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IT IS NOT CLEAR FROM THE CONTRACT WHETHER DEFENDANT TRUSTEE WAS TO PERFORM A MERELY MINISTERIAL FUNCTION OR A GATEWAY FUNCTION IN ACCEPTING ASSETS FOR THE TRUST FROM A NONPARTY WHICH WAS ACTING FRAUDULENTLY; THERE ARE QUESTIONS OF FACT ABOUT WHETHER THE DAMAGES ASSOCIATED WITH ACCEPTING NON-NEGOTIABLE ASSETS WERE DIRECT OR INDIRECT AND WHETHER A FIDUCIARY DUTY WAS BREACHED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Mazzarelli, reversing Supreme Court, determined the breach of contract, breach of fiduciary duty action against defendant trustee, Wilmington, should not have been dismissed. Wilmington acted as a trustee for assets transferred to the trust by a nonparty. The contract stated Wilmington would be responsible only for its own negligence but also stated no non-negotiable assets were to be placed into the trust. The nonparty which transferred assets to the trust acted fraudulently and made risky investments rendering the trust assets out-of-compliance with state law. Plaintiff sued Wilmington for breach of contract and breach of fiduciary duty. Wilmington argued that any damages suffered by plaintiff from the assets transferred by the nonparty were indirect, not direct, and therefore barred by the trust agreements:

… [I]t can be argued that, in light of Wilmington’s promise not to accept nonnegotiable assets into the trusts, and to be responsible for its own negligence, maintaining the value of the assets in the trusts was inherent in the service Wilmington agreed to provide. Thus, there is merit to plaintiffs’ argument that when the assets proved not to be negotiable, they lost the benefit of their bargain and were entitled to recover as direct damages the diminution in value, and the concomitant costs of restoring the assets to negotiable status, such as professional fees. * * *

… [A]t this stage of the litigation, it is difficult to discern whether the parties contemplated that Wilmington would have to pay the damages sought by plaintiffs if it failed to perform under the trust agreements. Again, the agreements provided that Wilmington would be liable for “its own negligence,” which a reasonable factfinder could consider as recognition that Wilmington, if it did not perform its duties in accordance with a minimum level of care, would need to pay more than the nominal damages represented by its fee. * * *

Even though the breach of contract and breach of fiduciary duty claims involved the same conduct, the fiduciary duty claim alleges a breach of a noncontractual duty relating to the trustee’s independent duty to perform nondiscretionary ministerial duties with respect to the negotiability of assets. Thus, the fact that Wilmington’s failure to prevent nonnegotiable assets from entering the trusts breached both fiduciary and contractual duties does not bar plaintiffs from seeking damages related to the former … . Bankers Conseco Life Ins. Co. v Wilmington Trust, N.A., 2021 NY Slip Op 02355, First Dept 4-20-21

 

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