the Kodak stock traded for about $139 per share; thus, the estate's 13,232 shares of the stock were worth almost $1,840,000. The September 5 meeting was the only occasion where retention of the Kodak stock or any other investment issues were taken up with Mrs. Janes.

By the end of 1973, the price of Kodak stock had fallen to about $109 per share. One year later, it had fallen to about $63 per share and, by the end of 1977, to about $51 per share. In March 1978, the price had dropped even further, to about $40 per share. When petitioner filed its initial accounting in February 1980, the remaining 11,320 shares were worth approximately $530,000, or about $47 per share. Most of the shares were used to fund the trusts in 1986 and 1987.

In addition to its initial accounting in 1980, petitioner filed a series of supplemental accountings that together covered the period from July 1973 through June 1994. In August 1981, petitioner sought judicial settlement of its account. Objections to the accounts were originally filed by Mrs. Janes in 1982, and subsequently by the Attorney-General on behalf of the charitable beneficiaries (collectively, "objectants"). In seeking to surcharge petitioner for losses incurred by the estate due to petitioner's imprudent retention of a high concentration of Kodak stock in the estate from July 1973 to February 1980, during which time the value of the stock had dropped to about one third of its date-of-death value, objectants asserted that petitioner's conduct violated EPTL 11-2.2(a)(1), the so-called "prudent person rule" of investment. When Mrs. Janes died in 1986, the personal representative of her estate was substituted as an objectant.

Following a trial on the objections, the Surrogate found that petitioner, under the circumstances, had acted imprudently and should have divested the estate of the high concentration of Kodak stock by August 9, 1973. The court imposed a $6,080,269 surcharge against petitioner and ordered petitioner to forfeit its commissions and attorneys' fees. In calculating the amount of the surcharge, the court adopted a "lost profits" or "market index" measure of damages espoused by objectants' expert--what the proceeds of the Kodak stock would have yielded, up to the time of trial, had they been invested in petitioner's own diversified equity fund on August 9, 1973.

The Appellate Division modified solely as to damages, holding that "the Surrogate properly found [petitioner] liable for its negligent failure to diversify and for its inattentiveness, inaction, and lack of disclosure, but that the Surrogate adopted an improper measure of damages" (Matter of Janes, 223 A.D.2d 20, 22, 643 N.Y.S.2d 972). In a comprehensive opinion by Presiding Justice M. Dolores Denman, the Court held that the Surrogate's finding of imprudence, as well as its selection of August 9, 1973 as the date by which petitioner should have divested the estate of its concentration of Kodak stock, were "well supported" by the record Id., at 29, 643 N.Y.S.2d 972. The Court rejected the Surrogate's "lost profits" or "market index" measure of damages, however, holding that the proper measure of damages was "the value of the capital that was lost"--the difference between the value of the stock at the time it should have been sold and its value when ultimately sold (Id., at 34, 643 N.Y.S.2d 972). Applying this measure, the Court reduced the surcharge to $4,065,029. We granted petitioner and objectants leave to appeal, and now affirm.

I. Petitioner's Liability

Petitioner argues that New York law does not permit a fiduciary to be surcharged for imprudent management of a trust for failure to diversify in the absence of additional elements of hazard, and that it relied upon, and complied with, this rule in administering the estate. Relying on Matter of Balfe, 152 Misc. 739, 749, 274 N.Y.S. 284, mod. 245 App.Div. 22, 280 N.Y.S. 128, petitioner claims that elements of hazard can be capsulized into deficiencies in the following investment quality factors: "(i) the capital structure of the company; (ii) the competency of its management; (iii) whether the company is a seasoned issuer of stock with a history of profitability; (iv) whether the company has a history of paying dividends; (v) whether the company is an industry leader; (vi) the expected future direction of the company's business; and (vii) the opinion of investment bankers and analysts who follow the company's stock." Evaluated under these criteria, petitioner asserts, the concentration of Kodak stock at issue in this case, that is, of an acknowledged "blue chip" security popular with investment advisors and many mutual funds, cannot be found an imprudent investment on August 9, 1973 as a matter of law. In our view, a fiduciary's duty of investment prudence in holding a concentration of one security may not be so rigidly limited.

New York followed the prudent person rule of investment during the period of petitioner's administration of the instant estate. This rule provides that "[a] fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent [persons] of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital" (EPTL 11-2.2[a][1] ). ^* Codified in 1970 (see, L. 1970, ch. 321), the prudent person rule's New York common-law antecedents can be traced to King v. Talbot, 40 N.Y. 76, wherein this Court stated:

"[T]he trustee is bound to employ such diligence and such prudence in the care and management [of the trust], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs.

"This necessarily excludes all speculation, all investments for an uncertain and doubtful rise in the market, and, of course, everything that does not take into view the nature and object of the trust, and the consequences of a mistake in the selection of the investment to be made. * * *

"[T]he preservation of the fund, and the procurement of a just income therefrom, are primary objects of the creation of the trust itself, and are to be primarily regarded" (id., at 85-86 [emphasis supplied] ).

No precise formula exists for determining whether the prudent person standard has...