In a collection of contested Accounting proceedings, the Trustee moves for an Order pursuant to CPLR §3212 for partial summary judgment to dismiss the Objectants' claim for market index damages; dismissing the Objectants' damage claim based on the theory that the Trustee miscalculated the tax basis of the Kodak stock held in one of the subject Trusts; and dismissing the Objectants' damage claim that seeks an adjustment for additional capital gains taxes incurred by the Objectants as result of a potential recovery. Upon consideration of the applicable law and facts presented, the Trustee's motion is denied in its entirety.

Trustee claims the Objectants have no legal basis to recover market index damages in this proceeding. In the event that the objections are sustained, the Trustee maintains that the Objectants are limited to recovering the value of lost capital as the Objectants claim the Trustee negligently retained a concentration of Kodak stock. Where ". . . 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." In re Estate of Janes, 90 NY2d 41 (1997). Under this methodology, recovery would calculated using the value of the Kodak stock on the date it should have been sold, less the proceeds from that sale, with certain adjustments for the income attributed to the dividends and other income attributable to the retained asset. Matter of Garvin, 256 NY 518, 521 (1932); Matter of Donner, 82 NY2d 574, 586 (1993).

However, this Court recently allowed the Objectants to supplement their objections to include allegations of self-dealing and conflict of interest. Should the Objectants prove that the Trustee engaged in self-dealing and the alleged breach of fiduciary duty extended beyond mere negligent retention of the trusts' holdings, market index damages may available as part of their recovery. Matter of Rothko, 43 NY2d 305 (1977); Scalp & Blade v. Advest, Inc., 309 AD2d 219 (4th Dept. 2003).Furthermore, summary judgment is not justified where there are likely to be claims that depend upon knowledge in the possession of the party moving for judgment, which might well be disclosed by cross-examination or examination before trial. Kamen v. Metropolitan Life Ins. Co., 6 AD2d 406 (1St Dept. 1958), affd. 6 NY2d 737. As such, it cannot be said that the Objectants' claim for market damages must be dismissed as a matter of law.

The underlying proceedings involve four distinct trusts, all of which measured by the life of Marjorie Strong Wehle, the beneficiary who died January 8, 2004. The subject Trust of this particular motion was created and funded by a power of appointment exercised by Marjorie H. Strong in Paragraph Ninth of her Will which directed a portion of the remainder of the inter vivos trust created by Alvah G. Strong pursuant to Trust Agreement dated May 23, 1932.

Objectants claim that the Trustee erroneously computed and paid federal and state taxes during the accounting period for the Trust. More specifically, it is alleged the Trustee failed to step up the basis of the Kodak stock to market value in 1966, when Alvah Strong passed, and in 1975, when the Marjorie H. Strong died. When the 1932 Trust was funded, the basis of the Kodak securities held was ¢.81 per share. When Marjorie H. Strong, the income beneficiary of the 1932 Trust, passed away in 1975 the market value of the stock was $93 per share. As a result of the Trustee's failure to adjust the tax basis, the Objectants argue the subject Trust was unnecessarily charged with substantial capital gains liability on those Kodak securities during the accounting period and seeks damages. [*3]

The Trustee seeks a summary dismissal of this objection, arguing that there is no legal foundation to support a step-up in the tax basis of the stock. The Trustee maintains the Agreement executed by Alvah G. Strong irrevocably transferred the Kodak stock in question to the Trust, with income to benefit his wife, Marjorie, and children. The Agreement provided Marjorie H. Strong a general power of appointment which she never exercised, but rather partially released it in 1946 and retained only a limited power of appointment, which she later exercised in her Will. The Trustee asserts that the IRS Code generally provides that general powers of appointment are to be included in a decedent's gross estate and thus the appointive property would receive a stepped-up basis. However, the Trustee also points to a qualification in 26 U.S.C. §2041(a)(1)(B)(i) if a power of appointment created before October 21, 1942 is partially released on or before November 1, 1951 so that it is no longer a general power of appointment, then the appointive property will not be included in the decedent's estate. The Trustee avers that the general power of appointment created in 1932 was subsequently transformed into a limited power of appointment by the partial release in 1946 and that transformation excludes the Kodak stock from Marjorie's gross taxable estate, therefore precluding any stepped up basis when she passed away in 1975.

The Objectants argue that while the Accounting sets forth the taxes paid by the Trustee, its does not provide any detail on tax treatment of the Kodak stock held as part of the corpus and notes there is no evidence to suggest the Trustee performed any type of analysis as to the tax treatment of the Kodak stock during the account period. Without this analysis, the Objectants contend it is dubious as to whether that the Trustee met its initial burden of completely accounting for trust assets. To wit, the Objectants claim that the tax basis of the Kodak stock should have been adjusted to market value on both the death of Alvah G. Strong and the passing of Marjorie H. Strong.

