40 Del. Ch. 567 | New York Court of Chancery | 1962
One George McNear died testate in 1947, and under the terms of his will he created trusts for the benefit of his wife, their children, his three sisters and brother, and their children (“beneficiaries”). The Wilmington Trust Company (“Trust Company”), Central Hanover Bank and Trust Company (which declined to serve), and Guy A. Gladson (“Gladson”) were named as trustees. The testator provided that the Trust Company was authorized to take
The estate’s principal asset consisted of 82% of the outstanding shares of common stock of the Toledo, Peoria & Western Railroad (“TP & W”). Before naming the Trust Company as trustee in his will, Mr. McNear asked and received assurances from it that it would be both able and willing to retain the stock as part of the trust estate.
On March 10, 1952, the Trust Company and Gladson began serving as trustees. Before qualifying as trustee the Trust Company was asked again by the beneficiaries if it would feel free to retain the TP & W stock, and the same assurances were given to them.
In the period from March 1947 to May 1954, the TP & W under the executive management of J. Russel Coulter (“Coulter”) made considerable progress. The Trust Company performed its duties during this period, i.e., prior to the transaction involved in this action, through J. Sellers Bancroft (“Bancroft”), one of its vice-presidents. Bancroft served as a director of the TP & W. He was seceretary for a time and later its vice-president.
There subsequently took place a series of events concerning the sale of the TP & W stock which, because of their importance in resolving the ultimate issues presented in this controversy, are discussed hereafter in some detail. The outcome of these events was that on April 15, 1955, agents of the Trust Company signed papers by which they accepted offers of the Pennsylvania Company (“Pennsylvania” or “plaintiff”), a wholly owned subsidiary by the Pennsylvania Railroad Company, and the Atcheson, Topeka & Santa Fe Railroad Company (“Santa Fe”) to purchase 23,400 shares, or 26%, each of the total number of shares outstanding of the TP & W stock at $100 per share, subject to certain conditions and the understanding “that all necessary details to implement this [agreement] will be worked out by our respective Counsel”. Before an implementing agreement was executed, the trustees received an offer from one Ben Heineman
Thereafter, Pennsylvania instituted this action against the trustees seeking specific performance of its alleged binding agreement of. April 15, 1955, or, in the alternative, monetary damages. The Trust Company filed a third-party complaint against the trust beneficiaries seeking in effect to be exonerated from liability on this original claim. Coulter, who became successor trustee to Gladson after the events herein involved, filed a cross-claim against the Trust Company, and the third-party defendants, the beneficiaries, filed a counterclaim against the Trust Company seeking to surcharge the Trust Company for the amount of any claim which might be established by the original plaintiff, Pennsylvania. Subsequently, cross-motions for summary judgment by the plaintiff and the Trust Company were denied, and this decision was affirmed on appeal. See Wilmington Trust Company v. Pennsylvania Company, 39 Del.Ch. 453, 166A.2d 726, aff’d, supra p. 1, 172 A.2d 63. Thereafter, and before trial, the Trust Company and Coulter as co-trustees settled with Pennsylvania by paying $500,000 from the assets of the trust. The court approved stipulation concerning that settlement provided in part that it was without prejudice to the pending cross-claim and counterclaim.
Thereafter the cross-claim of the co-trustee and the counterclaim of the beneficiaries came on for trial. This is the decision on the request of the beneficiaries of the McNear testamentary trusts and of
I pause to note that it appears to have been tacitly agreed by the parties that Gladson, co-trustee with the Trust Company at the time of the transaction herein involved, was in no condition at the date of the trial (1962) to testify meaningfully concerning the facts.
The facts are these: On April 15, 1955, the Trust Company for itself and its co-trustee entered into written agreements with the Santa Fe and the Pennsylvania to “sell” the latter 26% each of the outstanding common stock of the TP & W from the trust estate. The trust would thus retain 30% of the outstanding stock. Parenthetically, as noted before, the question later raised by Pennsylvania in this action was whether these agreements became binding before being implemented by the execution of a final written agreement. It is important to note that even if the April 15 agreements were intended to be binding before the execution of this implementing agreement, it is nevertheless tacitly conceded that such agreements were not binding between the parties thereto prior to approval by the respective boards of the purchasing railroads, as stipulated in the agreements themselves, and prior to receipt of the written consent of the individual co-trustee, as specifically required under the will of George P. McNear. Admittedly, both these requirements were ultimately satisfied, but the question here posed is whether the Trust Company was guilty of a breach of trust either before April 15 or thereafter, first in negotiating the written agreements with the Santa Fe and the Pennsylvania and then in not withdrawing therefrom prior to the time when there could have been no claim that the April 15 agreements were legally binding, viz., prior to April 27 when the Pennsylvania board voted its approval of these agreements. The substance of the beneficiaries’ claim is that the Trust Company allowed the trust estate to become “bound” by the April 15 agreements at a time when it could have dealt with Heineman at a higher price.
The special value of the TP & W in 1955 arose from the following facts: In 1954, Heineman succeeded to the management of the M & St. L. He thereafter sought to acquire control of both the Monon and TP & W railroads in order to accomplish a particular purpose. A substantial portion of the east-west railroad traffic in the United States is routed through the Chicago and the St. Louis “gateways”. Heineman believed that this situation resulted in undue congestion and losses in shipping time. He therefore proposed to link together the M & St. L, the Monon, and the TP & W in order to bypass the then principal gateways and to create a major interchange at Effner, Indiana — the eastern terminus of the main line of the TP & W. If the plan of acquisition had succeeded, it was possible that the position of the other railroads engaged in the east-west shipment of goods would have been seriously threatened.
Heineman’s intention to acquire the TP & W was well-known in the railroad industry, because in 1954, the M & St. L’s failure to do so had been an issue in the proxy fight that led to Heineman’s acquisition of control of the M & St. L. Nevertheless, the full scope of Heineman’s so-called “outer-outer belt” plan does not seem to have been appreciated at that time. The reason perhaps is that acquisition of the Monon link was undertaken covertly through the purchase of
I find it clearly established on the record that the Trust Company by the end of March 1955, appreciated the real interest of the M & St. L in acquiring the TP & W as part of a systematic plan and knew moreover that the interest of other railroads lay principally in preventing such acquisition. I am faced then with the question whether the course of conduct adopted by the Trust Company in negotiating the sale to the Pennsylvania and the Santa Fe and in placing the trust estate in a position where it was required to compromise a claim against it based on one of those agreements complied with the legal standards applicable to trustees.
