Analysis of 2012 Fiduciary Decisions in Surrogates Court

I.  Constructive Trusts & Powers of Attorney.    A “constructive trust” arises when equity intervenes to protect the rightful owner from the holder of legal title, where legal title was acquired through fraud, duress, undue influence, mistake, breach of fiduciary duty, or other wrongful act, and the wrongful owner is unjustly enriched. In New York, four conditions must exist before a constructive trust is imposed: (i) a fiduciary or confidential relationship; (ii) a promise; (iii) a transfer in reliance on the promise; and (iv) unjust enrichment.

In a recent case, the Surrogate held that in certain circumstances, a constructive trust can be established even after the death of the Settlor. Thus, in Matter of Chantarasmi, 2012 N.Y. Misc. Lexis 302 (2012), the court granted a petition requesting the creation of a constructive trust in a situation where the decedent died intestate, and there had been clear language in a prenuptial agreement requiring the decedent to create a trust for the benefit of his children.

The court reasoned that the decedent’s failure to leave a will constituted a breach of the premarital agreement that could be remedied only by the creation of a constructive trust. The prenuptial agreement clearly contemplated the existence of the trust, and designated the intended beneficiaries, the trustees, and the subject property of the proposed trusts.

In Peroise v. LiGreci, 2012 WL 2819300 (2nd Dept. 2012), the court addressed the issue of whether personal involvement of the settlor is required for trust terms to be amended. In that case, fifteen days before the settlor’s death, his daughter executed an amendment to an irrevocable trust replacing the trustee and successor trustee.  The daughter was acting under a power of attorney, and the trust was for the benefit of the daughter and her siblings.

The trustee who was replaced objected. The court vacated the trust amendment reasoning that the trust was irrevocable and could only be amended by complying with the statutory requirement of obtaining the consent of all persons with a beneficial interest in the trust.

The Second Department reversed, stating that “absent any special circumstances or contrary directives, the amendment of the Trust by the attorney-in-fact, with the consent of all the beneficiaries, was not an act which ‘by [its] nature, by public policy, or by contract,’ required the creator’s personal performance.” The court further held that unless a trust by its very terms prohibits the creator from amending by way of his attorney-in-fact, the attorney in fact, as the alter ego of the creator, may amend the trust.

II.    Prudent Investor Standard

Matter of Korn, 36 Misc.3d 1224A (Sur. Ct. 2012) involved an objection to an accounting by a trust beneficiary, the brother of the trustee, who was also a trust beneficiary. The alleged breach of fiduciary duty related to whether the trustee had failed to act prudently in not exercising a right of first refusal to acquire certain real estate. The Surrogate held that the prudent person standard of investing governed the trustee, and required that the trustee employ prudence in the care of trust assets equivalent to that of a prudent person of discretion and intelligence in managing his or her own affairs.  Applying that standard, the Surrogate found that the trustee had invested prudently in that the trust had insufficient liquid assets available to purchase the real estate, and also was already heavily invested in real estate. EPTL 11-2.3[b]-2.3 (the NY Prudent Investor Act) provides that a trustee shall exercise reasonable care,  skill  and  caution to make  and  implement  investment  and  management decisions as a prudent investor would  for  the  entire  portfolio, taking  into  account the purposes, terms and provisions of the governing instrument.

In Matter of Knox, 2012 N.Y. App. Div, LEXIS 4880 (4th Dept. 2012),  trust beneficiaries objected to a trust accounting alleging a failure to properly diversify stock investments. The beneficiaries alleged that the trustee had breached his fiduciary duty by imprudently retaining a high concentration of stock in two companies. The beneficiaries further alleged that the trustee had improperly relied upon the advice of a family member who was not a trustee. The Surrogate held that the trustee had negligently managed the trust by failing to maintain proper documentation and failing to develop an investment plan. The Appellate Division reversed primarily on the ground that the trust instrument itself expressly granted the trustee the power to invest without regard to diversification. The Court also noted that even though assets were held in “overweight” positions, the objectant had failed to demonstrate that it was imprudent to do so, and the objectant had failed to show a financial loss from the holdings.

