Citation. In re Estate of Rothko, 43 N.Y.2d 305, 372 N.E.2d 291, 401 N.Y.S.2d 449
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Brief Fact Summary.
Mark Rothko left numerous paintings in his will to his children. Bernard J. Reis, Theodoros Stamos, and Morton Levine were the executors of his estate. Rothko’s children filed suit claiming that the executors entered into improper business transactions to sell the paintings.
Synopsis of Rule of Law.
Trustees have a duty of loyalty that prevents them from accepting employment from a third party who is entering into a business transaction with the trust. An executor who knows that his co executor is committing breaches of trust and not only fails to exert efforts directed towards prevention but accedes to them is legally accountable even though he was acting on the advice of counsel. If a trustee in breach of trust transfers trust property to a person who takes with notice of the breach of trust, and the transferee has disposed of the property, it is proper to charge him with appreciation damages because if it had not been for the breach of trust, the property would still have been a part of the trust estate.
Facts.
Rothko was an abstract expressionist painter who had an international reputation of greatness. He died on February 25, 1970. His will was admitted to probate on April 27, 1970. Reis, Stamos, and Morton Levine were the executors. Within a period of three weeks, the executors hastily dealt with Rothko’s 798 paintings. By a contract of sale, the executors agreed to sell to Marlborough A.B. (hereinafter MAG) 100 Rothko paintings and to Marlborough Gallery, (hereinafter MNY) 700 paintings. The petitioner attempted to remove the executors, enjoin MNY and MAG from disposing of the paintings, and to rescind the agreements between the executors and said corporations, for a return of the paintings still in possession of those corporations, and for damages. Reis was the director, treasurer, and secretary of MNY, the consignee gallery. The testator had a 1969 inter vivos contract with MNY to sell Rothko’s work at commission of only 10 percent. Reis’s family had an extensive ar
t collection through the Marlborough interests. Stamos was an unsuccessful artist under contract with Marlborough. Marlborough purchased a Stamos painting from a third party for $4,000 during the week in May 1970 when the estate contract negotiations were pending. Levine was aware of the transactions.
Issue.
Whether executors fail to act unfairly in the transactions they entered into on behalf of the estate?
Whether an executor who acting prudently on the advice of counsel may be liable for the co executors breach of trust?
Whether an executor who is liable for making an improper transfer where he had duty to retain property but chose to sell the property, is liable for appreciation damages?
Held.
Yes. The executors not only held an interest that conflicted with the interests of the estate, but they acted unfairly because their interests conflicted with the interests of the estate. Reis was induced to act in the MNY’s favor in conducting the transactions with the estate. As the director, secretary, and treasure of MNY, Reis was induced to favor the interests of MNY, including his own financial aggrandizement of status and financial advantage through sales of almost one million dollars for items from his own collection and his family’s extensive private art collection by the Marlborough interests. Stamos was also induced to act in favor of the Marlborough interests because he was an artist under contract with Marlborough and the latter bought one of Stamos’s paintings during a week when contract negotiations were pending. Stamos breached his duty not to accept employment from a company that was conducting business with the estate.
Yes. Though Levine acted on the advice of counsel, he is liable for damages because he failed to exert efforts directed towards prevention but acceded to the breaches.
Yes. Because the paintings cannot be returned to the trust estate, the estate is entitled to appreciation damages. This case involves wrongful transfers that should make the estate whole. The damage award is not punitive.
Discussion.
Executors may be held to the same standard as trustees. Trustees may have an interest in a transaction with the estate but they must not engage in the transaction unless they can show that they will not be improperly influenced by those interests when dealing with the estate.
