379 N.Y.S.2d 923 (Sur. 1975)
Mark Rothko died on February 25, 1970.1 He left a will that named Bernard J. Reis, Theodoros Stamos, and Morton Levine as executors and directed the bulk of his estate, including 798 paintings, to the Mark Rothko Foundation for charitable purposes.2 The will had been drafted and its execution supervised solely by Reis on September 13, 1968.3
Reis, a certified public accountant and longtime advisor to Rothko, had been elected a director, secretary, and treasurer of Marlborough Gallery, Inc. on January 30, 1970, and began receiving a salary of $20,000 per year from that corporation on April 30, 1970. On May 21, 1970, the three executors executed agreements with Marlborough entities controlled by Francis K. Lloyd under which 100 paintings were sold to Marlborough A.G. for $1,800,000 payable over twelve years without interest and the remaining 698 paintings were consigned exclusively to Marlborough Gallery, Inc. for twelve years at a fifty percent commission.4
The Rothko children, who had elected against the will to receive their statutory share after their mother's death, petitioned to set aside these agreements, remove the executors, and obtain restitution and damages.5 The Attorney General intervened representing the public interest in the charitable bequests, and the Mark Rothko Foundation also appeared as an intervenor.6 The Surrogate's Court issued a temporary restraining order on June 26, 1972, later converted to a preliminary injunction affirmed by the Appellate Division, prohibiting the sale or other disposition of the affected paintings.7
Petitioners alleged that Reis and Stamos labored under conflicts of interest, that Levine acted with improvidence, and that the Marlborough respondents violated the injunction by shipping fifty-seven paintings after the order's issuance.8 Extensive trial proceedings in 1974 examined the negotiation of the contracts, the executors' knowledge and conduct, the value of the paintings, and the circumstances of subsequent sales.9 The litigation revealed that Marlborough had sold 140 of the estate paintings to third parties, with some transactions occurring in bulk at discounted prices, while 658 remained in Marlborough's possession at the time of trial.10
Whether the executors breached their fiduciary duties of loyalty and prudence by entering into the May 21, 1970 sale and consignment agreements with the Marlborough respondents?11
Executors owe beneficiaries a duty of undivided loyalty.12 They must exercise the prudence of a reasonably prudent person.13 A fiduciary with a conflict of interest must resign or obtain court approval before transacting with the adverse party.14 Self-interested conduct that harms the estate constitutes a breach.15
Yes. Reis served simultaneously as executor and as a salaried director of Marlborough Gallery, Inc.16 He actively promoted quick liquidation to benefit the corporation while the estate received a twelve-year payout at no interest.17 Stamos secured a personal agency contract with Marlborough on superior terms within months of the estate agreements, confirming divided loyalty.18 Levine, fully aware of both conflicts, approved the agreements without independent expert advice or higher appraisals despite privately viewing the $1,800,000 price as inadequate.19
These specific facts establish breaches of loyalty by Reis and Stamos and of prudence by all three executors.20
The executors breached their fiduciary duties of loyalty and prudence.21
Whether the May 21, 1970 agreements are voidable on the grounds of the executors' conflicts of interest and improvidence?22
Yes. Reis's and Stamos's conflicts were disclosed to Marlborough during negotiations.25 The executors' failure to obtain independent valuations or court approval rendered the sale of 100 paintings for $1,800,000 over twelve years and the twelve-year exclusive consignment at fifty percent commission improvident.26 Marlborough knowingly participated in these tainted agreements.27 The agreements are therefore voidable at the election of the beneficiaries.28
The May 21, 1970 agreements are voidable.29
Whether the three executors should be removed from office under SCPA 711 for misconduct, waste, and improvidence in administering the estate?30
SCPA 711 authorizes removal of an executor who has wasted or improperly applied estate assets, improvidently managed the property, or engaged in other misconduct rendering the fiduciary unfit.31
Yes. Reis and Stamos engaged in self-interested breaches of loyalty by favoring Marlborough.32 All three executors acted improvidently by accepting grossly inadequate terms without investigation or expert advice.33 These acts constitute waste and misconduct under SCPA 711.34 The letters testamentary must be revoked.35
The three executors must be removed from office under SCPA 711.36
Whether the Marlborough respondents and Francis K. Lloyd knowingly participated in and induced the executors' breaches of fiduciary duty so as to be jointly and severally liable for restitution and damages?37
A third party who knowingly participates in or induces a fiduciary's breach of duty is jointly and severally liable with the fiduciary for restitution of the property or its value and for any resulting damages.38
Yes. Marlborough and Lloyd were aware of Reis's directorship and salary and of Stamos's impending personal contract.39 They proceeded with the agreements that delivered 798 paintings on terms that allowed Marlborough to resell many at six to ten times the estate's recovery.40 Their knowing participation renders them jointly and severally liable for restitution and damages.41
The Marlborough respondents and Francis K. Lloyd are jointly and severally liable for restitution and damages.42
Whether the Marlborough respondents and Lloyd violated the June 26, 1972 temporary restraining order and September 1972 preliminary injunction by selling or otherwise disposing of estate paintings after those orders were issued?43
Yes. After the June 26, 1972 temporary restraining order, Marlborough shipped fifty-seven paintings to third parties, including twenty-eight canvases and twenty-nine papers, thereby disposing of estate property in violation of the injunction.46 Lloyd, who controlled all Marlborough operations and had actual knowledge of the order, acted in collusion with the corporate respondents.47 The shipments constitute contempt.48
The Marlborough respondents and Lloyd violated the restraining order and preliminary injunction.49
Whether the proper measure of damages for the breaches includes the present appreciated value of the 140 paintings sold to third parties rather than their value at the time of the contracts or at the time of the individual sales?50
When a fiduciary breaches the duty of loyalty through self-dealing and the third party knowingly participates, the beneficiaries may recover the present value of the wrongfully transferred property, including appreciation, to place them in the position they would have occupied absent the breach.51
Yes. Because Reis and Stamos acted from self-interest and Marlborough knowingly participated, the estate is entitled to recover the present appreciated value of the 140 paintings sold to third parties rather than the 1970 contract price or the prices realized on the individual sales.52 The court therefore awards appreciation damages measured at the time of trial.53
The proper measure of damages includes the present appreciated value of the 140 paintings sold to third parties.54
Whether executors Reis and Stamos may be surcharged for the petitioners' attorneys' fees incurred as a result of their breaches?55
An executor who breaches fiduciary duties through self-dealing or gross improvidence may be surcharged for the reasonable attorneys' fees incurred by the beneficiaries in remedying the breach.56
Executors Reis and Stamos may be surcharged for the petitioners' attorneys' fees.59