HomeMy WebLinkAbout02-25-05 (2)
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IN RE: ESTATE OF
JOSEPH D. BRENNER, SR., JOSEPH D.
BRENNER, JR., and MARGARET B. BUSHEY,
Petitioners,
v.
MANUFACTURERS AND TRADERS TRUST
COMPANY, a New York corporation, DAVID C.
GORITY, an individual, and CURT R.
STAUFFER, an individual,
Respondents.
IN RE: JOSEPH D. AND JANE W. BRENNER
TRUST
IN RE: JANE W. BRENNER TRUST UWO "B"
IN RE: JANE W. BRENNER TRUST UWO "C"
IN RE: NANCY B. BLAKELY TRUST
IN THE COURT OF COMMON PLEAS
OF CUMBERLAND COUNTY,
PENNSYLVANIA
ORPHANS' COURT DNISION
..-No. 21-2004-087/
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PETITIONERS' OBJECTIONS TO AUDITOR'S REPORT
AND MEMORANDUM IN SUPPORT OF OBJECTIONS
Petitioners Margaret B. Bushey ("Bushey"), Joseph D. Brenner, Jr. ("Brenner Jr.")
and Joseph D. Brenner, Sr. ("Brenner Sr.") submit the following objections to the Auditor's
Report and Recommendation Regarding All Objections Filed ("Auditor's Report" or "AR").
Introduction
This case involves four trusts. The Jane W. Brenner Trust UWO "B," the Jane W.
Brenner Trust UWO "C," and the Nancy B. Blakely Trust are referred to collectively as the
"Children's Trusts." Respondents Manufacturers and Traders Trust Company ("M&T") and
Brenner Sr. were co-trustees of the Children's Trusts at the time of the events in question. The
Joseph D. and Jane W. Brenner Trust is referred to as the "Grandchildren's Trust." M&T,
Bushey, and Brenner Jr. were co-trustees of the Grandchildren's Trust at the time of the events in
question. The four trusts are referred to collectively as the "Brenner Trusts" or the "Trusts."
These abbreviations are consistent with the Auditor's Report.
The facts of this case have been recited on many occasions, both to the Court and
to the Auditor. In the interest of brevity, Petitioners will not recite the facts yet again here, but
instead direct the Court to their Post-Hearing Memorandum, which provides a detailed summary
of the facts at pages 1-31. While the Post-Hearing Memorandum necessarily recites the facts as
alleged by Petitioners, it also contains extensive citation to the record before the Auditor, and
will provide the Court with a much more thorough understanding ofthe case since the Auditor
did not make any findings on many ofthe facts alleged therein. Petitioners also point the Court
to the damages analysis contained in their Post-Hearing Memorandum at pages 55-59, rather than
reciting it again herein. The Auditor did not consider or discuss damages in the Auditor's Report
since he concluded that Respondents did not breach their fiduciary duties. (AR 26.) A copy of
Petitioners' Post-Hearing Memorandum is attached as Exhibit A for the Court's convenience and
incorporated herein.
Petitioners object to the Auditor's Report on four grounds. Petitioners obviously
disagree with the Auditor's conclusion that M&T exercised "extraordinary care" (AR 21), and
that David C. Gority ("Gority") and Curt R. Stauffer ("Stauffer") exhibited "a high degree of
professionalism" (AR 25), in discharging their fiduciary duties. However, Petitioners limit their
objections to four specific areas in which the Auditor failed to make any findings, failed to make
sufficient findings, or erred in his application ofthe law. First, the Auditor failed to make any
findings or conclusions with respect to two of the six claims stated in the Petition. Petitioners
therefore submit their Third and Fourth Claims, which relate to M&T's failure to timely transfer
the trust assets to the successor trustee, to the Court for resolution based on the evidence in the
record. Second, the Auditor made only one finding regarding M&T's failure to advise Petitioners
that the disputed stock sales could be reversed for three days. That finding was insufficient to
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reach a legal conclusion regarding M&T's conduct, and the Auditor in fact did not discuss or
make any specific legal conclusion in the Auditor's Report with respect to M&T's conduct
regarding the right of reversal. Third, the Auditor made insufficient findings of fact regarding
M&T's recommendation of $9.00 stop-loss orders on two-thirds of the Tyco shares in the
Brenner Trusts on June 12,2002, and M&T's communication of that recommendation to
Petitioners. Based on the undisputed evidence, M&T's conduct with regard to the stop-loss
orders was negligent as a matter oflaw. Fourth, and finally, the Auditor rejected the only
medical evidence regarding Brenner Sr.'s diminished capacity for reasons not supported by the
evidence, gave inappropriate weight to self-assessment evidence, and improperly relied on his
personal perception of the "normal aging process" and Brenner Sr.'s demeanor during his
testimony at the hearing.
Obiections and Memorandum In Support of Obiections
I. The Auditor Failed to Consider or Rule on Petitioners' Claims Against
M&T for Refusing to Transfer the Trust Assets to the Lawfully
Appointed Successor Trustee.
The Auditor's Report completely fails to address two of Petitioners' claims,
specifically the Third and Fourth Claims in the Petition, which assert that M&T breached its
fiduciary duty by refusing to release the assets in the Brenner Trusts to the lawfully appointed
successor trustee.
Petitioners presented significant evidence regarding M&T's refusal to release the
trust assets at hearing, as well as addressing the issue in their pre-hearing and post-hearing
briefing. The evidence on this issue was entirely undisputed by M&T, and is as follows. After
the events of June 12,2002, Petitioners lost all confidence in M&T and decided to remove all
their accounts from M&T, including the Brenner Trusts. (Tr. 135,218,284.) The trust
instruments give Petitioners the authority to remove M&T and appoint a successor trustee.
