Legal Update: March 2025
Matter of Weber—Challenges to a Trustee’s Accounting Go Awry
Serving as a Trustee of a Trust is difficult. In the case presented, a trust beneficiary alleged that the trustee—his aunt—breached her fiduciary duty. The trust beneficiary retained an expert in connection to this claim and this did not go well for either the beneficiary or damages expert. The article summarizes the case, provides a road map and an admonition to experts in these types of cases regarding what is needed, and the perils of using AI.
British mathematician, Hannah Fry, once said, “People are often quite lazy. We like taking the easy way out …” In Matter of Weber, 2024 NY Slip Op 24258, (NY Surrogate’s Court for Saratoga County, October 10, 2024), the beneficiary of a trust and his damages expert witness found that out the hard way. The court found that the trustee had not breached her fiduciary duties to the trust, which would ordinarily have ended the court’s inquiry. However, the surrogate found the damages analysis so wanting that he was compelled to comment.
Background
Michael Weber died in 2003. His will named his sister (“Petitioner”) the executrix of his estate and the trustee of a will and trustee of the trust established in the will. The trust benefitted Mr. Weber’s son (“Objectant”) and included, among other invested assets, a vacation home on Cat Island in the Bahamas (the “Cat Island Property”). When Mr. Weber died, the Cat Island Property represented approximately 16 percent of the total value of the estate residuary which, in accordance with his will, were transferred to the trust.
Over the next 14 years, Petitioner traveled to the Cat Island Property annually for periods of one to three weeks. On those trips, she was accompanied by her significant other and, on at least one occasion, a friend. On those trips, she and her guests both provided maintenance and upkeep to the property, and enjoyed their time away from home. She estimated that approximately half of the time spent on these trips was for maintenance of the trust asset.
On January 14, 2022, the property was sold for $485,000.
In June 2022, Petitioner filed a Petition for Judicial Settlement of the Interim Account of the Trustee. Objectant filed objections to the accounting asserting, among other things, that Petitioner had breached her fiduciary duty to the trust by (a) not liquidating the Cat Island Property in 2008 when the remaining estate assets were transferred to the trust, and (b) traveling to the Cat Island Property multiple times at the expense of the trust. Objectant further claimed that he had been damaged both by Petitioner’s personal use of the property and the lost investment income that would have come from selling the property and adding the proceeds to the investment account.
The court held a three-day hearing in the spring of 2024. Ultimately finding that Petitioner had not breached her fiduciary duties to the trust,[1] the Surrogate was not obligated to consider Objectant’s damages claims and the expert testimony offered in support of those damages.
Court Findings
Objectant proffered an expert witness with decades of experience as a corporate trustee. The witness was not an expert in either real estate (Bahamian real estate) or investment management, which were the issues involved in Objectant’s claim for damages. The expert’s primary position was that Petitioner should have sold the Cat Island Property at the inception of the trust and that her failure to do so cost the trust income that would have been earned on the increased investment in securities. The court found numerous flaws in the expert’s analysis.
Damages Period
As an initial matter, the Surrogate faulted the expert for beginning his damages calculation on December 31, 2004. As noted above, Mr. Weber died in 2003. The estate took several years of administration. The estate accounting was judicially settled on January 25, 2008, and, in accordance with the will, the residuary assets were transferred to the newly created trust. The earliest that Petitioner, as trustee of the trust, could have been sold the property would have been on January 25, 2008.[2] Any alleged damages predating the formation of the trust would have been the responsibility of the executrix of the estate, and any claim for the failure to sell the property between December 31, 2004 and January 25, 2008 would have had to have been brought against the estate and the executrix before it was judicially settled.
Objectant’s damages period is further complicated by his expert witness’s lack of expertise in real estate. The expert was not admitted as a real estate expert and Objectant proffered no evidence of (a) the property’s value in 2004 or 2008, or (b) conditions of the Cat Island real estate market at any time during the damages period. The expert admitted that he did not consider any market information related to the property’s value before it was sold in 2022, including the 2008 global financial crisis or the COVID-19 pandemic. He knew nothing of the rental season, comparable rental rates, or the condition of the Cat Island Property at any time during the alleged damages period.
Damages Calculation Flawed
Perhaps most damning to the expert’s testimony on damages was that it was based on short-cuts. Rather than compute the actual alleged losses from hypothetical proceed from a 2004 sale of the Cat Island Property in the trust’s investment accounts, the expert “used a proxy investment account, the Vanguard Balanced Index Fund, to estimate the hypothetical investment performance.” As the expert testified, “the appropriate calculations would have required a full AMR analysis, which he testified is the industry standard.” That analysis was not done because it was too costly. It would have “required combing through the approximately 216 investment statements” from the trust’s investment firm.
Compounding the short-cut of using an index fund performance rather than the trust’s actual investment performance, Objectant’s expert did not even do the calculations that formed the basis of his damages testimony. Instead, the expert:
Relied on Microsoft Copilot, a large language model generative artificial intelligence (AI) chatbot, in cross-checking his calculations. Despite his reliance on AI, [the expert] could not recall what input or prompt he used to assist him with the Supplemental Damages Report. He also could not state what sources Copilot relied upon and could not explain any details about how Copilot works or how it arrives at a given output. There was no testimony on whether these Copilot calculations considered any fund fees or tax implications.
