Rothko's Estate, In re

• Decision Date: 07 September 1972
• Citation: 71 Misc.2d 320,336 N.Y.S.2d 130
• Parties: ESTATE of Mark ROTHKO. Surrogate's Court, New York County
• Court: New York Surrogate Court

Page 130

336 N.Y.S.2d 130

71 Misc.2d 320

ESTATE of Mark ROTHKO.

Surrogate's Court, New York County.

Sept. 7, 1972.

Richenthal, Abrams & Moss, New York City, for respondent executors, Morton Levine, Bernard J. Reis, and Theodor Stamos.

Butler, Jablow & Geller, New York City (Stanley Geller, New York City, of counsel), for petitioner Kate Rothko.

Hall, Dickler & Howley, New York City, for Barbara B. Northrup, as guardian of Christopher Rothko, respondent.

Louis J. Lefkowitz, Atty. Gen., State of New York, New York City (Gustave Harrow, Asst. Atty. Gen., of counsel), for ultimate charitable beneficiaries.

Rosenman, Colin, Kaye, Petschek, Freund & Emil, New York City (Ralph F. Colin and Arnold I. Roth, New York City, of counsel), for respondent Marlborough Gallery Inc. Graubard, Moskovitz, McGoldrick, Dannett & Horowitz, New York City, for respondent Marlborough A.G.

MILLARD L. MIDONICK, Surrogate.

In this proceeding for the suspension and ultimate removal of the executors a temporary restraining order was requested. (69 Misc.2d 752, 330 N.Y.S.2d 915.) By a prior order of this court dated June 26, 1972 the respondent executors and art galleries were restrained from selling or otherwise disposing of paintings executed by the testator. The restraining order permitted sales only upon application to the court on notice to the attorneys for the parties. In the court's opinion (New York Law Journal June 27, 1972, p. 13, col. 1) a further hearing was scheduled for July 18, 1972 and the suggestion was made that the parties come forward with a reasonable plan for the sale of some 800 paintings executed by the testator, an artist of stature, which comprise the principal asset of this estate.

A hearing was had on July 18th at which time a workable plan for the disposition of some paintings pending the conclusion of this proceeding was not presented. Arguments were heard and the parties were granted further time to submit affidavits and memoranda of law. These papers now have been received. The immediate issue is whether or not the executors and the respondent galleries should be temporarily enjoined from selling paintings pursuant to contracts entered into by the executors. The facts that can be culled from the affidavits are herein related.

It appears that during his lifetime the testator, a modern painter of high reputation, had sold his paintings largely through Marlborough A.G., a corporation formed under the laws of Lichtenstein, and, in fact, prior to his death, had granted this gallery an exclusive agency to sell his works over a period of years. The contention is made that these contracts extended beyond the testator's death although by their express terms the testator was obligated to deliver and the gallery was obligated to pay for only four paintings each year the price to be 90% Of the current selling price.

At his death the testator owned at least 800 paintings, some on canvas and others on paper, executed in various media. The executors under the testator's will were Bernard J. Reis, a certified public accountant who had been employed by the testator as an accountant and also had acted as a friend and business advisor, Theodor Stamos, a fellow artist, and Morton Levine, a professor of anthropology. During the testator's lifetime Reis, through his accounting firm, had been employed by Marlborough Gallery, Inc., a New York corporation, and by Marlborough A.G., both controlled by Frank Lloyd. It is asserted that at the date of the testator's death Reis no longer was acting as accountant for the galleries but it is conceded that at such time he was an officer and director of the New York gallery. After the testator's death Stamos entered into an agreement with Marlborough Gallery, Inc. providing that it act as his agent for the sale of his works of art.

Recognizing the advisability of liquidating the estate, the executors entered into negotiations with the respondents Marlborough Gallery, Inc. and Marlborough A.G. for the sale of paintings. It does not appear that any serious effort, or indeed any effort, was made to seek a different purchaser. While now claiming that no conflict of interest existed in a legal sense, Reis early realized that he was in an embarrassing position because of his connection with the prospective purchaser and he suggested that the negotiations be conducted by a lawyer without his assistance or advice. Purportedly this was done but, when two contracts had been negotiated, one for the outright sale of 100 paintings to Marlborough A.G. and a second for the consignment to Marlborough Gallery, Inc. of some 700 paintings for sale on a 50% Commission basis, Reis approved the agreements and executed the contracts as an executor.

