On appeal from the Superior Court of New Jersey, Chancery Division, Camden County.
Approved for Publication May 26, 1997.
Before Judges Havey, Brochin & Eichen. The opinion of the court was delivered by Brochin, J.A.D.
The opinion of the court was delivered by: Brochin
The opinion of the court was delivered by
Defendant CoreStates Bank, successor by merger to First Pennsylvania Bank, N.A., is a co-executor and co-trustee of the estate of Henry F. Lenahan, Sr. who died in 1977. The other co-executor and co-trustee is the decedent's older son, third-party defendant Henry F. ("Hank") Lenahan, Jr. He and the decedent's other children, plaintiffs Judith Semler, Mary Lou Yule, Timothy Lenahan, and James M. Lenahan are the sole beneficiaries of Henry F. Lenahan, Sr.'s estate. The largest single asset of the estate was a $700,000 installment promissory note from Lenahan Plastics, Inc., a Tennessee corporation, to Mr. Lenahan, Sr. Lenahan Plastics failed to pay $373,333.28 of principal plus accrued interest, and that portion of the debt is now uncollectible from the obligor corporation. Plaintiffs attribute the uncollectibility of the note to CoreStates' failure to perform its fiduciary duties with proper diligence and skill. They contend that, as a result, the bank is liable to compensate them for their loss. After a lengthy bench trial, the Chancery Division, Probate Part, agreed with plaintiffs and entered judgment in their favor for $597,735.80. Defendant has appealed.
Henry Lenahan, Sr. was the founder, president and, at the time of his death, sole stockholder of Lenahan Associates, a New Jersey Corporation, which owned real estate and equipment in Pitman, New Jersey. Lenahan Associates processed resins and sold them to manufacturers for the production of vinyl phonograph records. In approximately 1964, Hank Lenahan, with his father's assistance, established Lenahan Plastics, a Tennessee corporation, whose facilities were located in Tennessee and which was engaged in substantially the same business as Lenahan Associates. Hank Lenahan owned ninety-eight percent of the outstanding shares of capital stock of Lenahan Plastics, his wife, Margaret, owned one percent, and his father owned the remaining one percent.
By a purchase agreement, promissory note and security agreement dated July 1, 1977, Henry Lenahan, Sr. sold all but one of the 100 outstanding shares of Lenahan Associates to Lenahan Plastics for $700,000. The purchase agreement provides that the purchase price for the stock is to be paid by Lenahan Plastics' "execution and delivery . . . of a promissory note, payable to [Henry Lenahan, Sr.] in fifteen equal annual installments including interest at six (6%) percent per annum until paid in full." (The terms of the promissory note make it clear that the annual payments are to be fifteen equal payments of principal and, with each principal payment, interest on the unpaid balance.) Upon default in any payment, the holder of the note was entitled to declare the entire unpaid balance of the note payable immediately without prior notice.
To secure the purchase price, interest and costs of collection, Lenahan Plastics' security agreement granted Henry Lenahan, Sr. a security interest in the ninety-nine shares of stock which he was selling. When this agreement was executed, a secured creditor could perfect his security interest in capital stock only by taking possession of the stock certificates. See N.J.S.A. 12A:9-304 (security interest perfected by possession); but see also N.J.S.A. 12A:8-321, effective Jan. 16, 1990 (perfecting security interest in securities). The purchase agreement provides that possession will not be delivered to the creditor. The agreement states:
3. DELIVERY OF STOCK. SELLER hereby delivers to the PURCHASER ninety-nine (99) shares of the issued and outstanding capital stock of the Corporation with the proper endorsements thereon which vests good and marketable title to the stock in the PURCHASER as is being sold as provided in this Agreement.
4. REPRESENTATIONS OF SELLER. . . . . The delivery of said shares of stock of the Corporation to the PURCHASER, pursuant to the provisions of this Agreement, shall be made upon the execution of this Agreement and the promissory note hereinabove referred to in paragraph 2(a) above. SELLER will transfer valid title thereto, free and clear of all liens, encumbrances and claims of every kind.
Mr. Lenahan, Sr. delivered his shares of stock to Lenahan Plastics pursuant to these provisions. Two and a half months later, he died. His wife had predeceased him. His entire estate was left to an inter vivos trust which he created concurrently with the execution of his will. The will provided for distribution of ten percent of the trust income and corpus to Hank Lenahan and twenty-two and a half percent to each of his other four children. Hank Lenahan and First Pennsylvania Bank, N.A., which was subsequently merged into CoreStates Bank, were appointed and qualified as the decedent's co-executors and co-trustees. *fn1
The $700,000 indebtedness due from Lenahan Plastics represented approximately two-thirds of the value of the net estate. The annual installments on the note, which were due on June 30 of each year, were paid on time through June 30, 1979. The installment due June 30, 1980, was paid July 30, 1980. The installment due June 30, 1981, was paid on time. The interest component of the installment due June 30, 1982 was paid July 15, 1982 and the principal was paid July 28, 1982. The installment due June 30, 1983 was paid on time. The installment due June 30, 1984 was paid July 25, 1984. The installment due June 30, 1985 was not paid and the bank accelerated the note by a letter on or about August 27, 1985. A $5,000 partial payment was made in November 1987. No payments of principal or interest were made thereafter. CoreStates filed suit in Tennessee against Lenahan Plastics on October 27, 1987 and obtained a judgment against it in August 1988. By then or shortly thereafter, Lenahan Plastics had been adjudicated a bankrupt and the assets of Lenahan Associates were acquired by a trade debtor which had obtained and perfected a mortgage on its real property and a security interest in its equipment and accounts receivable.
The trial Judge found that CoreStates had breached its fiduciary duties in "three key respects." First, the court found, the bank failed to keep itself informed of the financial condition and viability of Lenahan Plastics and Lenahan Associates. Secondly, it should have obtained possession of the capital stock of Lenahan Associates following Mr. Lenahan, Sr.'s death, and it failed to do so. Thirdly, it failed to declare that the promissory note was in default in 1982 and to "seize the assets of Lenahan Plastics and Lenahan Associates before other creditors did so." The court ruled that these failures were a proximate cause of its inability to collect the unpaid balance of the note for the benefit of the beneficiaries of the estate; ...