In re JP Morgan Chase Bank, N.A.

• Decision Date: 20 November 2015
• Citation: 20 N.Y.S.3d 499,133 A.D.3d 1292
• Parties: In the Matter of JP MORGAN CHASE BANK, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under the Trust Agreement Dated May 23, 1932 by Alvah G. Strong, Deceased and Pursuant to the Exercise of the Power of Appointment Under Paragraph Ninth of the Will of Marjorie H. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 1.) In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph 22(B)(4) of the Will of Alvah G. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 2.) In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph Fourth of the Will of Alvah G. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 3.) In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph Tenth of the Will of Marjorie H. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 4.) Charles Wehle and Henry Wehle, Objectants–Respondents–Appellants. (Appeal No. 4.).
• Court: New York Supreme Court — Appellate Division

133 A.D.3d 1292

20 N.Y.S.3d 499

In the Matter of JP MORGAN CHASE BANK, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under the Trust Agreement Dated May 23, 1932 by Alvah G. Strong, Deceased and Pursuant to the Exercise of the Power of Appointment Under Paragraph Ninth of the Will of Marjorie H. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 1.)

In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph 22(B)(4) of the Will of Alvah G. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 2.)

In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph Fourth of the Will of Alvah G. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 3.)

In the Matter of JP Morgan Chase Bank, N.A. (Successor by Merger to the Chase Manhattan Bank) (Successor by Merger to Chase Lincoln First Bank, N.A. ) (Successor in Interest to Lincoln First Bank, N.A. ) (Successor by Consolidation to Lincoln First Bank of Rochester) (Formerly Known as Lincoln Rochester Trust Company ), as Trustee Under Paragraph Tenth of the Will of Marjorie H. Strong, Deceased, for the Benefit of Marjorie Strong Wehle, Deceased (Who Died January 8, 2004), Petitioner–Appellant–Respondent. (Proceeding No. 4.)

Charles Wehle and Henry Wehle, Objectants–Respondents–Appellants. (Appeal No. 4.).

Supreme Court, Appellate Division, Fourth Department, New York.

Nov. 20, 2015.

Harris Beach PLLC, Pittsford (A. Vincent Buzard of Counsel), for Petitioner–Appellant–Respondent.

Harris, Wiltshire & Grannis LLP, Washington, D.C. (Mark A. Grannis of Counsel), for Objectants–Respondents–Appellants.

PRESENT: CENTRA, J.P., PERADOTTO, LINDLEY, WHALEN, AND DeJOSEPH, JJ.

MEMORANDUM:

Petitioner-appellant-respondent (petitioner) served as trustee for, inter alia, three trusts that were established for the benefit of Marjorie Strong Wehle. Trust I was funded on August 2, 1976 with 15,430 shares of Kodak stock. The stock originally was placed in trust by Henry Alvah Strong, who was one of George Eastman's original partners and who served as Kodak's first president, for the benefit of his grandson, Alvah G. Strong. Alvah Strong assigned his remainder interest to an inter vivos trust he established in 1932 for the benefit of his wife, Marjorie H. Strong. In her will, Marjorie Strong directed that the principal of the trust be divided into three trusts for the benefit of her daughters, one of whom was Wehle, with a remainder interest for their respective issue, per stirpes. Trust I received additional shares of Kodak stock from two stock splits and from the estate of Alvah Strong's father, Henry Griffin Strong. Trust II was created in 1966 in the will of Alvah Strong for the benefit of his wife, and he directed that, at his wife's death, the remaining principal be placed into trusts for each of their three daughters, including Wehle, with a remainder interest to their respective issue, per stirpes. It was funded with 5,668 shares of Kodak stock. Trust III also was created in Alvah Strong's will, for Wehle's benefit, with a remainder interest for her issue, per stirpes. It was funded with 1,000 shares of Kodak stock.

It is undisputed that petitioner had sole investment authority over the three trusts and that none of the trusts provided for any restrictions regarding investment decisions (cf. Matter of Chase Manhattan Bank, 26 A.D.3d 824, 825–826, 809 N.Y.S.2d 360, lv. denied 7 N.Y.3d 824, 822 N.Y.S.2d 753, 855 N.E.2d 1167, rearg. denied 7 N.Y.3d 922, 827 N.Y.S.2d 691, 860 N.E.2d 993 ). The three trusts were entirely divested of Kodak stock by January 2002. Petitioner sold 8,400 shares held in Trust I between June 1993 and January 1998, 16,199 shares between May 1999 and April 2000, and the remaining 2,000 shares in January 2002. Petitioner completely divested Trust II of Kodak stock in two sales that occurred in 1978 and 1979, respectively. Petitioner sold small amounts of the Kodak stock held in Trust III between January 1968 and July 1972, approximately one-half of the remaining shares in February 1977, and the balance of the shares in January 1979.

