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Matter of Estate of Philip Lange

Decided: March 6, 1978.

IN THE MATTER OF THE ESTATE OF PHILIP LANGE, DECEASED


For reversal and remandment -- Chief Justice Hughes and Justices Sullivan, Pashman, Clifford, Schreiber and Handler. For affirmance -- None. The opinion of the court was delivered by Pashman, J.

Pashman

[75 NJ Page 469] The issue presented by this appeal is the propriety of surcharging executrices for acts beyond the scope of their powers under the will but validated by the effective consent of all parties in interest to those acts. The County Court, Probate Division, held, and the Appellate Division agreed, that any such consensual conduct was ineffective to exonerate the executrices from liability for the consequences of the breach of their fiduciary duties. Finding merit in the contention that such validation by the parties in interest precludes the imposition of a surcharge under the circumstances of this case, we reverse the judgment of the courts below.

Philip Lange died in December 1967, survived by his wife, Catherine Lange, and their adult children, Catherine Lennox, Elizabeth Dixon and George Lange. His will designated Catherine Lange and Catherine Lennox as co-executrices of his estate and co-trustees of a residuary trust created thereunder. Specific cash bequests of equal amounts were made to each of three children. The residue of the estate was placed in the trust, with the net income to be paid to Mrs. Lange during her lifetime and principal to be invaded, if necessary, to assure that her accustomed standard of living would be maintained. Upon her death, the trust was to terminate with the outright payment of the remaining trust balance in equal shares to the testator's three children, if living, or their surviving issue, per stirpes. The residuary assets from which the testamentary trust was to be funded consisted predominantly of numerous shares of various stocks and were valued at several hundred thousand dollars.

In early 1969, the attorney for the estate advised the executrices that approximately $60,000 would be needed to pay the estimated federal estate tax liability. Since liquid assets sufficient to meet this obligation were apparently not available, the attorney recommended that certain of the residuary assets of the estate be liquidated in order to obtain the necessary funds. It was then determined that 1500 of the estate's 4500 shares of stock in the Colonial National Bank (hereinafter Colonial) should be sold and the proceeds applied to the payment of the estate tax.*fn1 Five hundred shares of the Colonial stock were sold in March 1969 at a price considered to be very unfavorable by Mrs. Lange, who thereupon determined to refrain from selling any more of the stock until market conditions improved.*fn2 The proceeds of the shares

sold were used for partial payment of the estate taxes. No attempt was made to liquidate other residuary assets, although estate taxes were still owing. Later that month, apparently at the suggestion of Elizabeth Dixon, the executrices negotiated a loan from the Delaware Valley National Bank (hereinafter Delaware Valley) on behalf of the estate for the balance of the tax indebtedness. Mrs. Lennox agreed to the loan transaction on the understanding that it was to be only a temporary measure and would be repaid as soon as possible by the sale of small increments of the Colonial stock. This loan was secured by the pledge of a substantial amount of the estate's shares of Colonial stock as collateral. The attorney for the estate had given his opinion that the executrices would be acting within their powers under the will in procuring this loan. In addition, the lending bank agreed to the loan only after it had examined the will and satisfied itself that the executrices were authorized to so obligate the estate. Neither George Lange nor Elizabeth Dixon, the other parties in interest under the will, made any objection or otherwise questioned the propriety of the loan transaction. The monies obtained from the loan were used to pay the balance of the estate tax due. Interest on the loan was paid out of income from the residuary assets of the estate, including the pledged Colonial stock.

In late summer of 1971 the attorney for the estate recommended to Mrs. Lennox that a portion of the estate's Colonial stock sufficient to pay off the loan be sold. In March 1972 Mrs. Lennox's husband became the attorney for the estate and made a similar recommendation to the executrices, with which Mrs. Lennox agreed. However, Mrs. Lange, her co-executrix and the income beneficiary under the trust, refused to consent to liquidation of any of the estate's Colonial stock. Her resistance resulted from the opposition to the proposal by George Lange and Elizabeth Dixon, the other two legatees and beneficiaries in remainder. They believed that the stock continued to be undervalued and that any such sale would still yield an unfavorable price for the shares. When the attorney [75 NJ Page 472] formally requested the consent of those two beneficiaries to the retention of the shares as estate assets, both indicated their opposition to any sale of the Colonial stock. Mrs. Lange thereafter remained adamant in her refusal to consent to any liquidation of the Colonial stock.*fn3 In August 1972 the three children, by agreement, received their specific bequests in kind by way of shares of the estate's Colonial stock and executed the appropriate refunding bonds and releases. All subsequent efforts by Mrs. Lennox and her husband, as attorney for the estate, to persuade Mrs. Lange, Elizabeth Dixon and George Lange to liquidate the remaining Colonial stock held by the estate and to pay off the Delaware Valley loan proved unsuccessful. In May 1973 an informal accounting rendered by the executrices to all interested parties*fn4 revealed the outstanding Delaware Valley loan, the pledge of the Colonial stock and the monthly interest payments on the loan. None of the beneficiaries objected to the continuation of the loan or the estate's retention of the pledged and non-pledged Colonial stock.*fn5 As late as May 1974 Mrs. Lange, through her counsel, reiterated her continuing refusal to liquidate any of the Colonial stock for the purpose of satisfying the loan even though the value of the stock had steadily declined since her husband's death. None of the residuary remaindermen, other than Catherine Lennox, ever objected

