IN THE MATTER OF: JEROME MARKOWITZ TRUST, Appellees APPEAL OF: STEVEN A. MARKOWITZ, TRUSTEE AS WELL AS SANDRA GOLDSTEIN, JUDY MARKOWITZ, MARC MARKOWITZ AND STEVEN A. MARKOWITZ, Appellants
Appeal from the Order Entered April 16, 2012 In the Court of Common Pleas of Lehigh County Orphans' Court at No(s): 1991-0304 A
BEFORE: STEVENS, P.J., OLSON, J., and STRASSBURGER, J.[*]
This is an appeal from the April 16, 2012 Final Order entered in the Court of Common Pleas of Lehigh County, Orphans' Court Division, directing a surcharge of $11, 700.00 to be imposed upon Glenmede Trust Company, N.A. ("Glenmede"), for its breach of fiduciary duty owed to Appellants as it relates to investments Glenmede managed for the Jerome Markowitz Trust. On appeal, Appellants contend (1) the Orphans' Court's factual findings are not supported by competent and adequate evidence, (2) the Orphans' Court failed to acknowledge the full breadth of Glenmede's breach of its fiduciary duty to the Trust, (3) the Orphans' Court erred in failing to find Glenmede breached the parties' contract, and (4) the Orphans' Court erred in its calculation of the surcharge. We affirm.
The relevant facts and procedural history have been aptly set forth by the Orphans' Court, in part, as follows:
[On November 6, 2009, Petitioner, Steven Markowitz, filed a] Petition Seeking Reimbursement of Investment Funds and Other Relief From Glenmede Trust Company, N.A., ("hereinafter Markowitz's Petition")[.] [The petitioner sought] relief from Glenmede in relation to services Glenmede provided or failed to provide as the investment advisor, custodian, and agent for the Jerome Markowitz Revocable Trust under agreement dated October 6, 1983, as amended February 19, 1985 ("Trust").
The petitioner is Steven Markowitz[.] Although Markowitz's Petition identifies the petitioner only as Steven Markowitz, individually, and not in his fiduciary capacity as Trustee of the Trust, the parties conducted the hearing as though [Steven] Markowitz brought this action in his capacity as Trustee. Therefore, we find that Markowitz's Petition was brought in [Steven] Markowitz's fiduciary capacity and all references herein to "Steven Markowitz" refer to Steven Markowitz as Trustee. [Moreover, ] [b]y Order dated March 16, 2010, (approximately two months after the death of the life income beneficiary and co-trustee, Martha Markowitz, on January 29, 2010), Steven Markowitz, Marc Markowitz, Sandra Goldstein and Judy Roberts (the remaindermen of the Markowitz Trust) were added as individual petitioners. The Respondent is Glenmede, a corporation having its principal place of business at 1650 Market Street, Suite 1200, Philadelphia, Pennsylvania.
[Steven] Markowitz has been responsible for, and has managed, all financial aspects of the Trust since 1991. This included investments, distributions, disbursements, and responsibility for tax returns. It also included the selection of, and interaction with, investment managers or advisors for the Trust. [Steven] Markowitz is a sophisticated investor, experienced fiduciary and follower of the financial markets. Since 1992, [Steven] Markowitz has served as the sole trustee of Allen Organ's $20 million pension fund and has had sole responsibility for making the pension fund's investment decisions. He also has served and continues to serve as Trustee of other trusts. [Steven] Markowitz has been assisted in his role as Trustee of the Trust and in connection with Allen Organ's corporate affairs and the Allen Organ pension fund by Allen Organ's Chief Financial Officer, Nathan Eckhart ("Eckhart"). Eckhart, a Certified Public Accountant, has provided accounting services to the Trust. Eckhart maintained Trust records and accounts, prepared Trust tax returns, reviewed monthly Trust statements, discussed Trust investment decisions with [Steven] Markowitz, participated in the selection of Trust investment advisors, communicated with Trust investment advisors on behalf of the Trust, and attended and participated in every quarterly meeting between Glenmede and [Steven] Markowitz.