The legal test to be applied here is set forth in 12 Del.C. § 3302:
“In * * * selling * * * property for the benefit of another, fiduciaries shall exercise the judgment and care under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs * * * ”
The statute of course requires something more than an honest opinion or good faith business judgment on the part of the trustee. The statute contemplates that the trustee will act as other reasonable businessmen would have acted under the same circumstances. The trustee’s conduct is not excused because of his personal preferences or particular methods of doing business if men of “prudence, discretion and intelligence” would have acted otherwise.
I assume that the burden of proof on the issue of negligence rests with the persons asserting the claim. Neely v. People’s Bank of Anderson, 133 S.C. 43, 130 S.E. 550; In re Lerch’s Estate, 399 Pa. 59, 159 A.2d 506; In re Hubbell’s Will, Sur., 90 N.Y.S.2d 74. And Delaware authority, In re Mills’ Will, 26 Del.Ch. 203, 26 A.2d 241, is not inconsistent with the usual rule. In so assuming I do not reach the question as to whether the rule is different where it is established that the trustee refused to accept what was apparently the highest offer for the property.
The record indicates that active consideration of a sale of the stock commenced only in 1954 when Heineman made the first of two offers in that year to buy the shares. In June 1954, Heineman made an unsolicited offer to buy 100% of the outstanding stock for a sum of $6,260,000 or about $69.50 per share. This offer was on the basis of 7ji times 1953 earnings — well in excess of the price-earnings ratios of other railroad stocks which might be considered comparable. It was higher than the amount previously received for certain shares of the stock which had been liquidated to settle the estate.
The trustees seem to have agreed generally that diversification of the trust assets was desirable. After the testator’s death, the TP & W had enjoyed considerable progress under the management of Coulter. Thus, the trustees while aware of the desirability of ultimately selling the stock made exceedingly slow haste in that direction. Admittedly, before Heineman’s first offer in June 1954, no effort had been made to appraise the TP & W or to interest potential buyers. The record does not indicate that there had been any previous offers to buy the TP & W stock.
Who were the persons interested in the ownership, management, or control of the railroad in 1954? First, there were the trustees both corporate and individual. The Trust Company was represented in the relevant transactions either by Joseph W. Chinn (“Chinn”), then its vice president and principal trust officer and a law school graduate, or by Bancroft, who carried out the active duties of the trust through service as a director of the TP & W and as a member of its executive committee. Bancroft had contact with some of the bene
The beneficiaries under the trust may conveniently be divided into two groups: (1) Mrs. McNear, widow of the testator, together with her immediate family and (2) the so-called “California beneficiaries”, each of whom was a relative of George P. McNear. Mrs. McNear had a one-half interest in the income of the trust and her children one-fourth. On the deaths of these respective income beneficiaries, their descendants were entitled to the principal in the same proportions. The final one-fourth had been given to the testator’s sisters and brother and their descendants. Beginning in June 1954, upon receipt of Heineman’s initial offer, the trustees intermittently contacted various beneficiaries with respect to the possibility of sale. Mrs. McNear, who spoke for her children as well as herself, consistently opposed any sale because of her personal attachment to the TP & W. Nevertheless, she realized that some diversification of trust assets might realistically be necessary, and ultimately she was instrumental in obtaining a valuation of the TP & W for her own use. The Trust Company was aware of her attitudes. The California beneficiaries, each having a proportionately smaller interest in the trust property, looked with more favor on a sale of the stock. They were interested primarily in obtaining the most advantageous terms.
Actual management of the TP & W rested with Coulter. In the early part of the negotiations leading toward sale of the stock Coulter does not seem to have played a significant role. Subsequently, he
Heineman, the prime mover in the early part of the negotiations, was in constant communication with the trustees either by personal letter or through former Judge Hugh M. Morris, a Wilmington attorney. Heineman was troubled by the trustees’ refusal to suggest a price, or range of prices, with regard to which he could make an offer. They likewise would not state that the railroad was not for sale under any circumstances. On July 27, 1954, Chinn was informed that Heineman had offered to pay one-half the expenses of an appraisal of the TP & W’s assets. Chinn set forth the position of the Trust Company in the following contemporaneous memorandum to Bancroft:
“* * * I repeated to Judge Morris what I told him over the telephone yesterday, in your presence, that the Toledo, Peoria & Western Railway Company is not for sale; that we, as trustee, however, would feel obliged to consider any bona fide offer to purchase the Road, and if the offer should appear to us to be attractive we would, at our own expense, determine what appraisal, if any, would be necessary, and that in order for us even to consider an offer attractive it would have to be substantially more than Mr. Heineman’s original offer of $6,240,000 [sic].
*579 “I told him we are not in a position to indicate what we mean by substantial, and are not willing to enter into any negotiations for the sale of the Road unless and until we receive an offer that we feel merits our serious consideration, and that if Mr. Heineman cares to do so he should indicate to us the top figure he would be willing to pay for the Road, and we will then determine whether or not it is sufficiently attractive to justify our giving consideration to the same.”
Bancroft later testified that at that time the Trust Company’s representatives did not know what price would be “adequate”. Gladson, the co-trustee, was informed of the posture adopted and replied,
“* * * I am particularly glad that Joe told him that the Toledo, Peoria & Western is not for sale, because I understand that Heineman has stated publicly that the road is for sale, and that he expects to acquire it. I know nothing that would ruin the morale of the employees of the road quicker than that there was to be a change of management. * * *”
On September 23, 1954, Heineman made his second offer to buy the outstanding shares of the TP & W. This time he offered $7,250,000 for 100% of the stock, which brought the price per share from $69.50 to $80.55. Heineman also offered to buy the 82% held by the trustees at the same per share price. The agreement in either event would be subject to approval by the I.C.C. and the stockholders of the M & St. L. Heineman again offered to meet with the trustees at a convenient time and place in order to discuss details.
