Semler v. CoreStates Bank

• Decision Date: 22 May 1997
• Citation: 693 A.2d 1198,301 N.J.Super. 164
• Parties: Judith SEMLER, Mary Lou Yule, Timothy Lenahan and James M. Lenahan, Plaintiffs-Respondents/Cross-Appellants, v. CORESTATES BANK, successor by merger to First Pennsylvania Bank, N.A., individually and as Trustee appointed under Deed of Trust by Henry Francis Lenahan, deceased, Defendant and Third-Party Plaintiff-Appellant/Cross-Respondent, and Henry F. Lenahan, Jr., Third-Party Defendant.
• Court: New Jersey Superior Court — Appellate Division

Page 164

301 N.J.Super. 164

693 A.2d 1198

Judith SEMLER, Mary Lou Yule, Timothy Lenahan and James M Lenahan, Plaintiffs-Respondents/Cross-Appellants, v. CORESTATES BANK, successor by merger to First Pennsylvania Bank, N.A., individually and as Trustee appointed under Deed of Trust by Henry Francis Lenahan, deceased, Defendant and Third-Party Plaintiff-Appellant/Cross-Respondent and Henry F. Lenahan, Jr., Third-Party Defendant.

Superior Court of New Jersey Appellate Division.

Argued Feb. 10, 1997.

Decided May 22, 1997.

Glenn P. Callahan, Cherry Hill, argued the cause for appellant/cross-respondent (McCarter & English, attorneys; Mr. Callahan, of counsel; Mr. Callahan and Therese M. Keeley, on the brief).

Lars S. Hyberg, Northfield, argued the cause for respondent/cross-appellant (McAllister, Hyberg & White, attorneys; Mr. Hyberg, on the brief).

Before Judges HAVEY, BROCHIN and EICHEN.

The opinion of the court was delivered by

BROCHIN, J.A.D.

Defendant CoreStates Bank, successor by merger to First Pennsylvania Bank, N.A., is a co-executor and co-trustee of the estate of Henry F. Lenahan, Sr. who died in 1977. The other co-executor and co-trustee is the decedent's older son, third-party defendant Henry F. ("Hank") Lenahan, Jr. He and the decedent's other children, plaintiffs Judith Semler, Mary Lou Yule, Timothy Lenahan, and James M. Lenahan are the sole beneficiaries of Henry F. Lenahan, Sr.'s estate. The largest single asset of the estate was a $700,000 installment promissory note from Lenahan Plastics, Inc., a Tennessee corporation, to Mr. Lenahan, Sr. Lenahan Plastics failed to pay $373,333.28 of principal plus accrued interest, and that portion of the debt is now uncollectible from the obligor corporation. Plaintiffs attribute the uncollectibility of the note to CoreStates' failure to perform its fiduciary duties with proper diligence and skill. They contend that, as a result, the bank is liable to compensate them for their loss. After a lengthy bench trial, the Chancery Division, Probate Part, agreed with plaintiffs and entered judgment in their favor for $597,735.80. Defendant has appealed.

Henry Lenahan, Sr. was the founder, president and, at the time of his death, sole stockholder of Lenahan Associates, a New Jersey Corporation, which owned real estate and equipment in Pitman, New Jersey. Lenahan Associates processed resins and sold them to manufacturers for the production of vinyl phonograph records. In approximately 1964, Hank Lenahan, with his father's assistance, established Lenahan Plastics, a Tennessee corporation, whose facilities were located in Tennessee and which was engaged in substantially the same business as Lenahan Associates. Hank Lenahan owned ninety-eight percent of the outstanding shares of capital stock of Lenahan Plastics, his wife, Margaret, owned one percent, and his father owned the remaining one percent.

By a purchase agreement, promissory note and security agreement dated July 1, 1977, Henry Lenahan, Sr. sold all but one of the 100 outstanding shares of Lenahan Associates to Lenahan Plastics for $700,000. The purchase agreement provides that the purchase price for the stock is to be paid by Lenahan Plastics' "execution and delivery ... of a promissory note, payable to [Henry Lenahan, Sr.] in fifteen equal annual installments including interest at six (6%) percent per annum until paid in full." (The terms of the promissory note make it clear that the annual payments are to be fifteen equal payments of principal and, with each principal payment, interest on the unpaid balance.) Upon default in any payment, the holder of the note was entitled to declare the entire unpaid balance of the note payable immediately without prior notice.

To secure the purchase price, interest and costs of collection, Lenahan Plastics' security agreement granted Henry Lenahan, Sr. a security interest in the ninety-nine shares of stock which he was selling. When this agreement was executed, a secured creditor could perfect his security interest in capital stock only by taking possession of the stock certificates. See N.J.S.A. 12A:9-304 (security interest perfected by possession); but see also N.J.S.A. 12A:8-321, effective Jan. 16, 1990 (perfecting security interest in securities). The purchase agreement provides that possession will not be delivered to the creditor. The agreement states:

3. DELIVERY OF STOCK. SELLER hereby delivers to the PURCHASER ninety-nine (99) shares of the issued and outstanding capital stock of the Corporation with the proper endorsements thereon which vests good and marketable title to the stock in the PURCHASER as is being sold as provided in this Agreement.