The Trust was a majority shareholder in the Allen Organ Company. In 2006, in anticipation of the Trust's receipt of proceeds from the conversion of Allen Organ from a publicly held corporation to a closely held corporation, [Steven] Markowitz sought to hire an investment advisor. On August 16, 2006, he hired Wachovia Bank ("Wachovia") to hold the proceeds from the privatization of Allen Organ in its Short Term Investment Management ("STIM") product while the Trust explored long-term investment strategies. Wachovia's STIM portfolio at that time included Auction Rate Securities ("ARS"), [which]…typically refers to corporate or municipal bonds with a long-term nominal maturation date and for which the interest rate is regularly reset through an auction. Auctions are held usually every 7, 28, or 35 days and the interest on ARSs is paid at the end of each auction period. To participate in an auction, the owner of an ARS must possess the auction rights for that ARS. Auction rights are normally memorialized by a written document or are acknowledged by a remarketing agent. At all times relevant to this dispute, most ARSs were AAA rated and insured. In the event of a failure at auction, ARSs typically pay an increased interest rate to the ARS owner.
On August 31, 2006, the Trust (defined as "Client") entered into an Investment Management Agreement with Wachovia ("Wachovia Agreement"). Of significance to the present matter are Paragraphs 9, which provides that Wachovia "shall distribute Assets from the Account in accordance with the Client's written instructions" and Paragraph 13, which provides that, upon termination, "the assets then held by [Wachovia] shall be delivered as the Client may direct in writing and [Wachovia] shall have no further responsibility for the Account."
On September 28, 2006, [Steven] Markowitz and Eckhart met with Wachovia representatives to discuss investment issues and [Steven] Markowitz directed Wachovia to place $9 million of Trust funds in the STIM. The Trust deposited $9 million of Trust funds into the Trust's Wachovia Bank account ("Wachovia Account") on October 4, 2006.
By October 31, 2006, the Wachovia Account was invested 99.9% in fixed income tax exempt investment grade securities made in the ARS market. The Trust's ARS investments at the end of October 2006 included a $400, 000 investment in Mobile County, Alabama Limited Obligation Warrants (Cusip #607341AA2) ("Mobile ARS"). The Mobile ARS then had a Moody's Aaa rating and an AAA rating from Standard & Poor's Rating Services, meaning that it was investment grade and that there was little or no risk of default. Payment of the principal and interest on the Mobile ARS when due was also insured by a financial guaranty insurance policy issued by AMBAC Assurance Corporation. AMBAC's bond insurance business had an AAA rating from Standard & Poor's Rating Services as of October 2006 and held that rating until June 2008.
During the period that Wachovia served as temporary investment advisor, [Steven] Markowitz continued to meet with other candidates to serve as the Trust's long-term investment advisor. By late October 2006, [Steven] Markowitz had contacted Glenmede for this purpose. On October 30, November 16, and November 27, 2006, [Steven] Markowitz and Eckhart met with Glenmede representatives to discuss Glenmede's products and services and to review Glenmede's operations. On December 11, 2006, [Steven] Markowitz decided to retain Glenmede as an investment advisor for the Trust and notified Wachovia that the Trust assets would be moved to another manager; Wachovia acknowledged receipt of this notification on the same date.
On December 12, 2006, [Steven] Markowitz and [then living] Martha, as co-trustees of the Trust, identified [collectively] as "Owner, " and Glenmede, identified as "Glenmede, " executed an Investment Advisory Agreement ("IAA")[.] [The IAA established] a contractual relationship between Glenmede and the Trust in which Glenmede agreed [to] establish an investment advisory account ("Account") in the Trust's name and to serve as the Trust's investment advisor, custodian, and agent, hold assets of the Trust, and provide investment management of the assets. The IAA does not contain any clause that mentions an investment policy statement or any reference to the IPS,  it does not indicate that the IAA is conditioned on the parties completing an investment policy statement, [but it does] state that the IAA, along with Glenmede's Disclosure and Statement of Policy, is the entire agreement between the parties and requires that any amendment thereto be signed by the party affected by the amendment.
