In re Estate of Janes

Brief Fact Summary.

Rodney B. Janes created a testamentary trust consisting of Kodak stock. He named wife, Cynthia Janes, and several charitable organizations as the beneficiaries under the trust. The trustees, the petitioner, Ellison Patterson and Richard Young, failed to divest the estate of the stock that had dropped in value.

Synopsis of Rule of Law.

A trustee must diversity assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes and terms and provision of the governing instrument. In imposing liability upon a fiduciary on the basis of the capital lost, 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. The court has discretion on whether interest should be awarded. Dividends and other income attributable to the retained assets should offset any interest awarded.

Facts.

The testator’s estate consisted of a $2,500,000 stock portfolio, approximately 71% of which consisted of 13,232 shares of common stock of the Eastman Kodak Company. The Kodak stock had a date-of-death value of $1,786,733. From July 1973 to February 1980, the trustees retained the Kodak stock, the value of which dropped to about one third of its date-of-death value. In August 1981, the petitioner sought to settle the account. Janes and the Attorney-General on behalf of the charitable beneficiaries appealed. The primary life income beneficiary of the trust was Janes. Janes was 72 years old when the testator died. A certain amount of the trust income was to be paid to Janes for her life. Annual distributions from the charitable trust’s assets were to be made to select charities. The trustees did not establish an investment plan consistent with the testator’s purposes of the trust.

Issue.

Whether a fiduciary’s duty of investment prudence may be limited to the opinion of investment bankers and analysts who follow the company’s stock, and an overall determination of the investment quality determined by (1)the capital structure of the company, (2) the competency of its management, (3) whether the company is a seasoned issuer of stock with a history of profitability, (4) whether the company has a history of paying dividends, (5) whether the company is an industry leader, and (6) the expected future direction of the company’s business?

Whether, under all of the facts and circumstances of this case, the fiduciary violated the prudent person standard in maintaining a concentration of the Kodak stock?

Whether August 9, 1973 was a reasonable time by which the petitioner should have divested the estate of the stock?

Whether the proper measure of damages for breach of a duty to act prudently is “lost profits” or the amount that the proceeds of the stock would have yielded, up to the time of trial, had they been invested in petitioner’s own diversity equity fund on August 9, 1973.

Held.

No. A fiduciary’s duty of investment prudence may not be limited to the opinion of investment bankers and analysts who follow the company’s stock and other factors offered by the petitioner. The prudent person rule dictates against any absolute rule that immunizes a fiduciary from its failure to diversify based upon such factors. Also, omits other factors to be considered under the prudent investor rule like, the amount of the trust estate, the situation of the beneficiaries, the trend of prices and of the cost of living, and the prospect of inflation and deflation.

Yes. The petitioner here acted imprudently by failing to divest the estate of the Kodak stock by August 9, 1973 because the petitioner jeopardize the interests of the primary income beneficiary. The Kodak stock dropped in value, decreasing the amount of income that would be available to the primary income beneficiary, the testator’s 72 year old widow for whom the support testamentary trusts were created. Furthermore, the petitioner failed initially to undertake a formal analysis of the estate and establish an investment plan consistent with the testator’s primary objectives; (2) failed to follow petitioner’s own internal trustee review protocol during the administration of the estate, which advised special caution and attention in cases of portfolio concentration of as little as 2%; and (3) failed to conduct more than routine reviews of the Kodak holding in this estate, without considering alternative investment choices, over a seven-year period of steady decline in the value of
the stock.

Yes. August 9, 1973 was a reasonable time by which the petitioner should have divested the estate of the stock The petitioner’s internal documents and correspondence, as well as the testimony of Patterson, Young and objectants’ experts establish that the 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 significantly reduced in light of the estate’s over-all investment portfolio and the financial requirements of Janes and the other charitable beneficiaries.

No. The proper measure of damages is the value of the capital that was lost, the difference between the value of the stock at the time it should have been sold and its value when ultimately sold. In this case which involves faithless transfers as oppose to deliberate self-dealing, the proper measure of damages is not “lost profits.”

Discussion.

The investors here did not create an investment strategy. When the trustees decided to retain the stock, none of the factors that would lead to an informed investment decision were discussed. The investors did not act prudently because they did not take any reasonable steps to create and implement a sound investment plan.