4. REPRESENTATIONS OF SELLER. .... The delivery of said shares of stock of the Corporation to the PURCHASER, pursuant to the provisions of this Agreement, shall be made upon the execution of this Agreement and the promissory note hereinabove referred to in paragraph 2(a) above. SELLER will transfer valid title thereto, free and clear of all liens, encumbrances and claims of every kind.

Mr. Lenahan, Sr. delivered his shares of stock to Lenahan Plastics pursuant to these provisions. Two and a half months later, he died. His wife had predeceased him. His entire estate was left to an inter vivos trust which he created concurrently with the execution of his will. The will provided for distribution of ten percent of the trust income and corpus to Hank Lenahan and twenty-two and a half percent to each of his other four children. Hank Lenahan and First Pennsylvania Bank, N.A., which was subsequently merged into CoreStates Bank, were appointed and qualified as the decedent's co-executors and co-trustees. ¹

The $700,000 indebtedness due from Lenahan Plastics represented approximately two-thirds of the value of the net estate. The annual installments on the note, which were due on June 30 of each year, were paid on time through June 30, 1979. The installment due June 30, 1980, was paid July 30, 1980. The installment due June 30, 1981, was paid on time. The interest component of the installment due June 30, 1982 was paid July 15, 1982 and the principal was paid July 28, 1982. The installment due June 30, 1983 was paid on time. The installment due June 30, 1984 was paid July 25, 1984. The installment due June 30, 1985 was not paid and the bank accelerated the note by a letter on or about August 27, 1985. A $5,000 partial payment was made in November 1987. No payments of principal or interest were made thereafter. CoreStates filed suit in Tennessee against Lenahan Plastics on October 27, 1987 and obtained a judgment against it in August 1988. By then or shortly thereafter, Lenahan Plastics had been adjudicated a bankrupt and the assets of Lenahan Associates were acquired by a trade debtor which had obtained and perfected a mortgage on its real property and a security interest in its equipment and accounts receivable.

The trial judge found that CoreStates had breached its fiduciary duties in "three key respects." First, the court found, the bank failed to keep itself informed of the financial condition and viability of Lenahan Plastics and Lenahan Associates. Secondly, it should have obtained possession of the capital stock of Lenahan Associates following Mr. Lenahan, Sr.'s death, and it failed to do so. Thirdly, it failed to declare that the promissory note was in default in 1982 and to "seize the assets of Lenahan Plastics and Lenahan Associates before other creditors did so." The court ruled that these failures were a proximate cause of its inability to collect the unpaid balance of the note for the benefit of the beneficiaries of the estate; alternatively, it ruled that CoreStates, as a fiduciary, had the burden of proving, if it could, that the steps which it should have taken would have been unavailing and it failed to sustain that burden.

CoreStates asserts on appeal that the trial court erred in concluding that it should have acted to accelerate the promissory note prior to the 1985 default. It also argues that the court was mistaken in its determination that it could have obtained possession of Lenahan Associates' stock after Mr. Lenahan, Sr.'s death and in its conception of the bank's rights and remedies. In addition, the bank contends that it is entitled to the benefit of the exculpatory clause of the decedent's trust and that the court erred in denying it fees and commissions on the uncollected portion of the promissory note.

In order to evaluate the trial court's rulings and CoreStates' arguments against them, we need, first, to determine what steps the bank could have taken to collect the unpaid balance due from Lenahan Plastics. Secondly, if it failed to take one or more of the steps which it could have taken, we need to ascertain whether any such failure was a breach of its obligations as executor or trustee. Thirdly, if the bank breached any of its fiduciary obligations, we need to decide whether any such breach was, or should be presumed to be, a proximate cause of the loss suffered by the estate.

Experienced bank executives and trust administrators testified before the trial court as expert witnesses for both sides. Although they were not lawyers and did not claim to be legal experts, they undertook to define the bank's legal rights and duties and the standard of care to which it should have conformed as a corporate executor and trustee. The trial court appears to have based its conclusions about those legal rights and duties primarily on their testimony. The expert testimony was helpful on the question of what practices the bank should have adopted in order to fulfill its fiduciary obligations. But we view the definition of the bank's rights and duties as a fiduciary primarily as a legal matter and we will therefore undertake to determine them de novo. Manalapan Realty, L.P. v. Township Committee, 140 N.J. 366, 378, 658 A.2d 1230 (1995) (trial court's interpretation of law and legal...