U.S. Trust Corp. has lost an appeal of a court decision ousting it as a co-executor of the $1.2 billion estate of tobacco heiress Doris Duke.

In a 3-2 decision issued late Tuesday, the New York Supreme Court's appellate division upheld a Manhattan surrogate court ruling that removed U.S. Trust and Bernard Lafferty, Doris Duke's former butler, as executors.

In upholding the decision of the lower court, the appeals panel concurred that the bank had created a conflict of interest by making Mr. Lafferty "unsecured loans in the amount of $825,000, to pay for his 'personal needs,' i.e. still more luxuries."

By extending the loans to Mr. Lafferty, U.S. Trust cemented "a financial stake in Lafferty's continued service as an executor, so that he could repay the loans out of his commissions."

The court termed the conflict "actual and not theoretical, since it was apparent that the corporate co-executor improperly acquiesced in Lafferty's assorted misconduct."

The appeals court affirmed that Mr. Lafferty was unfit as co-executor "based on drunkeness."

Beyond the immediate blow from losing the case, U.S. Trust may suffer lasting harm to its reputation among wealthy clients.

"Each time U.S. Trust gets involved, its reputation slips," says Raymond D. Dowd, an attorney representing some of Ms. Duke's servants in a related action."Do they want their name to be synonymous with Bernard Lafferty's?"

The case may yet be appealed to the New York Court of Appeals, the state's highest court.

"We have not made any decision about an appeal," said a spokeswoman for U.S. Trust. "We're still considering what our future course of action might be."

The spokeswoman said there have been no management changes in the trust and estates area as a result of the case. She declined to comment on any management plans.

The appeals court decision includes a 15-page dissent- 11 pages longer than the brief majority opinion.

A number of attorneys contacted felt that U.S. Trust is likely to appeal, given the length and stridency of the dissenting argument.

One Wall Street analyst who follows U.S. Trust sought to downplay the ruling.

The bank has never discussed the direct financial implications of the case, said Raphael Soifer, of Brown Brothers Harriman, New York. Most people expect litigation in the trust area, he added, and sometimes banks "win and sometimes they lose."

The opinion affirms Surrogate Court Judge Eve Preminger's appointments of Alexander Forger, a trust attorney, and Morgan Guaranty Trust Co. as temporary administrators. It does not name co-executors to replace U.S. Trust and Mr. Lafferty.

"We think the opinion is correct, and we're pleased with it," said Daniel F. Kolb, a partner at Davis, Polk and Wardwell, representing Morgan Guaranty.

Katherine Fraser contributed to this report

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.