McGrath's Estate, In re

• Citation: 74 Misc.2d 92,344 N.Y.S.2d 688
• Parties: In re ESTATE of John W. McGRATH, Deceased, (two cases). In the Matter of the Judicial Settlement of the Third Intermediate Account of the Proceedings of John W. McGRATH, et al., as Successor Trustees of the Trust created for the benefit of Eileen F. McGrath by the Last Will and Testament of John W. McGrath, Deceased. In the Matter of the Judicial Settlement of the Fourth Intermediate Account of the Proceedings of Walter D. O'HEARN, Jr., and John M. Sullivan as Successor Trustees of the Trust created for the benefit of Eileen F. McGrath by the Last Will and Testament of John W. McGrath, Deceased. Surrogate's Court, Kings County
• Decision Date: 05 June 1973
• Court: New York Surrogate Court

Page 688

344 N.Y.S.2d 688

74 Misc.2d 92

In re ESTATE of John W. McGRATH, Deceased, (two cases).

In the Matter of the Judicial Settlement of the Third

Intermediate Account of the Proceedings of John W. McGRATH,

et al., as Successor Trustees of the Trust created for the

benefit of Eileen F. McGrath by the Last Will and Testament

of John W. McGrath, Deceased.

In the Matter of the Judicial Settlement of the Fourth

Intermediate Account of the Proceedings of Walter D.

O'HEARN, Jr., and John M. Sullivan as Successor Trustees of

the Trust created for the benefit of Eileen F. McGrath by

the Last Will and Testament of John W. McGrath, Deceased.

Surrogate's Court, Kings County.

June 5, 1973.

Quint, Marx & Chill, Brooklyn, for successor trustees, petitioners.

Seth Rubenstein, P.C., Brooklyn, for John W. McGrath, III.

Shea, Gould, Climenko & Kramer, New York City, for Hugh McGrath, respondent.

Davis, Polk & Wardwell, New York City, for Morgan Guaranty Trust Co. of New York and Anna M. McGrath as executors.

Post, Hopkins & DeMott, New York City, for Maureen McGrath Fortier.

NATHAN R. SOBEL, Surrogate.

These two intermediate accounts of the trustees present issues as to the 'compensation' of a deceased trustee and payment of commissions to a successor trustee. A prior decision of this Court (4/20/73) settled these intermediate accounts in other respects including the trustees' annual income commissions (SCPA 2308(2)) and annual additional principal commissions (SCPA 2308(3)). That decision reserved however determination of the issues now presented.

The parties are agreed that commissions of these trustees are governed by SCPA 2308 applicable to estates of persons dying before August 31, 1956. The Court agrees that as concerns 'compensation' and receiving commissions it would make no difference whether these issues are governed by SCPA 2308 or the predecessor statutes (SCA § 285--a; SCA § 285; Code of Civ.Proc. § 2753). (Robertson v. DeBrulatour, 188 N.Y. 301, 316, 317, 80 N.E. 938, 943, 944; Matter of Hurlbut, 180 Misc. 681, 44 N.Y.S.2d 450.)

As noted, testator John W. McGrath died in 1939. His will created a trust of substantially all his estate for the benefit of his wife to terminate five years after her death. Mrs. McGrath is dead and the trust will terminate in June of 1975. There has been a succession of trustees since 1940 when the original trustees were appointed.

Two intermediate accounts are before the Court.

The 'Third' intermediate account was necessitated by the death of contrustee John W. McGrath (II).

The 'Fourth' intermediate account was ordered by the Court for two reasons: first, to approve the sale of the sole assets of the trust and to determine the several issues raised by the cotrustees with respect to the sale (determined by decision of April 20, 1973); second, to permit the instant application to be made for advance payment of commissions in order that the trust will not be deprived of 'substantial advantages under the income tax laws of the United States or the state of New York * * *.' (SCPA 2311(1); Internal Revenue Code, § 2053 (U.S.Code, tit. 26, § 2053).)

I

The petition accompanying the 'Third' intermediate account requests the Court to fix the 'compensation' of John W. McGrath (II). Mr. McGrath became a trustee July 9, 1957. He died April 4, 1972. The application is unopposed.

The trust for Mrs. McGrath was funded solely by shares of stock in a family corporation. The shares (523,800) represented control. Mr. McGrath served as cotrustee for 15 years. During that period he and his cotrustees held major offices in the corporation. The cotrustees are agreed that during his stewardship of the trust and his management with his cotrustees of the corporation, the affairs of the corporation prospered. It suffices to note that when Mr. McGrath became a cotrustee in 1957 the shares of stock were then valued at approximately $350,000. As noted, he died in April of 1972. Four months later a sale of the trust's shares was consummated for over $12,000,000 all cash and the proceeds received on January 4, 1973. If Mr. McGrath had lived until the receipt of the proceeds of sale by the trust, he would have become entitled to receiving commissions of approximately $150,000.

