Opinion
1623-1960.
Decided February 24, 2004.
Putney Twombly, Hall and Hirson LLP (Alexander Neave, Christopher M. Houlihan and Steven R. Shapiro, of counsel). for Banker's Trust Company of New York, as trustee.
Balber, Pickard, Battistoni, Maldonado Van Der Tuin, PC (John Van Der Tuin, of counsel) for American Baptist Churches of Metropolitan New York, beneficiary.
Eliot Spitzer, Attorney General of the State of New York (William Josephson and Carl Distefano, of counsel) Eve Preminger, S. for the Ultimate Charitable Beneficiaries.
The main issue in this case is whether the Court may give effect to a 1973 agreement between the trustee and beneficiary of two charitable trusts to increase the trustee's commissions.
In 1922 and again in 1927, John D. Rockefeller, Jr. created trusts for the benefit of two entities of the Baptist Church, which are now part of The American Baptist Churches of Metropolitan New York ("ABCMNY"). Bankers Trust was trustee of the trusts, but in 1999, after that bank merged with Deutche Bank, Bankers Trust Company of New York ("BTNY") was appointed successor trustee. BTNY now seeks judicial settlement of intermediate accounts for both on-going charitable trusts. For the 1922 trust, the accounting period is December 29, 1954 through September 30, 1999. For the 1927 trust, the accounting period is December 7, 1964 through September 30, 1999. BTNY admits that it has lost records for the 1927 trust from September 1, 1936 to December 7, 1964 and that no accounting has been done for this period. BTNY also requests a review of its compensation under SCPA § 2114.
The attorney general and the beneficiary ABCMNY objected to both accounts primarily on the grounds that the commissions BTNY and its predecessor took were unlawful. The 1922 indenture does not mention trustee commissions, but by letter dated October 27, 1922, approved by the settlor, it was agreed that the trustee would receive $400 a year from the income of the trust or if the income was insufficient, the beneficiary would pay the fee. The 1927 indenture sets the trustee's commission at $300 per year from income, and also provides that if income is insufficient, the charity would pay the trustee's commission.
This was the fee agreement until October 2, 1973, when the Executive Secretary of ABCMNY sent a letter to Banker's Trust. It confirmed that
" * * * the Commission on Finance and Property of American Baptist Churches of Metropolitan New York at its meeting September 24, 1973 authorized the Banker's Trust to increase the fees now being paid under the Rockefeller Trusts by the following motion:
'The American Baptist Churches of Metropolitan New York hereby authorizes the Bankers Trust Co. to charge the legal fees for perpetual trust on the Rockefeller Trusts No. 1 and 2 [those at issue here] * * * in the amount of 7% of the first $2,000 of income and 5% on the balance of income generated per annum.'"
The letter further explained: "The Commission approved this action increasing the fees in the expectation that the trust funds will receive closer attention and generate a larger annual income which will justify the cost."
There is no question that "legal fees" as used in the letter means "statutory fees" as denoted by the percentages stated in the letter. These percentages were in fact the statutory rates at the time.
Bankers Trust apparently noted the commissions for these trusts internally on their recording systems as ordinary statutory commissions subject to change, and in 1985, Bankers Trust applied the reasonable compensation statutory scheme under the then recently enacted SCPA § 2312 for the trusts. This was done without the consent of ABCMNY. In August of 1998, Bankers Trust recognized its error and refunded the amounts taken as commissions above the amounts agreed to in 1973. Bankers Trust also refunded compound interest based on the average monthly 30-year U.S. Treasury Note rate on the excess commissions taken.
In the current accounting proceeding, ABCMNY claims the 1973 commission agreement was void because it did not have the approval of the attorney-general, who by statute represents the ultimate charitable beneficiaries (EPTL § 8-1.1[f]), and because there was no court approval of the 1973 increase. The attorney general initially joined ABCMNY in objecting, but its present position is "if the agreement was not tainted by fraud or overreaching on the part of the trustee, the agreed compensation (if it does not exceed the prevailing statutory rate) may * * * be approved retrospectively in a proceeding to settle the trustee's account."
