Trust Accounting Objections: Liberal Amendment and Summary-Judgment Limits in “Prudent Person” Diversification Claims

Introduction

In Matter of James M. McDonald III Trust (JP Morgan Chase Bank, N.A.) (2026 NY Slip Op 03481), the Appellate Division, Third Department reviewed a Surrogate’s Court order and decree entered in an SCPA 2208 judicial accounting proceeding involving a long-running, stock-concentrated trust.

The petitioner and respondent were, respectively, JP Morgan Chase Bank, N.A. (as corporate trustee) and James M. McDonald IV (a beneficiary and appellant). The controversy stemmed from the trust’s historically concentrated holdings in J.C. Penney Company, Inc. (“JCP”) stock and the trustee’s staggered sales of that stock after the death of a prior key figure, James M. McDonald Jr. (the “grandfather”), in 1972.

The key issues were (i) the preclusive effect of a 1973 decree settling an earlier accounting (res judicata), (ii) whether the beneficiary should be allowed to amend his objection to the accounting to conform to the evidentiary record developed in discovery, and (iii) whether the corporate trustee could obtain summary judgment dismissing a “failure-to-diversify” objection under the pre-1995 “prudent person” rule.

Summary of the Opinion

  • Res judicata applied to bar the objection to the extent it asserted the trustee should have liquidated at least 90% of JCP stock by April 1, 1972, because the 1973 accounting decree judicially settled the account through July 11, 1972 and the issue could have been raised then.
  • Leave to amend should have been granted: the Third Department held Surrogate’s Court abused its discretion in denying respondent’s cross-motion to amend the objection. The amendment did not change the underlying theory (imprudent overconcentration/failure to diversify), and petitioner failed to show prejudice.
  • Summary judgment on the merits was improper: even as amended (focusing on 1973–1982), the objection raised triable issues under the prudent person standard, and petitioner did not meet its initial burden to establish prudence as a matter of law.
  • Evidentiary rulings at summary judgment: the “investment diary” was admissible as a business record through the trustee’s affidavit, and a diary notation about a conversation was admissible for the nonhearsay purpose of showing the conversation occurred.
  • Counsel-fee award reversed as premature given reinstatement of the objection and remittal for further proceedings.

Analysis

Precedents Cited

The court’s reasoning was anchored in several well-established lines of authority, deployed for distinct doctrinal tasks: claim preclusion in accounting decrees, pleading amendment standards, summary judgment method, evidentiary foundations, and substantive fiduciary-investment standards.

1) Accounting decrees and res judicata

  • Matter of Hunter, 4 NY3d 260 (2005): used for the principle that res judicata bars relitigation of claims where a prior judgment on the merits exists between the same parties involving the same subject matter, and extends to claims that were or could have been raised. The court also relied on Hunter for the specific rule that an accounting decree is conclusive as to issues actually litigated and those that could have been raised, provided there was a full and fair opportunity.
  • Matter of Falck, 232 AD3d 1150 (3d Dept 2024): cited alongside Hunter to reinforce the breadth of preclusion in the accounting context and later, by comparison, to address timing/strategy around preclusion defenses.
  • Matter of Marine Midland Bank-N.Y., 77 Misc 2d 543 (Sur Ct, NY County 1974): used to interpret the 1973 decree’s discharge language. The Third Department adopted the trustee’s view that the carve-out (“except with respect to the balance of principal retained…”) did not reserve a right to challenge pre-July 11, 1972 retention, but instead clarified that discharge in the grandfather’s trust accounting did not immunize later conduct as trustee of the continuing/new trust.

2) Liberal amendment of pleadings; prejudice as the limiting principle

  • Kimso Apts., LLC v Gandhi, 24 NY3d 403 (2014): the court relied on Kimso for the core CPLR 3025 principle—leave to amend should be freely granted absent prejudice, and the opponent bears the burden of demonstrating prejudice.
  • Matter of Carter v Fairchild-Carter, 187 AD3d 1360 (3d Dept 2020): cited for the “liberally granted unless prejudice” formulation in the Third Department’s own precedent.
  • Loomis v Civetta Corinno Constr. Corp., 54 NY2d 18 (1981): used to define what “prejudice” means in this context—hindrance in preparing a case or being prevented from taking measures in support of one’s position.
  • Murray v City of New York, 43 NY2d 400 (1977) and Lakshmi Grocery & Gas, Inc. v GRJH, Inc., 138 AD3d 1290 (3d Dept 2016): cited in the footnotes for the point that CPLR 3015 (c) and CPLR 3025 (b) are governed by the same “freely granted absent prejudice” considerations.
  • Werner v Katal Country Club, 234 AD2d 659 (3d Dept 1996): cited for the proposition that summary judgment is the “procedural equivalent of a trial,” supporting use of CPLR 3025 (c) in that context.

