July 29, 2008
IN THE MATTER OF THE MARTHA HEYMAN TRUST AND IRREVOCABLE TRUST AGREEMENT DATED MARCH 20, 1998, DECEASED.
On appeal from the Superior Court of New Jersey, Chancery Division, Probate Part, Monmouth County, Docket No. P-243-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: April 16, 2008
Before Judges Axelrad and Messano.
Robert Weston, the Trustee for a generation-skipping trust, appeals from a judgment surcharging him $347,750.52 for fees and commissions received from the trust, for lost principal and income to the trust on an investment in which he had a personal interest, for missing assets and unexplained lost funds, and for his defense accounting and counsel fees paid from trust assets. On appeal, the Trustee claims the Chancery judge: (1) improperly refused to recognize a $350,000 life insurance recovery when calculating losses to the trust; (2) disregarded evidence of the trust's true performance; and (3) erred in assessing certain specific items of damage. The grandchildren trust beneficiaries, Daniel and Steven Needler (Needlers), filed a cross-appeal contending the court erred in: (1) denying their request for counsel and expert fees; (2) denying additional damages in the amount of $24,283 for losses in self-interested investments; and (3) failing to award them prejudgment interest. We affirm the appeal and cross-appeal.
On September 11, 1986, Martha Heyman created an irrevocable trust (the Trust) at the suggestion of Weston, her longtime financial advisor. She appointed Weston, a certified financial planner and New Jersey registered investment advisor, as trustee, and he acted as trustee uninterrupted from the Trust's inception. The settlor's daughter Lori Needler*fn1 was designated the lifetime income beneficiary and Lori's children were the remaindermen. At some point, the Trustee used trust funds to purchase a $350,000 insurance policy on Lori's life to cover estate taxes based on the expectation Lori would inherit her mother's sizeable estate. Lori, however, predeceased the settlor, dying of an illness on August l7, 2002, at age sixty-seven.*fn2
Upon learning of the Trust, and becoming dissatisfied with the lack of information provided by the Trustee regarding the assets and their management, the Needlers filed an Order to Show Cause and Verified Complaint in the Chancery Division, Probate Part on September 26, 2003. They sought an accounting, distribution of any remaining trust assets, and attorneys' fees and costs.
On October 31, 2003, the court entered an order directing the Trustee to file a complete and detailed accounting from the date of inception of the Trust, including a list of fees and commissions taken by the Trustee during the life of the trust, a detailed disclosure of any trust investment in which he also made a personal investment or had any direct or indirect ownership or investment interest, and a list and appraisal of the real and personal property of the Trust as of Lori's date of death. The Trustee's accountant, Andrew M. Chavkin, CPA, prepared an accounting dated May 19, 2004 (the Chavkin report).
On April 6, 2006, the Needlers noted five exceptions to the accounting set forth in a letter from counsel, and on February 27, 2006, their expert witness, John R. Bedard, CPA, issued a report critical of the Chavkin report.
Trial took place on August 24 and November 28, 2006, during which Weston, Daniel Needler, Chavkin and Bedard testified. The Needlers argued that Weston breached his fiduciary duty by failing to maintain adequate records and account for the trust assets, and by investing in entities in which he had an ownership interest and in vehicles that granted commissions and fees to him personally for the investment. They sought disgorgement of all fees and profits garnered by Weston in his role as trustee, specifically requesting the court to surcharge Weston for losses and commissions resulting from his investment of trust assets in investment vehicles in which he had an investment or ownership interest, and for unaccounted trust assets. They also sought prejudgment interest and attorneys' fees.
The eighty-one-year-old Trustee testified it was the first trust he managed and he did not understand the responsibilities of his position. He acknowledged he handled the Trust informally, kept poor records, and lost many that he had. The Trustee had no specific ledger or document regarding each deposit or investment, no checks or registers from l986 through l996, and no tax returns from l986 through l994. Moreover, he only produced sporadic checks covering the periods from January l996 through August l998 and July 200l through October 2003. The Trustee believed the total amount put into the Trust over its life in cash and reinvested matured investments was $438,106, exclusive of Lori's life insurance proceeds, and the distributions to the life beneficiary over sixteen years was $156,000, although he did not have backup documentation for either figure. After depositing the $350,000 life insurance proceeds into the Trust, he distributed approximately $800,000 in cash and in-kind to the Needlers.