(Exs. 1,2, 119.) M&T has never contested that Petitioners have such authority. Petitioners
exercised that authority and selected Orrstown Bank to serve as the successor trustee. (Tr. 133-
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34.) At Petitioners' behest, Barbara Brobst ofOrrstown Bank wrote a letter to Respondent
Gorityon September 30,2003. (Tr. 134; Ex. 95.) Ms. Brobst enclosed documents signed by the
Brenners and Orrstown Bank that removed M&T as trustee of the Brenner Trusts and appointed
Orrstown Bank as the successor trustee. Ms. Brobst also provided M&T with transfer
instructions for the trust assets. (Ex. 95.) Gority testified that the form of the removal notice was
valid in his experience and he did not have any objection to it. (Tr.573.) M&T has never
contested the validity or efficacy of its removal as trustee on September 30, 2003, nor has it ever
contested the appointment of Orrstown Bank as successor trustee.
M&T did not transfer the trust assets as directed. To this day, M&T retains the
entire corpus of all four of the Brenner Trusts. M&T did not even acknowledge receipt of the
September 30,2003, notice of its removal and Orrstown Bank's appointment as successor trustee.
It is undisputed that M&T did not respond in any way to the September 30 notice of its removal
as trustee and instructions to transfer the assets to the successor trustee. On February 2,2004,
Petitioners filed its Petition in this matter. Petitioners included two claims against M&T for
breach of fiduciary duty based on its failure to transfer the assets in the Children's Trusts (Third
Claim) and Grandchildren's Trust (Fourth Claim) to Orrstown Bank upon receipt of the
September 30 notice.1 Petitioners asserted ongoing damage to the trusts as a result. M&T still
did nothing to transfer the assets. On April 15, 2004 counsel for Petitioners sent a letter to M&T
demanding that M&T release the assets to Orrstown Bank immediately or explain their failure to
do so. Counsel specifically pointed out that M&T's failure to release the trust assets to Orrstown
Bank so that they could be reinvested (their being almost entirely in the form of cash equivalents
at M&T) was reducing the value ofthe trust assets and thereby causing unnecessary damage to
the trusts. (Ex. 96.) Again, M&T was completely silent. On June 17,2004, counsel for
1 The Petition filed in the Orphans' Division on February 2, 2004, was substantially similar to the
Complaint previously filed in the Civil Division on August 22,2003. However, since M&T had
not been formally removed when the Complaint was filed, the Third and Fourth Claims regarding
M&T's failure to transfer the assets to Orrstown were new to the Petition.
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Petitioners sent yet another letter to M&T, repeating the demand that the assets be released to
Orrstown Bank to stem the continuing damage to the trusts caused by M&T's non-
responsiveness. (Ex. 97.)
Nearly a year after receiving notice of its removal, M&T finally responded on
July 8, 2004, to Petitioners' repeated instructions to transfer the assets to the successor trustee.
M&T did not respond by transferring the assets, however. Instead, it sent a release for Petitioners
to sign to "facilitate" the transfer of trust assets to Orrstown Bank. (Ex. 98.) M&T offered no
explanation in its July 8 letter for its prolonged silence, its failure to transfer the assets earlier, or
its requirement that the Brenners sign a release. (Ex. 98.) On the same date, July 8, M&T filed
its Verified Answer to the Petition, in which it was forced to respond to the Third and Fourth
Claims. M&T admitted that the trust assets had not yet been released to Orrstown Bank and
continued to be held by M&T (Answer ~ 39), but otherwise denied Petitioners' allegations as
legal conclusions and asserted that no damage was being done to the trusts by M&T's failure to
release the assets (Answer ~~ 39,57,59).
As a matter of law, M&T breached its fiduciary duties by blatantly ignoring for
nearly a year its removal as trustee and instructions to transfer the assets to the successor trustee.
M&T gave no response to Petitioners' repeated requests to transfer the assets to Orrstown Bank
as the lawfully appointed successor trustee.2 As the Auditor recognized, M&T owes a "higher
standard of care" to the Brenner Trusts because it is a professional fiduciary (AR 21). Moreover,
M&T has physical control of the trust assets. No one at M&T has ever offered any explanation,
2 Petitioners' expert on fiduciary matters, David Steele, testified that a corporate trustee is
obligated to communicate with its co-trustees at all times regarding their accounts, including any
reasons the corporate trustee may have for not immediately transferring trust assets to a successor
trustee. (Tr. 389.) The Auditor dismissed Mr. Steele's testimony in its entirety as "neither
persuasive nor relevant." (AR 19 ~ 80.) Mr. Steele has 40 years of experience in the trust
industry, including 20 years managing trust departments at banks in Pennsylvania, and taught at
the Central Atlantic School of Trusts for 15 years. (Tr. 381-384 (discussing his credentials)).
While his testimony is not necessary to find in Petitioners' favor, it is relevant and persuasive on
its face and Petitioners submit it to the Court for appropriate consideration.
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during depositions, the hearing, or otherwise, for M&T' s willful or negligent failure to release
the trusts assets once M&T was removed as trustee. (Tr. 135,218,287-88.) Petitioners are not
aware of any authority that permits M&T to hold the trust assets hostage pending resolution of a
dispute between the co-trustees. Such a rule of law would be unfair to the trust beneficiaries, as
well as improperly discourage lawful actions against negligent fiduciaries. It is also notable that
M&T has never even suggested that there is any legal authority for its retaining the trust assets
subsequent to its removal on September 30,2003. To the contrary, M&T's letter of July 8, 2004,
makes clear that M&T believes it has the ability to transfer the trust assets to Orrstown Bank if it
wishes to do so.
Unfortunately, the Auditor did not address Petitioners' Third and Fourth Claims
against M&T for refusal to transfer the trust assets to the successor trustee. The only finding of
fact in the Auditor's Report that is pertinent to these claims is No. 81, which states, "Brenner Sr.,
Brenner Jr., and Bushey have requested that M&T transfer the Trusts to Orrstown Bank, of
Carlisle, Pennsylvania." There is no mention of the claims or their substance anywhere else in
the Auditor's Report.