In contrast, in Matter of Hunter, 2010 NY Slip Op 50548U, the Surrogate of Westchester County imposed a surcharge of $4.322 million against JP Morgan Chase, a trustee that had failed to diversify a stock portfolio which consisted entirely of Eastman Kodak stock. The Surrogate held that a prudent trustee would have sold 95 percent of the Kodak stock, noting that JP Morgan Chase had no written investment plan for the trust, other than to eventually sell some of the Kodak Stock. The Surrogate imposed a surcharge based upon the lost capital to the trust. On appeal, the Second Department found “no reason” to disturb the Surrogate’s finding that JP Morgan Chase had violated both the prudent-person standard of investing and the Prudent Investor Act, noting that the high concentration of Kodak stock had been held for twenty years. The Appellate Division also remarked that JP Morgan Chase had “acted contrary to its own internal policies, which restrict the retention of any one stock unless certain circumstances existed, none of which were present. Matter of Hunter, NY Slip Op 08124, 11/28/12.

III.    Delays in Distribution

When a trust terminates, trustees who delay in distributing assets to the beneficiaries do so at their own peril. In Matter of McCluskey, 951 N.Y.S.2d 852 (Nassau Cty Surr. 2012), the trustee failed to distribute trust assets for over a year after the trust terminated, by which time trust assets had declined in value. The trustee argued that damages should be mitigated if (i) the beneficiaries would have made the same mistake as the trustee or if (ii) the value of the trust assets appreciated subsequent to the distribution such that any theoretical loss was negated. Finding the arguments without merit, the Surrogate denied the motion made by the Trustee to compel production of the beneficiaries’ personal investment portfolios for the period during which it was alleged that the Trustee had been neglectful in distributing trust assets.

Matter of Lasdone, 2011 NY Slip Op 51710U (NY Cty Surr. Court, 2011) also presented a situation where  the trustee had delayed distribution of trust assets, during which time the value of trust assets declined. The trustee had refused to timely distribute trust assets to two beneficiaries who had been entitled to receive trust assets upon attainment of age thirty-five. The Surrogate granted summary judgment to the beneficiaries on their surcharge claim. With respect to the issue of damages, the Surrogate ruled that the surcharge award should not be reduced by the capital gains tax that would have been incurred by the beneficiaries, since the beneficiaries could have held the stock until their respective deaths, thus benefitting from a stepped up basis. The Surrogate held that reasonable attorneys’ fees should be chargeable to the estate, and not to the trustee, since the cost of preparing the accountings and other work done by the attorneys was necessary to the administration of the estate.

IV.   Importance of
        Trust Definitions

In re: the Trust created by Lydia Butler Dwight, 2012 NY Slip Op 22229, dealt with a trust created for the benefit of the Settlor’s “lawful issue.” The question was whether the term “lawful issue” includes a premarital child. The Surrogate held that a premarital child was not a beneficiary of the trust because under the law as it existed when the trust was created, the term “lawful issue” included only children born in wedlock.

V.   Jurisdiction and Standing

In Cohen v. Cohen, 2012 N.Y. Misc. LEXIS 25 (Jan. 5, 2012), the president of a for-profit university created a trust to hold real property on which the university was located for the benefit of his children and a family limited partnership used to transfer shares in the university to his children as part of an estate plan. There were lease and loan agreements between the trust, college, family limited partnership, and the children. One of the children brought an action against the father, the college, and its board of trustees, alleging breach of fiduciary duties. The college and its board of trustees intervened in the action and moved for summary judgment dismissing the complaint on the ground that the family limited partnership and the trust was formed in violation of tax law, and that enforcement of the partnership agreement and trust agreement would thereby result in judicial enforcement of an illegal contract.  The children challenged the college’s intervention, arguing that the college lacked standing to challenge the enforceability of the partnership and trust agreements. The court held that the issue of standing was not relevant to the proceeding because New York case law permits a court to allow a motion based on illegality that invokes principles of public policy, regardless of the movant’s standing.