In re OnBank & Trust Co. — 90 N.Y.2d 725

Majority

p. 725

[688 NE2d 245, 665 NYS2d 389]

In the Matter of OnBank & Trust Co., as Trustee of Discretionary Common Trust Fund "A” (Equities) of OnBank & Trust Co., Appellant. In the Matter of OnBank & Trust Co., as Trustee of Discretionary Common Trust Fund "B” (Fixed Income) of OnBank & Trust Co., Appellant. Elizabeth A. Hartnett et al., Respondents.

Argued October 23, 1997;

decided November 25, 1997

p. 726

POINTS OF COUNSEL

Carter, Ledyard & Milburn, New York City (Jack Kaplan, Richard B. Covey and Edmund J. Behan of counsel), and Melvin & Melvin, L. L. P., Syracuse (Richard M. Storto and Kenneth J. Bobrycki of counsel), for appellant.

I. The court below’s interpretation of subdivision 3 of Banking Law § 100-c is not supported by its plain meaning. II. The court below interprets the legislative intent of Banking Law § 100-c (3) too broadly and causes it to conflict with EPTL 11-2.2 (b) and to produce other unreasonable and absurd results. (Matter of Lincoln Rochester Trust Co., 201 Misc 1008 ; Matter of Chase Natl. Bank, 206 Misc 343 ; Matter of Bank of N. Y., 189 Misc 459 ; Matter of Plato’s Cave Corp. v State Liq. Auth., 68 NY2d 791 ; Williams v Williams, 23 NY2d 592 ; Matter of Robert Paul P., 63 NY2d 233 .) III. Great weight and deference should be afforded the opinion of the State banking department. (Matter of Moran Towing & Transp. Co. v New York State Tax Commn., 72 NY2d 166 ; Matter of New York State Assn. of Life Underwriters v New York State Banking Dept., 83 NY2d 353 ; New York State Bankers Assn. v Albright, 38 NY2d 430 .) IV. Banking Board General Regulation § 22.20 and the plans of operation of the common trust funds involved in this case do not support the result below.

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Hunter and Hartnett, Syracuse (Elizabeth A. Hartnett of counsel), Peter E. McLellan, Robert L. Jokl, Jr., and DeLaney & O’Connor (Michael E. O’Connor of counsel), for Elizabeth A. Hartnett, pro se, and others, respondents.

OnBank violated Banking Law § 100-c (3) by subjecting the common trust funds to the payment of mutual fund management fees. (Taylor v New York Cent. R. R. Co., 294 NY 397 ; Mack v Mendels, 249 NY 356 ; Hyatt v Taylor, 42 NY 258 ; Palmer v Van Santvoord, 153 NY 612 ; Matter of Tonis v Board of Regents, 295 NY 286 ; New York State Bridge Auth. v Moore, 299 NY 410 ; Matter of Blyn v Bartlett, 50 AD2d 442 , 39 NY2d 349 ; Matter of Bank of N. Y., 35 NY2d 512 ; Aldred Inv. Trust v Securities & Exch. Commn., 151 F2d 254 ; Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293 .)

Kramer, Levin, Naftalis & Frankel, New York City (Marvin E. Frankel, Michael S. Oberman and E. Lisk Wyckoff, Jr., of counsel), and David L. Glass for New York Bankers Association, amicus curiae.

The management fee of a mutual fund in which common trust fund assets are invested does not constitute a prohibited "charge against such [common trust] fund for the management thereof’. (Matter of Dugmore, 23 Misc 2d 792 ; Matter of Friberg, 199 Misc 593 ; Matter of Bank of N. Y., 189 Misc 459 ; Kamen v Kemper Fin. Servs., 500 US 90 ; Matter of Bank of N. Y., 35 NY2d 512 ; People v Bolden, 81 NY2d 146 ; Matter of New York State Assn. of Life Underwriters v New York State Banking Dept., 83 NY2d 353 ; Matter of Howard v Wyman, 28 NY2d 434 ; Matter of John Paterno, Inc. v Curiale, 88 NY2d 328 .)

Sullivan & Cromwell, New York City (H. Rodgin Cohen, Bruce E. Clark and Mark E. Coyne of counsel), for New York Clearing House Association, amicus curiae.