The Trustee admitted he made investments in entities in which he functioned as a partner or co-partner and in vehicles that granted commissions and fees to him personally for the investment. In particular, he unsuccessfully invested in Cambridge Partners, a high-risk hedge fund from which he received placement fees, having placed about one-third of the trust assets into this fund in 2000. Moreover, he collected fees annually from the Trust while receiving fees and commissions from these investment sources.
As a result of the Trustee's failure to maintain records, his accountant was unable to determine with certainty the amount of contributions to the Trust, disbursements, and the course of many of the investments. The Chavkin report contained the express caveat that the Trustee "never contemplated a formal accounting, and therefore, did not systematically retain and file records that would make it possible to prepare a complete and detailed accounting of all assets and activities of this Trust since inception." Chavkin acknowledged he was given the "unenviable task of trying to re-create approximately 20 years of transactions without accurate or complete records" and, as noted on the spreadsheet, much of the information was based on the Trustee's recollection and assumptions.
Although the Trustee conceded his lack of proper recordkeeping and some improper investments "in hindsight," he urged the court to consider the off-setting items that benefited the Trust. According to the Trustee, based on his reconstructed numbers, which were credible, the Trust performed quite well overall, and he thus satisfied the Prudent Investor Act, N.J.S.A. 3B:20-11.3b, evaluating a fiduciary's investment and management decisions in the context of the trust portfolio as a whole. He also argued that pursuant to N.J.S.A. 3B:19B-16, requiring a trustee to allocate to principal the proceeds of a life insurance policy in which the trust is named as a beneficiary, the grandchildren suffered no loss as a result of the Trust's augmentation by the $350,000 life insurance proceeds.
In rejecting the Trustee's arguments, Judge Lehrer found the "fundamental records required for a formal accounting were not available, including cash receipts and disbursements, journals, bank reconciliations, detailed investment activity, investments reconciliation and tax returns[,]" and even minimal records were not available. The judge further noted the deficiencies in the reconstructed documents provided and the Trustee's forensic accountant's acknowledged inability to provide a complete accounting of the Trust due to missing documents. Thus the Trustee was unable to support his claim of the amount of funds paid into the Trust and its earnings and dividends, assess performance of the Trust over its life, or substantiate his expenses. Judge Lehrer also found the Trustee was negligent and breached his fiduciary duty by failing to maintain adequate records relating to the Trust assets and failing to account, resulting in an inability to trace the funds. Thus, all presumptions and inferences were held against the Trustee. Additionally, the judge found the Trustee breached his statutory fiduciary duties by engaging in self-interested investments from which he personally gained and for which he failed to disclose his interest, and expressly found that Cambridge and other self-interested investments were not prudent under the law.
As a result of the Trustee's failures and improper conduct, the Chancery judge disgorged the Trustee of any benefits received from the Trust, surcharged him for unaccounted for Trust assets and losses incurred from high-risk investments in which he had a personal interest, and directed he repay accounting and counsel fees he took from the trust. The court entered judgment against the Trustee in the amount of $347,750.69, comprised of the following:
* $142,019.98 - loss of principal of the Trust from the Cambridge Partnership investment
* $9,759.29 - fees generated from investments in which the Trustee had an interest
* $53,913.20 - management fees received by the Trustee from the Trust (1% annually of the amount of Trust assets from l986 through 2002) taken in addition to fees from the Cambridge Partnership and other investment groups
* $57,867 - lost income on the Cambridge Partnership investment, calculated as amount generated if invested in a CD rather than in the high risk hedge fund
* $40,440 unaccounted for Trust assets $11,046.22 of additional unaccounted for Trust assets for time period following the Chavkin report
* $10,205 accounting fees and $22,500 counsel fees Trustee took from Trust for his defense
Judge Lehrer declined to offset the $350,000 life insurance proceeds against the judgment, finding "there was clearly misconduct on the part of the Trustee" and he should not be able to benefit from the policy that was purchased to pay taxes, which "were certainly not anywhere near the $350,000." The judge further ordered the parties to be responsible for their own counsel fees in the litigation. In response to the Needlers' request for prejudgment interest "as a discretionary award," the Chancery judge "decline[d] to exercise [his] discretion" to make such award, stating "enough is enough." This appeal and cross-appeal ensued.
