Stark v. United States Trust Co. of NY

• Decision Date: 05 January 1978
• Docket Number: No. 76 Civil 1694.,76 Civil 1694.
• Citation: 445 F. Supp. 670
• Parties: Alexandra R. STARK, Wendy R. Powell, Mary R. Roessler, Helene R. Epifano, and Henry Bullard, as guardian ad litem on behalf of the infant and unborn remainder beneficiaries of four inter vivos trusts established by Deed of Henry H. Rousseau, dated April 29, 1965, Plaintiffs, v. UNITED STATES TRUST COMPANY OF NEW YORK, Defendant.
• Court: U.S. District Court — Southern District of New York

445 F. Supp. 670

Alexandra R. STARK, Wendy R. Powell, Mary R. Roessler, Helene R. Epifano, and Henry Bullard, as guardian ad litem on behalf of the infant and unborn remainder beneficiaries of four inter vivos trusts established by Deed of Henry H. Rousseau, dated April 29, 1965, Plaintiffs, v. UNITED STATES TRUST COMPANY OF NEW YORK, Defendant.

No. 76 Civil 1694.

United States District Court, S. D. New York.

January 5, 1978.

Pollack & Kaminsky, New York City, for plaintiffs; Daniel A. Pollack, Richard M. Asche, Neil D. Thompson, New York City, of counsel.

Carter, Ledyard & Milburn, New York City, for defendant; John M. Walker, Jr., Richard B. Covey, Dan T. Hastings, Richard G. Moon, Arthur P. Lowenstein, New York City, of counsel.

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW

EDWARD WEINFELD, District Judge.

On April 29, 1965, the late Henry Harwood Rousseau created four inter vivos trusts (the "Trusts") for the benefit of each of his four daughters and their descendants (the "beneficiaries"). Named as Trustee in each of the Trusts was the defendant, United States Trust Company of New York ("USTC" or the "Trustee"). Plaintiffs, the beneficiaries, brought this action to recover losses incurred in the Trusts, allegedly the result of defendant's lack of prudent management.¹ Their charges center about defendant's retention in the Trusts of shares of stock in Clorox Co. ("Clorox"), Evans Products Co. ("Evans") and Coleco Industries, Inc. ("Coleco"), and their basic contention is that at an undetermined and unspecified time² following the death of the settlor in February 1972, USTC should have sold these stocks. Resisting plaintiffs' charges, the Trustee contends that in retaining these holdings it acted in good faith, exercised its judgment in a reasonable manner and measured up to the standard of prudent conduct imposed upon fiduciaries.

During the course of a five-day trial, defendant moved to dismiss the claim at the close of plaintiffs' case and renewed the motion at the end of trial; decision was reserved in each instance. Upon a word-by-word reading of the trial transcript, a review of the Court's trial notes, appraisal of the trial witnesses—particularly defendant's employees in charge of the trust accounts, whose testimony the Court finds credible—and a study of various exhibits, the Court concludes upon the totality of the entire record that the charge of fiduciary breach by the Trustee has not been sustained and accordingly judgment on the merits is granted in favor of the defendant. We reach this conclusion whether the standard of conduct applied is that of the "prudent man"³ or, as the plaintiffs here urge, a higher and more rigorous standard to be applied to professional fiduciaries who advertise their special skill and qualifications.⁴

I

A. The Trusts and Their Funding.

Under the terms of each Trust agreement, which for purposes relevant herein are identical, the daughter for whom it was created and her issue may receive income and/or principal in the "absolute discretion" of the Trustee during the Trust term. Upon termination, a Trust's property is to be distributed to the daughter's surviving issue, per stirpes, or if none, to other designated remaindermen. Each Trust runs until twenty-one (21) years after the death of the last surviving daughter.

Rousseau's apparent objective was long term capital appreciation for the Trusts' duration and the considerable discretion vested in the Trustee was presumably designed to accomplish this. Thus, in addition to the Trustee's discretion with respect to payment of income and principal, paragraph the Third of each agreement, which outlines the Trustee's powers, specifically provides that the powers are to be construed in the "broadest possible manner." Subsection (1), relevant herein, in substance empowers the Trustee, in its absolute discretion, to retain in the Trust any property received from the settlor, regardless of whether the Trust is invested disproportionately in such securities and provides that the Trustee shall neither be liable nor subject to surcharge or criticism for loss of income or principal caused by such retention or on the ground that such retained securities constitute an excessive portion of the Trust.⁵

