This proceeding was commenced in September, 2006, by HSBC BANK USA, N.A. ("HSBC") for judicial settlement of its intermediate accounts as a trustee of this trust. The accounting covers the period January 21, 1957 through November 3, 2005. HSBC also seeks permission to resign as trustee and to be discharged. [*2]

On January 21, 1957, grantor Seymour H. Knox II ("Seymour II") entered into a trust agreement with The Marine Trust Company of Western New York [now known as HSBC].^[FN1] The trust was formed to benefit the issue of grantor's son, Seymour H. Knox III ("Seymour III"), and HSBC is the sole trustee.

Seymour III's children — Seymour H. Knox IV, W. A. Read Knox, Avery Knox and Helen Keilholtz — filed objections to the accounting. They allege that HSBC negligently retained 23,000 shares of Venator Group, Inc. ("Venator"), which had previously been the F. W. Woolworth Co. ("Woolworth"), thereby breaching its fiduciary duty as trustee and resulting in loss to the trust.

The guardian ad litem appointed to represent the interests of the minor descendants of Seymour III — who are all presumptive remainderpersons — has also filed objections.^[FN2] The guardian ad litem contends that HSBC breached its fiduciary duty as trustee by retaining overweight investments in several securities, as well as violating its own policies regarding the purchase or retention of off-list securities. The claim is also made that HSBC improperly abdicated its fiduciary role to Seymour II and Seymour III, both non-trustees. Finally, the guardian ad litem alleges an overall pattern of imprudence and negligence by HSBC in the management of this trust.

Following extensive discovery, a trial on the issue of liability only was held in December, 2009.^[FN3] The parties have since submitted proposed findings of fact and conclusions of law, and I now find and decide as follows.

The Knox family has been prominent in the Buffalo, New York, area since the [*3]late 19th century, and has long been involved with the bank. Seymour II and his son, Northrup Knox, Sr. ("Northrup, Sr."), each headed the bank for many years. According to Jonathan Reynolds ("Reynolds"), the Chief Investment Officer ("CIO") of HSBC from 1991 to 2000, the Knox family was "one of the most important clients of the Bank and among the founders of the modern bank".

Seymour III and his brother, Northrup, Sr., founded the Buffalo Sabres NHL hockey franchise in 1969. Seymour III's wife, Jean Knox, has been involved with many Buffalo area cultural institutions, including as a director of the Albright-Knox Art Gallery.

A review of the trust agreement establishes that its purpose was to provide income in equal shares per stirpes to the children of Seymour III. HSBC was given discretion to accumulate or pay over income, and it was also given discretion to pay over a minor child's income share "for his or her support, maintenance, education and general welfare . . . without regard to any other funds which may be available from any other source for any such purpose." A somewhat more circumscribed power to invade trust principal for the health, maintenance, support or education of each such child was also contained in the trust agreement (see infra, at p. 32).

The trust was initially funded with 5,000 shares of Woolworth capital stock and 5,200 shares of Marine Midland common stock. At the time the trust was created in 1957, grantor Seymour II was a member of the Board of Directors of Woolworth and of Marine Midland. Reynolds testified that, by the beginning of the 20th century, Woolworth "was one of the most successful and significant companies in the world", and that Seymour II owned 13% of Woolworth's stock.

The trust was partly funded with 5,000 shares of Woolworth capital stock. By the end of 1957, nearly a year after the trust's creation, HSBC had sold 2,100 shares of the Woolworth stock and purchased three different equities. HSBC retained 2,900 shares of Woolworth, and continued to hold these shares pursuant to the grantor's request that they be retained. A notation dated December 20, 1960, in HSBC's administrative diary reflects the following entry: "Grantor has indicated a definite preference that balance of 2,900 shares Woolworth be retained" (emphasis added).

In February, 1997, 5,000 shares of Woolworth were sold, leaving 23,000 shares still in the trust. Woolworth stock was removed from HSBC's Hold List in March, 1997. On March 24, 1998, the trust sold 3,000 shares of Woolworth stock, leaving [*4]20,000 shares in trust. Then, on June 17, 1998, the trust received 20,000 shares of stock in Venator, the successor to Woolworth, in a one for one exchange.

Objectants allege that the Woolworth holding was both overweight and improperly retained.^[FN4] On December 31, 1985, HSBC's trust file shows that the Woolworth stock made up 38.1% of the trust portfolio. On May 26, 1996, the minutes from the trust's annual review by HSBC's Officers Trust Investment Committee ("OTIC") reflect that the trust was cited for holding an overweight position of Woolworth at 40.2%. The holding, however, was approved by HSBC's regional manager "due to the low cost basis, and the sensitive nature of these issues on this account" (emphasis added).

On May 7, 1991, Ronald M. Roche, an HSBC Vice President/Portfolio Manager, wrote a letter to Seymour III stating that, although HSBC had recommended the sale of the 28,000 shares of Woolworth stock, they would continue to be held because as "Co-Trustee" Seymour III did not want them sold:

"Dear Mr. Knox:

Please confirm the substance of our conversation on April 12, 1991 in your office.