Deceased fiduciaries (executors, administrators, trustees, etc.) are not entitled to commissions as such. A long series of cases hold that their estates may be allowed reasonable 'compensation' measured by the value of the services rendered. The fixation of such reasonable compensation rests in the sound discretion of the courts but may not exceed in any event the amount of commissions as fixed by the commission statutes in force and effect at the time and governing the particular kind of fiduciary. (Matter of Whipple, 81 App.Div. 589, 81 N.Y.S. 393 (1903); Matter of Bushe, 227 N.Y. 85, 124 N.E. 154 (1919); Matter of Barker, 230 N.Y. 364, 130 N.E. 579 (1921); Matter of Exton, 159 Misc. 503, 288 N.Y.S. 497 (1936); Matter of Hayden, 175 Misc. 506, 510, 24 N.Y.S.2d 15, 18, affd. 261 App.Div. 900, 26 N.Y.S.2d 490 (1940); Matter of Battell, 261 App.Div. 120, 128--130, 24 N.Y.S.2d 712, 720--722, affd. 286 N.Y. 97, 35 N.E.2d 913 (1940); Matter of McGinnis, 181 Misc. 207, 211, 46 N.Y.S.2d 60, 64 (1943); Matter of Wandling, 181 Misc. 292, 294, 46 N.Y.S.2d 118, 119 (1943); Matter of Reckford, 181 Misc. 211, 216, 46 N.Y.S.2d 898, 902 (1944); Durham v. Perkins, 270 App.Div. 739, 742--743, 62 N.Y.S.2d 205, 207--209 (1946); Matter of Baltz, 17 Misc.2d 890, 187 N.Y.S.2d 423 (1959); Matter of Vigeant, 29 Misc.2d 569, 215 N.Y.S.2d 187 (1961); Matter of Bourne, 55 Misc.2d 364, 285 N.Y.S.2d 182 (1967); Matter of Jadwin, 58 Misc.2d 809, 296 N.Y.S.2d 901 (1969).)

The discretionary authority to award 'compensation' instead of commissions does not derive from any statute. It is solely a decisional rule applicable to 'resigned' fiduciaries and those 'removed without cause' as well as deceased fiduciaries. Efforts have been made to codify the decisional rule without success (discussed infra).

A study of the cited cases establishes that the 'compensation' awarded to deceased fiduciaries is awarded for and measured by the value of the services rendered to the estate. In principle then it should not be measured as are commissions, by the 'value of any property * * * and the increment thereof' received or paid out. (SCPA 2307(2), 2308(10), 2309(9).) In common practice however the receiving and paying out concept governing commissions is applied in determining 'compensation' of deceased fiduciaries. As the earlier cases explain, this practice derives from another statute (SCPA 2207 formerly SCA § 257) which under specified circumstances permits or requires the fiduciary of a deceased fiduciary to account to the court for the estate or trust. That statute (SCPA 2207, subd. 6) provides that 'the court may allow to the fiduciary of the deceased fiduciary reasonable compensation for any service rendered by him * * *. The compensation so allowed plus any commissions retained by the deceased fiduciary or payable to his estate shall in no event exceed a full commission under 2307, 2308 or 2309, whichever section is applicable to the type of the deceased fiduciary' (See Cox-Arenson-Medina 'N.Y.Civ.Practice--SCPA' Vol. 10D, § 2207.07).

Since in practice the 'compensation' is measured by the arbitrary and much criticized concept (see Bennett Comm. on Law of Estates, Second Report (1963), No. 7.1B pp. 379, 388--390) of one-half commissions for receiving and one-half for paying out, a problem may arise, as it has in this proceeding, where there are at the time of death of the fiduciary 'unrealized' increases in principal as yet not 'received' by the fiduciary.

The statute governing commissions of pre-1956 trustees provides for payment of commissions on principal received and paid out. Further, that 'The value of any property * * * and the increment thereof received, distributed or delivered shall be considered as money in making computation of commissions' (SCPA 2308(10)). The word 'increment' in the statute was carefully chosen to include 'income' from principal and as well 'increases' in the value of the assets comprising the principal of the trust.

'Unrealized increments are a fluctuating concept. The value of the property may decrease after it has increased: it may also disappear.

Where the fiduciaries are living fiduciaries this factor presents little problem. Where the account is a final account all increments will have been realized. On an intermediate account commissions on unrealized increments are rarely allowed. But where allowed in such a proceeding or one for payment of commissions on account (SCPA 2310) or for advance payment of commissions (SCPA 2311) the court will make adequate provision to protect the estate against subsequent decreases by imposing conditions for recoupment on the final account or by requiring a bond.

However, 'compensation' to the estate of a deceased fiduciary is final. There is no protection for the estate if the 'unrealized' increment turns out to be illusory in whole or in part. But as heretofore noted, the amount of 'compensation' is wholly discretionary with the court--the only limitation being that 'compensation' may not exceed commissions.

Under the rules discussed, courts have occasionally allowed 'compensation' to the estates of deceased fiduciaries measured by commissions on 'unrealized' increments in principal assets (Matter of Battell, Supra, 261 App.Div. 120, 24 N.Y.S.2d 712, affd. 286 N.Y. 97, 35 N.E.2d 913 (deceased fiduciary); Matter of Bourne, Supra, 55 Misc.2d 364, 285 N.Y.S.2d 182 (deceased fiduciary); Matter of Baltz, Supra, 17 Misc.2d 890, 187 N.Y.S.2d 423 (removed w.o. cause fiduciary); Matter of Jadwin, Supra, 58 Misc.2d 809, 296 N.Y.S.2d 901 (deceased fiduciary); cf. Matter of Fry, 30 Misc.2d 180, 214 N.Y.S.2d 54 (living fiduciary).)

Other courts have refused to consider unrealized...