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

On January 21, 1957, grantor Seymour H. Knox II ("Seymour II") entered into a trust [*2]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.

The Trust Agreement provided, inter alia, as follows:

"FIRST: The Trustee [HSBC] shall take and hold the said securities and other property, and shall invest and from time to time reinvest the same and collect income, issues and profits arising therefrom and, from time to time during the continuance of this trust, shall pay over or apply the net income to or for the benefit of the child or children of said Seymour H. Knox, III (including any child or children of his born after the date of this instrument) and the lawful issue of any deceased child or children of his born and in being from time to time as and when such net income becomes available for distribution, in equal shares per stirpes."

This trust is to continue "for and during the lives and the life of the survivor, but not longer, of Seymour H. Knox, IV and William Augustus Read Knox, children of said Seymour H. Knox, III." Upon termination, the trust will be distributed to "the then surviving issue of said Seymour H. Knox, III, in equal shares per stirpes." If no issue survive, then the trust is to be distributed to the then surviving issue of Seymour III's brother, Northrup R. Knox, or in default of any issue, the trust will be paid over and distributed to The Seymour H. Knox Foundation.

The trust was initially funded with 5,000 shares of Woolworth capital stock and 5,200 shares of Marine Midland common stock. ^[FN2] During its management of the trust, HSBC acquired various other stocks for the trust portfolio, including Dome Petroleum Ltd. and Leesona Corporation, both acquired in 1969, and Bristol Myers Squibb and Digital Equipment.

Seymour III's children — Seymour H. Knox IV, W. A. Read Knox, Avery Knox and Helen Keilholtz — filed objections to the accounting. A guardian ad litem was appointed to represent the interests of the minor descendants of Seymour III — who are all presumptive remainderpersons — and he, too, filed objections to the accounting.^[FN3]

Following extensive discovery, a trial on the issue of "liability only" was held [*3]in December, 2009.^[FN4] By Memorandum and Order dated February 24, 2010, which is incorporated herein by reference, I upheld all objections, found that HSBC had negligently managed this trust, and concluded that HSBC was liable for all damages as a result thereof.

Following my liability determination, the guardian ad litem and HSBC sought clarification regarding the dates when certain stocks held by the trust should have been sold by HSBC (see Matter of Janes, 90 NY2d 41 [1997]; see also Matter of Donner, 82 NY2d 574 [1993]). On June 17, 2010, I issued an Order finding as follows:

"1. With respect to the Marine Midland stock, the date when divestiture should have occurred is the date of the inception and funding of the trust, which is January 21, 1957;

2. With respect to 90% of the initial 5000 shares of Woolworth stock, the date when divestiture should have occurred is the date of the inception and funding of the trust, which is January 21, 1957; and with respect to all remaining shares of Woolworth stock held by the trust, the date when divestiture should have occurred is May 7, 1991."

In July 2010, the damages portion of the bifurcated accounting trial was held. Post-trial briefs have been submitted, and I now find and decide as follows.

The purpose of a damages award is to make the trust "whole," which means that the trust is entitled to be put in the position it would have been in if no breach of fiduciary duty had occurred. The proper measure of damages for a trustee's breach of trust is "the difference between the value of the beneficiary's rights to the principal and income before and after the breach" (76 Am Jur 2d, Trusts §671 [2010]).

The proper method of calculating damages for the negligent retention of a trust asset is the "lost capital" formula set forth by the Court of Appeals in Matter of Janes, supra, at 55:

"Where, as here, a fiduciary's imprudence consists solely of negligent retention of assets it should have sold, the measure of damages is the value of the lost capital (see, Matter of Garvin, 256 NY 518, 521; see also, Matter of Donner, 82 NY2d [574, 586]). Thus, the Surrogate's reliance on Matter of Rothko in imposing a lost profit' [*4]measure of damages is inapposite, since in that case the fiduciary's misconduct consisted of deliberate self-dealing and faithless transfers of trust property [43 NY2d 305, 321-322 (1997)])."

