of damages is the value of the lost capital.").
Under the methodology the Court of Appeals enunciated, to measure lost
capital a court must first determine the value of the asset on the date
on which it should have been sold and then subtract either (a) the value
of the asset at the time of the accounting or (b) the value of the asset
at the time of the court's decision. See id. at 339. The court has
discretion to award interest. (See infra, discussion at Part II.B.3.) A
court also should subtract from an award of interest, if any, any
dividends or income attributable to the asset during the time the asset
was retained. See Janes, 681 N.E.2d at 340.
Williams attempts to distinguish Janes because that case involved the
failure to sell or diversify trust assets after they were invested in
securities, while here the trust assets were invested in tax —
exempt bonds during the mid-1970's, the time at which Williams contends
the trustee's failures occurred. This distinction is without a difference
because both claims concern alleged inattentiveness and inaction on the
part of the trustee. (See supra note 3.) Furthermore, Williams's
suggestion of a distinction between stocks and bonds as trust assets is
unprecedented. Accordingly, the Court concludes that the Janes rule
governs the calculation of damages should Williams prevail on liability.
2. Lost Profits
Under New York law, lost profits may be awarded where there is an
allegation of self-dealing or bad faith. See Rothko, 372 N.E.2d at
297-98; Janes, 681 N.E.2d at 339. The estate in Rothko consisted mainly
of the decedent Rothko's paintings. The three executors of his estate
then sold the paintings to galleries in which two of the executors had
professional and financial interests. See Rothko, 372 N.E.2d at 293-95. As
explained by the Court of Appeals, after a lengthy non-jury trial, the
Surrogate's Court found that the three executors' "sale and consignment
of paintings between the executors and [galleries] provided inadequate
value to the estate, amounting to a lack of mutuality and fairness
resulting from conflicts . . . and improvidence." Id. at 294. The sales
were set aside on the grounds of a breach of the fiduciary's duty of
loyalty and improvidence. The Surrogate's Court imposed appreciation
damages, and the Appellate Division affirmed. See id.
After analyzing public policies articulated in the Restatement Second
of Trusts, the Court Appeals affirmed the award of appreciation damages.
See id. at 297-98. The Court of Appeals reasoned that "allowing
appreciation damages, where there is a duty to retain, and only date of
sale damages where there is authorization to sell" would provide
appropriate incentives to trustees. Id. If a trustee has a duty to sell,
the risk of increased damages might make the trustee reluctant to sell
and thereby incur depreciation costs. On the other hand, if a trustee has
a duty to retain, the risk of increased damages if he sells the asset
will reinforce that duty. See id.
Subsequently, in Janes, the Court of Appeals limited the reach of
Rothko by holding that an award of appreciation damages, or lost
profits, was inapplicable unless "the fiduciary's misconduct consisted of
deliberate self-dealing and faithless transfers of trust property."
Janes, 681 N.E.2d at 339. No Court of Appeals case has modified the
Janes rule or suggested that it is inapplicable to trust assets other
Here, Williams has not alleged deliberate self-dealing or faithless
transfers of property; rather, his allegations sound entirely
in negligence and/or failure to meet the prudent investor standard of
care. As such, New York law is settled on the rule that loss of income
or appreciation damages are unavailable to him in this action.
Williams argues that lost profits may be awarded for failure to invest
or diversify under New York law based on Section 211 of the Restatement
Third of Trusts ("§ 211") and on public policy. Section 211 states in
If the trustee is under a duty to purchase property
for the trust estate and fails to purchase that
property within a reasonable time, the
beneficiaries: . . . (2) may, . . . if the duty was
to acquire any property constituting a proper
investment for the trust, charge the trustee with
the amount of the funds the trustee failed properly
to invest, adjusted for the amount of the total
return, positive or negative, that would have
accrued to the trust estate had the funds been
invested in a timely fashion . . . .
Restatement (Third) of Trusts, § 211 (1992). Williams's reliance on
§ 211 is unavailing because it represents a new rule that has not
been adopted by any New York state court. The advisory comments to §
211 indicate that, at the time of its promulgation, its rule differed
from New York law. See id. notes on §§ 205 and 208-11. The Court of
Appeals not only has declined to adopt. § 211, but has continued to
refer to the Restatement Second of Trusts despite the publication of the
third edition. See, e.g., Janes, 681 N.E.2d at 337; Sage Realty Corp. v.
Proskauer Rose Goetz & Mendelsohn, 689 N.E.2d 879, 883 (N.Y. 1997).
Moreover, the rule contained in § 211 can be fairly characterized
as speculative. See Janes, 643 N.Y.S.2d at 982; see also Martin D.
Beglieter, First Let's Sue All the Lawyers, 51 Hastings L.J. 325, 357-59
(2000). It may be that, as a matter of policy and as Williams urges,
allowing an award of appreciation damages theoretically might reinforce a
duty to sell and invest trust assets. However, the benefits of such a
policy would not be borne out in practice. That is, the measure of
appreciation damages for a wrongfully retained asset is too speculative.