The reply to this offer was in substance the same as that given to the earlier one. Heineman was informed by a letter dated October 11, 1954, that his offer was unacceptable. Before the reply was sent, however, all the interested persons were again contacted to ascertain their sentiments. A fair summary would be that no person had substantially altered his previously-held opinion. Gladson and Mrs. McNear continued to oppose a sale, but for reasons which were largely
In the face of these conflicting attitudes the Trust Company took no further steps. Mrs. McNear was advised that though the offer appeared “statistically favorable”, it would be rejected. The Trust Company, however, reserved the right to re-examine the matter in the light of changing circumstances. Two suggestions had arisen from within the Trust Company itself, but neither was apparently acted upon. First, there was some sentiment for making a counter-offer in order to .obtain a price in excess of $80.55. Secondly, it was thought that the Pennsylvania and the Santa Fe railroads should be contacted to ascertain their interest in acquisition of the stock. The Trust Company took no such action. Instead it acquiesced in the terse reply sent by Gladson. The Trust Company took no action at that time to obtain the appraisal which it had promised Heineman it would make in the event that it received a favorable offer.
Heineman’s second offer had provoked a series of communications between the trustees and beneficiaries which ultimately led to a rejection of that offer. Heineman was not dissuaded, however, since he had specifically been advised through Judge Morris that a suitable offer would still be considered. He therefore resumed contact with the trustees and also sought to approach the beneficiaries directly. The reason for this new tack is explained by this memorandum from Chinn to Bancroft dated October 14, 1954:
“I told Judge Morris that we could only repeat what we had previously said, that the Railroad was not for sale, but that we would carefully consider any offer made to us. I told him also*581 that we felt that it was most appropriate to ascertain the feelings of the principal beneficiaries of the trust, even though the ultimate decision is up to the trustees, and that so far as the beneficiaries are concerned, there still is a considerable difference between Mr. Heineman’s offer and what they consider to be the value of the Railroad.”
Further in the same memorandum Chinn also said:
“I told Judge Morris that we are not in a position to indicate a price or enter into any negotiations for the sale of the Railroad since we feel this would be extremely detrimental to the morale of the employees of the Road.”
Heineman therefore was led to believe that there were two hurdles to be overcome in purchasing the TP & W stock. First was the reluctance of the trustees to enter into negotiations of any kind, and second the apparent dissatisfaction of the beneficiaries with the price that had been offered.
The Trust Company then learned indirectly that Heineman was seeking to communicate personally with the beneficiaries. The Trust Company’s representatives doubted that anything would be accomplished by such meetings and therefore did not encourage them. These officials met together on October 29 and decided that since Heineman was bent on interviewing the beneficiaries, the stock should be offered to him on a “take it or leave it” basis at $100 per share. The only support for such a figure admittedly was the letter from the son of one of the California beneficiaries, but $100 was substantially in excess of Heineman’s previous high of $80.55. No appraisal had as yet been made of the TP & W’s assets. When Gladson was informed of this decision, his first reaction was to seek competitive bids, but Bancroft suggested that by assuming such a posture, the trustees would be admitting that the TP & W was for sale. Gladson considered the matter and advised Bancroft not only that competitive bidding should be avoided, but also that no offer should be made, since a refusal by Heineman at $10.0 would ,set a ceiling on the. price. The.
Heineman during November and December of 1954 continued to urge the trustees either to set a price or to commence negotiations. On November 18, Bancroft learned that there was another prospective purchaser in the field who was interested in the stock at $90 to $100 per share. Bancroft also knew that Heineman was somewhat piqued at the treatment he had received in his efforts to buy the stock. He had hinted that there were other alternative prospects available to the M & St. L. On December 28, Heineman sent Bancroft a letter in which he summarized his dealings with the trustees and offered to increase his previous bid:
“* * * This will advise you formally that subject to necessary corporate and Commission approval, and for a limited period of time, we are prepared to buy for cash at a price higher than our last offer, all of the capital stock of the TP & W now held by you as Trustees. In view of the fact that we have made two substantial offers without receiving any indication from the Trustees of the price which they would accept, we are not prepared to make specific the higher price that we are prepared to pay unless and until we receive an indication from the Trustees of a price, or range of prices, which they would accept.
“If within a reasonable time the Trustees have not arranged a meeting with us for the purpose of discussing such a price, we shall assume that the shares of stock of the TP & W now held by the Trustee are not for sale at any price.”
Another round of letters followed Heineman’s letter of December 28, with the result that no action was taken on his request for a meeting with the trustees until March. In the meantime the circumstances surrounding the potential sale were undergoing a change. At
“* * * Mr. Sheritt told Mr. Kelley that he would buy the Hanover Bank’s 15% stock interest in the TP & W, would pay more than the $80 bid by Heineman, but indicated he would not pay $100 per share. No one seemed to know why he would be interested in the TP & W stock.
“The Rock Island is very much opposed to the Minneapolis & St. Louis acquiring the TP & W which would indicate that the Rock Island would pay a good amount rather than see the Minneapolis & St. Louis come into control.
“Mr. Coulter saw Mr. Symes, President of The Pennsylvania Railroad, about three weeks ago and Mr. Symes indicated that there was no advantage in the Pennsylvania acquiring the TP & W.”
“Once again Mr. Kelley said that he would approve sale of the TP & W for $10,000,000, and once again Mr. Gladson refused to commit himself in any way.”
