In re Wellington Trusts
| Decision Date | 30 June 2015 |
| Docket Number | No. 117708.,117708. |
| Citation | 18 N.Y.S.3d 582 (Table) |
| Parties | In the Matter of the Judicial Settlement of the Final Account of Proceedings of the WELLINGTON TRUSTS. |
| Court | New York Surrogate Court |
McCarter & English, L.L.P., New York, attorneys for JP Morgan Chase Bank, N.A.
Sherman, Silverstein, Kohl, Rose & Podolsky, P.A., Moorestown, NJ, attorneys for Sarah P. Wellington.
Greenfield Stein & Senior, L.L.P., New York, attorneys for Estate of Herbert G. Wellington, Jr.
Loeb & Loeb, L.L.P., New York, attorneys for Peter Wellington and Margaret Wellington Constantine.
Chadbourne & Parke, L.L.P., New York, attorneys for Co–Trustee, Robert Merrill.
Stinson Morrison Heckler, L.L.P., St. Louis, MO, attorneys for Irene Wellington.
On January 6, 7, 9, 10 and 13, 2014, this court conducted the first portion of a bifurcated trial, which focused on the issue of fiduciary liability in connection with five contested trust accountings filed on behalf of JPMorganChase Bank, N.A., and on behalf of Herbert Wellington, Jr., who served as co-trustee on four of the five trusts. The objectant is Sarah P. Wellington, a beneficiary of two of the five trusts.
Each party submitted a post-trial brief on August 4, 2014. The court heard post-trial oral argument on November 12, 2014, and the transcript of the oral argument was sent to the court on April 22, 2015.
The background of this proceeding, along with the applicable law, have been reviewed previously in decisions issued by this court, but will be summarized below for purposes of clarity.
The objectant, Sarah P. Wellington (Sarah), is a daughter of Thomas D. Wellington (Tom) and a granddaughter of Herbert G. Wellington, Sr. (Herbert, Sr.) and Elizabeth Wellington (Elizabeth), all three of whom are deceased. The Wellington Trusts (the Trusts), were created pursuant to four instruments: (1) the 1961 Trust Agreement executed by Herbert, Sr. on August 15, 1961; (2) Herbert Sr.'s Last Will and Testament; (3) Elizabeth's Last Will and Testament; and (4) Tom's Last Will and Testament.
JPMorganChase Bank, N.A. and its predecessor banking corporations (each and collectively referred to as JPMorgan) served as a trustee of the Trusts for more than 50 years, often with a co-trustee. Herbert, Sr. had appointed his older son, Herbert Wellington, Jr. (Herb), as co-trustee, while Elizabeth had appointed Herbert Sr.'s and Herb's business partner, Robert Merrill (Robert), as co-trustee.
While Tom was alive, there were three Trusts for his benefit. These were established under the 1961 Trust Agreement (Tom Trust # 1), under Herbert Sr.'s Will (Tom Trust # 2) and under Elizabeth's Will (Tom Trust # 3). Tom died in July 2000.
Under the 1961 Trust Agreement, upon Tom's death, one-fourth of Tom Trust # 1 flowed into a trust for the benefit of Sarah (Sarah Trust # 1), and the balance flowed to trusts for her half-siblings. The trustees of Sarah Trust # 1 were JPMorgan and Herb. The co-trustees shared equal investment authority, and neither was empowered to make unilateral investment decisions. At the same time, Article Seventh of the governing trust instrument provided that Herb could at any time, and for any reason or no reason, remove and replace the corporate trustee.
The governing instrument gave the trustees authority to acquire and retain investments they deem advisable, “whether or not such investments be of the character permissible for investments by fiduciaries and they shall be under no obligation to diversify investments.”
As of September 18, 2000, the value of Tom Trust # 1 was $35,518,000.00, making the 25% share of Sarah Trust # 1 worth $8,879,500.00. Sarah Trust # 1 was funded in March 2001 with a transfer of $3,642,902.68 from Tom Trust # 1, which was invested 96% in equities and 4% in cash. In May 2001, JPMorgan transferred additional securities into the Sarah Trust # 1, bringing the total value to $7,291,922.51, of which 98% was invested in equities and 2% was invested in cash. Of the equity holdings, Merck made up more than 29% of the portfolio, GE made up more than 19%, nearly 8% was in Microsoft, approximately 7% was in SBC, and approximately 6% in Intel. The portfolio yielded 1.3% income.
By December 31, 2002, the value of Sarah Trust # 1 had decreased to $4,391,414.00.
Herb resigned as co-trustee of Sarah Trust # 1 by decree of this court dated April 4, 2005. Herb died on August 15, 2005.