to the continuance of the Delaware Valley loan or the retention of the Colonial stock during the decline in its market value.

As a result of other unrelated disputes among the parties in interest, in September 1974 Mrs. Lennox filed a complaint with the account annexed in the Probate Division of the Camden County Court. She sought, inter alia, to have her final and formal accounting approved and distribution of the residuary assets to the testamentary trustees ordered. She also sought an order directing the executrices to liquidate sufficient estate assets to retire the Delaware Valley loan, the outstanding amount of which was some $33,000 at that time. Mrs. Lennox's formal accounting revealed the outstanding status of the loan and the retention of both the pledged and non-pledged Colonial stock as estate assets. Mrs. Lange filed exceptions to this accounting, in which she had not joined as a co-accountant, in October 1974. None of her exceptions was addressed to the Delaware Valley loan transaction. Neither Elizabeth Dixon nor the two sons of George Lange filed any exceptions to the formal accounting.

Prior to filing her exceptions, Mrs. Lange had filed a complaint in the Probate Division seeking to have Delaware Valley restrained from liquidating any of the pledged Colonial stock for purposes of reducing the principal balance on the loan. It also sought to have Catherine Lennox ordered to take the necessary steps to have another estate asset (a certificate of deposit) liquidated and the proceeds applied to the principal on the Delaware Valley loan. Mrs. Lange alleged that the intervention of the court was required because her co-executrix refused to make any estate assets available to reduce the Delaware Valley loan.

Temporary restraints against the bank and an order to show cause against Catherine Lennox were issued by the probate judge. On the October 4, 1974 return date, the probate judge, prompted by Mrs. Lange's action for injunctive relief against her co-executrix, sua sponte raised the issue

of the executrices' authority to have negotiated the Delaware Valley loan and temporarily restrained the executrices from paying any interest on the loan until he ruled on that issue. In her subsequently filed answer to Mrs. Lennox's original complaint, Mrs. Lange requested that retirement of the Delaware Valley loan be held in abeyance until the court determined the propriety of the loan. She also asked that the court surcharge the executrices if the loan was found to be illegal. In late November 1974 the probate judge ordered that the pledged Colonial stock be sold and the proceeds applied to pay the Delaware Valley loan in full, with any excess monies resulting from the sale to be paid into the estate. However, by that time the value of the Colonial stock had so dwindled that the liquidation of the collateral was insufficient to satisfy the outstanding balance on the loan.

At the several hearings on the legality of the loan and other disputed matters, Mrs. Lange advanced the contention that she and her co-executrix daughter had acted improperly and in excess of their powers under the will in negotiating the Delaware Valley loan. As the life tenant with the right to the entire income from the corpus and with the power to invade, when necessary, the principal of the testamentary trust, Mrs. Lange would suffer no real harm from any surcharge imposed on her. Mrs. Lennox's position, however, was substantially more vulnerable and she vigorously contested the alleged impropriety of the loan.

In February 1975 the probate judge held, inter alia, that the executrices' negotiation of the Delaware Valley loan for the purpose of meeting the tax liability of the estate was an ultra vires act, notwithstanding the fact that no interested party had indicated any objection to the estate's obtaining the loan and no party other than Catherine Lennox had ever objected to the continuance of the loan. The basis for this ruling was the judge's finding that the procurement of a loan to pay a tax obligation contravened specific instructions in the will as to how taxes were to be paid. Consequently, [75 NJ Page 475] he concluded that it was not the testator's intention that his wife and daughter, as executrices, have the power to obtain a loan to pay the taxes imposed on the estate. The judgment specifically surcharged the executrices jointly and severally in the amount of $26,819.19, which the probate judge found to be the loss sustained by the estate as a result of the procurement of the Delaware Valley loan. This amount was calculated as the decrease in the value of the number of Colonial shares whose liquidation would have been necessary to satisfy the balance of the tax indebtedness in March 1969, the approximate date of the Delaware Valley loan, from that date to the November 1974 date when the collateral was sold at the court's direction. Appropriate adjustments were made for the value of dividends ...


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