In light of the Auditor's failure to address Petitioners' Third and Fourth Claims,
the Court must do so. Based on the undisputed evidence, M&T breached its fiduciary duties by
willfully or negligently failing to transfer the assets in the Brenner Trusts to Orrstown Bank, the
lawfully appointed successor trustee, for over a year. M&T has never offered a defense or
explanation for its post-removal conduct because there is no justification. M&T's refusal to
transfer the trust assets upon receiving undisputed valid notice of its removal as trustee, not to
mention its complete failure to even respond to its co-trustees on this issue, cannot satisfy M&T's
higher standard of care as a professional fiduciary. Due to M&T's conduct, the trust assets have
remained at M&T, largely in the form of cash equivalents earning minimal interest, while the
cost of reacquiring Tyco stock has risen from a closing price of $20.43 on September 30,2003
(the date on which Petitioners notified M&T of its removal as trustee) to $31.78 on July 8,2004
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(the date on which M&T finally responded to the removal notice) to $33.61 on February 10, 2005
(the date of the Auditor's Report). (Ex. 108.) M&T should be surcharged for the losses suffered
by the trusts as a result ofM&T's prolonged and inexcusable failure to timely transfer the assets
to Orrstown Bank for reinvestment.
II. The Auditor Did Not Discuss M&T's Failure to Advise Petitioners that It
Could "Reverse" the Disputed Sell Orders, and Did Not Make Adequate
Findings of Fact on This Issue to Reach a Conclusion of Law.
It is undisputed that M&T knew it could have "reversed" the contested sales of
Tyco stock that occurred on June 12,2002, for any reason, for three days. Respondent Stauffer,
the investment officer for the Brenner Trusts, testified at the hearing that he was fully aware of
the ability to reverse the trades for three days, but did not tell either Respondent Gority, who was
the administrative officer for the trusts, or Petitioners, who were the co-trustees. (Tr. 841-42.)
There is no evidence any of the Petitioners were aware trades could be reversed for three days.
It is also undisputed that M&T knew Petitioners were angry and upset on the
morning of June 13, 2002. Petitioners not only communicated those feelings to Gority, but
specifically told Gority that Brenner Sr. did not understand that the stock in the trusts would be
sold. Gority testified that, when he spoke to Brenner Sr. around 9 a.m. on June 13, Brenner Sr.
was upset and angry, "expressed his displeasure" to Gority, told Gority that he did not understand
the stop-loss order, and ultimately hung up on Gority, which was something Brenner Sr. had
never done before in their many years working together. (Tr. 506-08,554-55.) Gority recorded
in a contemporaneous memorandum that Brenner Sr. told him on June 13 that "he did not
understand that we had explained the stop-loss to him and that he thought we would not sell
shares below $9.00 per share." (Ex. 19 at 4.)
Bushey also spoke to Gority on the morning of June 13, immediately after he got
off the phone with Brenner Sr. Gority characterized Bushey as "upset and concerned" when he
spoke to her (Tr. 507), and testified at hearing that she told him that morning that Brenner Sr. did
not understand what a stop-loss order was. (Tr.554-55.) Gority told Bushey that he had just
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been on the phone with Brenner Sr., and that Brenner Sr. was upset and said he did not
understand that he had sold all the stock in the trusts. (Tr. 129,507.) Bushey remembers
Stauffer in the background yelling that he had told Brenner Sr. what a stop-loss order was.
(Tr. 129.) Gority's only response to Bushey on the morning of June 13 was to say "let's just
forget about it and move on" and suggest meeting the next week to discuss reinvestment of the
proceeds. Gority did not dispute that is what he told Bushey. (Tr. 130,507.) Bushey responded
that the family was processing the information, asked him to send copies of everything, and
asked whether he had a tape recording of their phone call the previous day. (Tr. 130-31.) Gority
responded, "Margaret, you are starting to scare me" (Tr. 131), which he also did not deny.
Finally, still on June 13, Gority spoke to Brenner Jr., who Gority testified had
"pretty much the same reaction [as Bushey], that there was concern and disappointment of what
had happened." (Tr.507-08.) Stauffer does not recall participating in any of the calls on June
13, but does not deny participating. (Tr. 658) Stauffer does remember it being communicated to
him that Brenner Sr. was really angry about the events of June 12 (Tr. 842) and recalls Brenner
Sr. not being interested in discussing reinvestment with them (Tr. 658).
M&T was the professional fiduciary, had investment expertise, made investment
recommendations to Petitioners regarding the trusts, and physically controlled the trust assets.
The Brenners, by contrast, had little investment experience beyond owning Tyco stock, and had
only sold stock from any of the trusts on one prior occasion (selling approximately 40% of the
Tyco stock in the Grandchildren's Trust in 1999). It is undisputed that Stauffer, the investment
officer, was the only person involved in the events of June 12,2002, who knew that stock trades
could be reversed for three days.3 Nonetheless, the Auditor apparently concluded that, in
evaluating M&T's conduct with respect to the Brenner Trusts, the burden was on Petitioners to
3 It is likely that Stauffer's immediate superior, John Klobusicky, who attended the June 12
meeting with Brenner Sr. by speakerphone, was aware that trades did not settle for three days and
could be reversed during that time. However, Mr. Klobusicky was not involved in the June 13
phone calls, and did not testify about reversal.
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specifically ask M&T to reverse the June 12 trades during the three-day window. Finding of Fact
No. 56, the only part of the Auditor's Report directed to this issue, states, "Neither Brenner Sr.,
Brenner Jr., nor Bushey requested that M&T reverse the stock sales that took place on June 12,
2002." (AR 14 ~ 56.) There are no other findings on this issue in the Auditor's Report.