Following Wehle's death in 2004, petitioner filed petitions on June 26, 2006, seeking judicial settlement of the accounts of the three trusts. The respective petitions alleged that Trust I had a gross value of assets, including principal and income, totaling more than $4.5 million, that Trust II had a gross value of assets totaling more than $3 million, and that Trust III had a gross value of assets totaling more than $718,000.

Objectants-respondents-appellants (objectants), Wehle's two surviving sons, filed objections to each account, alleging with respect to each account, inter alia, that petitioner had failed to prudently invest trust assets, including failing to adequately diversify the investment portfolios; that petitioner failed to exercise reasonable diligence, care, and skill in the management and administration of the respective trusts; that petitioner failed and neglected to establish investment objectives for the respective trusts and to formulate strategies to accomplish those objectives; and that petitioner failed to communicate with the beneficiaries with respect to management of the trust and the risk of maintaining a concentration of Kodak stock. Objectants sought compensatory damages, a return of petitioner's commissions, and legal fees.

Following a nonjury trial, Surrogate's Court determined, inter alia, that petitioner was negligent in its management of the three trusts, particularly with respect to its failure to diversify and divest the trusts of a concentration of Kodak stock. The Surrogate determined that petitioner should have sold 95% of the Kodak stock held in each trust within 30 days of the receipt of the stock, i.e., by September 1, 1976 and July 4, 1987 with respect to Trust I; by August 20, 1976 with respect to Trust II; and by August 19, 1966 with respect to Trust III. The Surrogate employed the lost capital method set forth in Matter of Janes, 90 N.Y.2d 41, 55, 659 N.Y.S.2d 165, 681 N.E.2d 332, rearg. denied 90 N.Y.2d 885, 661 N.Y.S.2d 827, 684 N.E.2d 277 to calculate the damages. Specifically, he determined the value of the stock on the date on which he determined that it should have been sold and subtracted from that figure the proceeds from the sale of the stock. He then added compound interest at the statutory rate from the date he determined that the stock should have been sold, i.e., six percent before June 15, 1981 and nine percent thereafter, and offset that amount by the amount paid to Wehle in dividends, with compound interest (see id.; see also Matter of HSBC Bank USA, N.A. [Knox], 98 A.D.3d 300, 320–321, 947 N.Y.S.2d 292 ). The Surrogate determined that there were no damages as a result of petitioner's management of Trust I, noting that the stock held in Trust I came from the time of Kodak's inception and had not received a step-up in the tax basis in over 80 years, which would have reduced the amount of capital gains tax liability. The Surrogate therefore determined that, at the two dates on which he determined that the stock should have been sold, inasmuch as the hypothetical sale would have resulted in the payment of significant capital gains taxes, there was a net loss of zero dollars. With respect to Trust II and Trust III, collectively, the Surrogate determined that the surcharge amount to be imposed against petitioner was $3,069,644, plus compound interest. He further determined that petitioner's commissions were to be added to the surcharge amount, with prejudgment compound interest applied at the statutory rate to the commissions. We conclude that the Surrogate erred in his determination that petitioner was negligent in the management of the three trusts and, consequently, in imposing surcharges, and we therefore modify the judgment by dismissing the objections to the accounts of each of the three trusts.

As a preliminary matter, we agree with petitioner that the Surrogate abused his discretion by directing it to forfeit its commissions and by awarding prejudgment interest on those commissions. Trustees "shall be entitled" to annual commissions (SCPA 2309[2] ; 2312[2], [4][a] ) where, as here, the Surrogate "made no finding of bad faith, fraud or personal enrichment" against petitioner (Matter of Blodgett, 261 App.Div. 878, 878, 25 N.Y.S.2d 39affd. 286 N.Y. 602, 35 N.E.2d 940 ). Indeed, the Surrogate rejected the objectants' claim that petitioner acted in its own self-interest or was disloyal to the beneficiaries (see Matter of Lasdon, 105 A.D.3d 499, 500, 963 N.Y.S.2d 99, lv. denied 22 N.Y.3d 856, 2013 WL 6169281 ). Contrary to objectants' contention, our decision in Matter of Janes (223 A.D.2d 20, 643 N.Y.S.2d 972affd. 90 N.Y.2d 41, 659 N.Y.S.2d 165, 681 N.E.2d 332, rearg. denied 90 N.Y.2d 885, 661 N.Y.S.2d 827, 684 N.E.2d 277 ), does not support the forfeiture of commissions. In that case, we concluded...