Matter of Hunter

• Decision Date: 24 March 2005
• Citation: 827 N.E.2d 269,4 N.Y.3d 260,794 N.Y.S.2d 286
• Parties: In the Matter of the Estate of BLANCHE D. HUNTER, Deceased. CHASE MANHATTAN BANK, as Trustee of the Trust Under Paragraph EIGHTH (B) of the Will of BLANCHE D. HUNTER, Deceased, for the Benefit of PAMELA TOWNLEY CREIGHTON, Respondent; JUDITH CHINELLO et al., as Administrators C.T.A. of the Estate of PAMELA TOWNLEY CREIGHTON, Deceased, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

4 N.Y.3d 260

827 N.E.2d 269

794 N.Y.S.2d 286

In the Matter of the Estate of BLANCHE D. HUNTER, Deceased.

CHASE MANHATTAN BANK, as Trustee of the Trust Under Paragraph EIGHTH (B) of the Will of BLANCHE D. HUNTER, Deceased, for the Benefit of PAMELA TOWNLEY CREIGHTON, Respondent;

JUDITH CHINELLO et al., as Administrators C.T.A. of the Estate of PAMELA TOWNLEY CREIGHTON, Deceased, et al., Appellants.

Court of Appeals of the State of New York.

Argued February 10, 2005.

Decided March 24, 2005.

Williams & Williams, Rochester (Mitchell T. Williams of counsel), for appellants.

Harris Beach LLP, Pittsford (Paul J. Yesawich, III, and Gregory J. McDonald of counsel), and Ruskin Moscou Faltischek, P.C., Uniondale (C. Raymond Radigan of counsel), for respondent.

Eliot Spitzer, Attorney General, New York City (Robert R. Molic

and Gerald A. Rosenberg of counsel), in his statutory capacity under EPTL 8-14.

Sidley Austin Brown & Wood LLP, New York City (Eileen Caulfield Schwab, Roger J. Hawke, Darcy M. Katris and Kimberly A. Johns of counsel), and Roberta Kotkin for New York Bankers Association, amicus curiae.

Chief Judge KAYE and Judges G.B. SMITH, CIPARICK, ROSENBLATT, READ and R.S. SMITH concur.

OPINION OF THE COURT

GRAFFEO, J.

In this case we are required to decide whether the doctrine of res judicata applies to judicial proceedings settling an estate and a trust accounting, submitted by a bank that acted both as executor and as trustee. Under the facts and circumstances presented here, we conclude that the beneficiary of a separate testamentary trust managed by the same bank is precluded from raising objections to the fiduciary's actions that could have been raised in prior proceedings.

I. Background

This case arises following more than 20 years of fiduciary involvement with the assets of the estate of Rochester resident Blanche Hunter, who died in 1972 leaving a gross estate in excess of $28 million. A substantial portion of Hunter's estate consisted of common stock of the Eastman Kodak Company. Paragraph EIGHTH (A) of Hunter's will established a residuary trust for the benefit of her granddaughter Alice F. Creighton, and paragraph EIGHTH (B) created a residuary trust for the benefit of another granddaughter, the objectant Pamela Townley Creighton. Both granddaughters were minors at the time of Hunter's death. Each trust was to be funded with one half of the residuary estate, and in the event either granddaughter died without issue or without having exercised the power of appointment, the balance of that trust would pour over into the other trust. Hunter's will designated Lincoln Rochester Trust Company, petitioner Chase Manhattan Bank's predecessor, as coexecutor of the estate with James W. Cook, a trust officer. Hunter also selected the Bank and Cook to serve as the cotrustees of Trusts A and B.

The will was admitted to probate in January 1973. In March, the Bank and Cook partially funded each of the granddaughters' trusts with a cash distribution of over $40,000 from the estate. Between 1973 and the conclusion of the estate's administration in 1977, the Bank and Cook periodically transferred Kodak stock to the trusts, so that each trust eventually held about 13,000 shares. From late 1972 to 1977 the price of Kodak stock apparently dropped from $148 to $70 per share, resulting in a decline in aggregate value of the trusts' stock of over $2 million.

As coexecutors of Hunter's estate, the Bank and Cook commenced a proceeding seeking judicial settlement of the estate account in 1976. Having been served with notification of the accounting, Pamela Creighton, the beneficiary of Trust B, appeared through counsel and filed objections to the amount of attorneys' fees sought by the Bank but raised no other concerns about the management of estate assets. Surrogate's Court settled the account in a 1977 decree, which provided that "the said Executors be and hereby are released from all further liability and responsibility as such Executors as to all matters embraced in their Account and this Decree."