As you recall we discussed each of the security positions in the accounts for which you are Co-trustee which are either not on Marine Midland Bank's list of recommended holdings or which represent 20% or more of the individual equity portfolio. For each of the following holdings I made a sale recommendation with which you are not in agreement at this time. Many of these holdings have a very low cost basis and you feel that the loss in capital due to tax payments is not justified. Other securities, particularly those which are not recommended by Marine Midland Bank, are followed closely by you or your advisors and you do not want them sold at this time" (emphasis added).

The Woolworth stock paid quarterly dividends to the trust from March, 1957, through March, 1995. By March, 1995, Woolworth was beginning to show signs of trouble, and its stock dividends stopped. The last dividend was paid to the trust on March 1, 1995. Despite this, HSBC continued to hold the stock for this trust.On May 1, 1995, Seymour III requested that HSBC invade the trust principal to make up for the reduction of income from the loss of the Woolworth dividends. [*5]HSBC granted his request and did indeed invade the trust corpus; but it also continued to hold the Woolworth stock in an overweight position of 33.6% as of May 4, 1995.

There is no documentation in the file why the stock was held after it stopped producing income for this trust in March of 1995. Woolworth did remain on HSBC's Hold List from March of 1995 until March of 1997, but even after it was removed from the Hold List, HSBC continued to retain the Woolworth stock in an overweight position.

On October 27, 1997, Northrup, Sr., a non-trustee, wrote a letter to the trustees and the executors of his late brother Seymour III,^[FN5] and to Henry Bradley ("Bradley"), HSBC's trust administration officer for this trust with a copy to Richard Marshall ("Marshall"), the trust investment officer for the trust. In his letter, Northrup, Sr., warned of the dangers of continuing to hold Woolworth stock:

"On reviewing the September 30, 1997 investment results of the Estate/Trust, I note that holdings of Woolworth are still maintained in both accounts.

The Trustees/Executors should consider the sale of Woolworth. George Gregory informs me that the outlook is not favorable and in addition, no dividends are being paid by the company.

For your information, all holdings of Woolworth in the Seymour H. Knox Foundation Account have been sold" (emphasis added).

Although the accounting shows that HSBC sold some Woolworth stock on February 20, 1997, as of December 31, 1997, nine months after Woolworth was taken off its Hold List, and two months after Northrup, Sr.'s letter, the Woolworth stock still constituted 21.1% of the trust portfolio. HSBC did not fully divest the trust of Woolworth stock until February 9, 1999, four years after the stock had stopped paying dividends.

When the trust was created, it was also funded with 5,200 shares of Marine Midland common stock. The trust agreement permitted the trustee to retain the Marine Midland stock:

"Without limitation of the generality of the foregoing, the Trustee is expressly authorized and empowered to retain and hold as investments in the trust fund hereunder, for such length of time as it shall determine in its sole discretion, any and [*6]all stock or other securities of Marine Midland Corporation, a Delaware corporation, or any successor thereto or any subsidiary or other affiliate thereof, which may be transferred and delivered to it to be held under the terms of this instrument, and at any time to purchase or acquire and in like manner retain additional or other stock or securities of said Marine Midland Corporation or any such successor, subsidiary or affiliate thereof, although such stock or securities shall not be authorized by law as investments for a trustee, and although The Marine Trust Company of Western New York or any successor thereto or affiliate thereof may then be acting as Trustee hereunder" (emphasis added).

An internal bank memorandum, dated January 22, 1957, the day after the trust agreement was executed, states that the bank's Directors' Trust Investment Committee had approved acceptance of this trust, despite the fact that the main investment was its own stock. The memorandum goes on to state that the trust grantor understood the complete authority given to the bank for all investment decisions, and that he was not "averse" to the sale of the funding stocks for diversification:

"At a special meeting held January 18, 1957 the Directors' Trust Investment Committee approved acceptance of these trusts, initially to consist entirely of F. W. Woolworth Company and Marine Midland Corporation stock. At the meeting I reported briefly the terms of the Trust Agreements including the discretionary powers given to the Trustee(s). I also outlined the investment provisions, particularly with respect to Marine Midland.

I also reported to the Committee the substance of my conversation with Mr. Seymour H. Knox on Thursday, January 17, 1957, indicating that the Grantors fully realized that the Trustee(s) are given full and complete authority regarding investments by the terms of the Agreements; that the Grantors are not averse to the sale of portions of these stocks from time to time for diversification purposes but hoped that other equities would be acquired rather than senior securities" (emphasis added).^[FN6]

On October 27, 1981, Seymour III sent the following directive to HSBC's trust department:

"I understand that it is bank policy to recommend sale of Marine Midland Bank securities held in accounts in which you act as a Corporate Fiduciary. [*7]

Please note, however, that it is my wish to retain the present holdings of Marine Midland Bank intact at this time" (emphasis added).

