What’s the appropriate scope of a trustee’s misconduct that a court should examine when deciding whether to award, reduce or deny a trustee’s commission? That was the question addressed by the N.Y. Appellate Division, First Department, in Matter of Gregory Stewart Trust, 2013 N.Y. Slip Op. (Sept. 26, 2013). In recalling and vacating part of a recommendation issued by a referee and adopted by the Surrogate’s Court, the Appellate Division concluded that courts have the discretion to consider all of a trustee’s misconduct when determining if the trustee is entitled to a commission—even conduct that occurred after the period applicable to the commission. But, said the court, a denial of a commission shouldn’t be in the nature of an additional penalty.
Commissions Granted; Commissions Denied
Petitioner Barbara Stewart was the co-trustee of four trusts of which her four children were beneficiaries. In 2012, she was removed as trustee due to misconduct that took place mainly after 2005. On March 21, 2012, the Surrogate’s Court, relying on a special referee’s determinations, granted Barbara’s request for a statutory annual trustee commission for 2005, awarding her two-thirds of 2005’s annual commission on the trusts’ principal in the amount of $695,960, under N.Y. Surrogate’s Court Procedure Act (SCPA) Section 2309(2). The 2005 commission was based on the value of the each of the four trusts as $85.695 million. The court denied her request for annual commissions on the trusts’ principal for 2003 and 2004, adopting the referee’s determination that Barbara failed to provide competent evidence of the value of the trusts in those years. It also denied Barbara’s request for annual commissions on the trusts’ income for 2003, 2004 and 2005. In granting Barbara’s commission based on trust principal for 2005, the referee stated that absent controlling precedent in New York, trustee misconduct that occurred after the timeframe for which a commission is sought can’t be considered in determining whether to grant the commission.
Barbara appealed to the Appellate Division, seeking commissions under SCPA Section 2309(2) for the years 2003, 2004 and 2005. Three of her children (who were beneficiaries of the trusts) opposed her request for commissions.
2005 Commissions
The Appellate Court concluded that although there weren’t appellate cases on point, no New York case holds otherwise that a court can’t take into account a trustee’s misconduct in determining the grant of annual commission, including conduct that takes place after the period related to the commission. Rather, said the court, a referee has broad discretion to deny a commission if a trustee engaged in misconduct, including misconduct that’s not directly related to the commission being sought.
In support of its conclusion, the court cited the Restatement (Second) of Trusts, Section 243, which lists a multi-factor analysis to use in determining whether a commission should be denied. Those factors include whether a trustee acted in good faith; if the misconduct related to the management of the entire trust; and if the trustee completed services of value to the trust. Thus, subsequent misconduct can be considered when deciding whether to award commission.
The court cautioned, however, that under Section 243, the denial of a commission shouldn’t be “in the nature of an additional penalty.” It should be based on a trustee’s failure to properly serve the trust, not formulated to be an additional punishment.
And So…
The Appellate Court determined that the Barbara’s misconduct in 2005 and thereafter didn’t warrant a denial of her annual commission for 2005. There was no evidence that the trust suffered any significant loss due to her actions and, in fact, there were still substantial assets in the trust. Barbara was only receiving two-thirds of the annual commission on the trusts’ principal, and denying Barbara her full 2005 commission would be tantamount to a punishment. Accordingly, the Appellate Court recalled and vacated the Surrogate’s Court’s order. Given that it had a complete record of the proceedings before referee, the Appellate Court accepted the referee’s determinations and would resolve the 2005 commission issue based on the briefs and record on appeal.