The Objectants contend that the Kodak shares should receive a stepped up basis when Alvah G. Strong died in 1966 because never fully alienated his interest in those securities when transferred them to the Trustee. Paragraph Eleventh of the 1932 Trust Agreement contained provisions to allow the settlor to withdraw principal, upon the consent of his spouse, if the Trustee determined that such payment would be in the best interests of the beneficiaries. Case law and portions of the United States Code cited by the Objectants support their theory that because Alvah G. Strong retained control over the trust principal, the value of the trust property must be included in his gross taxable estate, thereby allowing for a stepped up basis of the Kodak shares in 1966. The Trustee alleges that Alvah Strong relinquished his right to invade principal, but the extent of that release is disputed and remains a question of fact.

Whether the tax basis of the Kodak stock should have been adjusted in 1975, cannot be decided as a matter of law as there is question as to whether the partial release by Marjorie H. Strong of her power of appointment was properly executed.Pursuant to EPTL §10-9.2 a release must be in the form of a written instrument signed by the donee of such power. The Objectants contend the release in question contains the typed signature Marjorie H. Strong, with no unique seal or stamp. Whether the release was properly executed determines whether the [*4]Kodak stock should have included Marjorie H. Strong's taxable estate, which then decides whether the Kodak stock should have received a stepped up basis upon her death, thus impacting the tax treatment of the Kodak stock during the account period.

The Trustee argues that the Objectants are barred by the doctrines of collateral estoppel and res judicata from raising issue of the tax basis adjustment. Under res judicata, a valid final judgment bars future actions between the same parties on the transaction. Parker v. Blauvelt Volunteer Fire Co., 93 NY2d 343 (1999). Collateral estoppel precludes a single party from relitigating an issue already decided against it. The party seeking the benefit of collateral estoppel must prove that the identical issue was necessarily decided in the prior action and is decisive in the present action and the party to be precluded from relitigating an issue must have had a full and fair opportunity to contest the prior determination. Kaufman v Lilly & Co., 65 NY2d 449 (1985). "In the end, the fundamental inquiry is whether relitigation should be permitted in a particular case in light of fairness to the parties, conservation of the resources of the court and the litigants, and the societal interests in consistent and accurate results. No rigid rules are possible, because even these factors may vary in relative importance depending on the nature of the proceedings. Buechel v. Bain 97 NY2d 295 (2001); Staatsburg Water Co. v Staatsburg Fire Dist., 72 NY2d 147, 153 (1988). As there are questions as to whether there is privity between the parties and whether the issues summoned by the Objectants were litigated upon the passing of either Alvah Strong in 1966 or when Marjorie H. Strong died nearly 37 years ago.

Finally, the Trustee seeks the dismissal of the methodology proposed by the Objectants to calculate damages, arguing there is no legal basis to support adding back the value of the capital gains taxes paid on the hypothetical stock sales. The Objectants' expert calculates the damages by using the lost capital formula set forth in Matter of Janes, in which the capital gains taxes are deducted from the initial hypothetical sale of the Kodak stock. Then an adjustment is made to credit the Objectants for the tax liability incurred as result of receiving a recovery from the Trustee as opposed to a trust distribution. The Objectants assert that the upward adjustment is appropriate because had the Trustee not breached its fiduciary duty, the resulting tax liability would not fall upon the Objectants

"A determination of the amount of lost capital requires a review of the net after-tax proceeds that would represent the capital available to the trust after sale." Matter of Saxton, I274 AD2d 110 (3rd Dept. 2000). The amount of damages paid to a beneficiary should be reduced by the tax liability that the beneficiary would have had to pay had the stock been sold in the first place by the Trustee. Matter of Garvin, 256 NY 518 (1931); Matter of Hunter 27 Misc 3d 1205A (Sur. Ct. Westchester Co. 2010).However, the Trustee argues the Fourth Department has held that proposed adjustment is impermissible, citing Matter of HSBC Bank USA, N.A., 94 AD3d 300 (4th Dept. 2012) which is referred to in both parties' pleadings as Knox II. Upon review of the cited decision, this Court finds that the Trustee overstates the Fourth Department's holding. In that decision the Appellate Division stated "based on our resolution of the Surrogate's determination of liability, we need not address petitioner's remaining contentions [*5]concerning the damages award." Id at 320. In dicta, the Court stated "the objectants' expert failed to apply an interest rate that was compounded annually on the dividends and failed to account for capital gains taxes to the hypothetical sales of stock" and made reference to an article appearing in the NYLJ in which the author discusses the possibility of double taxation on damages. Id. The Objectants contend that their upward adjustment is a novel concept that has yet to be ruled upon by the Courts as it was not presented in the Knox II case and therefore no prior finding has been made as to its appropriateness. As such it cannot be said conclusively that the current law prohibits the Objectant's proposed methodology of calculating damages.

Based on the foregoing, the Trustee's motion for partial summary judgment is denied as the Objectants has presented "clear, well-defined, genuine issues" of fact with respect to the Trustee's conduct and tax treatment of the Kodak stock during the Account period and it cannot be said as a matter of law that the Objectant's methodology to calculate damages is prohibited. Falk v. Goodman, 7 N Y 2d 87 (1959); Sillman v. Twentieth Century-Fox Film Corp., 3 N Y 2d 395 (1957).

This decision shall serve as an Order of this Court

Dated:1/11/13Hon Edmund A. Calvaruso

Rochester, New YorkMonroe County Surrogate

ENTER. [*6]