Bancroft learned that in Coulter’s opinion the Santa Fe was “by far the most logical purchaser” of the TP & W, the Rock Island “the second most logical”, and the M & St. L also “logical”. Coulter, for reasons not disclosed, had at different times discussed the matter of sale both with Gurley and with Symes. Neither had responded in a manner which indicated a pressing concern with the disposition of the railroad. Nevertheless, the Trust Company now knew that in addi-
During the month of February the Trust Company’s representatives supplemented their knowledge of the value of the TP & W stock with two valuations made by members of the Trust Company itself. The Turnbull report, based on a comparison of the TP & W with other “bridge” railroads, placed a valuation of $10,400,000 ($115 per share) on the stock. The Jeanes report indicated a value of $90 per share, but I find that that report contemplated a recapitalization of the TP & W and was made in connection with Mrs. McNear’s suggestion that the trust estate buy out the stock interests of the California beneficiaries. Bancroft also was, or soon after became, familiar with the report compiled by W. E. Hutton & Co. at the request of Mrs. McNear. This report, dated December 31, 1954, suggested a valuation of from $7,053,750 ($78 per share) to $9,292,500 ($103 per share) “plus strategic value of connections with: Santa Fe, C. B. & Q. and Rock Island on West, Pennsylvania, N. Y. Central, C. & E, Illinois, St. Paul on East, and Chicago & North Western, M & St. L, Illinois Central, Gulf, Mobile & Ohio, N. Y. Chicago & St. Louis and Illinois Terminal in Center.”
What other indicators of “value” were then available to the trustees? Up to this time Heineman, in effect bidding against himself, had made an unambiguous offer to negotiate in excess of $80.55. The son of one of the California beneficiaries had recommended a sale at $100. Mr. Kelley had expressed approval of a sale of $111. Two other parties though unsolicited were rumored to be interested in the shares at less than $100. Gladson, one of the trustees, had refused to permit a counter-offer to Heineman at $100 or to enter into negotiations.
Up to this time, March 1955, the trustees had maintained the attitude which they had previously agreed upon. In the absence of
From March 4 to April 15, however, the character and tempo of the efforts to sell were to undergo a radical change. The change itself was foreshadowed in January by the apparent interest of other persons in the shares of the TP & W. During March the pressure to sell was intensified when the facts concerning Heineman’s Monon purchase and his outer-outer belt scheme became publicly known. It was clear, and the Trust Company which was at the center of the negotiations knew, that none of the competing bidders intended to purchase the TP & W as an ordinary investment. All but Heineman were interested principally in stopping the M & St. L. By April the trustees because of the competitive situation that had arisen were in a position to sell the stock at most advantageous terms.
On March 4, after having received the requested valuation reports, Bancroft advised Gladson of the unanimous feeling of its concerned officials regarding the question as to whether the TP & W stock should be sold or retained:
“First of all, we are of the definite opinion that we should not attempt to get Mr. Heineman’s top bid and then canvass the other railroads. We are quite sure that Mr. Heineman would not be willing to make a bid on such a basis, even though we assured him that his price would not be mentioned or indicated. Consequently, we might well cause Mr. Heineman to decide not to make any bid whatsoever.
“It is our recommendation, therefore, that each of the railroads we mentioned be called on and each be given the same story, namely, that there have been offers for the TP & W stock and indications of interest. The Trustees, as they have consistently said, do not want to sell their stock holding but they have to take cognizance of the offers ahd the rumors going around*586 that the railroad is going to be sold. It seems in order, therefore, that the Trustees try to clear up this situation for the present and the indefinite future by finding out just how much can be realized, the idea being that if the price is definitely a favorable one they should very seriously consider sale. If the price is not definitely a favorable one, there can be a final general turndown and the road should not be bothered for some time with offers and the attendant rumors. The Trustees would want to know reasonably soon of any material bid, as they do not want the present situation to continue any longer than necessary. They have not put a price on the stock as they are not trying to sell it — they are simply checking to see if it should be sold. Each railroad, of course, would be advised that other railroads are being asked about any interest which they may have.
“The above is a rough sketch of what would be said and, of course, should be refined and any other matters considered important should be added. * * *”
It was decided that the railroads to be contacted were the M & St. L, Pennsylvania, Santa Fe, and Rock Island. On March 10, Bancroft sent Gladson another letter which dealt with the same subject matter:
“Dear Guy:
“Confirming our telephone conversation this morning, we all seem to be in accord as to our visits to the various railroads. You, Henry [Kelley] and I will see each one on the general basis outlined in our letter of March 4. As I told you, I think under the circumstances we should call on Mr. Heineman first, although we will not treat him any differently than the rest.”
“* * * I doubt much time will be needed for a visit, as we are not going around to negotiate in any sense of the word nor would we expect any general discussions- — the purpose of each visit simply to acquaint the railroad with the present situation.”
The critical meeting was held with Heineman on March 15, 1955 in Chicago. Bancroft and Kelley were present, but Gladson declined to attend on a last-minute plea of illness. Bancroft’s memorandum of the meeting purports to be a record of the conversation that occurred:
“Mr. Heineman is still very interested in the acquisition of the TP & W, but time is running out and he may have to take his second choice so he will not lose it. He said that he was sure the Minneapolis & St. Louis would pay more than the other railroad. He refused to make another bid but stated that if we decided to auction off the road he would give an upset price provided we were willing to accept it if we did not get a better offer.
“Mr. Heineman mentioned that his group had purchased working control of the Monon from two insurance companies and through market purchases. He stated very definitely, however, that the fact that the three railroads fitted well would not make him pay any more for the TP & W.” * * *
“Although Mr. Heineman would not make another price, he did give an indication of the range in which he was willing to negotiate. He said that the February 28, 1955 markets of 31 railroads were 8.39 times their five-year average earnings and 8.41 times their three-year average earnings. The five-year earnings of the TP & W were exactly $9 per share, somewhat above the three-year average, the six-year average, and the seven-year average. His range would be between 9% times the five-year average and 11 times the five-year average, the first figure being $85.50 per share and the second figure $99 per share. * * *”
The next question then must be whether Heineman’s suggesting a “range” in which he was willing to negotiate gave the interviewer reasonable cause to believe that Heineman had firmly fixed a limit beyond which he would not go. The Trust Company claims that this is so. The record is not clear what the “range” was that the parties then had under consideration. Apparently the charts, memories, and memorandums of the parties differed on this score. Also, the average earnings figures used by Heineman at the meeting were inaccurate, as Bancroft subsequently learned. In any event, the lowest “top” figure suggested by Heineman was roughly $99, and the “range” was $85.50 to $99. Bancroft testified that Heineman had said “that he would negotiate within the range but neither at the top nor at the bottom.” Heineman on deposition admitted that “as a matter of negotiation strategy” he may have made that statement.