While the court had already determined that the expert’s analysis was unreliable, the Surrogate attempted to verify the AI result. He queried Copilot, “Can you calculate the value of $250,000 invested in the Vanguard Balanced Index Fund from December 31, 2004 through January 31, 2021?” The answer, approximately $949,000, was different from that contained in the expert’s report. The Surrogate then attempted the same query from two other computers in the court’s office, receiving results of approximately $948,000 to just over $951,000. “While these resulting variations are not large, the fact there are variations at all calls into question the reliability and accuracy of Copilot to generate evidence to be relied upon in a court proceeding.”
Confronted with the limitations of the AI responses, the expert was “adamant in his testimony that the use of Copilot or other AI tools, for drafting expert reports is generally accepted in the field of fiduciary services and represents the future of analysis of fiduciary decisions.” He could not, however, point to a single publication regarding its use or confirming that it is a generally accepted methodology.
New York state follows the standard of Frye v. United States, 293 F. 1013 (D.C. Cir. 1923), which requires that scientific evidence and expert testimony be grounded in general acceptance in the relevant field. The burden of proving general acceptance falls to the proponent of the testimony; in this case, Objectant.
In what may be an issue of first impression, at least in Surrogate’s Court practice, this Court holds that due to the nature of the rapid evolution of AI and its inherent reliability issues that prior to evidence being introduced which has been generated by an AI product or system, counsel has an affirmative duty to disclose the use of AI and the evidence sought to be admitted should properly be subject to a Frye hearing prior to its admission, the scope of which should be determined by the Court, either in a pre-trial hearing or at the time the evidence is offered.
Conclusion
The burden to prove damages rests with the party seeking them, and the evidence supporting such claims must be reliable. Proof of damages is not available through short-cuts just because reliable proof is difficult or expensive to produce. While AI spreads through society like wildfire, merely querying an AI software, absent evidence of the sources and methods for its analysis, is not sufficiently reliable to substitute for an expert witness performing the analysis.
[1] The Surrogate found that a trustee’s burden when holding on to an asset is different than that of investing trust capital in a new asset. The “retained asset standard” states that “a trustee’s decision to retain property received in-kind to a trust should be afforded more leniency than a trustee’s decision to purchase a new investment.” (citing In re JP Morgan Chase Bank, NA., 133 AD3d 1292 [4th Dept. 2015]). While Petitioner’s decision to hold the Cat Island Property was based partly on sentimental reasons, Objectant failed to introduce evidence that the decision was “imprudent on its face.” With regard to the alleged breach arising from Petitioner’s personal benefit of using the Cat Island Property without paying rent, Objectant’s own expert testified that a trustee’s “de minimus” personal use of a trust vacation asset would be permitted without compensating the trust. When pressed for what “de minimus” use would be, the expert acknowledged that between 33 percent and 50 percent of a trip providing personal benefit would qualify. Petitioner had testified that the trips were split equally between trust business and personal benefit. Further, the Surrogate found that Objectant, who bore the burden of establishing Petitioner’s breach, failed to introduce any evidence of the dates of Petitioner’s trips, what work was done on those trips, or the rental value lost to Petitioner’s use of the property during those trips.
[2] Alternatively, the damages attributable to Petitioner could have run from April 04, 2008, the date of the deed transferring the Cat Island Property from Mr. Weber to the trust. The court found that the final settlement of the estate, January 25, 2008, constituted a constructive transfer of legal and financial responsibility for the property to the trust, regardless of the date the paperwork was filed.
Michael J. Molder, JD, CPA, CFE, CVA, MAFF, applies 30 years of experience as a Certified Public Accountant and litigator to help investigate and analyze cases with complex financial and economic implications. He has acted as both counsel and accounting expert in pending and threatened litigation as well as participating in internal investigations of financial misconduct. As a litigator, Mr. Molder helped co-counsel understand complex financial and accounting issues in dozens of cases. In 2006, Mr. Molder returned to public accounting applying his unique skills to forensic engagements. He has also performed valuations of business interests in a wide variety of industries.
Mr. Molder has served as a valuation expert for both plaintiffs and defendants in commercial litigation matters and owner and non-owner spouses in matrimonial dissolutions. He has participated in the valuations of businesses in a wide variety of industries, including: food service, wholesale and retail distribution, literary development and production, healthcare, manufacturing, and real estate development.
Mr. Molder has also investigated and valued damages in a wide variety of litigation contexts ranging from breach of contract claims to personal injury cases, and from employment disputes to civil fraud. He has consulted on many matters which have not involved the issuance of a report for litigation or resulted in deposition or trial testimony. Accordingly, the identity of these matters is protected by attorney client privilege.
Mr. Molder has also lectured widely on a variety of accounting and litigation related topics including business valuation, financial investigations in divorce proceedings, accountant ethics, financial statement manipulation and “earnings management.”
Mr. Molder can be contacted at (610) 208-3169 or by e-mail to Molder@lawandaccounting.com.