The three stocks in question, Clorox, Evans and Coleco, were included in the Trusts' portfolios by direct gift or upon Rousseau's initiative. It is clear that he regarded these as desirable investments for the Trusts' purposes as he had been interested in the affairs of these companies and was familiar with the management of each. All were listed on the New York Stock Exchange. In addition to these securities, the Trustee purchased additional securities on its own initiative. During Rousseau's lifetime and up to the date of his death the estate appreciated substantially; some securities, including Evans, were sold by the Trustee over Rousseau's objections and considerable profits were realized.⁶ When Rousseau died in February 1972, each Trust contained 1000 shares of Clorox common stock, 2,002 shares of Evans common stock and 2,211 shares of Coleco common stock, valued at approximately $940,000. By January 1975, the total value of the three stocks had dropped to $93,000. Essentially, defendant's administration of the Trusts during the period following Rousseau's death in 1972 is the focus of this dispute.

B. Defendant's Handling of the Trusts.

Within defendant's investment division, which deals with inter vivos trusts such as those in question, a number of sub-groups perform various functions. The Investment Policy Committee ("IPC") predicts broad economic trends, evaluates the market environment and makes general recommendations on portfolio strategy.⁷ The Stock Selection Committee ("SSC") follows a universe of approximately 300-500 stocks (of a total 2500 held in one or more of the Company's portfolios) and codes these stocks with symbols suggesting⁸ to those dealing directly with the portfolios the SSC's judgment of that stock's prospects and an appropriate course to take with respect to its purchase, sale or retention.⁹ Both the SSC and the IPC rely upon the Trustee's research department and analysts therein, which provide reports on both whole industries and a specific company within an industry if that company is coded by the SSC, and upon the research library, which contains files on approximately 1600 companies and is kept current.

The actual responsibility for the day-to-day handling of customer accounts, however, rests with the portfolio manager (the "PM"). The PM makes the actual decisions for purchase, retention or sale of any security in a portfolio and is charged with keeping abreast of developments in the stocks and industries represented in an account. External and internal sources provide the information: externally, the Wall Street Journal, other business periodicals, securities ratings services, company publications, quotrons and current tickertape are available. Internally, research department reports, the IPC's economic forecasts and, where available, the SSC's decisions provide guidance to a PM. When a stock is not carried in the coded universe of SSC stocks, a PM has the additional responsibility of staying current on each non-coded company carried in a portfolio handled; no internal analyses can be relied upon to help synthesize all the relevant information. However, using outside sources of information—periodicals, outside research firms' analyses and publications of the followed company itself, all of which are in library files—the PM reaches a decision.

Since the fall of 1966, except for a brief period in late 1969 to early 1970, the Trustee's PM assigned to the Rousseau Trusts was Karen A. G. Loud, a woman with considerable professional credentials,¹⁰ assisted after the fall of 1970 by Kathy O. Leonard. Rousseau's relations with Loud were cordial and cooperative—indeed, Loud's resumption of responsibility for the Trusts in 1970 was at Rousseau's request, he being of the view that Loud better understood the Trusts' objectives than had her replacement.

The Rousseau portfolio was reviewed more often than was required by USTC policy. Prior to each visit by a member of the Rousseau family, the account was examined and the holdings evaluated for continued suitability. Similarly, each time an event of significance took place in any of these investments, that company's securities were reevaluated. Moreover, USTC was also co-executor of Rousseau's estate which contained substantial investments in these three companies, and Loud and Leonard repeatedly met with the portfolio manager assigned to the Rousseau estate and the account would be reviewed prior to and during these discussions. In all, the Trusts were reviewed by Loud and/or Leonard on more than forty occasions from 1972-75.

Concededly, USTC's forecasts of the economic climate for the period of 1972 through 1975 were not 100% accurate; its predictions concerning the course of the economy and stock market were not fully realized. For example, in November 1972, the IPC predicted that economic expansion would continue through 1973 and into 1974 and there would be no recession, when in fact the economy underwent a dramatic slowdown at that time. In May and June of 1973, the IPC cautioned the portfolio managers that stocks should not be sold to raise cash "in periods of market weakness." Perhaps most importantly, despite the economic slump, the IPC was of the opinion that the market had overly discounted equity securities and continued to recommend investment therein, especially in "quality growth stocks" with "proven ability to generate and maintain above-average and consistent profitability and growth in earnings." However, the Trustee explains, a number of factors affecting the economy were unforeseen and for the most part unforeseeable: the Arab oil embargo, inflation, consistently high interest rates, decline in discretionary...