In a sense, the Lasdon decision offers some comfort to fiduciaries concerned with being found liable for imprudent conduct by reinforcing the concept that a fiduciary has to commit certain egregious acts before a court exercises its discretion and denies commissions. Yet, Lasdon also stands for the principle that the determination of when a fiduciary crosses the threshold from simply surchargeable negligence to grossly negligent conduct is a judgment call left up to a court.
To highlight this point, in a Dec. 31, 2012 decision of Surrogate Kristen Booth Glen (the same Surrogate who heard Lasdon), the Surrogate's Court recommended that commissions, in whole or in part, should be withheld from two trustees, upon the completion of their accounting, due to their failure to make proper distributions to a severely disabled institutionalized beneficiary, even though the trust afforded the trustees absolute discretion in the making of such distributions.7
In Matter of Bozzi,8 the Surrogate's Court took a hardline approach when dealing with the acts and omissions of the executor of the estate of Anna Bozzi. For instance, evidence was presented during the course of a contested accounting proceeding establishing that the executor maintained cash assets of the estate in a non-interest bearing checking account, in contravention of the generally accepted principle that requires such funds to be deposited in interest-bearing accounts yielding a reasonable rate of return, and failed to review account statements for almost two years. Compounding matters, when the executor finally transferred the assets to a money market account, he exceeded FDIC insurance limits. Additionally, the executor failed to properly report estate income tax for several years, resulting in the assessment of penalties and interest. Furthermore, the executor improperly charged certain expenses to the estate. The executor's ultimate downfall was his failure to timely distribute the assets of the estate.
Taken together, the trustee's conduct was too much for the court to bear, which held that the executor should receive no commissions:
It is clear from the hearing that the executor was an executor in name only. His tenure as a fiduciary imparted no benefit to the administration of the estate and, in fact, caused a good deal of harm.
A commission is neither a gratuity nor a sinecure. While it is true that SCPA 2307(1), 2308(1) and 2309(1) state that the court must award the statutory commissions to the fiduciary on the settlement of his account, the courts have never hesitated to deny or reduce commissions for a job poorly done.9
Regardless of a court's discretion, a fiduciary engaged in self-dealing is likely to lose some, or all, of his or her commissions. The recent decision in Matter of Garrasi10 plainly illustrates that a fiduciary who places his or her own interests above those of the beneficiary will be dealt a harsh blow. In Garrasi, the beneficiaries of a family trust filed objections to the co-trustees' accounting. Some of the objections were based upon the co-trustees' alleged failure to adhere to the requirements of the Prudent Investor Act which resulted in financial loss to the beneficiaries. The Prudent Investor Act provides that "[a] trustee shall exercise reasonable care, skill and caution to make and implement investment decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument."11
The Surrogate's Court determined that one of the trustees violated the Prudent Investor Act by placing nearly $400,000 in a non-interest-bearing bank account and then repeatedly drawing down these funds by making loans to himself or to a limited liability company in which the only two members were his wife and him. On multiple occasions, the trustee also loaned money from the bank account to another limited liability company of which he was a minority member. Both trustees feigned ignorance of the Prudent Investor Act. Their ignorance, of course, was not an excuse for self-dealing, and the court found that the co-trustees had forfeited any right to their trustee commissions "for such willful mishandling of the Trust."12 Specifically, the court found that the trustee
failed to pursue any kind of investment strategy, except the one he pursued for his own self-interest and personal financial gain. Rather than properly and prudently investing the Trust assets, he loaned them to himself at below-market interest rates, that generated minimal interest income for the Trust.13
The prospect of self-dealing is so antithetical to the duties of a trustee that a court will not hesitate to deny commissions even if the terms of a trust agreement permit self-interested transactions. Consider, for example, the contested accounting proceeding of Matter of Tydings,14 in which the Surrogate's Court surcharged and denied commissions to a trustee for providing interest-free loans to family members and distributing trust profits to a closely held family-owned business in which the trustee held a one-sixth interest. Notably, the trust agreement explicitly mandated that the trustee "shall not be disqualified from acting because the trustee holds an interest in any property or entity in which the trust also holds as an interest" and authorized the trustee "to act on behalf of both the trust and herself or another entity with regard to any transaction in which the trustee and the trust or the other entity have an interest."15
The beneficiary (who was also the grantor of the trust) objected to the trustee's conduct, including her refusal to use trust funds to enable the beneficiary to purchase a home in Tenafly, N.J. Ultimately, the trustee (the beneficiary's cousin) capitulated to the request but subsequently resigned as trustee. When the trustee filed her accounting, the beneficiary objected to certain interest-free loans the trustee made to the family-owned business and the transfer of profits from trust investments to the family-owned business instead of to the beneficiary.