On December 13, 2006, Glenmede mailed a letter of authorization to [Steven] Markowitz with directions that it be signed by [Steven] Markowitz and Martha as the first step in effectuating the transfer of Trust assets from Wachovia to Glenmede. On December 14, 2006, [Steven] Markowitz agreed to an "in-kind" transfer of the investments in the Wachovia Account to Glenmede, but indicated that the transfer not occur until January of 2007. On December 15, 2006, Wachovia representative Sharon Malia prepared an Account Closing Request for the Trust assets held in the Wachovia Account. On December 27, 2006, Glenmede sent a letter to Wachovia, via Federal Express, for delivery on December 28, 2006, instructing Wachovia to transfer Trust assets "in-kind" to Glenmede.
Unbeknownst to [Steven] Markowitz or Glenmede, and despite having received and acknowledged notice of its removal as investment advisor on December 11, 2006, Wachovia, through its investment officer, continued to engage in purchases after that date, most significantly, on December 27, 2006, when it purchased a $300, 000 investment in Jefferson County, Alabama Sewer Revenue Warrants (Cusip # 472682NH2) ("Jefferson ARS"). Like the Mobile ARS, the Jefferson ARS then had a Moody's Aaa rating and an AAA rating from Standard & Poor's Rating Services[.] [It] was considered investment grade and was also insured by Financial Guaranty Insurance Corporation which had a Fitch AAA rating as of December of 2006 and held that rating until January of 2008. On December 28, 2006, the day after the purchase of the Jefferson ARS, Wachovia received the December 27, 2006 Federal Express letter instructing it to transfer all Trust assets to Glenmede.
The December 27, 2006 purchase of the Jefferson ARS was reflected on the December 2006 Wachovia Account statement which also included the Mobile ARS and fourteen (14) other ARSs. [Steven] Markowitz received and reviewed a copy of the December 2006 Wachovia Account statement on or about its issue date, and [he] did not question the December 27, 2006 purchase of the Jefferson ARS or the investment suitability of fourteen (14) other ARSs identified therein.
On January 4, 2007, [Steven] Markowitz and Glenmede jointly created an [IPS], the purpose of which was to "provide a clear understanding of the Trust's goals, objectives, expectations and constraints applicable to the management of the investment portfolio." It specified that the "most important objectives for the account are preservation of capital, real growth after inflation, liquidity and minimizing taxes." The IPS further set forth particularly relevant items as follows:
1.) "Portfolio Size: $12, 280, 000."
2.) "Permissible Asset Classes" included Cash, Fixed Income, Equities and Alternative Assets. The Fixed Income class included Investment Grade Bonds.
3.) "Term: The investment time horizon is less than 5 years."
4.) "Liquidity Needs: For liquidity, the client would like to maintain cash reserves as dictated by Glenmede policy."
5.) "Investment Authority: Glenmede has sole investment authority."
6.) "Other: Cash includes $3, 000, 000 for outside private investment by trustee."
7.) The Asset Allocation Target for Fixed Income was between 22% and 42%.
The IPS listed investment grade bonds as a permissible class of asset for the fixed income portfolio. As of January 2007, ARSs were considered investment grade bonds. The IPS does not indicate that it is an amendment, addendum, or supplement to the IAA, does not refer to the IAA in any way, and was not executed by either of the parties.
On January 4, 2007, Wachovia notified its personnel that the Trust relationship had been terminated and that Trust assets were to be sent "in-kind" to Glenmede. Glenmede notified [Steven] Markowitz that the transfer had not occurred as of January 17, 2007. On that date, Eckhart, on behalf of [Steven] Markowitz, contacted Wachovia and requested that it complete the transfer as soon as possible. By January 18, 2007, Wachovia had agreed to expedite the transfer process.
On January 22, 2007, Wachovia transferred to Glenmede the majority of Trust assets in its possession, comprised of sixteen (16) investments, eleven (11) of which were ARSs, the Jefferson ARS, and the Mobile ARS among them. However, Wachovia's January 22, 2007 transfer of the eleven (11) ARSs failed to include the auction rights associated with each ARS. On or about February, 2007, when it realized that Wachovia had failed to transfer the auction rights and/or to notify remarketing agents, Glenmede instructed its employee, Richard Gale ("Gale"), to obtain the auction rights for the ARSs. Glenmede did not inform [Steven] ...