I. Section 100-c (3) of the New York Banking Law does not apply to management fees of a mutual fund. (People v Finnegan, 85 NY2d 53 ; Matter of Bank of N. Y., 189 Misc 459 ; Matter of Chase Natl. Bank, 206 Misc 343 ; Sanders v Winship, 57 NY2d 391 ; Sega v State of New York, 60 NY2d 183 ; Matter of Albano v Kirby, 36 NY2d 526 ; Knapp v Monroe County Civ. Serv. Commn., 77 AD2d 817 , 51 NY2d 877 ; Matter of Bankers Trust Co. [Siegmund], 219 AD2d 266 .) II. The majority’s new per se rule contravenes the public policy of New York. (Matter of Dugmore, 23 Misc 2d 792 ; Matter of Prime, 200 Misc 410 ; Matter of Bankers Trust Co. [Siegmund], 219 AD2d 266 ; Guaranty Trust Co. v Lewis, 279 NY 396 ; Matter of Bank of N. Y., 189 Misc 459 .) III. The court

p. 728

below erred by not deferring to the banking department. (Matter of Salvati v Eimicke, 72 NY2d 784 ; Matter of Colt Indus. v New York City Dept. of Fin., 66 NY2d 466 ; Matter of Howard v Wyman, 28 NY2d 434 ; Matter of New York State Assn. of Life Underwriters v New York State Banking Dept., 83 NY2d 353 ; Matter of Industrial Indem. Co. v Cooper, 81 NY2d 50 .) IV. The decision below will spur litigation and increase costs to common trust funds. (Matter of Bankers Trust Co. [Siegmund], 219 AD2d 266 .)

OPINION OF THE COURT

Does Banking Law § 100-c (3) require that a common trust fund trustee who has lawfully invested in mutual funds itself absorb the mutual fund management fees, or can those fees be paid out of the trust fund? We conclude that such fees are properly payable by the common trust fund.

A common trust fund is essentially a collection of smaller trust funds pooled for joint administration and management. First authorized by the Legislature in 1937, such funds are regulated by Banking Law § 100-c. Before 1937, trustees were sometimes reluctant to administer smaller trusts because they required the same attention and effort as larger trusts but could not support commensurate fees. Pooled trust funds solved the problem by offering the individual trusts, more diversification, better management and lower fees while at the same time reducing administrative costs and thereby improving profitability (see generally, Note, The Common Trust Fund Statutes — A Legalization of Commingling, 37 Colum L Rev 1384 [1937]; see also, Matter of Bank of N. Y., 189 Misc 459 ).

While allowing common trust funds, the Legislature imposed restrictions on their management. In statutory language that has remained unchanged for six decades, the Legislature provided, for example, that a "common trust fund shall not be deemed a separate trust fund on which commissions or other compensation is allowable and no trust company maintaining such a fund shall make any charge against such fund for the management thereof’ (Banking Law § 100-c [3]).

Appellant OnBank & Trust Company, trustee of two common trust funds, Common Trust Fund "A” (Equities) and Common Trust Fund "B” (Fixed Income) commenced this proceeding pursuant to Banking Law § 100-c (6) for judicial settlement of its fifth accounting of the funds. During the accounting pe

p. 729

riod, which ran from December 1, 1984 to December 31, 1993, appellant had invested approximately 4% of the common trust fund assets in four mutual funds, each a registered investment company under the Investment Company Act of 1940, as amended (see, 15 USC § 80a-1 et seq.). As noted by the Appellate Division, as of December 31, 1993 "[t]he common trust funds held a total investment of $1,096,436 in mutual funds and during the accounting period its largest holding in mutual funds was approximately $2,000,000” ( 227 AD2d 20 , 23). Mutual fund management fees during the accounting period were approximately $50,000.

Respondents, guardians ad litem appointed by the Surrogate to represent the principal and income beneficiaries of the common trust funds, raised objections to the accounts on two grounds. They argued, first, that the investment of common trust fund assets in mutual funds was an improper delegation of the trustee’s management responsibility and, second, that investment in the mutual funds violated Banking Law § 100-c (3) by subjecting the common trust funds to two layers of management fees, one by the trustee and a second by the mutual funds.

Both initially and again following cross motions for reargument, the Surrogate held that while the trustee did not improperly delegate its management duty by investing in mutual funds, it — and not the common trust fund — was required to absorb mutual funds management fees. On cross-appeals, all five Justices of the Appellate Division agreed that appellant could properly invest common trust fund assets in mutual funds, but divided on the second issue. A majority at the Appellate Division agreed with the Surrogate that under Banking Law § 100-c (3), appellant itself should be surcharged for the mutual fund management fees. Only the surcharge issue is before us, and on that issue we reverse.