In fixing damages under the lost capital approach, the Janes Court clearly delineated how the calculations were to be made:

"In imposing liability upon a fiduciary on the basis of the capital lost, the court should determine the value of the stock on the date it should have been sold, and subtract from that figure the proceeds from the sale of the stock or, if the stock is still retained by the estate, the value of the stock at the time of the accounting (see, Matter of Garvin, supra, at 521; Matter of Frame, 245 App Div 675, 686; 6 Warren's Heaton, Surrogate's Courts §100.01[4][b][i] [misnumbered in original as §101.01(4) (b)(i)], at 100-9 [6th ed rev 1997]). Whether interest is awarded, and at what rate, is a matter within the discretion of the trial court (see, Woerz v Schumacher, 161 NY 530, 538, rearg denied 163 NY 610; King v Talbot, 40 NY, at 95, supra; CPLR 5001[a]; SCPA 2211 [1]; 6 Warren's Heaton, op. cit.; 3 Scott, op. cit., §207, at 255-256). Dividends and other income attributable to the retained assets should offset any interest awarded (see, Matter of Garvin, supra, at 521)." (at 55, emphasis added)

At the damages trial, objectants presented the testimony of Richard Scalfani ("Scalfani").^[FN5] Scalfani testified credibly before me as an expert in the liability trial, and his credentials are set forth fully in that decision. I found him equally qualified as an expert in the damages phase, and his testimony was credible and persuasive in all respects.

Scalfani testified that he used the lost capital approach set forth in Janes to calculate the amount of damages resulting from HSBC's negligent trust management. Scalfani testified that he first determined the value of the stock at issue on the date it should have been sold, and he then applied an interest rate of 9% compounded annually to that valuation amount through July 20, 2010, the start date of the damages trial. If the trust had sold the stock, Scalfani "credited"^[FN6] HSBC for the sales by [*5]compounding the proceeds at 9% to account for the capital the trust received from the sales, which offsets the damages total.

HSBC offered the testimony of Professor G. William Schwert with respect to the trust's retention of Woolworth and Marine Midland stock. Schwert is a professor of finance and statistics at the University of Rochester Graduate School of Business Administration. He has lectured extensively on economics, finance and statistics, and he has testified as an expert regarding the calculation of lost capital damages in other accounting cases.

Schwert, like Scalfani, applied the Janes lost capital formula to calculate damages, and there was no disagreement between them that the lost capital formula is the proper method to follow in this case. Despite this seeming consensus, each expert arrived at drastically different damages amounts. Indeed, Schwert calculates that the trust is not entitled to any damages.

There are two main distinctions between the Scalfani and Schwert conclusions. First, Schwert applied an interest rate which was compounded annually on the dividends that were generated by the stocks held in the trust. Scalfani did not.^[FN7] Second, based upon Schwert's testimony, HSBC argues for application of a capital gains tax to a hypothetical sale of the stock, whereas the objectants and guardian ad litem contend that this is improper and would result in double taxation of the damages.

I reject Schwert's application of interest to dividends. Compounding interest annually to the value of the stock on the date it should have been sold fully accounts for what should have been done with the trust assets. Offsetting that interest award in the final calculations by the dividends and other income actually received while the stock was held prevents a double recovery by the trust.

Adopting the Schwert approach, however, by adding interest compounded annually to the dividends and then subtracting that amount to offset any interest awarded on the sale valuation improperly penalizes the trust. I decline to do so.

I find equally without merit HSBC's argument — grounded in Schwert's testimony — that the damages calculations should take into account a capital gains tax calculation for any hypothetical (or actual) sale of trust stock. Apart from the impermissible double taxation problem brought into sharp focus by objectants' proof, if this approach is utilized in calculating damages here, the "grossed-up" calculations to which Nassau testified would then have to be made in order to make the trust [*6]whole. I find no legal basis for this approach in this case.

I find, therefore, that the straightforward application of Janes exemplified by Scalfani's testimony is the correct manner for calculating damages in this case, and I hereby accept his calculations in all respects. To the extent Scalfani's calculations and approach differ from that of Schwert, I decline to follow the Schwert methodology.

