September 15, 2006

TO:                  Lawyers Advisory Committee
                        Trust Executive Committee
                        Trust Legislative and Regulatory Committee

FROM:            Roberta Kotkin

RE:                  In the Matter of the Judicial Settlement of the Second Intermediate Account of Chase Manhattan Bank, as Trustee of the Testamentary Trust Established Under the Will of Charles G. Dumont

We are pleased to report that the Court of Appeals this week ruled in favor of JPMorgan Chase Bank in the above-referenced case, thus successfully ending litigation which examined both the calculation of damages for a trustee’s failure to diversify, and whether provisions in the governing instrument, which allow for non-diversification of trust assets and provide that the trustees are not to be liable for such non-diversification, violate the standard of prudence set forth in EPTL Section 11-1.7.

In this case, the Surrogate’s Court, Monroe County, issued a decision awarding surcharge damages of nearly $21 million against JPMorgan Chase Bank for failure to divest Eastman Kodak Company stock in 1974, based on a decline In price of the stock at that time.  Chase filed a notice of appeal to the Appellate Division, Fourth Department, and the objectants filed a notice of cross-appeal.  NYBA filed a motion for leave to submit an amicus curiae brief, which most unusually was denied by the Appellate Division, Fourth Department.  On February 3, 2006 the Appellate Division, Fourth Department overturned the Surrogate’s decision, finding that the bank had not acted imprudently in failing to sell the Eastman Kodak stock in 1974. In light of this determination, the Appellate Division declined to address the other questions of law. The objectants then sought leave to appeal this decision, which request was ultimately denied by the Court of Appeals this week.

The Dumont case was potentially very important for several reasons.  In calculating damages, the Surrogate cited the Court of Appeals and Appellate Division decisions in a key precedential decision, In re Janes, but the Surrogate’s calculation departed from the method utilized in Janes.  The award in Janes included compound interest on the damages, but deducted dividends and sale proceeds as and when they were received.  In this case, however, the Court compounded the interest throughout the nearly 30-year accounting period, but deducted the dividends and sale proceeds only at the end of the period, dramatically increasing the effect of the compounding.  If the Surrogate’s decision had been affirmed, it could have had a significant impact on the amount of damage awards in trust cases of this kind.

The case was also important in that it examined whether provisions in the governing instrument, which allow for non-diversification of trust assets and provide that the trustees are not to be liable for such non-diversification, violate the standard of prudence set forth in EPTL Section 11-1.7.  While the Surrogate found that the clause in question in this case did not violate EPTL Section 11-1.7, an adverse decision on this issue from the Court of Appeals could  have nullified the intent of grantors and created unanticipated liability for trustees.

If you have any questions, please feel free to call me at (212) 297-1684 or you can call Bill Bosies at (212) 297-1664.