M&T knew unequivocally on the morning of June 13 that the co-trustees were
upset and angry about the June 12 stock sales. It is undisputed that Brenner Sr. and Bushey each
specifically told Gority on June 13 that Brenner Sr. did not understand what he had purportedly
agreed to the previous day, particularly the stop-loss orders. Brenner Sr. was so angry with M&T
that he hung up on Gority, an unprecedented event. According to the Auditor's findings, Brenner
Sr. was the independent decision-maker for the Children's Trusts and the de facto decision-maker
for the Grandchildren's Trust. (AR 6-7 ~~ 13-14; AR 25-26.) Yet, when M&T was informed that
Brenner Sr. did not understand the transactions and had not intended to sell stock, no one at
M&T ever told Brenner Sr. that the trades could be reversed on June 13, or even June 14.
(Tr. 558.) No one at M&T ever told Bushey or Brenner Jr. either, even though they were the co-
trustees on the Grandchildren's Trust, Gority knew on June 13 that they were both upset and
concerned about what had happened on June 12, and Bushey had gone so far as to ask Gority on
the morning of June 13 whether he had a tape recording of their June 12 conversation.
The Auditor's only finding of fact on the reversal issue wrongly places the burden
on Petitioners to first know that M&T could reverse the transactions, and then to specifically ask
M&T to do so. M&T was the professional fiduciary, had made the disputed investment
recommendation, had drafted the authorization letter for Brenner's signature, had the expertise to
actually know the trades could be reversed for three days, and had physical control of the trust
assets. Once M&T was put on notice on the morning of June 13 that its co-trustees were upset
and concerned, and specifically asserted that they had not understood what they had allegedly
authorized the prior day, M&T was obligated to at least notify Petitioners of their options,
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including the three-day window for reversing the transactions.4 Instead, the only thing Gority
told Petitioners was that they should "just forget about it and move on" and meet with M&T in a
week to discuss reinvestment. Stauffer told Petitioners nothing.
The Auditor's sole finding of fact regarding reversal, i.e. that Petitioners did not
specifically request it, is insufficient to resolve this issue. The Auditor failed to make any
findings regarding M&T's conduct in connection with the reversal issue, and did not include any
specific discussion or conclusions about M&T's conduct in the Auditor's Report. Petitioners
respectfully ask the Court to make additional findings based on the undisputed facts, to conclude
that M&T breached its fiduciary duty by failing to notify the co-trustees of the availability of
reversal under the circumstances of June 13, and to surcharge M&T for the damages suffered by
the trusts as a result ofM&T's negligence.
III. Based on the Undisputed Facts, M&T's Recommendation to Enter a
$9.00 Stop-loss Order on June 12,2002, Was Negligent as a Matter of
Law. The Auditor Also Did Not Make Adequate Findings on this Issue.
The following facts are undisputed. M&T had internal discussions about
downside hedging mechanisms, including stop-loss orders, in connection with the Brenner Trusts
in September 2001. (Exs. 64-66, 70, 72.) No one at M&T ever discussed stop-loss orders or any
other downside hedging techniques with Petitioners, however, until June 12,2002. (Tr.806-08,
117,280.) On June 12, Stauffer recommended to Brenner Sr. that they enter a stop-loss order at
$9.00 for 2/3 of the shares in each of the trusts (having already recommended that they sell 1/3 of
the shares immediately at market price). (AR 13 ~ 49.) Stauffer spoke on behalfofM&T and
was the only person present who had any experience with stop-loss orders. (Tr. 535, 743-45,
4 Petitioners' expert on investment matters, James Quinlan, testified at the hearing that, under the
undisputed circumstances of June 13, a prudent investment advisor would have told their client
about the possibility of reversing the trades for three days. (Tr. 366-67.) The Auditor dismissed
Mr. Quinlan's testimony in its entirety as "neither persuasive nor relevant." (AR 19 ~ 80.)
Mr. Quinlan is a practicing investment advisor and the President of Smart Financial Advisors.
(Tr. 323-35 (discussing his credentials)). While his testimony is not necessary to find in
Petitioners' favor, it is relevant and persuasive on its face and Petitioners submit it to the Court
for appropriate consideration.
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280.) Stauffer did not consult with Brenner Sr. regarding what stop-loss trigger price he would
be comfortable with.s (Tr.809-10.) Stauffer did not tell Brenner Sr. as co-trustee why he was
recommending a $9.00 trigger price, did not tell Brenner Sr. how he had tested the $9.00 trigger
to reasonably ensure that it would not trigger a sale simply as a result of recent intraday market
volatility, and did not explain to Brenner Sr. how likely it was that the stop-loss order would
trigger in the market environment existing on June 12,2002. (Tr. 812-13.) Put another way,
Stauffer did not tell Brenner Sr. that the trigger price he was recommending would have resulted
in the complete liquidation of Tyco stock on three of the preceding seven trading days. (Tr.813.)
The following facts are also undisputed. Stauffer was the only person M&T
considered qualified to discuss investment matters with Petitioners. Stauffer never spoke to
Bushey or Brenner Jr. about the stop-loss recommendation for the Grandchildren's Trust,
however. It was Gority who called Bushey and Brenner Jr. on June 12. (AR 14 -055.) Gority
had been on vacation in Ireland the ten days prior to June 12, did not have an opinion on M&T's
recommendation that they sell 1/3 ofthe Tyco stock in the Brenner Trusts immediately and place
a stop-loss order at $9.00 on the remainder, and did not believe he was qualified to answer any
questions regarding that investment recommendation. (Tr.494-95.) Gority told Bushey and
Brenner Jr. that Brenner Sr. had agreed to the $9.00 stop-loss order for 2/3 of the shares, and
asked for Bushey and Brenner Jr. to agree to the same for the Grandchildren's Trust. (Tr. 113,
212; AR 14 -0 55.) Gority did not explain anything about the stop-loss order to Bushey or
Brenner Jr. (Tr. 493-94, 497-98.) Gority did not explain how a stop-loss order worked, how
Stauffer set the $9.00 trigger price, how Stauffer tested the trigger price, or what the likelihood of
a $9.00 stop-loss order triggering in the current market was. (Tr. 493-94, 497-98.) Brenner Jr.
specifically expressed concerns to Gority about the use of a stop-loss order. (Tr. 498,213-14,
5 Mr. Quinlan gave expert testimony that a stop-loss trigger price should typically be determined
in consultation with the client, since the price at which the client wants to exit the stock position
is the "optimal" level for a stop-loss trigger. (Tr. 359-60.) Stauffer's superior, Dan Magee, also
testified that setting the trigger price is normally a collaborative effort with the client. (Tr.708.)