3) Summary judgment standards

  • McFadden v State of New York, 138 AD3d 1167 (3d Dept 2016) and Cole v Triple M Excavating & Trucking LLC, 237 AD3d 1304 (3d Dept 2025): cited for the familiar two-step summary judgment framework and the “drastic remedy” caution.
  • American Food & Vending Corp. v Amazon.com, Inc., 214 AD3d 1153 (3d Dept 2023) and Matter of McNeil, 233 AD3d 1231 (3d Dept 2024): used for the requirement to view evidence in the light most favorable to the nonmovant, affording every reasonable inference and making no credibility determinations.
  • Winegrad v New York Univ. Med. Ctr., 64 NY2d 851 (1985): cited for the rule that if the movant fails to meet its initial burden, the motion must be denied regardless of the opponent’s proof.

4) Business records and nonhearsay use

  • Deutsche Bank Natl. Trust Co. v Monica, 131 AD3d 737 (3d Dept 2015) and Merrill Lynch Bus. Fin. Servs. Inc. v Trataros Constr., Inc., 30 AD3d 336 (1st Dept 2006): cited to support admission of records integrated into a successor entity’s files and relied upon in the ordinary course of business.
  • People v Patterson, 28 NY3d 544 (2016) and People v Ricco, 56 NY2d 320 (1982): used to justify admission of the diary notation not for the truth of its content, but to show a conversation occurred (a nonhearsay purpose).

5) Fiduciary investment/surcharge doctrine and the prudent person rule

  • Matter of Donner, 82 NY2d 574 (1993) and Matter of Janes, 90 NY2d 41 (1997): cited for surcharge fundamentals (loss caused by negligence/imprudence) and for core features of the prudent person standard, including the caution against per se rules on diversification and the expectation that corporate fiduciaries undertake more than routine reviews.
  • Matter of Saxton, 274 AD2d 110 (3d Dept 2000): cited for the principle that once imprudence is found, a court may designate a reasonable time within which divestiture should have occurred and that there is no fixed divestiture timeline.
  • Matter of Kopec, 25 Misc 3d 901 (Sur Ct, Monroe County 2009), affd on op below sub nom. Matter of Duffy [Stone], 79 AD3d 1732 (4th Dept 2010): cited for the beneficiary’s burden to prove, by a preponderance, a more reasonable “divest-by” date than the trustee’s actual diversification timing.
  • Matter of Rowe, 274 AD2d 87 (3d Dept 2000): used to identify that, during 1973–1982, New York applied the prudent person rule of investment.
  • Matter of Bank of N.Y., 35 NY2d 512 (1974): cited for the requirement of a “balanced and perceptive analysis” of the fiduciary’s action/inaction, viewed at the time of the decision/omission and in light of the investment’s history.
  • Matter of Hyde, 44 AD3d 1195 (3d Dept 2007) and Matter of HSBC Bank USA, N.A. [Knox], 98 AD3d 300 (4th Dept 2012): used to illustrate application of prudent-person principles and the importance of review/monitoring evidence.
  • Matter of JP Morgan Chase Bank, N.A., 133 AD3d 1292 (4th Dept 2015): cited as a contrast point—post-trial findings (not summary judgment) sustaining prudence determinations on a developed factual record.
  • Matter of Hahn, 93 AD2d 583 (4th Dept 1983), affd 62 NY2d 821 (1984): cited generally for summary judgment principles in fiduciary contexts.

Legal Reasoning

1) The court split the objection into “what period is even open to litigation?” and “is the trustee entitled to win as a matter of law?”

A central structural move in the opinion is that it treats the beneficiary’s “failure-to-diversify” narrative as potentially spanning multiple time periods, but then applies doctrine that confines which period may be attacked.