Mr. Kelley’s recollection throws further light on the attitude of each of the parties:
*589 “A. Yes. We went to the meeting. Of course Mr. Heine-man knew we were coming, and I think that I spoke first. I am not sure whether I or Bancroft did. I said, ‘Well, you have made’ — after a few preliminaries, why, we started in with the meeting, ‘You have made two offers. One for $70 a share approximately, the other one for $80, both of which have been turned down.” And, as I say, I can’t recall which one of them said, ‘We have come here to find out. In the first place we want to get this thing over with, we want to get your best price.’
“He got very angry at that point and he said T think you have treated me shamefully. You don’t even let me know what you want. You ignore me. I am just sick and tired of the whole thing.’ He was quite angry about this thing. He said, T thought you fellows came over here to negotiate this thing in good faith.’
“So then he calmed down a little bit, he got out these graphs with these charts showing I don’t know how many railroads, their earnings and so forth, as I recall it, for quite a while. And Bancroft and he argued. I didn’t argue with him on that point, I am not a figure man. So he finally came to the conclusion or ended up by saying, T have taken eight times, or eleven times earnings, and I think a fair statement is to say that this stock — and this is my position — is worth — •’ I am going to give you ‘85 and 100’ because that is my recollection of what he said.
“O. Your recollection is he used the specific figures 85 and 100?
“A. That’s my recollection, yes, sir. The other memorandums of his own and Bancroft used a different figure there of 85.50 and 99, I think it was. But that doesn’t strike in my mind; what was in my mind was 85 to 100. And he said as I recall it that the bottom is 85, we shouldn’t sell for less than that, and the top is 100 and nobody should buy it for more than 100. ‘If I negotiate, I am going to negotiate in that area, neither at the top nor at the bottom.’
*590 “So we discussed this thing for some time on a more friendly basis. I think that’s about all there was to it. We told him we were going to other people; that is, to other roads.
“Q. Did he make any comments on your reporting you were going to see other people ?
“A. Yes. He said, ‘Well, I’m interested in the railroad.’
“Q. He said to you, didn’t he, that he was prepared to pay more than anybody else would ?
“A. No, he did not. He did not. He said he was interested and that he wanted us to come back if we got another offer better than his. No, he didn’t say that until later, Mr. Ball, I don’t believe. I think I know what you have in mind. It wasn’t at that meeting.”
From Kelley’s testimony it is clear that Heineman did not intend irrevocably to commit himself to narrow price limits even though he stated that he was going to negotiate in the middle, rather than at the ends of the negotiable range. Heineman did not say that $85.50 and $99 were his range for negotiation. Instead he spoke of that range in an objective sense, as if that were the range which the trustees would necessarily have themselves proposed after considering the available data. Heineman therefore offered to negotiate in the middle of what he urged was the trustees’ range. His reasons for doing so are fairly evident. He could not commit himself to a specific figure for fear that the trustees would accept a higher offer from another party. He could not suggest a “range” within which he would negotiate because this too would tend to set a limit on his offering price. Instead he adopted the third course of telling the interviewers the range in which they could negotiate and offering to negotiate within that range. By acting in this manner, he effectively placed the trustees in the position of having either to affirm or deny the validity of his assumption about the “range”. If they were to receive an offer beyond that range, they would have to return to Heineman and explain that his previous “assumption” was incorrect.
Each of the statements attributed to Heineman in Bancroft’s memorandum is consistent with Kelley’s recollection of the meeting , and the interpretation placed upon it. The Trust Company points out that Heineman stated at the time that his acquisition of the Monon would not cause him to pay any more for the TP & W. He also discussed the TP & W’s revenues from the hauling of freight and said, moreover, that if the trustees did not give him an early response, he would purchase an undisclosed “second choice”. These statements were necessitated by the position in which Heineman found himself. If he had stressed the importance of the TP & W to the M & St. L, he would only have made the trustees less willing to name a figure. Therefore he emphasized that he was a buyer like each of the other interested parties and would negotiate in what he had said was the proper range of prices for the trustees to consider. Nevertheless, Heineman did offer an upset price in the event that the trustees decided to “auction off the road” and asked them to return if they received a better offer.
While it is clear that Heineman did not intend to limit himself to a fixed price or range of prices, could the trustees reasonably believe from what Heineman had said that he did so limit himself? The answer depends of course on what’the trustees knew of Heine-man as a buyer and of his outer-outer belt scheme. They must have known that the conditions under which they were attempting to sell imposed an impossible burden on any anxious buyer and
What conclusions can be drawn from the events occurring at the March 15 meeting? As a practical matter the Trust Company’s representatives were interested in selling the stock and diversifying the trust assets. The principal problem was the method to be used in effecting a sale. Two considerations seem to have predominated in the minds of the sellers. First, that the TP & W stock had a value upon sale in excess of what might normally be expected for shares of stock and secondly, that unless there were at least two active bidders, they could never determine how high this inflated value might be. Heineman’s singular interest posed a special problem in deciding upon a method of sale. Any attempt to name a price on the part of the sellers would establish an upper limit for the stock — with no assurance that the upper limit had in fact been reached. On the other hand, if the sellers did not name a price, there seemed to be a very real danger that Heineman would lose interest and conclude that the shares could not be bought. The latter method was of course the one adopted at the March 15 meeting. The results were predictable. Heineman refused to set a price, or range of prices, for reasons which have already been examined. Thus, the sellers were in effect in precisely the position they had been in before the meeting except that Heineman now threatened not to buy at all if the trustees did not respond to his offer to negotiate.
Up to this time, as Kelley indicated in his deposition, none of the other railroads had been contacted to determine what price they would offer for the shares. The sellers, including Kelley as well as
I think that one may fairly conclude from this record that the Trust Company’s representatives were not unwilling to sell the TP & W stock provided the price received was sufficiently high. They were cognizant of the fact that Gladson and Mrs. McNear did not like Heineman and that if they were to sell at all, the latter would prefer not selling to him. They knew that the California beneficiaries and Gladson had both in effect recommended a sale in the neighborhood of $100.00 per share; that the Trust Company had given assurances to the beneficiaries that it was in a position to retain the shares; and that Heineman himself might not offer $100.00 unless there were bidding pressures from other buyers or the trustees were to commit themselves to a specific dollar figure. Nevertheless, they also knew, and, as the implications of the outer-outer belt plan became more generally known, it was apparent, that Heineman was a most anxious prospect and would go to great lengths to obtain the stock. This was all the more certain as the determination of the Pennsylvania and Santa Fe to prevent such a sale became clear to them.