Analysis

Effective July 21, 1997, the Legislature amended Banking Law § 100-c (3) to add the following:

"Provided, however, that in those instances where a trust company invests common trust funds in securities of any management type investment company or investment trust pursuant to the provisions of subdivision one of this section, such trust company may charge the common trust fund for

p. 730

the fees and expenses of such securities pursuant to and consistent with the provisions of sections 11-2.2 and 11-2.3 of the estates, powers and trusts law” (L 1997, ch 250, § 2).^[1]

Because this language indisputably permits a trustee to pass mutual fund management fees on to the common trust fund, we must first determine if the new law is to be applied retroactively. If so, it is dispositive.^[2]

In determining the retroactivity issue, respondents urge us to apply the settled axiom that amendments are prospective only unless retroactive application is clearly indicated (see, e.g., People v Oliver, 1 NY2d 152 , 157; Jacobus v Colgate, 217 NY 235 , 240 [Cardozo, J.]; McKinney’s Cons Laws of NY, Book 1, Statutes § 51). Here, the Legislature did not explicitly provide for retroactivity. Appellant, however, arguing that the amendment was remedial, points to the equally settled principle that such legislation should be applied retroactively to better achieve its beneficial purpose (see, e.g., Becker v Huss Co., 43 NY2d 527 , 540; McKinney’s Cons Laws of NY, Book 1, Statutes §54).

As we have previously recognized, neither of these axioms should be determinative (see, Matter of Duell v Condon, 84 NY2d 773 , 783; see also, Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum L Rev 527 , 544-545). Rather, "the reach of the statute ultimately becomes a matter of judgment made upon review of the legislative goal” (Matter of Duell v Condon, supra, 84 NY2d, at 783 ). Based on our analysis of statutory text and history, we conclude that the Legislature intended the amendment to Banking Law § 100-c (3) to apply retroactively.

Initially, even though the amended statute does not explicitly speak to retroactivity, its language is indicative of a legislative intent that it have retroactive application.^[3] The amended statute permits the trustee to pass along mutual fund fees to the

1 Section 1 of chapter 250 of the Laws of 1997 separately amends Banking Law § 100-c (1), expressly permitting trustees of common trust funds to invest in mutual funds.

2 [2] New questions of law, which could not have been raised below, may be presented for the first time on appeal (see, e.g., Post v 120 E. End Ave. Corp., 62 NY2d 19 , 28-29). We therefore may consider the amendment on this appeal even though it was not previously raised.

3 We reject respondents’ argument that because the language of the statute is clear and unambiguous there is no need to look to outside sources, including the subsequent amendment, to interpret the preexisting statute. In *731 our view, the preamendment statutory language was anything but clear — it did not plainly compel the result sought by either party to this proceeding.

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common trust fund only "pursuant to and consistent with the provisions of sections 11-2.2 and 11-2.3 of the estates, powers and trusts law” (L 1997, ch 250, § 2). EPTL 11-2.2 (b) (1) allows trust funds to invest in mutual funds, subject to the restriction that if the mutual fund is affiliated with the trustee, the trustee may receive management fees for the trust or the mutual fund, but not both (see also, Turano, 1994 Supp Practice Commentaries, McKinney’s Cons Laws of NY, Book 17B, EPTL 11-2.2, 1997 Pocket Part, at 70-71). It is effective only for investments made before January 1, 1995 (EPTL 11-2.2 [b] [1]). After that time, the statute is superseded by the similar provisions of EPTL 11-2.3 (d).

If Banking Law § 100-c (3) were prospective only, there would have been no need for reference to EPTL 11-2.2 and that portion of the statute would be meaningless. We decline to read the amendment in such a way as to render some of its terms superfluous (see, Matter of Roosevelt Raceway v Monaghan, 9 NY2d 293 , 305-306, mot to amend remittitur denied 9 NY2d 966 ; New York State Bridge Auth. v Moore, 299 NY 410 , 416).

The history of the amendment also indicates a legislative intent that it be retroactive. Senator Farley, the amendment’s sponsor and chair of the Senate Banking Committee wrote both in his memorandum in support of the bill and in his letter to the Governor’s Counsel that the amendment was intended to clarify the law that trustees could pass along the costs of mutual fund management to the common trust funds (see, Sponsor’s Mem to L 1997, ch 250; Sponsor’s Letter to Honorable Michael C. Finnegan, Bill Jacket, L 1997, ch 250). Moreover, he stated on the Senate floor that "[a] controversy has recently arisen” regarding Banking Law § 100-c (3), the amendment "was intended to clarify” that statute, and the Banking Law "does not and never has” required trustees to absorb mutual fund fees. He added that it "is the legislative intent that the trustees thereof should not be subject to liability for prudent investment in mutual funds whether made in the past or the future” (Senate Debate on Senate Bill 4514-A, July 1, 1997, at 6760-6761 [statement of Senator Farley]). The remedial purpose of the amendment would be undermined if it were applied only prospectively (see, Matter of Duell v Condon, supra, 84 NY2d, at 784 ).

We thus conclude that the amendment to Banking Law § 100-c (3) should be applied retroactively. The surcharge

p. 732

imposed by the Surrogate based on his application of the statute was therefore inappropriate.

Accordingly, the decrees appealed from and the order of the Appellate Division brought up for review should be reversed, without costs, and the matters remitted to Surrogate’s Court for further proceedings in accordance with this opinion.

Judges Titone, Bellacosa, Smith, Levine, Ciparick and Wesley concur.