On appeal, the Trustee does not challenge the trial court's findings that he engaged in inadequate recordkeeping. He also concedes his investment of Trust assets in the high-risk hedge fund known as Cambridge Partners, which resulted in substantial risk and loss to the Trust and from which he personally gained, and in which he did not disclose his self-interest, was improper. Weston asserts as error that the court focused solely on the defects in his performance as trustee, punitively surcharging him for each and every loss and damage claimed by the Needlers' expert witness, and refusing to give him any credit for the good things he did, including an overall "respectable" trust performance of income and capital appreciation as testified to by Chavkin, and the Trustee's "perspicacious" investment in life insurance. According to the Trustee, N.J.R.E. 1004(a), which expressly permits "other evidence of the contents of a writing" when the "originals are lost or have been destroyed," required the court to give credence to the "unrefuted" figures that he and Chavkin testified to based on Weston's memory and the limited financial records. The Trustee contends that based on his reconstructed figures, even without the life insurance proceeds, he distributed to the remainder beneficiaries over $70,000 more than the $438,000 the settlor contributed to the trust, which was an adequate performance for the sixteen-year Trust.
The Trustee further challenges the following computation of damages: (1) the $53,913.20 management fee, contending the record does not support that he simultaneously took management fees from the Trust and investment vehicles over the life of the Trust and that it would be disproportionate to his breaches to preclude him from receiving any fees paid by the Trust for his work over the sixteen-year period; (2) the $57,867 lost income on the Cambridge investment, contending the surcharged loss of principal was sufficient for his breach; (3) the over $51,000 in Trust assets that could not be accounted for, due to lost records, contending it was unduly harsh and punitive in view of the overall satisfactory Trust performance; and (4) the $22,500 he paid to counsel from the Trust to defend this lawsuit, contending they were reasonable trust expenses authorized by the Trust Agreement. Alternatively, the Trustee contends the remainder beneficiaries suffered no damage as a result of his prudent investment in the life insurance policy and the court erred in failing to credit the $350,000 proceeds to any losses incurred.
We are not persuaded by any of the Trustee's arguments on appeal and affirm substantially for the reasons articulated by Judge Lehrer. Our scope of review of a trial court's fact-finding is limited, with particular deference given when the evidence is largely testimonial and involves questions of credibility in view of the trial court's particular perspective in observing and evaluating the witnesses. Pascale v. Pascale, 113 N.J. 20, 33 (1988). "Findings by the trial court are considered binding on appeal when supported by adequate, substantial and credible evidence." Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974).
As aforementioned, the Trustee does not challenge the trial court's findings that he engaged in improper conduct and breached financial duties. His challenge to the judgment based on claimed overall "adequate performance" is neither supported by the law nor the record. Weston clearly did not act as a prudent investor with a duty of loyalty toward the Trust beneficiaries, when he invested Trust assets in Cambridge Partnership, a high risk hedge fund, and other entities in which he had a personal interest. See L. 1997, c. 26, § 1 (N.J.S.A. 3B:20-11.1) ("The bill requires a fiduciary to invest trust assets as a prudent investor would . . . and imposes upon the fiduciary the dut[y] of loyalty . . . toward beneficiaries[,] [requiring] each investment or course of action . . . [to be] consistent with an overall investment strategy as required under the standard of care set forth in the bill."). Even assuming arguendo the outcome mitigated improper performance, the Trustee failed to present any evidence to support his gauzy claim of the Trust's "adequate performance." As the Needlers' accountant testified, the Trustee could not establish a financial trail from the onset of the Trust to its end. Because the Trustee admittedly failed to maintain Trust records, neither he nor his accountant were able to establish at trial the amount of principal invested in the Trust, contributions to the Trust over its life, investments made, or the amounts paid to the income beneficiary during her lifetime. As one example, although initial contributions of about $93,000 were listed as a schedule to the Trust Agreement, no ledgers or other records of further contributions to the Trust were provided to substantiate the Trustee's $438,000 figure. Even Chavkin conceded he could not state what funds were invested or re-invested in the Trust, and the bulk of the contributions were "assumed" based on the Trustee's recollection.
