Verna and John Obermuller transferred their real property located in Brooklyn, New York to their daughter Joan Langone, one of their four children, while retaining life estates and powers of appointment in the property. John and Verna also executed a Trust Agreement between themselves as grantors, and Joan as grantee, in which Joan acknowledged that the Brooklyn property was transferred to her subject to the life estates and powers of appointment held by her parents. In the Trust Agreement, Joan also acknowledged that she held the property in trust for herself and her three siblings. The Trust Agreement also prohibited Joan from mortgaging the property.

Soon after the property was transferred, Joan mortgaged the property for $100,000. Several months later, Joan sold the property to third parties purchasers for $230,000. From the $230,000 proceeds, Joan paid off the $100,000 mortgage, and used the $113,000 remaining from the net proceeds to establish a stock portfolio in her own name.

Several years later, two of Joan’s then-living siblings, and the widow and children of the deceased sibling, instituted a lawsuit against Joan and her son John,  seeking an accounting and other relief. Plaintiffs’ alleged that by mortgaging and selling the Brooklyn property, and by misappropriating all of the settlement proceeds from the sale of the property, Joan had breached her fiduciary duty to them. Plaintiffs sought compensatory damages, namely, compelling Joan to distribute the proceeds of the sale in accordance with the terms of the Trust Agreement. They also alleged that Joan’s misconduct should result in the award of punitive damages equal to the forfeiture of her share of the proceeds.

Both defendants consented to the entry of default against them on liability, but reserved the right to challenge the amount of damages to be awarded. After a proof  hearing, the trial judge entered judgment (1) declaring defendants jointly and severally liable in the amount of $100,810.51, representing the amount of the payoff from the mortgage, the proceeds of which Joan gave to her son John to pay back an existing debt he had incurred; (2) in favor of plaintiffs and against Joan individually in the amount of $116,088.49, which represented the proceeds she received from the sale of the property; (3) awarding punitive damages in the amount of $54,224.75 representing Joan’s one-fourth interest in the as a result of her violation of her fiduciary duties; and, (4) compelling Joan to pay plaintiffs’ attorneys fees and costs.

On appeal, defendants alleged, among other claims, that the award of punitive damages against them was error in the absence of proof of fraud or collusion. The appellate court held that the award of punitive damages could be based upon Joan’s breach of fiduciary duty as trustee. The court reasoned as follows:

It is undisputed that Joan, as trustee, was obliged to administer the trust solely for the benefit of the beneficiaries, herself and her siblings. A trustee is “not permitted to place himself in a position where it would be for his own benefit to violate his duty to the beneficiary[.]” McAllister v. McAllister, 120 N.J. Eq. 407, 411 (Ch. 1936). Whether conceptualized as a surcharge against Joan’s interest, see Silverstein v. Last, 156 N.J. Super. 145, 156 (App. Div. 1978) (specifying that a surcharge should be imposed when a trustee is found to have violated his or her fiduciary duty), or punitive damages, see Maul v. Kirkman, 270 N.J. Super. 596, 620 (App. Div. 1994) (holding that an award of punitive damages is appropriate to compensate a party for the egregious wrongdoing of a defendant), the judge correctly determined that Joan’s conduct constituted both fraud and a breach of her fiduciary duty. We affirm the award of punitive damages … .

The case is annexed here – Pfeifer v. Langone