In Re the Judicial Settlement of the Intermediate Account of HSBC Bank USA, N.A.
947 N.Y.S.2d 292
| N.Y. App. Div. | 2012Background
- 1957 Trust established by Seymour H. Knox II for the benefit of Seymour H. Knox III’s issue; funded with 5,000 Woolworth shares and 5,200 Marine shares; Marine Midland Bank-Western as sole Trustee.
- Trustee may invest without diversification and may consult counsel; term 'counsel' not limited to legal counsel and compensation to counsel is authorized.
- Petition filed for judicial settlement of the intermediate account from 1957 through 2004 (Final Account covers through 2005); disputes arise among adult objectants and a GAL over investments and fees.
- Surrogate liability order found trustee liable for retaining/purchasing six securities (BMS, Digital, Dome, Leesona, Marine, Woolworth) with specific divestiture dates for Woolworth and Marine.
- Divestiture: Woolworth 90% sold Jan 21, 1957; remaining Woolworth sold by Mar 1, 1995 (dividends) or May 7, 1991 per orders; Marine stock to be sold Jan 21, 1957; other divestiture dates adopted in later orders.
- Appellate Division modified liability findings, dismissed several objections, and remitted to recalculate surcharges; ultimately affirmed the modification with respect to Woolworth after Mar 1, 1995 and remanded for recalculation of surcharges.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What standard governs fiduciary care for trustees here? | Knox argues three standards apply (common-law, prudent person, prudent investor act) and may impact liability. | Trusteeship should follow governing instrument with possible scope for good-faith reliance on counsel per the trust terms. | Governing instrument and statutes guide care; no liability unless prudence standard violated under applicable standard. |
| Was retention of Woolworth stock after March 1, 1995 imprudent? | Adult objectants contend retention after dividends ceased was imprudent. | Stock was a major income source; retention until dividends ended may be prudent considering purpose of trust. | Imprudence found for retaining 23,000 Woolworth shares beyond February 20, 1997, but divestiture date adjusted to March 1, 1995; liability modified accordingly for objectors’ objection. |
| Did GAL objections establish imprudence in diversification or individual holdings? | GAL asserted failures to diversify and imprudence in holdings (Marine, Dome, Leesona, etc.). | Many holdings were authorized by the trust or retained for legitimate reasons; losses were negligible or outweighed by gains and income. | GAL objections largely rejected; overrulings except as to Woolworth timing; diversification concerns not proven as imprudence. |
| Did the reliance on Knox, III’s advice absolve petitioner of fiduciary responsibility? | Petitioner relied on Knox III’s advice; should not exonerate for imprudent conduct. | Advice from Knox III, a knowledgeable investor, fell within good-faith reliance permitted by trust terms. | Reliance on Knox III was prudent and good faith; not a basis to surcharge. |
| How should damages be calculated and interest applied for imprudent retention? | Damages should reflect lost capital using a lost capital approach with proper interest, taxes, and compounding. | Damages should follow Janes methodology with appropriate interest treatment and tax considerations. | Damages recalculation required; adopted lost capital approach with correction for dividends, compound interest, and capital gains taxes; incorrect interest rate applications corrected on remand. |
Key Cases Cited
- King v. Talbot, 40 NY 76 (N.Y. 1869) (historical prudent investment standard governing fiduciaries)
- Matter of Hahn, 93 AD2d 583 (4th Dept. 1983) (prudent investment principles and diversification under common law)
- Matter of Janes, 90 NY2d 41 (N.Y. 1997) (Prudent Investor Act and diversification standards; test is prudence, not performance)
- Bankers Trust Co. [Siegmund], 219 AD2d 266 (1st Dept. 1995) (imprudence requires causal link to loss; diversification context)
- Matter of Chase Manhattan Bank, 6 NY3d 456 (N.Y. 2006) (governing instrument supremacy over statutory constraints when applicable)
- Matter of Weston, 91 NY 502 (N.Y. 1888) (trustee may retain securities from creator when prudent under circumstances)