It is apparent that upon realization by Reis of his delicate position as an executor on the one hand and as an officer and director of one of the galleries on the other hand, the appropriate procedure would have been to submit the proposed contracts to this court for approval.

'The rule has long been established that a trustee 'should not be allowed to become the purchaser of the trust property, because of the danger in such a case that the interests of the beneficiary might be prejudiced.' (Corbin v. Baker, 167 N.Y. 128, 132, 60 N.E. 332; see Matter of Hubbell's Will, 302 N.Y. 246, 97 N.E.2d 888, 47 A.L.R.2d 176; Matter of Fulton's Will, 253 App.Div. 494, 2 N.Y.S.2d 917; Davoue v. Fanning, 2 Johns. Ch. 252; see, also, Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.L.R. 1.) However, there is little danger of such prejudice if the transaction is subjected to prior judicial scrutiny and given court approval. Accordingly, the rule against self-dealing has not been applied, and does not apply, to interdict the purchase of trust property by a trustee where the court, after conducting a full adversary hearing at which all interested parties are represented, approves and authorizes the sale.' (Matter of Scarborough Props. Corp., 25 N.Y.2d 553, 558--559, 307 N.Y.S.2d 641, 645, 255 N.E.2d 761, 763.)

Had such procedure been adopted, the executors would have obtained full legal protection either had the court approved the contracts after notice to the beneficiaries under the will or had the court disapproved the contracts by reason of opposition by such beneficiaries. Unfortunately this precaution was not taken and now the executors find themselves confronted with a charge of self-dealing.

'The standard of loyalty in trust relations does not permit a trustee to create or to occupy a position in which he has interests to serve other than the interest of the trust estate. Undivided loyalty is the supreme test, unlimited and unconfined by the bounds of classified transactions.' (City Bank Farmers Trust Co. v. Cannon, 291 N.Y. 125, 131, 51 N.E.2d 674, 675.)

Two of the executors, Reis and Stamos, assert that this is not a case of self-dealing. The third executor, Levine, assumes the position that the temporary restraining order should be continued in effect until the court has had an opportunity to review the agreements and that the transaction involves self-dealing on the part of Reis, and 'potential conflict of interest of Stamos * * * (a noted painter)' who 'was considering entering into an agreement of his own with Marlborough' which he later consummated.

Much is contained in the various affidavits as to the valuation of the paintings involved in the contract of sale and as to the allegedly excessive amount of commissions fixed in the consignment contract. Were an element of self-dealing absent from the transaction, the question of valuation and excessive commissions ordinarily would be disposed of in an accounting proceeding but, if self-dealing is present, immediate action by the court is required for the protection of the estate and questions of valuation and terms may not be a determining factor. '* * * (W)hen the trustee has a selfish interest which may be served, the law does not stop to inquire whether the trustee's action or failure to act has been unfairly influenced. It stops the inquiry when the relation is disclosed and sets aside the transaction or refuses to enforce it, and in a proper case, surcharges the trustee as for an unauthorized investment. It is only by rigid adherence to these principles that all temptation can be removed from one acting as a fiduciary to serve his own interest when in conflict with the obligations of his trust.' (City Bank Farmers Trust Co. v. Cannon, 291 N.Y. 125, at page 132, 51 N.E.2d 674, at page 676; see also Matter of People (Bond & Mtge. Guar. Co.) 303 N.Y. 423, 103 N.E.2d 721.

It is urged that the testator was fully aware of Reis' connection with the gallery at the time of the will's execution and that from this knowledge an implication can be drawn that the testator implicitly approved self-dealing. The fact that a possibility of conflict of interest existed at the time of the appointment of executors was not a basis for denial of letters testamentary (Matter of Foss' Will, 282 App.Div. 509, 125 N.Y.S.2d 105) but the testator's designation of Reis as an executor did not exempt the latter from the ordinary rules prohibiting self-dealing on the part of a fiduciary (Matter of Hubbell's Will, 302 N.Y. 246, 97 N.E.2d 888). If the testator had any reason to anticipate that Reis would place himself in the awkward position of dealing with himself, the will's silence in this regard did not permit Reis to avoid seeking the exoneration which could have been obtained by a presentation of the facts to the court before any commitment was made. We do not here have the fact situation which existed in Matter of Sherman's Estate, 9 Misc.2d 731, 104 N.Y.S.2d 988, affd. 279 App.Div. 981, 112 N.Y.S.2d 324 where the testator explicitly directed in his will that the executor perform stated business functions. Moreover, Reis could have avoided his dual role by terminating his association with the Galleries. ...