Alice Creighton, the beneficiary of Trust A, died in 1980 without issue and never having exercised her power of appointment. Under the terms of Hunter's will, Alice's assets, including 13,000 shares of Kodak stock, were transferred to Pamela's trust — Trust B. In July 1981, the Bank and Cook sought to judicially settle their account as cotrustees of Trust A. The cotrustees again served the petition on Pamela. Rather than appearing in the proceeding, Pamela executed a waiver and did not file any objections to the account. In 1981, Surrogate's Court issued a decree settling the account and discharging the cotrustees "from all further liability and responsibility as such Trustees as to all matters embraced in their Account and this Decree."

After Cook died in 1996, the Bank initiated a judicial accounting of Trust B, covering the years 1973-1996. A Bank representative met with Pamela in California to deliver a copy of the account and to obtain a waiver of citation if she found the account satisfactory. Before reviewing the account documents, Pamela signed the waiver. Upon obtaining the waiver, Surrogate's Court settled the account in 1998. Pamela later consulted an attorney and commenced a proceeding to withdraw her waiver and vacate the 1998 decree, seeking to file objections to the account. After conducting a fact-finding hearing, Surrogate's Court determined that "the waiver was not knowingly and intelligently given," set aside the waiver and vacated the decree (190 Misc 2d 593, 600 [2002]). The Bank did not appeal this decision.

Pamela then filed objections to the account of Trust B, including the claims now under review. As relevant here, her objections fell into three categories, but all pertain to the Bank's conduct in its capacity as trustee of Trust B. First, she claimed that the Bank acted improperly by failing to diversify the high concentration of Trust B assets in Kodak stock. Second, Pamela contended that the Bank breached its duty to challenge its actions as executor in failing to diversify the stockholdings in Hunter's estate and in not timely funding the trusts. Third, Pamela asserted that the Bank breached its duty to object to its actions as trustee of Trust A in failing to diversify the stockholdings of Trust A.

The Bank moved to dismiss the second and third categories of objections (i.e., allegations against the Bank, as trustee of Trust B, for its failure to object to the estate and Trust A accountings). The Bank argued that Pamela's failure to object in the 1977 and 1981 judicial accounting proceedings precluded these claims under the doctrine of res judicata.

Surrogate's Court denied the Bank's motion to dismiss the second and third categories of objections. The court rejected the Bank's argument that those objections were barred by res judicata, concluding that the Bank's "actions as cotrustee of the EIGHTH (B) Trust were not subject to judicial scrutiny in either of those two proceedings" (194 Misc 2d 364, 370 [2002]).

Pamela Creighton died in 2002 and the administrators of her estate as well as the beneficiaries of her trust were substituted as the objectants.¹ Thereafter, the Appellate Division, with one Justice dissenting, modified the Surrogate's order, by granting the Bank's motion to dismiss the second and third categories of objections (6 AD3d 117 [2d Dept 2004]). The majority held that Pamela's opportunity to raise objections to the Bank's alleged mismanagement as executor and trustee of Trust A in the 1977 and 1981 proceedings precluded her present objections to the Bank's failure as trustee of Trust B to contest the prior accountings under the doctrine of res judicata. The Appellate Division granted leave to appeal to this Court, certifying the following question: "Was the opinion and order of this court dated March 29, 2004, properly made?" We answer in the affirmative.

II. Surrogate's Court Procedure Act

Under article 22 of the Surrogate's Court Procedure Act, fiduciaries such as executors and trustees have an obligation to account for their actions. Executors ordinarily account at the conclusion of estate administration while trustees account "when the trust is terminated or when they cease to serve" (Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 58A, SCPA 2205, at 18). Although the SCPA does not require a fiduciary to give periodic or intermediate accountings, where trusts are managed over a lengthy period trustees often account periodically.²

A fiduciary may voluntarily proceed to obtain formal judicial settlement of an account under SCPA 2208.³ Additionally, certain persons, including beneficiaries under a will or trust, may initiate a proceeding to compel a formal accounting (see SCPA 2205). The court may also compel a judicial accounting on its own initiative (see SCPA 2205).

Judicial settlement serves the interests of both the fiduciary and the beneficiary in that it provides full disclosure of the fiduciary's financial transactions and, upon issuance of a decree, the fiduciary is released from liability for those transactions (see 6 Warren's Heaton, Surrogates' Courts § 91.02 [1], at 91-4 [6th ed rev]). Where a fiduciary commences a judicial accounting and accounts to a trustee, it is generally not necessary to serve process on the beneficiaries of that trust because the trustee represents the beneficiaries' interests (see SCPA 2210 [7]). But SCPA 2210 (10) provides an exception to this rule for a fiduciary who simultaneously fulfills more than one role:

"[w]here an accounting fiduciary accounts to himself in a separate capacity as the fiduciary of a deceased beneficiary of the estate, or as trustee . . . process shall issue to all persons interested in the estate of the deceased beneficiary, . . . or the trust of which the accounting party is trustee."

Thus, under the statute, if the fiduciary seeking to account also serves as a trustee, the...