ABCMNY has provided no contemporaneous documents to the 1973 agreement. BTNY, however, has provided several relevant documents. Two internal memoranda from 1969 discuss the trustee compensation issue, one of which recounts a meeting with Reverend Hull, the then executive secretary of ABCMNY. It states that the Bankers Trust employees asked him to "consult his counsel as to whether the letter establishing the $400 fee [for the 1922 trust] was all-conclusive, or whether it left room for renegotiation." Another internal memo from 1970 states that the "reasons" for the "substandard commission" of the 1922 trust included the amount of work required; the expectation of holding simple stock; and the expectation of future Rockefeller business. The memo explained that in the intervening years the administration of the trust was substantially different due to diversification. Following up on conversations with the beneficiary, a letter to ABCMNY in September of 1972 requested that it approve trustee compensation of "statutory fees as they may be in effect from time to time." Yet, as noted, ABCMNY approved only the 1973 statutory rates for both trusts.
Under SCPA § 2312, which now governs the commissions of corporate trustees, commission agreements between the creator of a trust and the trustee are binding and in lieu of statutory commissions (SCPA §§ 2312, 2312 2312[a]). Such agreements are not unilaterally amendable ( Matter of Lehman, 55 NY2d 97; Matter of Schinasi, 3 NY2d 22; Matter of Smith, 200 AD2d 311; Matter of Christensen, 175 AD2d 641; Matter of Moritz, 20 AD2d 196; see also Matter of Baehm, 110 Misc 2d 499).
With the creator of the trusts long since dead, ABCMNY is correct that the usual statutory means for modifying a trust are no longer available (EPTL § 7-1.9). Nor has the goal or object of these gifts in trust proved impossible or impracticable, triggering the court's cy pres power (EPTL § 8-1.1[c][2]). Nevertheless, a beneficiary cannot complain about an act that would otherwise constitute a breach of duty, when, with full knowledge of relevant facts, it consents to the act and that consent was not induced by any improper conduct on the part of the fiduciary ( Butterfield v. Cowing, 112 NY 486, 492; Matter of Goldstick, 177 AD2d 225, 246; Matter of Sheridan, 32 Misc 2d 38; Matter of Newhouse, 29 Misc 2d 1021, 1032; compare Matter of Newhoff, 107 AD2d 417, 428; see Frachter, Scott on Trusts, § 216, at 326-329 [4th ed]; Bogert, Trust and Trustees, § 992, at 226-228 [2nd rev ed]; see also Matter of Lange, 383 A2d 1130, 1136 [N.J.]). In other words, the fully informed beneficiary can be estopped from later challenging the agreed-to acts.
Since the attorney general was not a party to the 1973 agreement, he would be entitled to oppose enforcement of the new fee agreement (EPTL § 8-1.1[f]; Matter of Community Serv. Soc'y, 275 AD2d 171, 186-187; Matter of Schlussel, 195 Misc 1008, 1013-1015). However, the attorney general seeks only that the agreement be shown to be free from fraud and overreaching.
ABCMNY does not contest the authenticity of the documents BTNY provided from the time around the date of the agreement. These documents establish a pattern of negotiation and full disclosure. The document approving the increase was a duly authorized action of the ABCMNY Board, and ABCMNY has offered nothing to dispel what BTNY has shown to be fully informed negotiations leading up to the agreement.
Additionally, in 1973, when the commission increase agreement was made, one of the trusts had been operating for 50 years and the other for 45. Substantial changes had occurred with regard to the assets held by the trust, including greater diversification and increased administrative tasks. While it is not the obligation of the court to relieve a party like BTNY, which is sophisticated in business dealings, from a bad bargain, it cannot be said that BTNY's request for increased fees was unfair at the time it was made, given the passage of several decades, the small sum provided for commissions in the original agreements, the perpetual nature of these trusts, the increase in administrative burdens brought by a more diverse corpus of assets and the handling of the mortgages and loans the trusts funded ( cf. Matter of Talman [Diocesan Convention], 126 Misc 2d 860 [noting the change in economic circumstances in the last 80 years]; Matter of Pinkerton, 165 Misc 2d 866; Matter of Pulitzer, 139 Misc 575; see generally Mertz v. Guaranty Trust Co., 247 NY 137, 144). Given these circumstances, the beneficiary cannot now be heard to complain that the bargain it struck in 1973 should be avoided.