HSBC continued to retain the Marine Midland stock after receiving this letter.

The record also includes a trust investment diary, which documents the annual trust OTIC review (formerly by the Directors' Trust Investment Committee). At various times between 1957 and 1973, the Committee approved the retention of the Marine stock. However, the only documentation of this investment decision is a literal rubber-stamped entry at various places in the investment diary, which states: "APPROVED CONTINUED RETENTION FOR TIME BEING OF MARINE MIDLAND CORPORATION STOCK". There is no analysis in the trust file to document the underlying rationale behind this decision.

The Marine Midland stock was finally sold on December 17, 1987.

During its management of this trust, HSBC acquired various stocks for the trust portfolio, including Dome Petroleum Ltd. and Lessona Corporation, both acquired in 1969, and Bristol Myers Squibb and Digital Equipment.

In 1969, Seymour II and Seymour III requested that HSBC purchase stock in Dome Petroleum, Ltd., and Lessona Corporation for this trust. Correspondence from the bank to Seymour III, dated April 18, 1969, demonstrates that HSBC had analyzed these stocks and determined that it was not advisable to purchase either stock for this trust:

"Inasmuch as the purchase side represents investment in issues not presently on our trust approved list and as there is a somewhat speculative aura surrounding Dome Petroleum at the current price level, the program would be carried out only upon the suggestion of yourself and the grantor. If the program appears appropriate to you and your father I would ask that each of you sign and return a copy program" (emphasis added).

Despite the negative finding by HSBC, on May 8, 1969, 200 shares of Dome Petroleum and 300 shares of Lessona were purchased by the trust "at suggestion of Co-Trustee". The trust file contains approvals of these "suggested" purchases executed by Seymour II and Seymour III, both of whom were non-trustees. On October 1, 1969 the trust purchased an additional 100 shares of Dome Petroleum "at suggestion of Co-Trustee" (emphasis added).

HSBC held the admittedly "speculative" investment in Dome Petroleum from 1969 through 1987. There is no evidence that this stock was on HSBC's lists of approved securities at any time, and, in fact, the HSBC research department concluded it had a "negative feeling" about the Dome stock. Despite this finding, [*8]internal correspondence shows that HSBC held the Dome stock because Seymour III, treated as a "Co-Trustee", directed it to do so:

"Re: S.H. Knox Tr 1/21/57 issue Seymour, III - #X-XXXX-X

As of this date I spoke with Seymour H. Knox, III, a Co-Trustee on each of the above named Trusts, with regard to the rather large positions in Dome Petroleum. I informed him of our Research Department's negative feeling about this stock, and of their advice to sell. Mr. Knox informed me that he was following the stock quite closely and that he feels that they will be able to resolve their financial problems. Accordingly, he does not wish to dispose of any of the holdings at this time" (emphasis added).

The trust documents show that not only did the trust continue to hold Dome Petroleum, but that it was held at a consistently overweight position. Dome was held at various percentages, all well above 10% of the total trust portfolio and its equity sector. On June 30, 1981, for example, the trust account review shows that it constituted 43.4% of the trust portfolio and its equity sector.

On May 8, 1969, HSBC purchased 300 shares of Lessona at the direction of Seymour III even though HSBC had determined that Lessona was an off-list security not proper for this trust. The trust file also shows that Seymour III "suggested" and authorized the sale of the 300 shares of Lessona on August 15, 1969.The trust held Bristol Myers Squibb as a consistently overweight security between 1997 and 2000: as of December 31, 1997, 26.4% 30.4%; as of December 31, 1998, 30.8%/31.3%; as of December 31, 1999, 23.0%/23.0%; and as of December 31, 2000, 21.4%/22.3%.^[FN7] Marshall acknowledged that overweight positions should be scaled back. Although Marshall testified that, if a portfolio manager maintains an overweight position, the special circumstances warranting it must be documented, there is no evidence that HSBC documented why this stock was being held in an overweight position. It is clear that this stock holding was never scaled back.

The trust also held Digital Equipment stock in an overweight position from March, 1982, to December, 1988. The account review dated March 31, 1982, shows this stock being held at 20.1%/20.1%, and it is consistently held at this level or greater through July 18, 1988, when the stock was held at 20.8%/20.6%. As with the Bristol Myers Squibb stock, there is nothing in the record to show why the overweight position was maintained. [*9]

When the trust was created in 1957, the conduct of a trustee was governed by the common law standard which requires a trustee "to employ such diligence and such prudence in the care and management [of the trust], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs" (King v Talbot, 40 NY 76, 85-86 [1869]). This common law rule was later codified in EPTL 11-2.2(a)(1). Under this standard, risk was discouraged (see Matter of Bank of New York, 35 NY2d 512[1974]), and diversification was encouraged though not mandated (see Matter of Newhoff, 107 AD2d 417 [1985], appeal denied 66 NY2d 605 [1985]). The standard was somewhat less strict vis à vis investments which the grantor transferred to a trust (see Matter of Hahn, 93 AD2d 583 [1983], affirmed 62 NY2d 821 [1984]).