Decrees appealed from and order of the Appellate Division brought up for review reversed, etc.

Cases cited

In re the Accounting of Lincoln Rochester Trust Co. 201 Misc 1008 N.Y. Sur. Ct. 1952-02-27 p. 726
In re the Accounting of Chase National Bank 206 Misc 343 N.Y. Sur. Ct. 1954-05-24 p. 726, p. 727
In re the Accounting of Bank of New York 189 Misc 459 N.Y. Sur. Ct. 1946-12-04 p. 726, p. 727, p. 728
Williams v. Williams 23 NY2d 592 N.Y. 1969-01-23 p. 726
In re the Adoption of Robert Paul P. 63 NY2d 233 N.Y. 1984-10-16 p. 726
Moran Towing & Transportation Co. v. New York State Tax Commission 72 NY2d 166 N.Y. 1988-07-12 p. 726
New York State Ass'n of Life Underwriters, Inc. v. New York State Banking Department 83 NY2d 353 N.Y. 1994-03-30 p. 726, p. 727, p. 728
New York State Bankers Ass'n v. Albright 38 NY2d 430 N.Y. 1975-12-29 p. 726
Taylor v. New York Central Railroad 294 NY 397 N.Y. 1945-07-19 p. 727
Mack v. Mendels 249 NY 356 N.Y. 1928-11-20 p. 727
Hyatt v. Taylor 42 NY 258 N.Y. 1869-03-23 p. 727
Palmer v. Van Santvoord 153 NY 612 N.Y. 1897-10-05 p. 727
Tonis v. Board of Regents of the University 295 NY 286 N.Y. 1946-04-18 p. 727
New York State Bridge Authority v. Moore 299 NY 410 N.Y. 1949-07-19 at 416 p. 727, p. 731
Blyn v. Bartlett 50 AD2d 442 N.Y. App. Div. 1976-01-15 p. 727
Blyn v. Bartlett 39 NY2d 349 N.Y. 1976-04-01 p. 727
In re the Accounting of the Bank of New York 35 NY2d 512 N.Y. 1974-12-20 p. 727
Roosevelt Raceway, Inc. v. Monaghan 9 NY2d 293 N.Y. 1961-03-23 at 305-306 p. 727, p. 731
In re Dugmore 23 Misc 2d 792 N.Y. Sur. Ct. 1960-04-20 p. 727
In re the Accounting of Bank of New York & Fifth Avenue Bank 199 Misc 593 N.Y. Sup. Ct. 1950-09-19 p. 727
Kamen v. Kemper Financial Services, Inc. 500 US 90 SCOTUS 1991-05-20 p. 727
People v. Bolden 81 NY2d 146 N.Y. 1993-02-25 p. 727
Howard v. Wyman 28 NY2d 434 N.Y. 1971-06-10 p. 727, p. 728
John Paterno, Inc. v. Curiale 88 NY2d 328 N.Y. 1996-06-06 p. 727
People v. Finnegan 85 NY2d 53 N.Y. 1995-02-16 p. 727
Sanders v. Winship 57 NY2d 391 N.Y. 1982-11-18 p. 727
Sega v. State 60 NY2d 183 N.Y. 1983-10-25 p. 727
Albano v. Kirby 36 NY2d 526 N.Y. 1975-05-07 p. 727
Knapp v. Monroe County Civil Service Commission 77 AD2d 817 N.Y. App. Div. 1980-07-10 p. 727
In re Bankers Trust Co. 219 AD2d 266 N.Y. App. Div. 1995-12-21 p. 727, p. 728
In re the Accounting of Bank of New York & Fifth Avenue Bank 200 Misc 410 N.Y. Sur. Ct. 1951-09-15 p. 727
Guaranty Trust Co. v. Lewis 279 NY 396 N.Y. 1939-01-10 p. 727
Salvati v. Eimicke 72 NY2d 784 N.Y. 1988-12-20 p. 728
Colt Industries, Inc. v. New York City Department of Finance 66 NY2d 466 N.Y. 1985-12-19 p. 728
Industrial Indemnity Co. v. Cooper 81 NY2d 50 N.Y. 1993-03-30 p. 728
In re OnBank & Trust Co. 227 AD2d 20 N.Y. App. Div. 1996-11-08 at 23 p. 729
People v. Oliver 1 NY2d 152 N.Y. 1956-04-26 at 157 p. 730
Jacobus v. Colgate 217 NY 235 N.Y. 1916-02-22 at 240 p. 730
Becker v. Huss Co. 43 NY2d 527 N.Y. 1978-02-09 at 540 p. 730
Duell v. Condon 84 NY2d 773 N.Y. 1995-02-09 at 783 p. 730

Statutes and regulations cited

Banking Law p. 726, p. 727, p. 728, p. 729, p. 730, p. 731