Williams v. J.P. Morgan & Co., Inc., 00 CIV.6321(VM).

• Decision Date: 07 May 2002
• Docket Number: No. 00 CIV.6321(VM).,00 CIV.6321(VM).
• Citation: 199 F.Supp.2d 189
• Parties: Luiz Eduardo Fontes WILLIAMS, Plaintiff, v. J.P. MORGAN & CO. INCORPORATED, Defendant.
• Court: U.S. District Court — Southern District of New York

199 F.Supp.2d 189

Luiz Eduardo Fontes WILLIAMS, Plaintiff, v. J.P. MORGAN & CO. INCORPORATED, Defendant.

No. 00 CIV.6321(VM).

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

May 7, 2002.

R. Scott Greathead, Howe & Addington, L.L.P., New York City, for Luiz Eduardo Williams.

Bradley I. Ruskin, Proskauer, Rose, L.L.P., New York City, for J.P. Morgan & Co. Inc.

David Spencer, New York City, for Maria Thereza Fontes Williams.

DECISION AND ORDER

MARRERO, District Judge.

Plaintiff Luiz Eduardo Fontes Williams ("Williams") is a remainderman of an inter vivos trust (the "Trust"). Invoking the Court's jurisdiction under 28 U.S.C. § 1332, Williams filed suit against the trustee of the Trust, defendant J.P. Morgan & Co. Incorporated ("Morgan"), seeking damages for a breach of fiduciary duty and an accounting. By leave of the Court, the parties filed cross-motions for summary judgment on the issue of damages calculation. For the reasons set forth below, the Court grants Morgan's motion in part, denies Morgan's motion in part and denies Williams's motion.

I. BACKGROUND

The parties do not dispute the facts for the purposes of this motion, which they assert concerns only issues of law.¹ According to Williams's complaint, the Trust was created in 1958 with a corpus of approximately $500,000. Morgan, a New York corporation, was appointed the trustee. Williams's mother ("Mrs.Williams"), a citizen of Brazil, was identified as the income beneficiary. By its terms, upon Mrs. Williams's death, the Trust's assets were to be distributed to her surviving descendants. Williams, also a citizen of Brazil, is a descendant of Mrs. Williams, as is his brother Anthony Forrest Williams, and they therefore are the remaindermen of the Trust.

In or about November 1970, the assets of the Trust had a fair market value of $1,000,000. Morgan learned that a bilateral income tax treaty between the United States and Brazil was being negotiated (the "Contemplated Treaty"). Morgan consulted its counsel to determine how to avoid the adverse tax consequences for the income beneficiary that would result if the treaty were ratified by both nations. To this end, Morgan also liquidated the Trust's stock portfolio and reinvested the proceeds in cash and tax-exempt bonds (the "1970 Investment"). On January 18, 1971, Mrs. Williams ratified Morgan's 1970 Investment decision. Morgan did not seek the remaindermen's ratification. Morgan did not alter the 1970 Investment at any date thereafter.

The United States and Brazil never entered the Contemplated Treaty. Williams thus claims that by the mid-1970's it was clear that the Contemplated Treaty no longer posed a risk to the income beneficiary's interests. At that point, Williams claims that the justification for the trustee's investment in tax-exempt bonds disappeared and that Morgan had a duty to diversify the investment and consider the remaindermen's interests in the Trust. Williams does not claim that Morgan engaged in any fraud or self-dealing or misconduct apart from the negligent and imprudent failure to invest and/or diversify trust assets since the mid-1970's. Currently, by Williams's calculation, the trust assets are valued at "less than $800,000." (Compl. at ¶ 19.)

II. DISCUSSION

A. Standard of Review

"It is axiomatic that federal courts are courts of limited jurisdiction and may not decide cases over which they lack subject matter jurisdiction." Lyndonville Sav. Bank & Trust Co. v. Lussier, 211 F.3d 697, 700 (2d Cir.2000). The federal diversity jurisdiction statute provides federal courts with subject matter jurisdiction over state law claims if the amount in controversy exceeds $75,000 and the parties are "citizens of a State and citizens or subjects of a foreign state." 28 U.S.C. § 1332(a). The claims at bar meet the requirements for diversity jurisdiction because Williams is a citizen of Brazil and Morgan is a New York corporation. In addition, the amount in controversy exceeds $75,000.

A federal court must apply state "substantive" law to a diversity case. See Gasperini v. Center for Humanities, Inc., 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996) ("[F]ederal courts sitting in diversity apply state substantive law and federal procedural law."); Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Here, New York State substantive law applies.