Events from March 15 to April 15 moved very swiftly, culminating in the trustees’ written agreement to sell to the Pennsylvania and the Santa Fe 26% each of the outstanding stock of the TP & W from the corpus of the trust. During this period Coulter, president of the TP & W, because of his contacts with Symes and Gurley, presidents of the Pennsylvania and Santa Fe, came to play a leading role in the negotiations. Gladson was to play a significantly lesser role.
By March 18, however, Bancroft had reason to believe that significant steps were being taken by the Pennsylvania to prevent Heineman’s capture of the TP & W. Coulter called Bancroft to inform him that he had learned from Symes that the latter was flying to Cleveland to meet Gurley and arrange a joint purchase with the Santa Fe. Up to this time the trustees had never formally discussed the question of sale with the Pennsylvania. On March 21, Coulter called and said that Gurley had spoken very strongly about the TP & W falling into the hands of either the Rock Island or the M & St. L. His views, however, differed from those of Mr. Symes in that he favored an acquisition by them of all rather than part of the outstanding TP & W stock. On the same day, Bancroft made arrangements for a conference ryith Symes on March 24. In answer to an inquiry by Judge Morris, Bancroft replied that no decision had been reached by the trustees regarding a sale of the stock and that other railroads were going to be contacted.
On March 23, Judge Morris again contacted Bancroft and reiterated Heineman’s desire for a speedy “yes” or “no” decision. Judge Morris stated that he understood that Heineman’s interest in the TP & W would terminate by the middle of April. Bancroft said that the trustees as well “were interested in getting the question of sale resolved one way or the other as soon as reasonably possible.”
Bancroft, Chinn, and Kelley conferred on March 24, with Symes and Bevan of the Pennsylvania at a meeting arranged by Coulter. Symes said, according to Bancroft’s memorandum,
*595 “* * * that Pennsylvania was very happy with the present situation but it would do all it could to prevent the TP & W from falling into unfriendly hands, the M & St. L being mentioned specifically. He suggested, if we were interested in selling, that The Pennsylvania acquire 26% of the stock, the Santa Fe acquire 26% of the stock, they be given first refusal on any future sales and the Company be operated independently. He was against the Santa Fe idea of 100% ownership as he said that that had not worked out when the Burlington and The Pennsylvania owned the property. Mr. Symes is going to see Mr. Gurley today and let us know promptly what their decision is with respect to majority or 100% control.
“In connection with the acquisition by unfriendly hands, Mr. Symes said that Pennsylvania would do all they could to prevent such an acquisition which, as we know from their position on the east end, could be material.”
This meeting with Symes and Bevan proved to have a very marked effect on the trustees’ continuing efforts to sell the stock. The trustees now had a second potential bidder and understood the circumstances which compelled each of the respective parties to press for a sale. As soon as the Pennsylvania-Santa Fe attitude was known, Bancroft contacted Coulter and Gladson. Coulter’s advice did not relate to the value or price of the stock but to the desirability of sale to either of the potential buyers. The Trust Company claims that it relied heavily on his advice in these matters. Bancroft knew that under certain circumstances approval of a sale of the stock would have to be obtained by the purchaser from the I.C.C. Coulter told Bancroft that with Pennsylvania and Santa Fe opposition I.C.C. approval of a sale to the M & St. L was “by no means assured”. He said that a decision one way or the other might be delayed for more than a year. Coulter also suggested that if the Pennsylvania and the Santa Fe became substantial stockholders, it would be to their advantage not to injure the TP & W competitively.
When Gladson was contacted, he too responded enthusiastically. He thought, according to one of Bancroft’s memoranda, that both
“* * * that it was most important that no word get out about the possible proposal as we undoubtedly could get a better price from the Pennsylvania and Santa Fe if the M & St. L was still in the picture. I also told him that we would have to move very fast because Mr. Heineman has indicated that we negotiate with him in the next several weeks or he will no longer have any interest in acquiring the TP & W.”
It is evident from the record that the Trust Company’s representatives were very enthusiastic about a possible deal with the Pennsylvania and Santa Fe. When Bancroft said “we would have to move very fast”, he was clearly speaking in terms of closing a deal with those railroads. Heineman’s position was to become one that Heine-man himself had long feared, i.e., his persistence would become a tool by which the trustees would sell to another at a high price. The trustees made no further approach to Heineman even though, as I have found, they knew or should reasonably have known that once the other railroads were actively bidding, he could be expected to raise his bid. In fact they took active steps to prevent other persons from disclosing the fact that negotiations were being carried out with the Pennsylvania and the Santa Fe, the explanation being that they feared that Heineman would lose interest in the TP & W and thereby relieve the pressure on the other buyers.
The Trust Company’s representatives met together on March 25 to discuss the Pennsylvania’s proposal which they felt “had much to be said for it.” The question of price apparently had not been mentioned in the conversation with Symes. At this meeting on the 25th, the representatives had the advantage of having obtained Coulter’s opinion on the advisability of selling to either of the respective parties. Admittedly there were “pros” and “cons” on either side, but the balance apparently was felt to tip in favor of the Pennsylvania and Santa Fe. One of the troublesome factors was that by selling 52% of the
Several days later Coulter told Bancroft that Mrs. McNear had informed him that she would never approve a sale to Heineman and would appear before the I.C.C. to prevent approval of such a sale. It is not clear why Mrs. McNear contacted Coulter on this matter, nor does it appear that she then knew of the approaches made by the Pennsylvania and the Santa Fe. She had just tried without success to convince the California beneficiaries to oppose any sale of the stock.
