In re Korn

• Decision Date: 07 June 2012
• Docket Number: No. 2921/89.,2921/89.
• Citation: 2012 N.Y. Slip Op. 51468,36 Misc.3d 1224,959 N.Y.S.2d 89
• Parties: 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.
• Court: New York Surrogate Court

36 Misc.3d 1224

959 N.Y.S.2d 89

2012 N.Y. Slip Op. 51468

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.

No. 2921/89.

Surrogate's Court, New York County, New York.

June 7, 2012.

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, 2010.¹ 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.

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 ², and 15.³ The objectant also withdrew 14 supplemental objections, (numbered 1, 2, 3, 4, 5, 6, 7, 10, 11, 12, 14, 18, 23, 24) ⁴.

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 ⁵, 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.

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 Trial1. 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 ⁶, 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).

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...