In his Will, Tom exercised powers of appointment granted to him under Herbert Sr.'s Will and under Elizabeth's Will and created four new trusts, one for each of his four children, funded with the combined assets from Tom Trust # 2 and Tom Trust # 3. The trust for Sarah that was created pursuant to Tom's power of appointment is known as Sarah Trust # 2. JPMorgan served as sole trustee of Sarah Trust # 2, following the renunciation of the other nominated co-trustees.
As of September 18, 2000, the value of Tom Trust # 2 was approximately $2,866,000.00, which was invested 99% in equities and 1% in cash, and the value of Tom Trust # 3 was approximately $1,858,000.00, which was invested 93% in equities, 1% in cash, and 6% in fixed income. The share of Sarah Trust # 2 was thus worth $1,181,000.00.
In December 2001, the assets of Tom Trust # 2 were distributed to the four trusts created for Tom's children. The value of the assets transferred from Tom Trust # 2 to Sarah Trust # 2 had decreased $250,000.00 since Tom's death. The assets of Tom Trust # 3 were distributed to the four trusts created for Tom's children approximately one year after Tom's death. During that year, the value of the assets transferred from Tom Trust # 3 to the Sarah Trust # 2 had decreased by half, or approximately $250,000.00, and were invested 11% in fixed income, 9% in cash, and 80% in equities.
JPMorgan began diversification of Sarah Trust # 2 in 2003, proposing a reduction over time of stock concentrations in excess of 10%.
In August 2003, JPMorgan and Herb filed petitions seeking approval of their accounts for the Tom Trusts and Sarah Trust # 1. JPMorgan filed a petition seeking approval of the bank's account as trustee of Sarah Trust # 2. The petitions were served on all interested parties, including, but not limited to, Sarah and her half-siblings. The accountings were updated through June 2004 after Herb's resignation as co-trustee. Subsequently, the accountings for the Sarah Trusts were updated through April 2009.
Sarah filed the only objections to the accounts.
In her objections to the accounts filed by JPMorgan for the Sarah Trusts, Sarah alleged that JPMorgan breached its fiduciary duties to her by: (1) failing to diversify the trusts' assets, which resulted in substantial trust losses; and (2) failing to make appropriate distributions to her from the income and/or principal of the trusts. Sarah seeks equitable and monetary damages in the form of restitution, retroactive distributions, return of commissions, surcharges, attorneys' fees, diversification, removal of the fiduciary and appointment of a successor trustee or co-trustee. Although Sarah objected to the conduct of both co-trustees, JPMorgan and Herb, she only sought affirmative relief from JPMorgan.
In December 2012, Sarah entered into a settlement agreement with Herb's estate in connection with her objections to the accounts. Pursuant to the settlement agreement, Herb's estate paid $100,000.00 to Sarah in exchange for a full release. Sarah agreed to indemnify Herb's estate against any claims for contribution.
As a result of the settlement reached between Sarah and Herb's estate, JPMorgan moved for leave to supplement its pleadings to assert an affirmative defense for a credit pursuant to New York's General Obligations Law or to assert a cross-claim against the estate of Herbert G. Wellington, Jr. with respect to each of the trusts which are the subject of the objections and the settlement agreement. The motion was granted in a decision dated September 26, 2013.
Subsequently, Sarah alleged that Herb lacked capacity to serve as a co-trustee during the period of the accounts, and that JPMorgan knew or should have known this. In connection with this allegation, Sarah asserts that JPMorgan was obligated to seek advice and direction from the court or bring a proceeding to have Herb removed.
The trial conducted before this court was limited to the issue of liability. If the court finds that JPMorgan is liable, the court must schedule the second portion of the bifurcated trial, to address the issue of damages. If the court determines that damages were sustained, it will then consider whether responsibility for the damages should be apportioned between JPMorgan and Herb as co-trustees, as argued by JPMorgan.
Nine witnesses testified at the trial on the issue of liability: Loren Ross (Ross), expert witness for Sarah; Jonathan Blattmachr (Blattmachr), who was counsel to Herb from 1980 until Herb's death; Charles Wellington (Charles), Herb's oldest son; Peter Wellington (Peter), Sarah's half-brother; Sarah; Brian Bandler (Bandler), who was the trust officer at JPMorgan during the accounting period of the Sarah Trusts; Timothy J. Erb (Erb), who was the JPMorgan portfolio manager on the Trusts during the accounting period of the Sarah Trusts; Jeffrey Osmun (Osmun), expert witness for JPMorgan; and Paul Napoli (Napoli), expert witness for JPMorgan.
The following key points were made by, or on behalf of, Sarah, during the trial and in her counsel's post-trial brief:
1. JPMorgan believed that it was appropriate to diversify the assets held in the Sarah Trusts.
2. Despite this, when Herb refused to consent to diversification of Sarah Trust # 1, JPMorgan deferred to Herb, because Herb was a long-time client and JPMorgan did not want Herb to use the power given to...
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