On January 1, 1995, the Prudent Investor Act [EPTL 11-2.3] became the governing standard for fiduciaries. It imposes an affirmative duty on a fiduciary "to invest and manage property held in a fiduciary capacity in accordance with the prudent investor standard defined by this section" (EPTL 11-2.3[a]). The standard of conduct under this role is not defined by "outcome". Rather, compliance "is determined in light of facts and circumstances prevailing at the time of the decision or action of the trustee" (EPTL 11-2.3[b][1]). The rule expressly requires that a

"trustee shall exercise reasonable care, skill and caution to make and implement investment and management decisions as a prudent investor would for the entire portfolio, taking into account the purposes and terms and provisions of the governing instrument" (EPTL 11-2.3[b][2]).

Additionally, the statute requires a trustee:

"(A) to pursue an overall investment strategy to enable the trustee to make appropriate present and future distributions to or for the benefit of the beneficiaries under the governing instrument, in accordance with risk and return objectives reasonably suited to the entire portfolio;

(B) to consider, to the extent relevant to the decision or action, the size of the portfolio, the nature and estimated duration of the fiduciary relationship, the liquidity and distribution requirements of the governing instrument, general economic conditions, the possible effect of inflation or deflation, the expected tax consequences of investment decisions or strategies and of distributions of income and principal, the role that each investment or course of action plays within the overall portfolio, the expected total return of the portfolio (including both income and appreciation of capital), and the needs of beneficiaries (to the extent reasonably known to the trustee) for present and future distributions authorized or required by the governing instrument; [*10]

(C) to diversify assets unless the trustee reasonably determines that it is in the interests of the beneficiaries not to diversify, taking into account the purposes and terms and provisions of the governing instrument . . ." (EPTL 11-2.3[b][3], emphasis added).

Because the period accounted for here by HSBC straddles January 1, 1995, two different legal standards apply to its investment conduct. Those investment activities which occurred during the period prior to January 1, 1995, are governed by the standards set forth in EPTL 11-2.2, the prudent person rule. Investments made or held on or after January 1, 1995, are subject to EPTL 11-2.3. Significantly, an investment which was made under the "old" law and was prudent by its standards might be imprudent if held on or after January 1, 1995, by reason of the standards of the "new" law (see Matter of Manufacturers and Traders Trust Co., 19 Misc 3d 1135A [2008]). Under the prudent investor standard, a bank trustee is held to a higher standard of conduct than an individual trustee:

"For a bank, trust company or paid professional investment advisor (whether or not registered under any federal securities or investment law) which serves as a trustee, and any other trustee representing that such trustee has special investment skills, the exercise of skill contemplated by the prudent investor standard requires the trustee to exercise such diligence in investing and managing assets as would customarily be exercised by prudent investors of discretion and intelligence having special investment skills" (EPTL 11-2.3[b][6], emphasis added).

The same heightened standard for bank trustees also applied beginning January 1, 1986 under the prudent person rule (EPTL 11-2.2[a][1]).

In addition to the standards set out by statute, case law has established other required conduct of trustees. Accountability is a major principle of any fiduciary relationship (Groppe et al., Harris 5th Edition New York Estates: Probate, Administration and Litigation §12:34). If a fiduciary fails to maintain adequate records of its conduct and transactions, all doubts and presumptions are resolved adversely against it (see Matter of Camarda, 63 AD2d 837 [1978]; Matter of Shulsky, 34 AD2d 545 [1970], appeal dismissed 27 NY2d 743 [1970]; Matter of Sakow, 21 AD3d 849 [2005], lv denied 7 NY3d 706 [2006]).

In assessing a fiduciary's conduct under a trust, it is well settled that "the trust instrument is to be construed as written and the settlor's intention determined solely from the unambiguous language of the instrument itself" (Mercury Bay Boating Club v. San Diego Yacht Club, 76 NY2d 256, 267 [1990]).

A Court must search "not for the probable intention of the settlor merely, but for the intention which the trust deed itself, either expressly or by implication, declares. We are to ascertain the intention from the words used and give effect to the legal consequences of that intention when ascertained" (Central Union Trust Co. of [*11]New York v. Trimble, 255 NY 88, 93 [1930], emphasis added). Although pursuant to EPTL 11-2.3(a), a testator or grantor can create a different standard of conduct in a trust, a testator cannot exonerate testamentary trustees for failure to use "reasonable care, diligence and prudence" (see EPTL 11-1.7).