Under Janes, it is within the discretion of this Court to award interest. Based on the evidence before me, and my findings in the liability trial as to HSBC's negligence, I find that 9% is the appropriate interest rate, compounded annually, to apply to the damages award. Scalfani testified that he applied a 9% compounded annual interest rate to the damages calculations because, in his opinion and based on his experience, a 9% rate of return on trust investments is well within a reasonably expected rate of performance. Scalfani further explained that the 9% expected rate of return is what a prudent investor would expect over time for the types of investments in this trust:

"[T]he returns, since they're a multiyear program, obviously, you are not going to get the same exact return every year. But, on average, over the course of span of time, a trust, depending upon what the trustee does as far as asset allocation, the trustee can manipulate the assets of the trust to generate anywhere from 8 to 12 percent on average is, has been a history of expected return from trusts.

That's the purpose of investing is to expect that return, whether you achieve it or not is another matter. The point is, that your expectation given the needs of the beneficiary of the trust, coupled with the asset allocation that an investment officer or a trustee can apply to a trust to try to attain those gains within the risk parameters that are established. Those are objectives.

On average, the expectation of investors, a class of investors including trustees over time, the expectation of investing assets of a trust is in the area, conservatively, without taking undue risk anywhere between 8 and 12 percent on average over time."

Having accepted the Scalfani methodology for calculating damages in this case, which, as noted, precisely tracks the formula outlined in Janes, I come now to the matter of actual damages. I hereby adopt in all respects the Scalfani calculations, which were introduced into evidence as exhibit GT-D#1, at tab 5. A copy of that exhibit is attached hereto as Appendix A and is made part hereof.

Scalfani's calculations yield the following damages sustained by this trust as [*7]a result of HSBC's negligence, which I hereby award:^[FN8]

The cases are clear that "a trustee is entitled to full commissions unless the record establishes that the trustee's action or inaction bespeaks not merely misfeasance, but also bad faith, dishonesty, or fraud (see Matter of Drier, 245 AD2d 787, 788 [3rd Dept 1997], lv denied 91 NY2d 812 [1998])" (Matter of Lasdon, NYLJ, June 29, 2010, at 37, col 1). Because the record in this case contains no evidence of malevolence, dishonesty, or other malfeasance on the part of HSBC, I find that the commissions received thus far by HSBC need not be returned to the trust.

Objectants have requested payment by HSBC of the legal fees, guardian ad litem fees, and related expenses and costs incurred by them as a result of the contested accounting proceeding. In Parker v Rogerson, 49 AD2d 689, 690 [1975], our Appellate Division pointed out that

"an errant fiduciary may be surcharged for the legal expenses incurred in establishing his wrongdoing and obtaining recoupment . . . from him for the loss which he has caused" (see also Matter of Lasdon, supra).

The Appellate Division, Third Department, citing Rogerson, put the legal standard this way:

"Surrogate's Court may award counsel fees where the misconduct of a fiduciary brings about the expense" (Matter of Rose BB, 35 AD3d 1044, 1045 [2006]; see also Matter of Rose BB, 16 AD3d 801, 803 [2005]).

There is no question in this case, as my liability decision makes clear, that [*8]HSBC, as fiduciary of this trust, was derelict in the performance of its duties. That misconduct resulted in the guardian ad litem fees, counsel fees, and related expenses and costs incurred by objectants to establish HSBC's wrongdoing and to make the trust whole.

To establish the amount to be surcharged against HSBC, objectants shall, on or before December 17, 2010, submit an affidavit of services detailing all legal fees, expenses and costs incurred in this proceeding, with a copy to be served on all other parties. Any responding papers shall be served and filed on or before January 4, 2011. This Court will then decide the matters on the papers, unless a request is made for an evidentiary hearing.

Finally, pending a determination of the fees, expenses and costs issues, no final decree shall be entered herein.

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

DATED:BUFFALO, NEW YORK

November 24, 2010

HON. BARBARA HOWE

Surrogate Judge