As pleaded, the objection demanded divestiture of 90% of JCP by April 1, 1972. The Third Department held that claim was precluded because the 1973 accounting decree settled the account through July 11, 1972, and an objection to holding JCP as of April 1, 1972 could have been raised then, with the beneficiary represented by a guardian ad litem.

The beneficiary attempted to avoid preclusion by pointing to the decree’s discharge language that excluded “the balance of principal retained…in the continuing trust.” The Third Department rejected that reading, concluding (based on the funding timing and Matter of Marine Midland Bank-N.Y.) that the carve-out preserved future accountability as trustee of the continuing trust, not retroactive vulnerability for conduct already covered by the settled account.

2) Amendment was required because it preserved the same theory while aligning the dispute with the legally available time period

Having narrowed what was precluded, the court then addressed whether the beneficiary could amend to pursue the same imprudence theory for a different—and legally reachable—period (1973–1982), and without locking himself to an April 1972 “divest-by” date.

Applying CPLR 3025 (and the liberal amendment principles of Kimso Apts., LLC v Gandhi), the court found no cognizable prejudice because:

  • The underlying theory did not change: the trustee allegedly maintained an imprudent overconcentration in JCP and failed to diversify timely.
  • The proposed “divest-by” phrasing largely tracked what the law requires anyway: if imprudence is found, the court must determine a reasonable divestiture period (as described in Matter of Janes and Matter of Saxton).
  • The trustee’s claim that an “unspecified date” was unfair was undermined by the record: the amendment responded to expert proof (e.g., an opinion that March 1975 was the latest prudent date), and the court noted that a precise divest-by date may be undiscoverable without developing a record.
  • The trustee’s “delay” argument rang hollow because the trustee itself waited until the close of discovery to press preclusion in a way that would have clarified the pleading target earlier.

Importantly, the court signaled that case-management problems (late amendment, potential additional discovery, scheduling-order issues) can be addressed through costs or just terms, rather than categorical denial of amendment.

3) On the merits, the court emphasized what a corporate trustee must show to win at summary judgment under the prudent person standard

The trustee attempted to defeat the amended objection on summary judgment. The Third Department declined, stressing two core deficiencies in the trustee’s proof relative to its initial burden.

(a) Lack of proof of a documented, ongoing, prudent process—especially for a corporate fiduciary

While acknowledging that prudence is “generally” a factual determination (quoting Matter of Janes), the court focused on process evidence: a corporate fiduciary must exercise the special due care and skill it holds itself out as possessing, which includes undertaking a formal analysis, establishing a sound plan, and conducting more than routine reviews.

The trustee’s proof was thin: a couple of letters in 1972, a bare “Initial Review” notation in 1973, and a “Reviewed for losses” notation in 1982, with no disclosed substance, and no persuasive evidence of periodic review/communication during the decade. An expert’s assertion that the industry does not keep detailed records did not relieve the trustee of its evidentiary burden at summary judgment.

(b) The trustee’s market-optimism rationale did not establish prudence “as a matter of law” for this trust and beneficiary

The trustee’s expert relied on Value Line safety ratings and positive commentary, supporting gradual diversification as plausible. But the court highlighted that the optimistic commentary described suitability for “conservative accounts willing to take the long view” and a “patient investor,” and the record did not clearly establish that the subject trust or the father fit that profile. In addition, the court noted contrary indicators, including a sustained decline in safety rating and, after 1975, share price—and a cited Value Line statement: “We would avoid this stock for the present.”

Because prudence under EPTL 11-2.2 (a) (1) requires a contextual, time-of-action evaluation (as stated in Matter of Bank of N.Y.), the court held that the trustee had not foreclosed competing inferences—particularly the inference that the trustee implemented a “standard-issue” ten-year plan, conducted routine transactions, and performed cursory reviews, which could constitute imprudence under Matter of Janes.

(c) Tax efficiency was treated as a factor, not a safe harbor

The trustee also offered expert analysis that gradual sales produced greater capital gains tax efficiency than an immediate April 1972 liquidation. The court acknowledged tax efficiency but held it does not, standing alone, establish prudence as a matter of law.

