Will of Janes, Matter of

• Decision Date: 31 May 1996
• Docket Number: No. 2,2
• Citation: 643 N.Y.S.2d 972,223 A.D.2d 20
• Parties: Matter of Judicial Settlement of Account of Lincoln First Bank, N.A. (Successor by Consolidation to Lincoln First Bank of Rochester) and Howard Ullman, as Personal Representative of Estate of Cynthia W. Janes, Deceased, as Executors of WILL OF Rodney B. JANES, Deceased. Lincoln First Bank, N.A., Appellant; Howard Ullman, as Personal Representative of Estate of Cynthia W. Janes, Deceased, and State of New York, on Behalf of Charitable Beneficiaries, Respondents. (Appeal)
• Court: New York Supreme Court — Appellate Division

Page 972

643 N.Y.S.2d 972

223 A.D.2d 20

Matter of Judicial Settlement of Account of Lincoln First

Bank, N.A. (Successor by Consolidation to Lincoln First Bank

of Rochester) and Howard Ullman, as Personal Representative

of Estate of Cynthia W. Janes, Deceased, as Executors of

WILL OF Rodney B. JANES, Deceased.

Lincoln First Bank, N.A., Appellant;

Howard Ullman, as Personal Representative of Estate of

Cynthia W. Janes, Deceased, and State of New York,

on Behalf of Charitable Beneficiaries,

Respondents. (Appeal No. 2.)

Supreme Court, Appellate Division,

Fourth Department.

May 31, 1996.

Nixon, Hargrave, Devans & Doyle, L.L.P. (William S. Brandt and Edward G. Case, of counsel), Rochester, for Appellant--Chase Lincoln First Bank, N.A.

Williams & Williams (Mitchell T Williams and Kenneth Joyce, of counsel), Rochester, for Respondent--Estate of Cynthia W. Janes.

Dennis Vacco, Atty. Gen. (Troy J. Oechsner and Barbara Gott Billet, of counsel), New York State Department of Law, Albany, for Respondent--Ultimate Charitable Beneficiaries.

Gates & Adams (Anthony J. Adams, Jr., of counsel), Rochester, for Shriners Hospitals for Crippled Children, amicus curiae.

Sullivan & Cromwell (H. Rodgin Cohen, Philip L. Graham, Jr., Basil P. Zirinis, III and Holly H. Weiss, of counsel), New York City, for New York Clearing House and another, amici curiae.

Before DENMAN, P.J., and GREEN, LAWTON, BALIO and DAVIS, JJ.

DENMAN, Presiding Justice:

The question before us is whether a coexecutor was properly held liable for losses to an estate allegedly resulting from the failure of the coexecutor to diversify its investment of estate assets. If we determine that liability was properly imposed, we must then determine the proper measure of damages to be assessed against the coexecutor for its negligent retention of estate assets. We conclude that the Surrogate properly found the coexecutor liable for its negligent failure to diversify and for its inattentiveness, inaction, and lack of disclosure, but that the Surrogate adopted an improper measure of damages.

I

Petitioner, Lincoln First Bank, N.A., appeals from a judgment of Surrogate's Court that sustained objections by the estate of Mrs. Cynthia W. Janes and by the Attorney-General to the settlement of petitioner's account as coexecutor of the estate of Rodney B. Janes. The Surrogate found that petitioner was negligent in managing the estate's portfolio, particularly in retaining a large concentration of Eastman Kodak stock over a period of many years during which the value of the stock dropped from about $140 per share to as low as approximately $40 per share. As a result of that finding, the Surrogate ordered petitioner to pay "lost profit" damages based on the $1,687,647.30 value of the Kodak stock on August 9, 1973, the date by which the Surrogate held that petitioner should have sold most of the Kodak stock, multiplied by the cumulative rate of return subsequently achieved on a well-diversified stock fund managed by petitioner, offset by the dividends and proceeds attributable to the estate's ownership and ultimate sale or transfer of the Kodak stock (Matter of Janes, 165 Misc.2d 743, 630 N.Y.S.2d 472). Petitioner thus was ordered to pay damages of $6,080,269 plus prejudgment interest of $479,758.20 from October 1, 1994 through August 17, 1995, and was ordered to remit $30,000 previously paid to petitioner as a commission and $296,302.66 previously paid to petitioner's attorneys for their defense of the surcharge proceeding, for a total award of $6,886,329.86, plus postjudgment interest, costs, and disbursements. Additionally, petitioner was ordered to forfeit further commissions as coexecutor of the estate of Rodney Janes.

On appeal, petitioner contends that the Surrogate erred in finding that petitioner's decision to retain the Kodak stock was imprudent; in holding that petitioner was under a duty to diversify by August 9, 1973; and in measuring damages based upon "lost profits".