Over the years, the bank has had its own internal protocols for managing and administering trusts. HSBC requires that all of its fiduciary accounts, including trusts such as this, be managed according to its Trust Administration General Policy ("TAGP") manual and its Investment Policy Guidelines ("IPG") manual (which is specific for investments for the bank's fiduciary accounts). Under the TAGP, all exceptions to policy "are to be clearly documented as to their correctness or the reasons for maintaining the exception". Furthermore, all "[d]ecisions and exercises of discretion" "are to be clearly documented to record the propriety and the reason for the decisions, and to evidence the exercise of prudence and care utilizing the facts available at the time" of the decision.

Each trust administrator and investment officer is charged with knowledge of the IPG and must follow its provisions:

"The portfolio manager is responsible for determining if any investment decision he or she proposes to act upon is in compliance with the Investment Policy Guidelines. If the action as proposed is not in compliance, approval of an exception to the Investment Policy Guidelines must be obtained following the procedure set forth herein" (emphasis added).

Appendix A of the IPG restates the bank's statutory duties pursuant to the Prudent Investor Act. Appendix A, setting out EPTL 11-2.3, explains that the prudent investor standards are the "framework for our approach to meeting our fiduciary duties and meeting our clients' needs. Whether acting as executor, trustee, or investment management/advisory agent, the principles embedded in the Prudent Investor Standard guide our conduct in carrying out our investment duties".

The IPG is clear that trust investment officers may only purchase stocks on HSBC's Focus List, which are stocks HSBC considers suitable for purchasing for their fiduciary accounts. The bank requires that the only securities which may be held by the trusts it manages be on its Focus List or Hold List. Any exception to this policy must be documented, the principal must give written approval for the investment, and the exception to policy must be approved by the appropriate OTIC. In addition, any off-list position in excess of $250,000 must be reviewed and approved by the Trust Investment Management Group ("TIMG") Risk Management Committee, as provided in the IPG. Portfolio managers are encouraged to "aggressively pursue elimination" of any off-list position. [*12]

Reynolds,^[FN8] who was CIO for the bank's trust division from approximately 1991 to 2000, began his employment at HSBC in 1977. As CIO, Reynolds was responsible for managing and overseeing all trust investments and the trust portfolio managers, including Marshall. Reynolds testified that each trust was reviewed at least annually to ensure compliance with the prudent investor rules and the bank's own internal investment guidelines contained in the IPG.

The IPG also requires its investment officers to create an investment plan and objectives for each trust account:

"Investment objectives and optimum portfolio asset mix must be arrived at separately for each account. The principal consideration in setting investment objectives, goals, and asset mix is client circumstances and needs. It is the policy of the Bank to determine those needs through consultation with its clients" (emphasis added).

In instances such as this, where HSBC acts as sole trustee, bank policies require that:

"Every account for which MMB has assumed sole or shared investment authority, or advisory responsibilities, shall be reviewed by OTIC and ratified by the TIMCO in accordance with the provisions of this Section. Each account review shall include, but shall not be limited to, examination of:

1. Adherence to investment policy and procedures as determined by the TIMCO;

2. Appropriateness of investment strategy, including asset mix, to achieve the established objectives;

3. Management of investments in accordance with the terms of the governing instruments; and

4. Large or illiquid holdings."

HSBC's policies also require that:

"If the portfolio manager decides to maintain the overweight position in an account, such special circumstances must be documented and presented in the annual account review and, where appropriate, written approval for such retention must be [*13]obtained from co-trustees or co-executors. Documentation must be updated annually" (emphasis added).

Finally, an overweight position is defined in the IPG as follows:

"[P]urchases of one equity position should not exceed 10% of the fair market value of the account's total equity sector, including equity cash reserves. Consideration should be given to reducing any equity position as it approaches 20% of the account's total equity holdings including equity cash reserves. . . . Equity positions in excess of 20% should be reviewed to consider whether reduction is advisable" (emphasis added).

The 1957 trust agreement names HSBC as the sole trustee. The trust agreement mandates that "all powers and authority herein granted to the Trustee may be exercised by it only in its capacity as Trustee, with strict regard to its fiduciary obligations as such, and neither the Grantor [Seymour II] nor any person other than the Trustee shall have any right to participate in the exercise thereof" (emphasis added).

In addition to the unambiguous language of the trust, which clearly provides that HSBC shall act alone in all trust decisions and must have "strict regard to its fiduciary responsibilities", objectants offered expert testimony from Richard Scalfani ("Scalfani").

Scalfani has a bachelor's degree in economics, and a master's degree in business administration/finance. He also is a Certified Financial Analyst, and a senior grade advisor for the CFA program. He worked as a stockbroker and then was employed as an investment officer at Marine Midland from 1976 until 1984.^[FN9] In 1984, Scalfani left Marine Midland and took a position as the head of fiduciary investing for the trust division of M & T Bank. He was charged with reforming the investment practices for the trust division, including creating the investment policies and guidelines for it. He also oversaw all of M & T Bank investment officers located in the Western New York area. He retired from M & T in 1996, and now heads his own asset management company, managing asset portfolios for a select group of clients.