Nor did the trial court err in its calculation of damages. Contrary to his arguments on appeal, because of the Trustee's inconsistent and sometimes disjointed testimony, the trial judge sought clarification on at least two occasions, and the Trustee admitted he took a one percent annual fee from the Trust in addition to the fees and commissions he received from Cambridge Partners and the other investment groups that paid him fees. We do not perceive the $54,913 assessment to be disproportionate to the Trustee's breach in view of his longstanding pattern of self-dealing by investing Trust assets in ventures in which he had a personal interest, some of which were high risk, and failing to fulfill the most basic fiduciary obligation of recordkeeping. The assessment for lost income on the Cambridge Partnership investment was proper as "profit which would have accrued to the estate if there had been no breach of trust." See Restatement (Second) of Trusts, § 205(c). The Trustee did not dispute that about $51,000 could not be accounted for, and based on his failure to maintain records, the trial judge was within his discretion in assessing that figure against the Trustee. See In the Matter of Dougal Herr, 22 N.J. 276, 287-88 (1956) (holding that doubts and ambiguities will be construed against a trustee when he fails to keep proper records). Lastly, based on the trial court's finding of the Trustee's self-dealing, the disallowance of his defense costs and fees from the Trust was proper.
There is no merit to the Trustee's claim that the life insurance proceeds should have been credited to the losses incurred. First of all, the remainder beneficiaries were damaged, as it is impossible to establish a financial trail of the Trust without records. Second, improper conduct should not be sanitized based on the fortuitous premature death of the lifetime beneficiary. Third, had the Trust been handled properly, it would have generated the life insurance proceeds as well as avoided the losses caused by the Trustee's improper conduct.
We turn now to the Needlers' cross-appeal. They argue the trial court erred in: (1) refusing to award attorney's fees; (2) denying additional damages in the amount of $24,283 for losses in self-interested investments; and (3) failing to award prejudgment interest. The arguments regarding the first two discretionary rulings do not merit further discussion. R. 2:11-3(e)(1)(E). As to prejudgment interest, we add the following comments.
Pursuant to Rule 4:42-11(b), prejudgment interest "shall" be awarded in tort actions*fn3 ; however, the court may suspend it in "exceptional cases." We have consistently recognized that "[t]he purposes for awarding prejudgment interest in tort actions . . . are not only to compensate plaintiffs for not having use of the judgment money while their actions are pending and to require defendants to give up the benefits of their use of the money during that time, but also to encourage defendants to settle cases." Heim v. Wolpaw, 271 N.J. Super. 538, 542 (App. Div. 1994) (citing Kotzian v. Barr, 152 N.J. Super. 561, 565 (App. Div. l977), rev'd in part on other grounds, 81 N.J. 360 (1979). In these cases we held that a case with a judgment-proof defendant was the kind of exceptional situation for which the court could suspend the running of prejudgment interest because an award of interest would neither advance the aim of early settlement nor constitute fair settlement to plaintiff for money intentionally withheld and used or presumptively used by defendant.
Overall, "the denial of prejudgment interest is left to the sound discretion of the trial judge, based on considerations of equity, fairness and justice, viewed in the factual context of the case at hand." Green v. General Motors Corp., 310 N.J. Super. 507, 534 (App. Div.), certif. denied, 156 N.J. 381 (1998). The suspension authority, however, should be used in exceptional circumstances only and should "be most cautiously exercised; and always with consideration of the underlying purpose and philosophy of the rule, namely that prejudgment interest is not a penalty but is rather a payment for the use of money." Pressler, Current N.J. Court Rules, comment 2.1 on R. 4:42-11 (2008).
We would have preferred the trial judge to have analyzed all the circumstances, including the Trustee's financial situation, and to have made a finding of "exceptional circumstances" prior to denying prejudgment interest. In the context of the way the application was made at the end of the trial, however, we cannot necessarily fault the court for not having made a complete record. Under the totality of the circumstances we are satisfied that it would not serve any purpose to protract the litigation and remand the matter for a hearing on this issue. Without minimizing the Trustee's negligent conduct, in view of the Trustee's advanced age, the two-year period between the Chavkin report and Bedard's responding report, and the presumed financial burden the Trustee will have in paying the substantial judgment, to name only a few items, the trial judge did not err in denying prejudgment interest.