U.S. Trust Corp. has landed smack in the middle of a messy court fight over the estate of one of the world's richest women.
The New York banking company, which prides itself on providing discreet service to the wealthy, has come under fire for its handling of the $1.2 billion estate of tobacco heiress Doris Duke.
Last month, a Manhattan judge fired U.S. Trust as preliminary co- executor of the Duke estate, saying the bank had failed to discharge its duty to the estate.
In her ruling, Manhattan Surrogate Court Judge Eve M. Preminger blasted the bank for failing to police the other co-executor - Ms. Duke's pony- tailed Irish butler, Bernard Lafferty.
She was especially critical of the bank's decision to extend loans totaling $825,000 to Mr. Lafferty, who expects an inheritance, but who has $1 million in unpaid debt and no assets but his $100,000-a-year salary.
The bank has vehemently denied the allegations, and has appealed the ruling. On Friday, U.S. Trust won a stay from the Appellate Division of the New York State Supreme Court, pending review of the surrogate court's ruling. A hearing has been set for June 21.
Even so, the threat of dismissal is a stinging blow to the bank's reputation. In fact, the case dramatizes a clear pitfall of catering to high-profile clients: disputes can quickly mushroom into embarrassing public spectacles.
In an interview Thursday at his midtown office, U.S. Trust president Jeffrey S. Maurer said the bank's name is being dragged through the mud by the case, which for months has been a mainstay for New York's racy tabloids.
"We've had more press coverage in the last month than we've had in 142 years," he said. "The way it's been portrayed in the press, and indeed the way the surrogate has portrayed it, has impugned our integrity.
"We're going to defend ourselves vigorously, not to get $1 million or $2 million, but to clear our reputation," Mr. Maurer added. He was speaking of the commissions the bank stands to collect if it is allowed to stay on as co-executor.
Most of the controversy surrounding U.S. Trust's role in administering the Duke estate centers on the bank's relationship with its co-executor, Mr. Lafferty.
Judge Preminger concluded that Mr. Lafferty, who started work for Ms. Duke six years before her death in 1993, exploited his position as co- executor by running up hundreds of thousands of dollars in personal expenses on the expectation of collecting a hefty inheritance. Ms. Duke's will has not yet been admitted to probate, meaning that Mr. Lafferty's inheritance is not assured.
In addition to his $100,000 salary, which continues to be paid by the estate, the 49-year-old butler is in line for an annuity of $500,000 a year plus an executor's commission of $5 million.
That prospective inheritance was the basis for U.S. Trust's decision to extend credit to Mr. Lafferty, according to Mr. Maurer. "I wouldn't call anyone who expects to receive $500,000 a year without funds," he said.
The first loan, for $300,000, was granted in November 1993, a month after the death of Ms. Duke, who inherited her fortune from her father, the founder of American Tobacco Co.
But in her ruling, Judge Preminger called the credit extensions a conflict of interest, saying that U.S. Trust should have sought direction from the court rather than appease Mr. Lafferty with loans.
Furthermore, she noted, because Mr. Lafferty has close to $1 million in unpaid debt, including the U.S. Trust loans, he is insolvent.
"If ever there was a need for a corporate fiduciary to rein in the excesses of an unsophisticated and unknowledgeable individual co-fiduciary, it exists in this estate," the judge wrote.
Judge Preminger's findings were based on an extensive two-part report assembled by Richard H. Kuh, a former New York district attorney who was assigned to look into allegations of misconduct by Mr. Lafferty and U.S. Trust.
Two internal U.S. Trust documents - which were turned over to Mr. Kuh and reviewed by the American Banker - suggest that bank officers who considered Mr. Lafferty's loan requests were mindful that he could fire the bank as co-executor.
In a memo dated Nov. 23, at the time Mr. Lafferty had asked for $300,000, a bank official stated, "It is essential that we receive an opinion from Counsel ... that this extension of credit does not constitute a conflict of interest, or be an impropriety, as U.S. Trust is co-executor with Mr. Lafferty on the Estate, and Mr. Lafferty has the right to fire U.S. Trust as co-executor, or hire U.S. Trust in the future."
Asked about this memo, Mr. Maurer said the loan didn't meet the bank's usual standards, but was approved because it would have been repaid if Mr. Lafferty were to receive his expected inheritance.
He added that the loans were made not against Ms. Duke's estate, but against the bank's own assets. If the current will is not validated, the bank - not the estate - will be on the hook, he said.
Mr. Kuh's report has been challenged by both co-executors on grounds that Mr. Kuh, who apparently interviewed more than 50 people, based his findings on "gossip" and did not record much of the testimony.
And support for the bank has been forthcoming from New York State Attorney General Dennis C. Vacco, who recently filed papers opposing the judge's decision.
Among other criticisms, Judge Preminger rapped U.S. Trust for:
*Allowing Mr. Lafferty to continue living on the Duke estate and running up "substantial expenses" - for instance, $260,000 redecorating Ms. Duke's Los Angeles property. In its appeal, U.S. Trust responded that a majority of the money was spent to repair earthquake damage.
*Failing to detect that Mr. Lafferty - who acknowledged on his 1987 employment application that he is an alcoholic - could not fulfill his obligations as co-executor because of drinking binges. The bank said Mr. Lafferty's drinking affected neither the estate nor his duties as co- executor.
*Allowing two illegal aliens to work on the Duke property and be paid in cash in violation of federal law. U.S. Trust admits paying the workers in cash, but maintains it is trying to get work permits for them. U.S. Trust also emphasizes that the workers had been hired by Ms. Duke, not by the bank.
Few sources contacted for this story would comment, citing respect for a bank that has successfully administered estates of the rich and famous for over a century.
"If U.S. Trust, one of this country's best corporate fiduciaries, may have made a mistake in this case, it only proves the old adage that nobody is perfect," said William D. Zabel, an estate lawyer in New York.