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231-32.) Gority did not respond to those concerns though. (Tr. 213,498). In fact, Gority
testified that he did not feel it was necessary to respond to the co-trustee's concerns about the
stop-loss order because he "really felt as though the objection was just an expression of an
opinion." (Tr.498.) Despite the fact that Stauffer was the investment officer for the
Grandchildren's Trust, Stauffer considered it Gority's job to communicate M&T's
recommendation to Bushey and Brenner Jr. on June 12 (Tr. 827-28) and never spoke to either
Bushey or Brenner Jr. about his stop-loss recommendation. (Tr. 828, 836.)
Given the foregoing undisputed facts, M&T's June 12 recommendation regarding
the stop-loss order was negligent as a matter oflaw. First, M&T should have communicated
downside hedging options to Petitioners as part of the November 2001 presentation, or at least
once Tyco's stock price began declining precipitously in early 2002. Tyco stock fell from trading
around $57 in early January, to around $35 in early February, $20 in early May, and $10 on
June 7 when Stauffer called Petitioners to set up a meeting. However, between November 13,
2001 and June 7,2002, M&T contacted Petitioners only twice,6 and did not mention downside
6 The Auditor found that Gority and Stauffer "repeatedly advised" Petitioners between January
2002 and June 12,2002 "to diversify the holdings of the Trusts" (AR 11 ~ 40), and that M&T
kept Petitioners well-informed of market events and M&T's opinion on Tyco during that time
period (AR 12 ~ 42). These findings are inconsistent with the undisputed facts in evidence.
After Stauffer's presentation of a seven-year diversification program for the trusts in November
2001 (Ex. 11), there are only two subsequent contacts in evidence: (1) a conversation with
Brenner Sr. at the end of January 2002 about potentially implementing the long-term
diversification plan, with a letter from Gority dated February 1 memorializing the conversation
(Ex. 14); and (2) a letter on March 6 from Stauffer to Brenner Sr., copied to Bushey and Brenner
Jr., which provided reassurances about the decline in Tyco's stock price, and reiterated Stauffer's
general belief that all portfolios should be diversified (Ex. 15). There is evidence that in early
May, when Tyco was trading around $20, Stauffer asked Gority to set up a meeting with
Petitioners to discuss an aggressive systematic sales program for the trusts (Ex. 16), but it is
undisputed that Gority never set up such a meeting. Quinlan gave expert testimony that a
prudent investment advisor would have discussed downside protections with the client given the
market environment existing in the first half of 2002 (Tr. 332-34).
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hedging mechanisms on either occasion. Instead, M&T waited to suggest building a door until
the horse was long out of the barn.
Second, and more importantly, when M&T finally did recommend a downside
hedging mechanism for the first time on June 12,2002, Stauffer failed to adequately test the
stop-loss trigger price that he recommended to reasonably ensure it would not trigger based
solely on intraday market volatility. According to Stauffer's own testimony, "What you want to
do in a stop-loss in a situation like this is set it so that it wouldn't go off in a normal trading day.
There would have to be some type of event that would cause the stock to trade much more
volatilely on the downside that would trigger that."7 (Tr.637.) Stauffer acknowledged the
importance of back testing an investment recommendation against historical data to "determine
whether certain parameters and assumption would actually be effective" in generating the desired
result. (Tr.615.) The only other time Stauffer had made an investment recommendation to
Petitioners was in November 2001. In that instance, Stauffer back tested his proposal, made a
point of explaining the importance of back testing to Petitioners, and included in the written
materials for the November 2001 presentation information about back testing, the time period he
had back tested, and a graphic depiction of what sales would have triggered in the previous
18 months pursuant to his recommended diversification plan. (Ex. 11.)
On June 12,2002, however, Stauffer did not do adequate back testing and did not
communicate to Petitioners how inadequate his back testing was. On June 12, Stauffer
recommended a trigger price 15% below the price at which Tyco was then trading. (Tr. 810.)
Stauffer says his calculation was "based upon just looking at the stock and its intraday
movements, what its volatility was from high to low in any given day." (Tr.637.) However, a
comparison of Tyco stock's high and low trading prices for the month of June 2002 shows that
7 Mr. Quinlan also gave expert testimony that a prudent investment advisor would avoid setting a
stop-loss order so that it triggered due to intraday volatility. (Tr. 337-39,358-60.)
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there was more than 15% volatility on three ofthe seven trading days leading up to June 12.8
Stauffer testified that he could not "recall" those statistics (Tr. 811-12) or whether he noticed that
fact at the time. (Tr.812-13.) In any event, Stauffer admits that he did not communicate to
Brenner Sr. what period he back tested, or how likely it was that a stop-loss order would trigger if
the price were set at $9.00. (Tr. 813.) Stauffer "thinks" he looked at Tyco's daily volatility "for
the past six months or so" (Tr. 810), even though he knew Tyco had been more volatile recently
(Tr.812). Stauffer testified that it "is possible" the co-trustees to whom M&T was making the
recommendation would have wanted to know how likely it was in the current market that the
$9.00 price would trigger liquidation of all Tyco stock in the trusts. (Tr.813.)