Scalfani testified that it is imprudent and a breach of a sole corporate trustee's fiduciary duty to seek approval or take direction from a non-trustee who is prohibited by the agreement from participating in trust decision making. The record establishes that, on numerous occasions during the existence of the trust, HSBC consulted with and took direction from the grantor, Seymour II, and from his son, Seymour III, [*14]regarding investment decisions and trust administration. Contained in the trust file are several documents generated by HSBC which refer to Seymour II and/or Seymour III as either a "trustee" or a "co-trustee".

On December 20, 1960, Seymour II communicated a preference to retain Woolworth stock in the trust, and, without any demonstrated independent analysis by HSBC, the bank, as sole trustee, simply deferred to his wishes.

On April 18, 1969, a bank officer wrote a letter to Seymour III regarding certain investments which Seymour II and Seymour III wanted to have the bank purchase for the trust. The letter states that the securities desired were not on the bank's approval list and would be purchased "only upon the suggestion of yourself and the grantor [Seymour II]" (emphasis added). The letter clearly demonstrates a complete abdication of the bank's fiduciary duty to non-trustees, even going so far as seeking the approval of the non-trustees to go forward with investments it had advised against:

"Dear Sey:

The enclosed investment program represents changes which we discussed prior to your leaving on vacation and will give you some idea of the figures involved.

Inasmuch as the purchase side represents investment in issues not presently on our trust approved list and as there is a somewhat speculative aura surrounding Dome Petroleum at the current price level, the program would be carried out only upon the suggestion of yourself and the grantor. If the program appears appropriate to you and your father I would ask that each of you sign and return a copy program. However, should you wish to discuss the account in general or the enclosed in further detail please do not hesitate to call me" (emphasis added).

As a result of the "approval" by Seymour III and Seymour II, on April 18, 1969, HSBC purchased 300 shares of Leesona and 200 shares of Dome Petroleum, both off-list securities.

HSBC produced a "Trust Investment Diary", dated from 1957 through January, 1973, which documents investment action taken and approved by the bank's Directors' Trust Investment Committee. Within this Investment Diary are numerous entries which help establish how HSBC permitted non-trustees — specifically Seymour II and Seymour III — to control its management of the trust:

"Sep 3 1969 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase of 500 shares (income) Pan American World Airways Inc. common at suggestion of Grantor.

Oct 1 1969 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase of 100 shares Dome Petroleum Ltd. common (73 5/8), at suggestion [*15]of Co-Trustee.

May 8 1969 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase of the following, at suggestion of Co-Trustee:

200 shs. Dome Petroleum Ltd. common (88 3/8)

300 shs. Leesona Corp. common (47 3/4)

400 shs. Pan American World Airways Inc. common (Income) (22 1/4)

200 shs. Pratt and Lambert Inc. common (Income) (46 5/8)

AUG 11 1965 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase with income funds of 20 shares International Business Machines Corp. Capital and 100 shares Consolidated Electronic Industry Corp. Common, at suggestion of Grantor.

MAR 9 1966 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase with income funds of 150 shares Consolidated Electronics Industries Corp. common (at the suggestion of Grantor).

JUL 13 1966 OFFICER'S TRUST INVESTMENT COMMITTEE

Purchase with income funds of 10 shares (20 held) International Business Machines Corp. common and 150 shares (500 held) Consolidated Electronics Industries Corp. common, at suggestion of grantor.

AUG 16 1967 OFFICER'S TRUST INVESTMENT COMMITTEE

Sale of 624 shares FMC Corp. common (income) (var. 35 7/8-36) and purchase with income funds of 500 shares Gerber Products Co. common (38) and 600 shares Pan American World Airways Inc. common (28 7/8), at suggestion of Co-Trustee.

JAN 24 [ ] Purchase with income funds of 250 shares Consolidated Electronics Industries Corp. common (at the suggestion of Grantor).

JUL 25 [ ] OFFICER'S TRUST INVESTMENT COMMITTEE

Reviewed. Rescind minute of 7/10/62 (O.T.I.C.). At the suggestion and with approval of Co-Trustee, purchase with income funds of 78 shares Xerox Corporation; also continued retention for time being of all securities, including Marine Midland Corporation common stock" (emphasis added).

These entries demonstrate that HSBC shared its investment authority and its fiduciary responsibilities with Seymour II and Seymour III. In light of other credible evidence in the record, the conclusion is inescapable that, on critical investment [*16]management issues, HSBC simply deferred to Seymour II and Seymour III, even to the extent of permitting one or both of them to effectively override the best considered judgment of the bank — as sole trustee and a trustee with specialized skills and knowledge — to the contrary.

I find that HSBC breached its fiduciary duty and was negligent in purchasing the Dome and Leesona stocks at the direction of a non-trustee when the bank's own analysis revealed that Dome and Leesona were not proper investments for the trust.