On April 1, Coulter advised Bancroft that Symes had called him about the “tentative proposition” and to stress to him the dangers of the TP & W being in “unfriendly hands”. Coulter said that he had told Symes that if he were the latter “he would move in on the matter most promptly”. Both Coulter and Gladson were cautioned about discussing the pending negotiation either generally or with the beneficiaries. Coulter agreed with Bancroft that Gladson should not be involved in drawing the protective provisions to be included in a contract of sale with the Pennsylvania and the Santa Fe. When Bancroft talked with Gladson, he spoke in terms of “the price at which the shares might be offered to the Pennsylvania and Santa Fe.” As noted, this was a complete reversal of the position previously adopted by the trustees in attempting to sell the shares. Apparently, the trustees had by now considered that under all the circumstances they should sell to the Pennsylvania and the Santa Fe at the best terms that could be achieved.
Another curious matter took place from April 1 to April 15 wholly collateral to the mainstream of events. A Mr. Sherritt and Mr. Crown were interested in buying the TP & W either for themselves or for the Rock Island. They employed a Mr. Mulligan for the purpose of carrying out negotiations, and in the course of events contact was made with Coulter, Gladson, and the Trust Company representatives. The Rock Island had in fact been putting out “feelers” since 1954, and Gurley of the Santa Fe had mentioned the Rock Island as being “unfriendly”. On April 7, Mulligan met with Chinn and told him that he represented two groups of potential buyers, one who would require I.C.C. approval and one who would not. Chinn indicated that the TP & W was not for sale, but that any offer would be considered. Mulligan was told that an offer should be made promptly but that the trustees would not negotiate or name a figure at which they would sell. This is instructive in that Bancroft had already discussed with Gladson “the price at which the shares might be offered to the Pennsylvania and Santa Fe”. The Rock Island group continued to make overtures as late as April 15, but never made a specific offer to buy.
On April 12, Bancroft in a letter to Bevan confirmed the arrangements made for a meeting to be held on April 15. On the same day Bancroft wrote Coulter requesting that he be notified of the necessary protective provisions by the morning of April 15. Thus, it can
On April 13, Coulter informed Bancroft that Heineman had called him to find out what had been done concerning a possible sale. Coulter told Bancroft that he had indicated to Heineman Gladson’s personal opposition to a sale to him. Coulter also said that he had tried to prevent Mrs. McNear from reporting the course of the Pennsylvania-Santa Fe negotiations to the other beneficiaries in order to keep the transaction as quiet as possible.
On April 14, Coulter told Bancroft he had talked to Marsh, vice president of the Santa Fe, about the meeting scheduled for April 15. Marsh indicated that he was apprehensive that the trustees would try to haggle or to use the Santa Fe’s offer to obtain a higher price from someone else. Coulter assured Marsh this was not so. Coulter said that Marsh was worried about who would name a price first and that he, Coulter, had mentioned figures of “95 or 98”. Bancroft thought this statement was most unfortunate. Indeed, it should have suggested to the Trust Company an excessive interest on Coulter’s part that the sale be made to Pennsylvania and Santa Fe. Gladson at this time, according to a memorandum of Bancroft, still anticipated a price of about $100.00 per share.
The transaction of April 15 was carried out, according to the Trust Company’s witnesses, in the following manner. Chinn and Bancroft had agreed to meet Be van and Marsh of the Pennsylvania and the Santa Fe on the 15th in Philadelphia. Before they left Wilmington, Bancroft received a call from Gladson in which he was urged not to sell the stock down to a minority position. Parenthetically, it has been noted that the Trust Company had already anticipated the possibility of having to sell down to a minority position. At the meeting itself, notwithstanding a plea by Chinn, it soon appeared that the Pennsylvania was interested in buying only 26% of the stock, together with 26% to be sold to the Santa Fe. At that point Symes, who had been informed of the difference in attitude between the negotiating parties, called Coulter who in turn called
By Monday, April 18, Bancroft had contacted Coulter, Kelley, and Mrs. McNear and communicated to them the terms of the transaction. Gladson already knew what terms were to be anticipated. None of these interested persons raised any objection to the transaction at that time except Mrs. McNear, who asked that her attorney be permitted to review the agreement of sale and any further agreements that might be entered into. Apparently, she had been told that some further agreement was contemplated, tier request was denied. Bancroft advised each of the persons he talked with that the purchasers wanted the transaction kept quiet.
Heineman’s reaction to the sale was thoroughly predictable. He was furious at not having had the opportunity to offer an upset price. First, on the very day that the agreements were reached, April 15, Judge Morris had been trying to contact Chinn or Bancroft and arrange a meeting between Heineman and the trustees. This Bancroft and Chinn learned as soon as they returned from Philadelphia that evening, Friday, April 15. It does not appear that either Coulter, Kelley, or Mrs. McNear were informed of this fact when they were later contacted by Bancroft. On Monday morning, April 18, Chinn and Bancroft went to see Judge Morris and told him that an arrange
Earlier in the week, after Bancroft and Chinn had first told Judge Morris that Heineman was “out”, Bancroft succeeded in communicating with Mr. Harrison Leppo, son of one of the California beneficiaries. This was Monday, April 18, before receipt of Heineman’s formal letter but after he had offered to bid competitively. It does not appear that during the conversation with Mr. Leppo, Bancroft made reference to the fact that Heineman had attempted to interpose a higher bid and had been rebuffed. Later in the week, Bancroft received a phone call from Mr. Leo Korbel, husband of another California beneficiary, and Mr. E. Denman McNear, himself a beneficiary. Bancroft learned that Heineman had mailed his letter offer of April 19 to each of the beneficiaries as well as to the trustees. According to
The meeting of March 15 between Heineman and the interviewers, Bancroft and Kelley, had been a critical one in the efforts of the trustees to sell the TP & W stock. The events that then occurred have already been fully discussed. A second critical meeting, from the viewpoint of this litigation, took place on Friday, April 22, one week after the agreements with the Pennsylvania and the Santa Fe had been signed. Heineman, Judge Morris, and his associate, Mr. Arsht, met with Bancroft and Mr. Edmonds, president of the Trust Company. At this meeting Heineman launched into a chronological review of his prior efforts to purchase the stock. Bancroft agreed that his recounting of events was substantially correct except with regard to the meeting of March 15. Bancroft disputed Heine-man’s claim that the interviewers had told him they did not want him to name his price. It was Bancroft’s belief that Heineman was then asked for his best price. Bancroft also thought Heineman’s recollection erred in two other ways. First, Heineman while admitting that a range of prices had been suggested by him did not recall stating, as Bancroft believed he had, that he would not negotiate at the top or bottom of the range. Secondly, Heineman did not mention that at the meeting on March 15 he had discounted the importance of the Monon acquisition. Bancroft wrote in his memorandum, however, that he did not think these omissions or differences of opinion were important.