To grant them, a court would be forced to generate and assign real-world
value to the hypothetically reinvested proceeds from the asset. See
generally Janes, 643 N.Y.S.2d at 982.
Williams also would have the Court apply federal case law concerning
Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001
et seq., trust funds. However, ERISA case law regarding losses and the
calculation of damages is largely defined by the ERISA statutory text,
framework, legislative history and the common law of trusts. See Donovan
v. Bierwirth, 754 F.2d 1049, 1052 and 1056 (2d Cir. 1985); Sullivan v.
LTV Aero. & Defense Co., 82 F.3d 1251, 1258-59 (2d Cir. 1996). Thus,
federal courts adjudicating claims under ERISA do not apply New York law
in the same manner that a federal court sitting in diversity must do, and
the Court declines to follow federal case law from the ERISA context.
Likewise, the Court rejects Williams's argument that this Court should
follow the example of other state courts that have adopted § 211 of
the Restatement Third of Trusts. See Estate of Wilde, 708 A.2d 273, 276
(Me. 1998); First Alabama Bank v. Spragins, 515 So.2d 962, 966 (Ala.
1987); Daker Boyer Nat'l Bank v. Garver, 719 P.2d 583, 591-92 (Wash. Ct.
App. 1986). Williams's arguments represent a dramatic departure from
unequivocal state law principles articulated by the New York Court of
Appeals. If his theory holds any sway, it must persuade and prevail in a
New York Stare court. It is not the function of a federal court sitting
in diversity and applying New York law to veer so substantially
from settled state law or to strike its own path grounded on federal
doctrine or its own notion of appropriate policy.
For the foregoing reasons, the Court declines to create a new rule of
New York state substantive law. See Gasperini, 518 U.S. at 426 ("Federal
diversity jurisdiction provides an alternative forum for the adjudication
of state-created rights, but it does not carry with it generation of
rules of substantive law."). The Court finds than rule in Janes, limiting
appreciation or loss of profits damages to cases involving self-dealing,
applies to the case at bar. Accordingly, as Williams alleges only trustee
negligence and imprudent conduct, lost profit or appreciation damages are
unavailable to him in this action.
3. Interest, Commission Fees, Attorney's Fees and Costs
It is within a court's discretion on award interest and to determine
the applicable rate of interest. See Janes, 681 N.E.2d at 339. The
decision of whether to award interest depends on the factual
circumstances of the case. See King v. Talbot, 40 N.Y. 76, 95 (1869); In
re Revson's Estate, 447 N.Y.S.2d 297, 302 (App. Div. 2d Dep't 1982)
(citing Brown v. Knapp, 79 N.Y. 136, 145 (1879)); see also C.P.L.R.
§§ 5001, 5004. Summary judgment, however, is not appropriate where the
material facts bearing on the issue are in dispute. See Arnold v.
Luckenbach Steamship Co., 160 F. Supp. 807, 809 (S.D.N.Y. 1954); Tondas
v. Amateur Hockey Ass'n of U.S., 438 F. Supp. 310 (W.D.N.Y. 1977). On the
record before the Court, it would be premature to address the issue of
In the absence of an allegation of self-dealing, misconduct or fraud
there is no ground under New York law for disallowing a trustee's
commission fee. See King, 40 N.Y. at 76; In the Matter of Saxton,
712 N.Y.S.2d 225, 233 (App. Div. 3 d Dep't 2000). The decision to order a
refund of commission fees is discretionary and must be based on the facts
before the Court. See In re Rutledge, 56 N.E. 511 (N.Y. 1900); In re
Baker's Estate, 292 N.Y.S. 122, 130-31 (App. Div. 4th Dep't 1936);
Rothko, 379 N.Y.S.2d 923, 952 (Surr. Ct. 1975), aff'd in part and mod. in
part on other grounds, 392 N.Y.S.2d 870 (App. Div. 1st Dep't 1977),
aff'd, 372 N.E.2d at 291. In the absence of a factual record, the Court
cannot address the issue of commission fees.
A court has discretion to award attorney's fees in cases involving a
trustee's negligent failure to sell a depreciating asset. See In re
Garvin's Will, 177 N.E. 24, 25 (1931); Cooper v. Jones, 435 N.Y.S.2d 830
(App. Div. 4th Dep't 1981); see also Public Serv. Co. of Colo. v. Chase
Manhattan Bank, N.A., 577 F. Supp. 92, 110 (S.D.N.Y. 1983) (applying New
York law). Again, it would be premature for the Court to address the
issue of attorney's fees or costs.
For the foregoing reasons, it is hereby
ORDERED that Morgan's motion for summary judgment on the issues of lost
capital and lost income or appreciation damages is hereby granted; and it
ORDERED that Morgan's motion for summary judgment on the issues of
interest and commission fees is denied; and it is further
ORDERED that Williams's motion for summary judgment on the issues of
lost income or appreciation damages, interest, commission fees, and
attorney's fees is denied; and it is finally
ORDERED that the parties appear for a status conference before the
Court on May 31, 2002, at 2:00 p.m.