Trust Updates Archive
(June 26, 2012 --Chicago, IL) -- In 2010, a New York state court issued a stinging rebuke of HSBC's fiduciary conduct in managing and overseeing seven Knox family trusts. Now, a four-judge panel of the New York appellate division has rebuked the lower court decision and reversed the overwhelming total of the $25.6 award against the bank. Beneficiaries plan to appeal.
The ruling covers seven trusts that were initially funded by shares in F.W. Woolworth Company and Marine Midland (now HSBC). In 1911, Knox Stores were purchased by Woolworth.
The 2010 ruling by Erie County Surrogate Judge Barbara Howe painted a portrait of a bank more concerned with pleasing its grantors than complying with the terms of the trust agreements. The rulings, which quoted, often at length, from depositions and court hearings, suggested annual reviews were perfunctory and investment decisions rarely documented.
A common theme in the Knox cases, as well as others involving retention of large concentrations of deposited securities, is the failure of the trustee to document a plan to address the holding. While the Knox trusts contained large concentrations of Woolworth stock, they also held concentrations in Merck, IBM, and HSBC bank stock.
The lower court found that HSBC violated "the Prudent Investor Act and its own internal policies" in failing to diversify trust assets, to document policy exceptions, and to address conflicts of interest in holding its own bank stock.
The appellate judges ruled that the beneficiaries acted as co-trustees and thus bore co-fiduciary liability. The instrument allowed the bank to seek outside "counsel." The appellate ruling concluded that counsel was not restricted to legal counsel. In effect, the appellate judges ruled that the beneficiaries could not sue themselves.
As to investment in own bank stock, the appellate court noted that the investment was a specifically authorized under the governing instrument.
The appellate court did find fault with the bank in retaining the Woolworth stock and remanded the case to the lower court to re-determine damages. As assessed by the lower court, the Woolworth damages accounted for only 15 percent of the total original damages awarded.
With the exception of the Woolworth stock, the appellate judges noted, "while it may have been prudent to reduce the concentration, the mere availability of other prudent courses of action that a fiduciary could have pursued does not support a finding that the fiduciary acted imprudently in choosing one such course."
Matter of HSBC, No. 11-01691 (N.Y. Appl. Div., 4th Jud., June 19, 2012)
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