In the Matter of the James M. McDonald III Trust
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Attorneys and Parties
Brief Summary
Whether a corporate trustee breached its fiduciary duty under the former prudent person rule, EPTL 11-2.2 [a] [1] [rule permitting fiduciaries to invest as prudent persons of discretion and intelligence seeking reasonable income and preservation of capital], by keeping the trust heavily concentrated in J.C. Penney Company, Inc. (JCP) stock and diversifying too slowly.
Surrogate's Court, in an accounting proceeding under SCPA 2208 [procedure for judicial settlement of a fiduciary's account], granted summary judgment to the trustee, dismissed the beneficiary's objections, denied leave to amend the remaining objection, settled the final account, and awarded the trustee counsel fees from the beneficiary's share.
The Appellate Division left intact the ruling that any claim based on a duty to liquidate by April 1, 1972 was barred by res judicata, but reversed the denial of the amendment, reversed summary judgment dismissing the amended prudent-person objection, reversed the decree settling the account, and held the fee award premature.
The amendment should have been freely allowed under CPLR 3025 [rule permitting liberal amendment of pleadings absent prejudice] because it did not change the basic theory and the trustee failed to show prejudice. On the merits, the trustee did not establish as a matter of law that its decade-long, gradual sale of concentrated JCP stock from 1973 to 1982 was prudent, because the record lacked clear evidence of a documented investment plan, meaningful periodic review, or trust-specific analysis.
Background
The decedent's 1956 will created trusts for his children and restricted sale of estate or trust stock without the consent of his son James M. McDonald Jr. until that son's death. A large part of the estate was JCP stock. After the grandfather died in 1972, a 1973 accounting decree settled the trustees' account through July 11, 1972. The trust for James M. McDonald III was then funded in December 1973 with 28,640 shares of JCP stock. The trustee soon began selling portions of that position and by October 1983 had sold about 93% of the original JCP holdings. After James M. McDonald III died in 2020, the trustee filed a final accounting in 2022. His son, James M. McDonald IV, objected, claiming the trustee had imprudently failed to diversify the concentrated JCP holdings and caused losses.
Lower Court Decision
Surrogate's Court held that the beneficiary's claim that the trustee should have sold at least 90% of the JCP stock by April 1, 1972 was precluded by the 1973 accounting decree under res judicata principles reflected in CPLR 3211 [a] [5] [dismissal based on prior adjudication or other defenses]. The court also denied the beneficiary's request to amend the objection to assert a later, court-determined divestiture deadline, granted summary judgment dismissing the objection on the merits, judicially settled the trustee's account, and awarded $645,741.01 in counsel fees against the beneficiary's share.
Appellate Division Reversal
The Appellate Division agreed that res judicata barred only the specific theory tied to April 1, 1972, because the 1973 decree settled the trustees' conduct through July 11, 1972 and did not reserve a challenge to retention of JCP stock before that date. But it held that the beneficiary should have been allowed to amend his objection because the amendment still alleged the same essential wrongdoing: imprudent maintenance of an overconcentrated JCP position. The court further held that summary judgment on the amended objection was improper. Although the trustee properly authenticated its investment diary as a business record under CPLR 4518 [a] [business records exception to hearsay], its proof still did not conclusively show prudence. The record contained only limited letters, sparse diary notations, and expert opinions supporting gradual diversification, but lacked clear evidence of formal analysis, a sound trust-specific investment plan, or meaningful periodic review. Viewing the evidence in the beneficiary's favor, a factfinder could infer that the trustee simply used a routine 10-year diversification approach rather than exercising the individualized prudence required of a corporate fiduciary.
Legal Significance
The decision reinforces that an earlier accounting decree can bar claims that were or could have been raised for the period already settled, but it also underscores that amendment of objections in trust accountings should be liberally permitted absent real prejudice. Substantively, it emphasizes that under New York's former prudent person rule, gradual diversification of a concentrated stock position is not automatically prudent merely because it aligns with industry practice, favorable tax treatment, or optimistic market commentary. A corporate trustee must be able to show contemporaneous, trust-specific judgment, including analysis, planning, and review.
A trustee defending a concentrated-stock strategy cannot win summary judgment by showing only that gradual sales were common or tax-efficient; it must demonstrate a documented, prudent, and individualized decision-making process. Prior accounting decrees may bar older theories, but beneficiaries may still pursue later-period imprudence claims if properly amended.