Regardless of the reasonableness of the agreement and the estoppel of the beneficiary, the court must also determine whether the increase disrupted the settlor's charitable purposes ( see Matter of Fiscus, 45 AD2d 235). The amount of commissions are not included in the 1922 trust agreement, but were agreed to after the fact in a subsequent letter, suggesting that commissions were not of primary importance in establishing the trust. Although the trustee's fees were included in the 1927 trust indenture, nothing suggests that the commissions for managing either trust were to be set in stone.
For all the foregoing reasons, the court concludes that there was neither fraud nor overreaching on the part of the trustee; that the agreement was equitable at the time it was made; and that the agreement did not materially alter the settlor's intent in establishing these charitable trusts.
BTNY's request for reasonable compensation under SCPA § 2312 going forward is moot because the trustee and beneficiary have stipulated to the resignation of BTNY as trustee. The 1927 trust document permits the trustee to resign; the 1922 document is silent on the subject. Given the desire of both parties to end their relationship and without objection from the attorney general, the court will permit the trustee to resign from both trusts upon the qualification of a successor trustee.
Three issues remain: the interest rate to be charged on the refunded excess commissions; the effect of the lost documents for the unaccounted for period; and the amount of attorney's fees and costs.
The trustee refunded moneys for excess commissions taken from May, 1985 through August, 1998 plus compounded interest at the average monthly 30-year Treasury note rate. This was reasonable because in taking excess commissions the trustee essentially deprived the beneficiary of income it should have had. If the beneficiary had had the benefit of that income over that time period, a reasonably safe use of that money could likely have yielded something close to the 30-year Treasury note rate, which during the period at issue went from 11% to near 5.5% ( see Rodriguez v. N.Y. City Housing Auth., 91 NY2d 76, 80-81; see also CPLR §§ 5001[a], 5004). There is thus no need to recalculate the interest on the commission refunds.
Regarding the lost records, trustees are duty bound to keep proper accounts ( In re Reckendorfer's Estate, 307 NY 165, 176; Restatement (Second) of Trusts § 172; Bogert, Trusts and Trustees, § 962 [2nd rev ed]). For the 1927 trust, the period between July 1, 1936 and December 7, 1964 is unaccounted for and BTNY admits that there are no records on which to base an accounting. BTNY defends by claiming that its delegee, a professional storage company, lost the records, and that this excuses its inability to account. It does not, but it is a factor to be considered.
Where a fiduciary cannot or will not account or otherwise fails to discharge its record-keeping duties, all inferences are to be taken against it for that period ( see In re Reckendorker's Estate, 307 NY at 177), unless equitable considerations mitigate the rule ( White v. Rankin, 18 App Div 293 affd w/o opn 162 NY 622). Without any records or a way to determine what happened during the period in question, the rule that all presumptions should be taken against the fiduciary at least means a loss of commissions. Here, that is mitigated by the fact that a proper delegee lost them, and thus the trustee is not entirely to blame ( see Matter of Smith, 148 Misc 585, affd w/o opn 246 App Div 563; see also EPTL § 11-2.3[c]). Under the circumstances presented, however, delegation is not a complete defense because the trustee has failed to show what steps it took to supervise its delegee or to provide any detail regarding how and why the records were lost that could amount to a reasonable excuse ( see EPTL § 11-2.3[c]; Restatement (Second) of Trusts § 171 cmt k).