The evidence establishes that Woolworth should have been sold, at the very latest, when it became an off-list holding in March, 1997, and was no longer considered a viable security according to HSBC's own analysis. Despite this fact, HSBC inexplicably held on to Woolworth and did not complete the sale of the stock until February 1999, approximately two years after coming off the Hold List and nearly four years after it had stopped paying dividends. Marshall testified that he did "not write up a plan" to dispose of the Woolworth stock once it was off-list.

HSBC has offered no plausible explanation to justify this gross dereliction of its fiduciary duty. Although HSBC has implied in these proceedings that it sold the Woolworth stock over time for tax reasons, Reynolds testified that there was no tax justification for failing to sell all the Woolworth stock when it became off-list. Because the Woolworth stock represented a long term capital gain, the tax from selling it would have been the same regardless of whether HSBC sold all of its holdings at once or over time. Furthermore, there is no analysis or investment plan in the trust file which demonstrates the rationale for retaining and selling the Woolworth stock as the bank did. Therefore, it is reasonable to infer that there was no analysis or plan (see Matter of Camarda, supra; Matter of Shulsky, supra; and Matter of Sakow, supra).

Objectants allege that, from the inception of the trust, it was a conflict of interest for HSBC to hold its own stock because it was the sole trustee with complete discretion over all investments, including the decision to hold on to its own stock. Furthermore, objectants allege that HSBC deferred to the directions of non-trustees to retain the Marine Midland stock, and they also allege that it was held at a consistently overweight position, including on the date of the trust's creation. Therefore, objectants argue, the Marine Midland stock should have been sold immediately after the trust was funded, and HSBC's failure to do so constitutes a breach of its fiduciary duty and a breach of its internal policies.

Objectants have offered the testimony of their expert, Scalfani, to demonstrate why HSBC's holding of its own stock was not prudent and was a breach of HSBC's fiduciary duties and internal policies. Scalfani testified that HSBC never performed any independent analysis of its own stock, and, because it was the sole trustee, it [*17]could not value its own stock given the inherent conflict of interest. There is no evidence in the trust file from 1957 through the end accounting date which demonstrates any analysis regarding the prudence of retaining the Marine Midland stock for this trust.

Although the trust agreement permitted HSBC to hold its own stock, it was not required to do so. I recognize that the "retention of securities received from the creator of the trust may be found to be prudent even when purchase of the same securities might not" (Matter of Hahn, supra, at 586). Our Court of Appeals, in determining whether a trustee has breached its fiduciary duty, has made a distinction between "the acts of trustees in making investment of trust funds, and their acts in making, or failing to make, prompt disposition of securities received from the hands of the creator of the trust" (Matter of Clark, 257 NY 132, 136 [1931]).

While trustees will not be held liable for "mere errors of judgment" when acting "with ordinary prudence and within the limits of their trust", if a trustee's conduct in holding the stock is found to be imprudent because the trustee was "inattentive to its duty, or ignored the question whether a sale of the stocks was advisable or otherwise", it will be held liable for any such negligence which results in loss to the trust (Matter of Clark, supra, at 137-138).

HSBC argues that the trust itself absolves it of any liability from retaining the Marine Midland stock. Article SIXTH of the agreement does exonerate HSBC but only for loss or damage resulting from its exercise of judgment or discretion:

"SIXTH: The Trustee shall not be in anywise responsible for any loss or damage which may result from the exercise of judgment or discretion in carrying out the provisions of this instrument nor for any moneys or property except such as shall actually and in fact come into its hands and possession by virtue of the provisions hereof. The Trustee may advise with counsel and shall be fully protected in respect of any action under this instrument taken, suffered or omitted in good faith by the Trustee in accordance with the opinion of counsel" (emphasis added).

I disagree with HSBC about the effect of this provision on HSBC's retention of the Marine Midland stock. There is no proof that HSBC performed any analysis as to whether holding the Marine Midland stock was prudent for this trust. I find that HSBC was "inattentive to its duty, or ignored the question whether a sale of the stocks was advisable or otherwise" (Matter of Clark, supra, at 137-138). HSBC cannot be absolved of its negligence by the language of the trust agreement where it ignored its fiduciary obligation as the sole trustee to act with "reasonable care, diligence and prudence" (see EPTL 11-1.7).

Marshall testified that it was HSBC's policy develop a program to scale back [*18]any overweight stock. HSBC's IPG states:

"As a general guideline, purchases of one equity position should not exceed 10% of the fair market value of the account's total equity sector, including equity cash reserves. Consideration should be given to reducing any equity position as it approaches 20% of the account's total equity holdings including equity cash reserves. These limitations do not apply to units of the Diversified Investment Funds or mutual funds.

Equity positions in excess of 20% should be reviewed to consider whether reduction is advisable. In considering whether to sell a portion of the position, special circumstances should be taken into account. Such special circumstances might include rapid appreciation combined with expectations of continued appreciation or the benefit of a stepped-up basis upon the death of the client. If the portfolio manager decides to maintain the overweight position in an account, such special circumstances must be documented and presented in the annual account review and, where appropriate, written approval for such retention must be obtained from co-trustees or co-executors. Documentation must be updated annually.