Stauffer's negligence in formulating the stop-loss trigger price was exacerbated by
M&T's failure to adequately communicate the stop-loss recommendation or its practical
application to Petitioners, its co-trustees. Klobusicky recalls Stauffer giving only a single "brief'
description of a stop loss order. (Tr. 754.) Stauffer testified that he explained the stop-loss order
to Brenner Sr. as follows: "My explanation to him was that it was outside of a normal one day
trading volatility of the stock. So therefore, just normal market ups and downs would not
necessarily trigger the stop-loss." (Tr.649.) Gority does not recall exactly what Stauffer said
about how the stop-loss worked, but says his best memory is that Stauffer said words to the effect
that "it was a mechanism that was employed to protect the value and the shares should there be a
free fall in the market." (Tr. 536.) Stauffer's description to Brenner Sr. (as either Stauffer or
Gority remembers it) was not accurate as to the stop-loss order Stauffer recommended on June
12, as a result of Stauffer's failure to back test the $9.00 trigger price in the existing market and
8 On June 3, the high was 18.800 and the low was 15.600 (17.02% volatility). On June 4, the
high was 16.800 and the low was 15.550 (7.73% volatility). On June 5, the high was 17.750 and
the low was 16.910 (4.78% volatility). On June 6, the high was 17.300 and the low was 14.400
(16.76% volatility). On June 7, the high was 12.550 and the low was 9.450 (24.70% volatility).
On June 10, the high was 11.750 and the low was 10.300 (12.34% volatility). On June 11, the
high was 11.250 and the low was 10.500 (6.66% volatility). All stock prices are taken from
Exhibit 108.
14
explain that a trigger price set 15% below current trading price would have triggered on three of
the last seven trading days. As to Bushey and Brenner Jr., Gority admits he did not tell either of
them anything about how the stop-loss trigger price was determined or back tested, or how likely
it was that it would trigger liquidation of all the Tyco shares in the Grandchildren's Trust that
day. 9
Mere hours after M&T recommended the $9.00 stop-loss order, Tyco stock's price
dipped briefly, causing the complete liquidation of all Tyco shares in the Brenner Trusts. The
sell order was triggered solely by intraday volatility that was predictable to someone with
investment expertise who back tested in the recent market. Tyco stock opened at $10.90 and
closed at $10.15 on June 12 (Ex. 108), and there were no announcements regarding Tyco during
the market day on June 12.
It was incumbent on Stauffer, as the person making the recommendation to
Brenner Sr. on behalf ofM&T and the only person knowledgeable about stop-loss orders, to
explain why he was recommending a stop-loss order, why he was recommending a $9.00 trigger
price, whether he had back-tested the recommended trigger price, and what the reasonable
likelihood was of a $9.00 stop-loss order triggering complete liquidation in the current market.
Stauffer failed in all these regards, and instead recommended a stop-loss order that was very
likely to achieve the result that he preferred-short-term sale of the entire Tyco position in the
trusts. (Tr. 634.) Gority performed even worse in regards to the Grandchildren's Trust,
providing no information about the stop-loss recommendation to Bushey or Brenner Jr., and
blatently ignoring Brenner Jr.'s express concerns about using a stop-loss order.
M&T's negligence with regard to the stop-loss order is not excused by the fact that
M&T had previously encouraged Petitioners to diversify the trusts. This case is not about the
merits of diversification as a financial strategy. It does not matter whether the trusts might have
9 Mr. Quinlan testified that recommending a stop-loss without explaining it or explaining how
the trigger price was set is not prudent investment advice. (Tr. 339-40.)
15
performed better if Petitioners had sold more Tyco stock earlier. (See AR 25.) Tyco stock had
performed very well for the trusts historically, Petitioners were not obligated to diversify for the
mere sake of diversification, 10 and even M&T had recommended a 5-10 year diversification plan
that it did not revise until June 2002.
The only issue is whether M&T's conduct in connection with the disputed June 12
transactions met the standard of care. Petitioners submit that, as a matter of law, M&T's
undisputed conduct with regard to the stop-loss orders did not satisfy the standard of care
applicable to M&T as a professional fiduciary, and certainly did not constitute the "extraordinary
care" that the Auditor found M&T to have exercised generally (AR 21). The Auditor did not
make specific findings about M&T's formulation ofthe stop-loss order recommendation and
communication of the same to its co-trustees. Petitioners respectfully request that the Court
make findings consistent with the undisputed facts (with respect to both the Children's Trusts and
Grandchildren's Trust), conclude that M&T breached its fiduciary duties with respect to its stop-
loss order recommendations, and surcharge M&T accordingly.
IV. Brenner Sr. 's Diminished Capacity is a Fundamental Issue, and the
Court Should Hear Evidence on this Issue Itself.
The foregoing errors in the Auditor's Report can be resolved in Petitioners' favor
without overturning the Auditor's findings that Brenner Sr. was "competent to participate and to,
in fact, make decisions with respect to the Trusts" (AR 7 ~ 17) and that Brenner Sr. "fully
understood and voluntarily signed both authorizations" with respect to the transactions on
June 12,2002 (AR 13 ~ 51). Brenner Sr.'s capacity, however, is a fundamental issue in this case,
and the Auditor's findings and conclusions as a whole are objectionable if the Court concludes
that Brenner Sr. was in fact not able to fully understand and make decisions independently
regarding the trusts by June 12,2002. If the Court concludes that Brenner Sr. was suffering from
diminished capacity, and that M&T knew or had reason to know that fact, then M&T was
10 The "duty to diversify" (or lack thereof) is discussed in Petitioners' Post-Hearing
Memorandum at pages 65-67.
16
obligated to take appropriate steps to accommodate his diminished capacity and to ensure that it
had informed consent to any recommendation it made, including involving Bushey and Brenner
Jr. if necessary since M&T knew they had power of attorney for Brenner Sr. and kept copies of
the power of attorney in the trust files (Exs. 60, 61; Tr. 580).
