681 N.E.2d 332 (N.Y. 1997)
Rodney B. Janes died on May 26, 1973, survived solely by his wife Cynthia W. Janes, then age 72. His $3,500,000 estate included a $2,500,000 stock portfolio, of which approximately 71 percent consisted of 13,232 shares of Eastman Kodak common stock valued at $1,786,733 on the date of death.1
Testator’s 1963 will and a 1969 codicil bequeathed most of his estate to three trusts. The first was a marital deduction trust consisting of approximately 50% of the estate’s assets.2 The income of that trust was to be paid to Mrs. Janes for her life with a generous provision for invasion of the principal and a testamentary power of appointment.3 The testator also established a charitable trust of approximately 25% of the estate’s assets which directed annual distributions to selected charities. A third trust comprised the balance of the estate’s assets and directed that the income therefrom be paid to Mrs. Janes for her life, with the remainder pouring over into the charitable trust upon her death.4
On June 6, 1973, the testator’s will and codicil were admitted to probate. Letters testamentary issued to petitioner’s predecessor, Lincoln Rochester Trust Company, and Mrs. Janes, as coexecutors, on July 3, 1973. Letters of trusteeship issued to petitioner alone.5 By early August 1973, petitioner’s trust and estate officers had ascertained the estate’s assets and the amount of cash needed for taxes, commissions, attorneys’ fees, and specific bequests.6
In an August 9, 1973 memorandum, Patterson recommended raising the necessary cash by selling assets, including 800 shares of Kodak stock, and holding the remaining issues until the trusts were funded. The memorandum did not otherwise address investment strategy.7 In a September 5, 1973 meeting with Patterson and Young, Mrs. Janes, who had a high school education, no business training or experience, and who had never been employed, consented to the sale of some 1,200 additional shares of Kodak stock.8 The September 5 meeting was the only occasion where retention of the Kodak stock or any other investment issues were taken up with Mrs. Janes.9
By the end of 1973, the price of Kodak stock had fallen to about $109 per share. One year later, it had fallen to about $63 per share and, by the end of 1977, to about $51 per share. In March 1978, the price had dropped even further, to about $40 per share.10 When petitioner filed its initial accounting in February 1980, the remaining 11,320 shares were worth, approximately $530,000, or about $47 per share.11
In addition to its initial accounting in 1980, petitioner filed a series of supplemental accountings that together covered the period from July 1973 through June 1994.12 In August 1981, petitioner sought judicial settlement of its account. Objections to the accounts were originally filed by Mrs. Janes in 1982, and subsequently by the Attorney-General on behalf of the charitable beneficiaries.13 When Mrs. Janes died in 1986, the personal representative of her estate was substituted as an objectant.14
Following a trial on the objections, the Surrogate found that petitioner had acted imprudently and imposed a surcharge.15 The Appellate Division modified solely as to damages, and this Court granted leave to appeal and now affirm.
Whether the executor breached its investment duties by retaining a high concentration of Kodak stock in the estate portfolio?16
The prudent person rule provides that a fiduciary holding funds for investment may invest the same in such securities as would be acquired by prudent persons of discretion and intelligence in such matters who are seeking a reasonable income and the preservation of their capital.17 No precise formula exists for determining whether the prudent person standard has been violated.18 The determination depends on an examination of the facts and circumstances of each case.19 The court should engage in a balanced and perceptive analysis of the fiduciary's consideration and action in light of the history of each individual investment, viewed at the time of its action or its omission to act.20
Yes. The executor failed to consider the investment in Kodak stock in relation to the entire portfolio of the estate.21 Petitioner paid insufficient attention to the needs and interests of the testator's 72-year-old widow for whose comfort, support and anticipated increased medical expenses the testamentary trusts were evidently created.22 Petitioner failed to exercise due care and the skill it held itself out as possessing as a corporate fiduciary by failing initially to undertake a formal analysis of the estate and establish an investment plan consistent with the testator's primary objectives, failing to follow its own internal trustee review protocol, and failing to conduct more than routine reviews of the Kodak holdings over a seven-year period of steady decline in the value of the stock.23
Upon the facts, the retention of 71% Kodak stock violated the prudent person rule.24
The executor breached its investment duties by retaining the high concentration of Kodak stock.25
Whether August 9, 1973 constituted the date by which a prudent fiduciary should have divested the estate of its Kodak stock concentration?26
The court may examine a fiduciary's conduct throughout the entire period during which the investment at issue was held.27 The court may then determine, within that period, the reasonable time within which divesture of the imprudently held investment should have occurred.28 What constitutes a reasonable time will vary from case to case and is not fixed or arbitrary.29 The test remains the diligence and prudence of prudent and intelligent persons in the management of their own affairs.30
Yes. Petitioner's own internal documents and correspondence, as well as the testimony of Patterson, Young, and objectants' experts, establish that by August 9, 1973, petitioner had all the information a prudent investor would have needed to conclude that the percentage of Kodak stock in the estate's stock portfolio was excessive and should have been reduced significantly, particularly in light of the estate's over-all investment portfolio and the financial requirements of Mrs. Janes and the charitable beneficiaries.31
August 9, 1973 constituted the date by which a prudent fiduciary should have divested the estate of its Kodak stock concentration.32
Whether the proper measure of damages for negligent retention of the stock is the lost capital value rather than lost profits measured against a market index?33
Where a fiduciary's imprudence consists solely of negligent retention of assets it should have sold, the measure of damages is the value of the lost capital.34 The court should determine the value of the stock on the date it should have been sold, and subtract from that figure the proceeds from the sale of the stock or, if the stock is still retained by the estate, the value of the stock at the time of the accounting.35 Whether interest is awarded, and at what rate, is a matter within the discretion of the trial court.36 Dividends and other income attributable to the retained assets should offset any interest awarded.37
Yes. The Surrogate's reliance on a lost profit measure of damages is inapposite because the fiduciary's misconduct consisted of negligent retention rather than deliberate self-dealing.38 Application of the lost capital measure resulted in a figure of $4,065,029, which includes prejudgment interest at the legal rate, compounded from August 9, 1973 to October 1, 1994.39
The proper measure of damages for negligent retention of the stock is the lost capital value rather than lost profits measured against a market index.40