II

Rodney Janes died on May 26, 1973, survived by his widow, Cynthia Janes, who was then 72. Janes left an estate valued at approximately $3,500,000, the bulk of which, approximately $2,500,000, was in equities. Most of his stock portfolio was concentrated in Kodak stock, 13,232 shares with a date of death value of about $135 per share, or approximately $1,800,000. Janes's will named Cynthia Janes and petitioner Lincoln First Bank (actually, its predecessor, Lincoln Rochester Trust Company) as coexecutors of the estate. The will bequeathed most of the estate to three trusts: one purely charitable, and two split-interest, with the income of the split-interest trusts generally to be paid to Cynthia Janes for her life, and thereafter to certain charities. The will named petitioner as sole trustee of the trusts.

Letters testamentary were issued on July 3, 1973. Two bank employees, Richard Young and Ellison Patterson, were assigned to manage the estate and trusts. In early July 1973, Young met with Cynthia Janes several times and ascertained her income needs, the estate's assets, and the estate's needs for cash to pay taxes, commissions, attorney's fees, and specific bequests. On August 3, 1973, Young related his estimate of the cash requirements to Patterson. On August 9, 1973, Patterson wrote a proposal to raise the necessary cash by selling certain assets of the estate, including 800 shares of Kodak stock. Without mentioning potential risks associated with the high concentration of Kodak stock, or further discussing investment strategies, the proposal stated: "It would appear the remaining issues can be held until the trusts are funded." As of early August 1973, Kodak stock was trading at about $139 per share. Thus, the estate's 13,232 shares of Kodak stock were worth approximately $1,840,000, or more than 71% of the estate's stock holdings.

On September 5, 1973, Young and Patterson met with Mrs. Janes to explain the proposal. Mrs. Janes, who had a high school education and no business training or experience, and who had never been employed, consented to the sale of 1,232 shares of Kodak stock in order to raise cash for the estate. That was the last meeting between bank officers and Mrs. Janes devoted to investment issues. The bank never communicated with the various charitable beneficiaries.

Almost immediately thereafter, the price of Kodak stock declined steeply to about $109 at the close of 1973, to about $63 by the close of 1974, and to about $51 by the end of 1977. The stock hit its post-1973 low of about $40 per share in March 1978. The stock was selling at $45 per share in February 1980 when petitioner filed its initial accounting. By August 1981, when petitioner instituted this proceeding for judicial settlement, the stock was valued at about $65 per share. The Kodak stock traded at an adjusted price (adjusted for a 3-for-2 stock split in 1985) of about $92 per share at the end of October 1986, and about $127 per share on July 8, 1987. Large blocks of Kodak stock were either sold or transferred to the trusts on those dates, 7,333 shares on October 31, 1986, and 2,842 shares on July 8, 1987 (the number of shares being adjusted for the split in 1985). Prior to that, petitioner had divested the estate of only the 1,232 shares originally sold in September 1973, 100 shares conveyed in May 1978, and an additional 580 shares transferred in June 1978, when the stock was near its post-1973 low.

Following the initial sale of 1,232 shares in September 1973, over one-half of the estate's value, and more than two-thirds of its equity holdings, remained concentrated in Kodak stock. Thus, the drastic decline in the value of Kodak stock after August 9, 1973 had a significant negative impact on the value of the estate. At times, the loss to the estate exceeded $1,100,000.

Beginning in February 1980, petitioner filed its initial accounting and a series of supplemental accountings that together covered the period from July 3, 1973 through June 30, 1994. In August 1981, petitioner sought judicial settlement of its account. Mrs. Janes filed objections in February 1982. Subsequently, the Attorney-General filed objections on behalf of the charitable beneficiaries (see, EPTL 8-1.4[m] ). When Mrs. Janes died in 1986, the personal representative of her estate was substituted as an objectant.

A trial on the objections was conducted in October and November 1994. The Surrogate heard testimony establishing the foregoing facts and also heard conflicting expert testimony concerning whether petitioner was negligent. Further, the Surrogate heard the testimony of objectants' expert on various measures of damages, including damages based on a theory of lost profits or appreciation, measured by what the proceeds from a sale of Kodak stock in August 1973 would have grown to if invested in diversified stock. Petitioner put in no proof on the issue of damages.

The Surrogate found that petitioner had breached its fiduciary duty in failing to diversify by divesting the estate of nearly all of the Kodak stock by August 9, 1973. The Surrogate held that petitioner had acted imprudently in ignoring the concentration of Kodak stock, failing to consider the income needs of Mrs. Janes and the charities, failing to protect the estate against the precipitous drop in the value of the Kodak stock, and failing to communicate with the beneficiaries. On the issue of damages, the Surrogate adopted the approach of objectants' expert, i.e., the use of past stock performance to determine what a prudent fiduciary would have earned by diversifying the estate's holdings. Using petitioner's own diversified equity fund as a measure, the Surrogate found that a sale of 12,087 shares of Kodak stock in August 1973 would have yielded $1,687,647.30, which, if invested in the Lincoln First Income Development Trust, would have grown to $6,080,269 by the time of trial. The Surrogate surcharged petitioner that sum plus posttrial interest, ordered ...