The only medical expert who gave any testimony regarding Brenner Sr.'s mental
ability, in June 2002 or otherwise, was Dr. Joseph Braze1.11 Dr. Brazel has been practicing
medicine for over 30 years, has been Brenner Sr. 's personal physician for over ten years, and
testified that approximately 70-75% of his patients are elderly. (Tr. 49-50.) Dr. Brazel testified
at the hearing that he has "absolutely no doubt" in his mind that Brenner Sr. was suffering from
senile dementia of the Alzheimer's type in June 2002 (Tr. 78,50-56) and "no doubt" that Brenner
Sr. "did not have the ability to deal with complex data, subjects, discussions, or terminology" by
June 2002. (Tr. 78, 56-57.) Dr. Brazel testified that his opinion is based on his many years of
experience with Brenner Sr. and his many years of experience with dementia and how it is
handled in clinical practice. (Tr.61.)
In finding Brenner Sr. fully competent to make decisions independently about the
trusts on June 12,2002, the Auditor necessarily rejected Dr. Brazel's expert testimony. The only
reason for that rejection apparent in the Auditor's Report is in Finding of Fact No. 75, which
states, "Dr. Joseph S. Brazel's diagnosis that Brenner, Sr. suffered from senile dementia,
Alzheimer's type, prior to June 2002 was based upon observations only. No clinical tests,
including the Wechsler test or any other evaluations were given." (AR 18 ~ 75.) It is true that
Dr. Brazel based his diagnosis of Brenner Sr. on clinical observation and extensive experience
with senile dementia, but Respondents offered no evidence that clinical observation by an
experienced physician is an unacceptable method of diagnosis. As for clinical tests,
Respondents' counsel asked Dr. Brazel during cross-examination whether he had ever
11 Respondents offered no expert evidence regarding Brenner Sr.'s competency, and never
requested prior to the hearing that Brenner Sr. submit to any examination.
17
administered a "Wechsler Adult Intelligence Scale Test," a "Leiter Adult Intelligence Scale Test,"
or a "mini-mental" exam to Brenner Sr. Dr. Brazel testified that he had "absolutely not"
performed a Wechsler test "because we find them of no clinical value" (Tr. 59), that he had never
heard of a Leiter test (Tr. 60), but that he had "absolutely" performed one or more mini-mental
exams on Brenner Sr. (Tr.59-61.) Respondents never offered any evidence regarding the nature
or relevance of the Wechsler or Leiter tests, and asked no further questions about the mini-mental
exam( s) Dr. Brazel conducted.
Having dismissed the only expert medical testimony (on objectionable grounds),
the Auditor concludes that Brenner Sr. fully understood and appreciated M&T's June 12
recommendation, based solely on Brenner Sr. 's own testimony at the hearing and the Auditor's
personal observation of the same. The Auditor's Report states, "The most persuasive evidence as
to the mental competency of Brenner, Sr., was his own testimony. * * * Brenner, Sr., by his own
testimony, stated that he was perfectly capable of handling his own financial affairs. Both under
direct and cross examination, Brenner, Sr., exhibited a very clear ability to comprehend questions
asked and to respond accordingly. As to cross examination, Brenner, Sr. more than held his
own." (AR 23.)
The Auditor's Report misstates Brenner Sr.'s testimony, and mistakes its
relevance. Brenner Sr. acknowledged at his deposition and at the hearing that, since the late
1990s, he has needed "help," in fact "a lot of help," making business decisions.12 (Tr.291-92.)
12 Brenner Sr. testified as follows at the hearing, in response to questions by Respondents'
counsel Mr. Bradshaw:
Q. In May during that deposition, I asked you a question, sir, do you believe
that you are competent to make business decisions today, and your answer at
that point was sure?
A. Yes.
Q. Okay. So you believe that is an accurate response that you gave me back
during the deposition?
A. I needed help in making some of them.
Q. Okay.
A. I need a lot of help.
18
As Dr. Brazel testified, it is not surprising that a man of Brenner Sr.'s stature and experience
would have terrible difficulty admitting that he was no longer the man he once was. Brenner Sr.
did admit that he has declined though, both by acknowledging that he needs a lot of help and by
explaining the various ways in which he relies on his children for assistance. Petitioners testified
to the many ways in which Brenner Sr. relies on Bushey, Brenner Jr., and others (including
Shawnee Smith at M&T) to assist him with financial and business matters. For example, by June
2002, Bushey had been assisting Brenner Sr. with processing his bearer bonds, doing his annual
gifting, looking for items in his safe deposit boxes, reading his retirement papers, and balancing
his checkbook for years. (Tr. 110.) She testified that he could no longer perform even simple
financial tasks alone, such as balancing his checkbook or making change. (Tr. 111.)
More importantly, however, Dr. Brazel specifically testified that a patient's self-
assessment of their mental condition is of "absolutely no value" in determining whether he or she
is suffering from dementia. (Tr.67.) Dr. Brazel testified that he was unaware that Brenner Sr.
had declared himself competent, and that Brenner Sr. has told him personally "that he did not
understand the details of the meetings in regards to business terminology, sale of stocks,
etcetera," but that, given Brenner Sr.'s "proud nature and his past history as a successful
businessman," it would not surprise Dr. Brazel at all if Brenner Sr. "does feel that he is
competent, and he also feels he is taking his medications and other things correctly," which he
was not. (Tr. 67.) Respondents offered no contradictory evidence regarding the value of self-
assessment in diagnosing senile dementia.
It is also inappropriate for the Auditor to base his conclusions about Brenner Sr. 's
capacity to understand the information communicated to him on June 2002, on the Auditor's
Q. I also asked you: Do you believe that you were competent to make business
decisions in June of 2002, and your answer on that day was I do. Do you
believe that was an accurate answer? Was it accurate in May when you told
me that you believed that you were competent to make business decisions in
June of2002?
