OnBank & Trust Co., Matter of

• Decision Date: 25 November 1997
• Citation: 665 N.Y.S.2d 389,688 N.E.2d 245,90 N.Y.2d 725
• Court: New York Court of Appeals Court of Appeals
• Parties: , 688 N.E.2d 245, 1997 N.Y. Slip Op. 10,217 In the Matter of OnBANK & TRUST CO., as Trustee of Discretionary Common Trust Fund "A" (Equities) of OnBank & Trust Co., Appellant. In the Matter of OnBANK & TRUST CO., as Trustee of Discretionary Common Trust Fund "B" (Fixed Income) of OnBank & Trust Co., Appellant. Elizabeth A. Hartnett, et al., Respondents.

Page 389

665 N.Y.S.2d 389

90 N.Y.2d 725, 688 N.E.2d 245, 1997

N.Y. Slip Op. 10,217

In the Matter of OnBANK & TRUST CO., as Trustee of Discretionary Common Trust Fund "A" (Equities) of OnBank & Trust Co., Appellant In the Matter of OnBANK & TRUST CO., as Trustee of Discretionary Common Trust Fund "B" (Fixed Income) of OnBank & Trust Co., Appellant Elizabeth A. Hartnett, et al., Respondents.

Court of Appeals of New York.

Nov. 25, 1997.

Carter, Ledyard & Milburn, New York City (Jack Kaplan, Richard B. Storto and Kenneth J. Bobrycki, of counsel), for appellant.

Hunter and Hartnett, Syracuse (Elizabeth A. Hartnett, of counsel), for Elizabeth A. Hartnett, pro se, and others, respondents.

Kramer, Levin, Naftalis & Frankel, New York City (Marvin E. Frankel, Michael S. Oberman and E. Lisk Wyckoff, Jr., of counsel), and David L. Glass, for New York Bankers Association, amicus curiae.

Sullivan & Cromwell, New York City (H. Rodgin Cohen, Bruce E. Clark and Mark E. Coyne, of counsel), for New York Clearing House Association, amicus curiae.

OPINION OF THE COURT

KAYE, Chief Judge.

Does Banking Law § 100-c(3) require that a common trust fund trustee who has lawfully invested in mutual funds itself absorb the mutual fund management fees, or can those fees be paid out of the trust fund? We conclude that such fees are properly payable by the common trust fund.

A common trust fund is essentially a collection of smaller trust funds pooled for joint administration and management. First authorized by the Legislature in 1937, such funds are regulated by Banking Law § 100-c. Before 1937, trustees were sometimes reluctant to administer smaller trusts because they required the same attention and effort as larger trusts but could not support commensurate fees. Pooled trust funds solved the problem by offering the individual trusts more diversification, better management and lower fees while at the same time reducing administrative costs and thereby improving profitability (see generally, Note, The Common Trust Fund Statutes--A Legalization of Commingling, 37 Colum. L. Rev. 1384 [1937]; see also, Matter of Bank of N.Y., 189 Misc. 459, 67 N.Y.S.2d 444).

While allowing common trust funds, the Legislature imposed restrictions on their management. In statutory language that has remained unchanged for six decades, the Legislature provided, for example, that a "common trust fund shall not be deemed a separate trust fund on which commissions or other compensation is allowable and no trust company maintaining such a fund shall make any charge against such fund for the management thereof" (Banking Law § 100-c[3] ).

Appellant OnBank & Trust Company, trustee of two common trust funds, Common Trust Fund "A" (Equities) and Common Trust Fund "B" (Fixed Income) commenced this proceeding pursuant to Banking Law § 100-c(6) for judicial settlement of its fifth accounting of the funds. During the accounting period, which ran from December 1, 1984 to December 31, 1993, appellant had invested approximately 4% of the common trust fund assets in four mutual funds, each a registered investment company under the Investment Company Act of 1940, as amended (see, 15 U.S.C. § 80a-1 et seq.). As noted by the Appellate Division, as of December 31, 1993 "[t]he common trust funds held a total investment of $1,096,436 in mutual funds and during the accounting period its largest holding in mutual funds was approximately $2,000,000" (227 A.D.2d 20, 23, 649 N.Y.S.2d 592). Mutual fund management fees during the accounting period were approximately $50,000.

Respondents, guardians ad litem appointed by the Surrogate to represent the principal and income beneficiaries of the common trust funds, raised objections to the accounts on two grounds. They argued, first, that the investment of common trust fund assets in mutual funds was an improper delegation of the trustee's management responsibility and, second, that investment in the mutual funds violated Banking Law § 100-c(3) by subjecting the common trust funds to two layers of management fees, one by the trustee and a second by the mutual funds.

Both initially and again following cross motions for reargument, the Surrogate held that while the trustee did not improperly delegate its management duty by investing in mutual funds, it--and not the common trust fund--was required to absorb mutual funds management fees. On cross-appeals, all five Justices of the Appellate Division agreed that appellant could properly invest common trust fund assets in mutual funds, but divided on the second issue. A majority at the Appellate Division agreed with the Surrogate that under Banking Law § 100-c(3), appellant itself should be surcharged for the mutual fund management fees. Only the surcharge issue is before us, and on that issue we reverse.

Analysis

Effective July 21, 1997, the Legislature amended Banking Law § 100-c(3) to add the following "Provided, however, that in those instances where a trust company invests common trust funds in securities of any management type investment company or investment trust pursuant to the provisions of subdivision one of this section, such trust company may charge the common trust fund for the fees and expenses of such securities pursuant to and consistent with the provisions of sections 11-2.2 and 11-2.3 of the estates, powers and trusts law" (L. 1997, ch. 250, § 2). ¹

Because this language indisputably permits a trustee to pass mutual fund management fees on to the common trust fund, we must first determine if the new law is to be applied retroactively. If so, it is dispositive. ²

In determining the retroactivity issue, respondents urge us to apply the settled axiom that amendments are prospective only unless retroactive application is clearly indicated (see, e.g., People v. Oliver, 1 N.Y.2d 152, 157, 151 N.Y.S.2d 367, 134 N.E.2d 197; Jacobus v. Colgate, 217 N.Y. 235, 240, 111 N.E. 837 [Cardozo, J.]; McKinney's Cons. Laws of N.Y., Book 1, Statutes § 51). Here, the Legislature did not explicitly provide for retroactivity. Appellant, however, arguing that the amendment was remedial, points to the equally settled principle that such legislation should be applied retroactively to better achieve its beneficial purpose (see, e.g., Becker v. Huss Co., 43 N.Y.2d 527, 540, 402 N.Y.S.2d 980, 373 N.E.2d 1205; McKinney's Cons. Laws of N.Y., Book 1, Statutes § 54).

As we have previously recognized, neither of these axioms should be determinative (see, Matter of Duell v. Condon, 84 N.Y.2d 773, 783, 622 N.Y.S.2d 891, 647 N.E.2d 96; see also, Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum. L. Rev. 527, 544-545). Rather, "the reach of the statute ultimately becomes a matter of judgment made upon review of the legislative goal" (Matter of Duell v. Condon, supra, 84 N.Y.2d, at 783, 622 N.Y.S.2d 891, 647 N.E.2d 96). Based on our analysis of statutory text and history, we conclude that the Legislature intended the amendment to Banking Law § 100-c(3) to apply retroactively.

Initially, even though the amended statute does not explicitly speak to retroactivity, its language is...