Overweight positions in excess of $250,000 must be reviewed and approved by the TIMG Risk Management Committee."

Objectants' expert, Scalfani, testified that HSBC breached its fiduciary duties by holding Woolworth in an overweight position from the date the trust was funded until all the stock was finally sold, and also by failing to immediately sell all of the Woolworth stock when it was taken off HSBC's Hold List in March of 1997. Scalfani testified that, in his opinion, the stock should have been sold at the very latest when it stopped producing dividends in March, 1995, taking into consideration that the purpose of this trust was to provide income to its beneficiaries.

HSBC seeks to excuse its retention of the Woolworth stock by pointing out that, over the years, the stock produced dividends equal to one-third of the trust's income. First, there is no documentation in HSBC's trust files to demonstrate that such rationale played any part in the decision to retain Woolworth in an overweight position. Second, it is conceivable that the acquisition of stocks other than Woolworth might have yielded even greater income for the trust, but there is no contemporary analysis by HSBC in its files to show whether this factor was considered. Third, HSBC's income rationale is the strongest reason why it should have sold the Woolworth stock almost immediately after it stopped producing income in March, 1995. By retaining the Woolworth stock after that point, and especially retaining it in an overweight position, HSBC was, in effect, treating the loss of one-third of the trust's income as a mere irrelevancey.

Turning to the other stocks held in overweight positions, there is nothing to [*19]show that HSBC performed any analysis for its retention of those overweight stocks. This was a violation of HSBC's policies in general, but the lack of documentation also reflects a continuing indifference to the careful analysis, planning and review which trust investment management required.

The trust agreement grants HSBC the power to invade principal, but the trust language significantly limits that power:

"It is the intent and purpose of the Grantor that the power and authority of the Trustee in this regard shall be limited by a reasonably definite and ascertainable standard, and that any such decision to make payments from the principal of the trust shall be based upon reasonable need therefor, taking into account the independent means and sources of income (including any current or accumulated income hereunder) of any such person to whom or for whose benefit such payments may be made" (emphasis added).

As Scalfani testified and as the trust file demonstrates, there was no analysis by HSBC as to whether invasion of the trust principal to make up for the lost dividends was the proper course of action for this trust. There was no consideration by HSBC as to (1) whether the income needs of the income beneficiaries required an invasion of principal, or (2) what "the independent means and sources of income" of Seymour III's children were at the time payments were being made to them out of trust principal. Moreover, Scalfani testified that, if the Woolworth stock had been diversified and sold to purchase other income producing securities before Woolworth stopped paying dividends, there would have been no reason to invade the principal to make up for the income loss.

There is nothing to show that HSBC, as required by the trust agreement, conducted any analysis to determine whether the invasion of principal to make up the difference for the lack of Woolworth dividends was proper. Rather, it appears that HSBC simply acquiesced when asked to do so by Seymour III, who was not a trustee of this trust.

As demonstrated above, HSBC failed to maintain any documentation about either its decision making processes or the exceptions to its policies. There is no evidence that the bank ever developed an investment plan for this trust.

HSBC also demonstrated its indifference to its duties and to normal bank policies for trust management by violating its policy prohibiting directed brokerages when acting as sole trustee. The IPG provides that "[d]irected brokerage is not permitted in instances where the Bank acts as sole fiduciary for irrevocable trusts". Despite the bank's policies, it acquiesced as early as the 1980s to directions to effectuate securities transactions through brokerage firms selected by Seymour III. [*20]Indeed, one communication from Seymour III, on July 29, 1993, gives the bank such instructions in the ostensible capacity as HSBC's co-trustee (which Seymour III clearly was not):

"Re: S KNOX 1/21/57 ISSUE SEYMOUR III - A/C# XX-XXXXXX Directed Brokerage Equity Securities Trading Direction by Co-Fiduciary

Gentlemen:

As co-fiduciary for the above designated trust, I request that you effect purchases and sales of equity securities, to the extent permitted by your policies as fiduciary, through: Brokerage Firm: Kidder Peabody" (emphasis added).

This document not only reflects that Seymour III apparently saw himself as a co-trustee of this trust, but that, in following his directions, the bank treated him as such.

Accordingly, for the reasons stated above, I conclude that the credible evidence establishes that HSBC negligently managed this trust, that all the objections interposed against HSBC's intermediate accounting have been satisfactorily established, and that HSBC is liable for all damages as a result thereof. I hereby set this matter down for a status conference before me on Tuesday, March 23, 2010, at 2:00 p.m.

This decision shall constitute the Order of this Court and no other or further order shall be required.

DATED:BUFFALO, NEW YORK

February 24, 2010

BARBARA HOWE

Surrogate Judge