4) The court’s evidentiary treatment of the “investment diary” enabled—but did not decide—the prudence inquiry

The court validated the diary’s admissibility as a business record through a successor-trustee integration-and-reliance foundation, and admitted a key diary notation for the limited, nonhearsay purpose of proving that a discussion occurred. Those evidentiary rulings matter because they ensure the prudence dispute will be litigated on a fuller record at further proceedings, rather than being truncated on threshold admissibility grounds.

Impact

1) Trust-accounting practice: clearer boundary between precluded periods and litigable periods

The decision reinforces that a judicial accounting decree is not merely a closing document; it is a broad preclusion instrument. Beneficiaries who later challenge concentration/retention decisions must reckon with what was settled and what could have been raised. At the same time, the court’s reading of the decree’s “except with respect to the balance of principal retained” language narrows attempts to use discharge carve-outs to reopen time-barred conduct.

2) Pleading strategy: divest-by dates are important, but the court recognized they may crystallize only after discovery

The opinion reduces the risk that an otherwise viable imprudence theory fails because the objectant initially pleaded an aggressive or legally precluded divest-by date. By emphasizing liberal amendment and the practical reality that a “reasonable divestiture time” may not be ascertainable pre-discovery, the court encourages litigation on the merits (and permits courts to manage any prejudice through conditions and costs).

3) Corporate trustees: process proof is central, and “industry practice” assertions may not win summary judgment

The decision signals that, at least on summary judgment, trustees should expect to produce evidence of a real process: analysis, plan design tailored to the trust/beneficiary, and meaningful periodic review—especially where a decade-long diversification approach is defended. The court’s unwillingness to accept “the industry doesn’t document this” as a substitute for proof may influence how institutional fiduciaries document concentration decisions and review cycles.

4) Litigation posture: summary judgment will be difficult where competing inferences about “routine” versus “prudently tailored” management exist

By framing the record as supporting at least two reasonable inferences and crediting the nonmovant’s inference at summary judgment, the court underscores that prudence disputes—particularly about concentrated positions and gradual divestiture—often require trial-level factfinding.

Complex Concepts Simplified

Judicial settlement of an account (SCPA 2208)
A court-approved accounting by a fiduciary (here, a trustee). Once settled by decree, it generally finalizes what happened in the covered period.
Res judicata
A rule preventing relitigation of claims/issues after a final judgment on the merits. In the accounting context, it can bar not only what was argued, but also what could have been argued about the same period.
Prudent person rule (EPTL 11-2.2 [a] [1])
The pre-1995 New York investment standard requiring fiduciaries to invest like prudent, careful people seeking both reasonable income and preservation of capital. It is context-specific and does not impose a per se requirement to diversify in every case.
Prudent investor rule (EPTL 11-2.3)
A later, more exacting regime (effective January 1, 1995). The court explicitly did not apply it because the amended objection targeted 1973–1982 conduct.
Surcharge
A monetary remedy against a fiduciary for losses caused by negligence or imprudence (not merely poor outcomes).
“Divest-by date” / reasonable time for divestiture
If an investment is found to have been imprudently retained, a court may determine a reasonable time within which the fiduciary should have sold it. There is no fixed number of days or months; it depends on the facts.
Business records exception (CPLR 4518 [a])
A hearsay exception allowing admission of records made and kept in the regular course of business, if properly authenticated. Successor entities may lay a foundation if they integrated and routinely relied on the records.

Conclusion

Matter of James M. McDonald III Trust (JP Morgan Chase Bank, N.A.) offers a practical roadmap for trust-accounting litigation involving concentrated stock positions: (1) prior accounting decrees can decisively preclude challenges to earlier retention decisions; (2) courts should nevertheless freely permit amendment of objections to pursue the same imprudence theory within a legally available period absent demonstrated prejudice; and (3) corporate trustees seeking summary judgment under the prudent person rule must come forward with concrete, admissible evidence of a prudent, trust-specific process, not merely generalized industry practice, tax-efficiency outcomes, or optimistic third-party commentary.

The remittal leaves the ultimate prudence determination for further proceedings, but the decision’s lasting significance lies in its insistence that fiduciary prudence—especially in prolonged, gradual diversification—turns on demonstrable process and context, and often cannot be resolved as a matter of law on summary judgment.