A federal court sitting in diversity must follow the law as enunciated by the highest court of the state, here, the New York Court of Appeals. See Calvin Klein Ltd. v. Trylon Trucking Corp., 892 F.2d 191, 195 (2d Cir.1989). In the absence of a ruling by the Court of Appeals, a federal district court is not bound by the opinions issued by New York State's lower courts. See id. (citing Plummer v. Lederle Laboratories, 819 F.2d 349, 355 (2d Cir.1987) and Stafford v. International Harvester Co., 668 F.2d 142, 148 (2d Cir.1981)). Indeed, a federal court should reject any lower court's ruling that is inconsistent with a Court of Appeals decision. See Levin v. Tiber Holding Corporation, 277 F.3d 243, 253 (2d Cir.2002) (citing First Investors Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 165 (2d Cir.1998)). Only "where the substantive law of the forum state is uncertain or ambiguous, the job of the federal courts is carefully to predict how the highest court of the forum state would resolve the uncertainty or ambiguity." Travelers Ins. Co. v. 633 Third Assocs., 14 F.3d 114, 119 (2d Cir.1994).

In matters of "procedure," however, federal courts must apply federal law. See Gasperini, 518 U.S. at 427, 116 S.Ct. 2211; Erie, 304 U.S. at 64, 58 S.Ct. 817. As such, a court reviews a motion for summary judgment under the federal standard of review. See Gasperini, 518 U.S. at 427, 116 S.Ct. 2211; Com/Tech Communication Technologies v. Wireless Data Systems, Inc., 163 F.3d 149 (2d Cir.1998).

Summary judgment is appropriate only when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits" demonstrate an absence of any genuine issue of material fact and "the moving party is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To grant the motion, a Court must determine from the record before it that a reasonable trier of fact would not be able to find in favor of the non-mover. See Brady v. Colchester, 863 F.2d 205, 211 (2d Cir.1988). In considering the motion, the evidence is viewed in the light most favorable to the non-moving party; reasonable inferences and factual conflicts are resolved in his favor. See Cruden v. Bank of New York, 957 F.2d 961, 975 (2d Cir.1992).

Here, based on Williams's pleading, the parties' cross-motions largely raise a legal question regarding the availability of damages under New York law. Accordingly, the factual record before the Court is brief. The lack of factual detail does not prevent the Court from addressing the discrete legal issue before it. However, the Court concludes that at this stage of the litigation, it would be premature to address certain issues involving the exercise of the Court's discretion.

B. Calculation of Damages

Williams clearly bases his claims against Morgan on "negligent and imprudent failure to properly invest and diversify the assets of [the] Trust." (Compl. at ¶ 19.) Williams asserts his first claim for relief on the theory that Morgan's "failure to diversify and prudently invest the assets of [the] Trust constitutes a breach of its fiduciary duty to the remaindermen."² (Compl. at ¶ 21.)

The question before the Court is, what is the proper measure of damages to which Williams would be entitled should he prevail on the merits of his case. In its motion for summary judgment, Morgan asserts that damages are to be calculated on the basis of lost capital, only. By Morgan's calculation, the value of capital lost between August 15, 1974 and June 1, 2001 (the date of the accounting) is $3,114. However, depending on the valuation dates, a choice that is a question of fact to be determined at trial, the amount of lost capital may range from zero to $20,000. Morgan argues that Williams's claims are legally insufficient to qualify for any additional form of damages, including an award of interest.

In opposition to Morgan's motion, and as a cross-motion for summary judgment Williams claims that, if liability is established, he will be entitled to lost profits. By his calculation, had the Trust assets been properly diversified and invested during the mid-1970's the Trust would have assets of "at least" $21,000,000. This figure is based on a hypothetical re-investment of all Trust assets on January 1, 1975, and measuring the performance by the Standard & Poor 500 Index's performance. Accordingly, Williams asserts that his damages amount to approximately $20,000,000.

In the alternative, should he be due lost capital only, Williams asserts that he is entitled to compound interest on the lost capital amount. By Williams' calculation, the lost capital plus compound interest calculated at the statutory rate of 9 percent, see New York Civil Practice Law and Rules ("C.P.L.R.") §§ 5001 and 5004, would equal $6,680,000. Williams asserts an award of interest is appropriate because Morgan engaged in misconduct.³ In addition, Williams seeks a return of all commission fees paid to Morgan since the mid-1970's and attorney's fees and costs.

1. Lost Capital

Morgan's motion for summary judgment seeks to establish that the appropriate measure of damages based on Williams's claims is lost capital. Under New York law as construed by the state Court of Appeals, the measure of damages for negligent and imprudent failure to invest and diversify, which may also be styled as the negligent and imprudent retention of assets, is the value of capital lost.⁴ See In re Janes, 90 N.Y.2d 41, 659 N.Y.S.2d 165, 681 N.E.2d 332, 339-40 (1997). The trust estate...