A. Yes.
19
personal observation of Brenner Sr. for a short time on November 2,2004. Medical diagnosis is
certainly not within the Auditor's expertise, and the only medical expert at the hearing testified
that Brenner Sr. was not capable in June 2002 of processing the type of information at issue or
making the type of decisions at issue. Neither Respondents nor the Auditor questioned
Dr. Brazel about the vicissitudes of senile dementia, whether one short interaction is sufficient
for a lay person to recognize senile dementia in another person, or whether it is fair to
characterize senile dementia as merely the normal "aging process." Brenner Sr.'s testimony was
directed almost entirely to his memory of events. The fact that he was able to focus on the
questions, give responsive answers, and display orneriness on cross examination,13 hardly
justifies the conclusion that he was capable of hearing, processing, and meaningfully responding
on June 12 to the proposal of a financial mechanism with which he was unfamiliar and the
unexpected demand for a decision. Brenner Sr. testified that, to this day, he does not know what
a stop-loss order is except that it is something he is "not interested in." (Tr.280.) Brenner Sr.
was not "tested" on his ability to understand and use this type of information, even if it were
possible to do so, during the Auditor's hearing.
Finally, the Auditor made no findings regarding Brenner Sr.'s ability to hear
during the June 12 meeting, or about his ability to read the authorization forms that he signed.
The testimony is undisputed that Brenner Sr. has had profound hearing loss since at least 1997,
which necessitated hearing aids in first one then both ears. (Tr. 255-56, 57-58.) Brenner Sr. also
has had vision problems since at least 1997 that made it difficult for him to read, such that he
stopped subscribing to periodicals and has relied on his wife (now deceased) and children to read
to him. (Tr. 258-61, 108-09.) Brenner Sr. testified that he has difficulty with telephones and
speakerphones in general due to his hearing loss (Tr. 255-57), and that he could not understand
13 It is hardly surprising that Brenner Sr. would be somewhat ornery given how upset he is about
how M&T treated him. Brenner Sr. was a bank customer for many years, had known and
respected Gority in particular for a long time prior to the events of June 12, and feels that he was
treated terribly on June 12. (Tr. 250-51, 280.)
20
Klobusicky during the June 12 meeting. (Tr.281.) More importantly, with respect to the written
authorizations, the clear weight of the evidence is that no one read the papers to Brenner Sr.
before he signed them. It is undisputed that Brenner Sr. did not read them (Tr. 282), whether or
not he physically could have at the time. (Tr. 108, 260.) Gority claims that he read the
authorizations aloud to Brenner Sr. (Tr. 481), but Brenner Sr. says that did not happen (Tr. 282)
and neither Stauffer nor Klobusicky remember Gority doing that (Tr. 835, 752).14 The Auditor
made no findings on this issue.
Based on the foregoing, Petitioners submit that the Court itself must evaluate the
issue of Brenner Sr.'s mental ability relative to the events of June 12, as well as addressing the
relevance of the hearing and reading issues that the Auditor did not resolve. ill their briefing on
the disputed question of whether the Court or an auditor should hear this case, Respondents
urged the Court to have an auditor hear the evidence, and specifically argued:
If, on the other hand, either party is dissatisfied with the disposition of
Auditor Bogar, our Local Rules of the Cumberland County Orphans' Court
establish a procedure for final resolution ofthe claims by the Orphans'
Court. * * * ill the event that further Court involvement is necessary, the
expenditure of the Court's resources will be limited to issues truly
requiring the court's involvement, and the Court will benefit from the
inevitable 'winnowing' of the issues which is sure to result from the
auditor's proceedings."
Respondents' Memorandum of Law in Support of Resolution of All Claims and Accounts by
Court Appointed Auditor (filed Oct. 1,2004) at 7. ill this case, whether Brenner Sr..had
diminished capacity on June 12,2002, is a crucial issue at the heart of the litigation. If that issue
is determinative of the Court's decision, Petitioners submit that the Court should review the
testimony of Dr. Brazel and determine whether to hear additional evidence on the issue of
Brenner Sr.'s capacity in June 2002. Petitioners will make Dr. Brazel available for further
14 Gority testified at the hearing that it is his practice to read important documents to clients.
(Tr. 520.) However, when asked during his deposition why he had not read a document to
Bushey and Brenner Jr., Gority testified: "Perhaps, I misspoke. I don't always in the sense that if
there's any question, then I would read it." Asked" Any question about what?," Gority testified,
"Their ability to hear and understand what they are agreeing to." (Tr. 520; Ex. 113 at 33.)
21
testimony, and otherwise accommodate the Court in this regard.
Conclusion
Petitioners object to the Auditor's Report and Recommendation Regarding All
Objections Filed on the foregoing grounds, and respectfully ask the Court make additional
findings of fact and conclusions of law consistent with the evidence.
DATED this 25th day of February, 2005.
TONKON TORP LLP
By
William F. Martson, r., 0 B No. 72163
Robyn E. Ridler, OSB No.
Attorneys for Petitione
22
CERTIFICATE OF SERVICE
I hereby certify that I served the foregoing PETITIONERS' OBJECTIONS TO
AUDITOR'S REPORT AND MEMORANDUM IN SUPPORT OF OBJECTIONS on:
Mark D. Bradshaw
Stevens & Lee
P. O. Box 11670
Harrisburg, P A 17108-1670
Of Attorneys for Respondents
[&] by mailing a copy thereof in a sealed, first-class postage prepaid envelope,
addressed to each attorney's last-known address and depositing in the U.S. mail at Portland,
Oregon on the date set forth below;
o by causing a copy thereof to be hand-delivered to said attorneys at each
attorney's last-known office address on the date set forth below;
o by sending a copy thereof via overnight courier in a sealed, prepaid envelope,
addressed to each attorney's last-known address on the date set forth below; or
o by faxing a copy thereof to each attorney at each attorney's last-known
facsimile number on the date set forth below.
DATED this 25th day of February, 2005.
By
William F. Martson, Jr., OS No. 72163
Robyn E. Ridler, OSB No. 0 016
Attorneys for Petitioners
031590\00001\615384 V002