The trustee has not attempted to demonstrate that there were no losses resulting from imprudent management of the trust during this period ( Matter of Miller, 116 AD2d 580). The available records show that the value of the trust was $206,549.32 at the end of the prior account (July 1, 1936) and $278,044.06 at the beginning of the current account (December 7, 1964). These numbers shed little light on whether there was prudent management during this period. Given all the facts and circumstances and there being no evidence of bad faith ( compare Matter of Rozycki, 144 Misc 2d 741; Matter of DeFillippis, 113 NYS2d 724), the Court will require the trustee to repay only ten percent (10%) of its annual commissions of the unaccounted-for period to the beneficiary ( see Matter of Schnare, 191 AD2d 859, 961). An award of interest is appropriate, and interest compounded annually will run from December 7, 1964 at the specified statutory interest rate established from time to time by CPLR § 5004.
As to attorney's fees, ABCMNY objects to all amounts above $6,032.00 which relate to fees for a loan under one of the trusts. Regarding the remaining $105,182.94, ABCMNY claims these were solely to protect the trustee for its actions in violation of its trust. However, there is no evidence of serious malfeasance here on the order of Matter of Rothko ( 43 NY2d 305, affg 56 AD2d 499), as ABCMNY asserts. Fees in reasonable amounts can be awarded from the trust, where, as in this case, the trustee successfully defends against claims of breach of trust ( Matter of Steinhardt, 192 Misc 819), and this includes fees related to the judicial settlement of the trustee's accounting.
The familiar Freeman/Potts criteria ( Matter of Freeman, 40 AD2d 397, affd 34 NY2d 1; Matter of Potts, 213 AD 59, affd 241 NY 593) includes consideration of: the amounts involved; the difficulty of the issues presented; the professional standing of counsel; the results obtained; and the time spent. Regarding the contested accounting period, which comprises most of the fees, the court takes into account the fact that it was the trustee's own actions that led to the current dispute: the trustee itself should be responsible for the majority of these fees. Moreover, some of the work done by counsel relates to the lack of records for the unaccounted-for period of the 1927 Trust, which should also be the responsibility of the trustee. All factors taken together, attorney's fees are allowed against the trusts in the amount of $44,344.92, which includes the $6,032 related to a loan from one of the trusts. No objection was raised as to the apportionment of the fees between the trusts.
Regarding costs, trustee's counsel requests $23,669.76, of which $15,500 is for out-of-pocket fees to an accounting firm for work in preparation of the account. These accounting firm fees appear reasonable in light of the work done. As to the remaining $8,169.76, a portion of these amounting to $1,616.27 were not for out-of-pocket expenses, but were items that should properly be considered part of overhead, e.g., photocopying, faxing, internal printing charges ( Matter of Herlinger, NYLJ, Apr 28, 1994, at 28). Costs are thus allowed in the amount of $22,053.49.
Finally, ABCMNY requests that its legal fees be paid by the trustee. There are, however, no facts suggesting bad faith, fraud, self-dealing or theft warranting an imposition of the beneficiary's legal fees on the trustee ( Matter of Saxton, 179 Misc 2d 681). In the alternative, ABCMNY requests that its fees be paid from the trusts. Given its bona fide objections and its actions on behalf of the trust, the court will allow the reasonable attorney's fees of ABCMNY against the trusts, to be determined after its counsel provides a detailed affirmation of services ( Matter of Burns, 130 Misc 2d 317).
Accordingly, the objections to the trustee's account for the 1922 Trust for the period December 29, 1954 through September 30, 1999 as well as to the trustee's account for the 1927 Trust for the period December 7, 1964 through September 30, 1999 are dismissed, except as to attorney's fees and costs herein allowed; under its review of the trustee's compensation for the 1927 Trust for the period July 1, 1936 to December 7, 1964 for which the trustee has no records and cannot account, the trustee shall pay to the beneficiary ten percent (10%) of its annual commissions for this period with interest in accordance with this opinion; Bankers Trust of New York is authorized to resign as trustee of the trusts effective upon the appointment of a successor trustee.
Settle decree.