IN RE ESTATE OF JANES 681 N.E.2d 332 (1997) CASE BRIEF

IN RE ESTATE OF JANES

681 N.E.2d 332 (1997)

NATURE OF THE CASE: Lincoln First Bank, N. A., (Executor) sought review of an order which affirmed a judgment imposing a surcharge against Executor for failure to diversify and inattentiveness to testator's estate. The personal representatives also sought review of an order by the lower court, which rejected a certain determination for the amount of the Executor's surcharge.

FACTS: Janes (testator) died on May 26, 1973, survived solely by his wife, Cynthia, who was then 72 years of age. Testator's $3,500,000 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, or approximately $135 per share. Most of his estate was bequeathed to three trusts. He created a marital deduction trust consisting of approximately 50% of the estate's assets, the income of which was to be paid to Mrs. Janes for her life. He also established a charitable trust of approximately 25% of the estate's assets which directed annual distributions to selected charities. A third trust comprised the balance of the estate's assets and directed that the income therefrom be paid to Mrs. Janes for her life, with the remainder pouring over into the charitable trust upon her death. Mrs. Janes, had a high school education, no business training or experience, and had never been employed. No one had discussed the issue of diversification away from the possession of Kodak stock. By the end of 1973, the price of Kodak stock had fallen to about $109 per share. One year later, it had fallen to about $63 per share and, by the end of 1977, to about $51 per share. In March 1978, the price had dropped even further, to about $40 per share. In February 1980, the remaining 11,320 shares were worth approximately $530,000, or about $47 per share. Most of the shares were used to fund the trusts in 1986 and 1987. Allegations were made in violation of the 'prudent person rule' of investment. At trial, it was found that Executor, under the circumstances, had acted imprudently and should have divested the estate of the high concentration of Kodak stock by August 9, 1973. The court imposed a $6,080,269 surcharge and ordered the Executor to forfeit its commissions and attorneys' fees. In calculating the amount of the surcharge, the court adopted a 'lost profits' or 'market index' measure of damages espoused by objectants' expert--what the proceeds of the Kodak stock would have yielded, up to the time of trial, had they been invested in petitioner's own diversified equity fund on August 9, 1973. The Appellate Division modified solely as to damages. The Court rejected the Surrogate's 'lost profits' or 'market index' measure of damages, however, holding that the proper measure of damages was '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. Applying this measure, the Court reduced the surcharge to $4,065,029. Both parties appealed.

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LEGAL ANALYSIS:

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