New York Law Review

Tag: Prudent Person Rule

  • In re Bankers Trust Co., 60 N.Y.2d 584 (1983): Prudent Person Standard for Trustees

    In re Bankers Trust Co., 60 N.Y.2d 584 (1983)

    A trustee’s investment decisions are evaluated under the prudent person standard, requiring the exercise of diligence and prudence that prudent individuals would employ in managing their own affairs, considering the circumstances and express authorizations granted to the trustee.

    Summary

    This case addresses the application of the prudent person standard in evaluating a trustee’s decision to retain shares of stock despite a prior plan to liquidate them. The Court of Appeals affirmed the Appellate Division’s decision, holding that the trustee did not breach its duty. The court emphasized that the trustee’s discretion, as authorized in the trust document, and the overall circumstances, including market conditions, should be considered when assessing prudence. The court clarified that a trustee is not necessarily bound to rigidly adhere to an initial liquidation plan if changing circumstances warrant modification or abandonment of that plan in the exercise of sound discretion.

    Facts

    Bankers Trust Co. served as trustee for a trust that included shares of Coleman. The trust document granted the trustee “absolute discretion” to retain these shares. Initially, the trustee considered a plan to promptly liquidate the Coleman shares. However, the trustee ultimately retained the shares. Beneficiaries of the trust later claimed that the trustee acted imprudently by not selling the shares earlier when it would have been more advantageous.

    Procedural History

    The Surrogate’s Court initially reviewed the trustee’s accounting. The Appellate Division reversed the Surrogate’s Court, finding no breach of the prudent person standard. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether the trustee breached its fiduciary duty by failing to promptly liquidate the Coleman shares, considering its initial plan to do so and the express authorization granted to the trustee to retain the shares in its absolute discretion?

    Holding

    No, because the prudent person standard allows for modification or abandonment of an initial liquidation plan when circumstances and the trustee’s discretion warrant it, and the trustee exercised the required diligence and prudence in managing the trust assets.

    Court’s Reasoning

    The Court of Appeals agreed with the Appellate Division’s determination that the trustee did not violate the prudent person standard. The court emphasized that even if the trustee had initially planned to promptly liquidate the Coleman shares, the prudent person standard did not mandate rigid adherence to that plan. The court stated: “The standard by which the performance of the trustee is to be judicially measured is whether, in all the circumstances including in this instance the express authorization to the trustee “in its absolute discretion” to retain the Coleman shares, the trustee exercised “such diligence and such prudence in the care and management [of the fund], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs” (King v Talbot, 40 NY 76, 85-86; cited with approval Matter of Bank of N. Y., 35 NY2d 512, 518-519).” The court considered the express authorization granted to the trustee to retain the Coleman shares “in its absolute discretion.” This authorization, along with the circumstances surrounding the management of the fund, was critical in determining whether the trustee acted prudently. The court found that the Appellate Division’s determination of no breach of duty aligned with the weight of evidence, indicating that the trustee’s actions were reasonable under the given circumstances.

  • Matter of Bank of New York, 35 N.Y.2d 512 (1974): Prudent Person Standard for Trust Investments

    Matter of Bank of New York, 35 N.Y.2d 512 (1974)

    A trustee is held to the standard of diligence and prudence that prudent persons of discretion and intelligence employ in their own like affairs, but is not held to a standard of investment infallibility or prescience.

    Summary

    This case addresses objections raised by a guardian ad litem regarding investment decisions made by The Bank of New York, as trustee of a common trust fund. The guardian questioned four specific investments. The Court of Appeals held that the trustee acted in good faith and exercised the required diligence and prudence in managing the fund, dismissing all objections. The court emphasized that while individual investments should be scrutinized for prudence, overall portfolio performance is not the sole determinant, nor is hindsight a sufficient basis for surcharge. The statutory requirement for periodic accountings balances the need for scrutiny with the fund’s protection against harassing litigation.

    Facts

    Empire Trust Company established a discretionary common trust fund in 1952. The Bank of New York, as successor trustee, made a periodic accounting for the period ending September 30, 1968. The guardian ad litem questioned four investments made by the trustee: Harcourt, Brace & World, Inc., Mercantile Stores Company, Inc., The Boeing Company, and Parke, Davis & Company.

    Procedural History

    The Surrogate initially denied the trustee’s motion to dismiss the objections, allowing the guardian to examine the trustee’s representatives. After the examination, the trustee renewed its motion. The Surrogate granted summary judgment for two investments but denied it for the other two. The Appellate Division modified, granting summary judgment for all four investments. The Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    1. Whether the trustee should be surcharged for imprudence with respect to individual investments, despite the portfolio’s overall increase in value during the accounting period.
    2. Whether the trustee exercised “such diligence and such prudence in the care and management [of the fund], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs” in making the four challenged investments.

    Holding

    1. No, because the fact that the portfolio showed substantial overall increase in total value during the accounting period does not insulate the trustee from responsibility for imprudence with respect to individual investments for which it would otherwise be surcharged.
    2. No, because the record disclosed that with respect to each investment the trustee acted in good faith and cannot be said to have failed to exercise the required diligence and prudence.

    Court’s Reasoning

    The Court emphasized that a substantial overall increase in portfolio value does not automatically shield the trustee from liability for imprudent individual investments. Citing King v. Talbot, 40 N.Y. 76, 90-91, the court stated, “To hold to the contrary would in effect be to assure fiduciary immunity in an advancing market such as marked the history of the accounting period here involved.” While the overall fund performance can influence individual investment decisions, the focus remains on the prudence of each decision.

    Regarding the standard of care, the Court referenced Matter of Clark, 257 N.Y. 132, 136, stating that a trustee must employ “such diligence and such prudence in the care and management [of the fund], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs”. The Court also cautioned that hindsight or mere errors in judgment are insufficient to mandate a surcharge, citing Matter of Hubbell, 302 N.Y. 246, 257: “Our courts do not demand investment infallibility, nor hold a trustee to prescience in investment decisions.”

    The court found no basis for surcharge, stating, “Whether a trustee is to be surcharged in these instances, as in other cases, must necessarily depend on a balanced and perceptive analysis of its consideration and action in the light of the history of each individual investment, viewed at the time of its action or its omission to act.”

    The Court commended the guardian ad litem for their thorough investigation, recognizing their crucial role in protecting the interests of the trust beneficiaries, especially given the limited economic interest of individual beneficiaries and the need to prevent harassing litigation against common trust funds.