Heineman then offered to buy the TP &W stock at $12,000,000 for 100% of the outstanding shares, or $133.33 per share, provided
Heineman’s offer of $133.33 placed the Trust Company officials in a potentially embarrassing position. It is tacitly conceded, and indeed they were required to know, that the written agreements of April 15 were not legally binding, at least until the Trust Company received Gladson’s written consent and the boards of the purchasing railroads voted approval. Up to that time neither of these steps had as yet been taken. The amount of $133.33 was substantially in excess of what they had previously agreed to accept and moreover was offered for all, rather than part, of the shares owned by the trust estate. While Heineman’s new offer was neither in writing nor formally authorized by the M & St. L’s board, Heineman was in substantially the same position as the representatives of the Pennsylvania and the Santa Fe, prior to approval by their respective boards. The Trust Company officials had no reason to believe that the board of the M & St. L would fail to approve a purchase of the stock at $133.33, and there is no evidence that they ever held any such doubt.
After meeting with Heineman on the morning of April 22, Bancroft received the phone call from Korbel and Denman McNear
Later that day Bancroft wrote a memorandum entitled “Factors Considered in Connection With The Sale of 52% of The TP & W stock” which set forth the reasons why the Trust Company had carried out the transaction in the manner described. These “reasons” are considered later herein. On that same evening Korbel and Denman McNear called Bancroft again, this time in connection with transfer of the shares to the purchasers. Bancroft did not mention the morning’s meeting with Heineman. On April 25, Bancroft spoke on the phone with Gladson, the co-trustee, with regard to the proposed protective provisions to be included in the formal contract with the Pennsylvania and the Santa Fe. Here again, admittedly, no mention was made of the meeting with Heineman on April 22 or of his proposal. This has a pervasive significance because the agreement with Pennsylvania could still have been can-celled by the trustees with legal impunity. On April 27, the board of the Pennsylvania Company formally approved the April 15 agreement with the trustees. By that time the Trust Company had also received Gladson’s written consent to the transaction.
The approval of the agreement on April 27 did not bring the activity surrounding the sale of the TP & W stock to a close. Heine-man persisted in his efforts to have his offer of $133.33 considered by the trustees and the beneficiaries. At the same time, the Trust Company and the purchasers were attempting to draw up a formal contract which would provide sufficient protection to the minority interest retained by the trustees. On April 29, Gladson wrote to Bancroft:
“Word has come to me that Ben Heineman offered $133 per share for the TP & W stock. It is hard to believe that this is true, but if it is, I am wondering why this offer was not accepted and why I was not consulted.
*605 “It was my understanding that Heineman was likely to withdraw all offers if we could not come to terms promptly and for that reason the sale to the two railroads was to be speeded up because with him out of the market they would not be willing to pay as much for stock as they would if he stayed in.”
The response to Gladson’s inquiry is contained in a memorandum of Bancroft dated May 2:
“Upon receipt of Mr. Gladson’s letter of April 29, which is attached, Mr. Chinn telephoned him to explain that Mr. Heineman had not made an actual offer and if he had it could not have been accepted without Mr. Gladson’s approval. As it was, there seemed to be no reason to unnecessarily upset Mr. Gladson in bringing him up-to-date with respect to Mr. Heine-man’s visit, the alternative of telling him about it at the next railroad meeting appearing more desirable. In his conversation, Mr. Gladson mentioned that Mr. Coulter reported that the California heirs were quite upset about the deal. In a conversation later today with Mr. Coulter, he was asked about this and reported that the California beneficiaries had not been in communication with him either by telephone or by letter for a long time. * * *”
This memorandum amounts to an admission by the Trust Company that the co-trustee was not given the opportunity to discharge his duty with respect to this new and significant development at a time when the trustees could admittedly have withdrawn from the Pennsylvania-Santa Fe deal without legal liability.
On May 5, Heineman formalized his $133.33 per share offer and sent it to the beneficiaries as well as the trustees. The various beneficiaries by way of counsel determined that the April 15 agreements were for various reasons not binding on the parties and urged the commencement of negotiations with Heineman. The impending formal contract consummating the deal with the Pennsylvania and the Santa Fe failed of approval when Gladson refused to sign without receiving advice of counsel.
On May 26, counsel for the Trust Company advised Chinn that the April 15 agreements were not legally binding. On the following day the Trust Company agreed that Heineman’s offer should be accepted provided that no better offers were forthcoming. Inquiries were directed to Symes and Gurley. Symes refused to pursue the matter any further and stated that the Pennsylvania would stand by its April 15 agreement. Gurley with the approval of the Santa Fe’s board offered $135 for all of the stock, and that offer was accepted. On June 28, the Santa Fe agreed to sell one-half the stock it had acquired to the Pennsylvania. This action by the Pennsylvania Company seeking to enforce its agreement of April 15 then followed.
The principal issue is whether the trustees exercised proper care and judgment first in carrying out the transaction of April 15 and then in allowing the agreements signed on that date to stand, notwithstanding the fact that higher offers were subsequently received prior to the time these agreements became even arguably binding on the trust estate. As a result of the trustees’ failure to take steps to delay consummation of the transaction, the trust was placed in the
On the record here I am of the opinion first that the Trust Company negotiated the April 15 agreements and thereafter persisted in maintaining them even though it knew that it had not reasonably explored the possibility of obtaining a higher price from Heineman. Whatever doubts may have existed on this score in the minds of the Trust Company’s representatives on April 15 were necessarily dispelled by Heineman’s offers of April 19 and April 22. At a minimum its representatives possessed sufficient information to require them to explore the possibility of dealing with him.
Moreover, it is clear that until April 27, when the Pennsylvania Company’s board voted approval of the April 15 agreement, the trustees were not legally bound to continue with that agreement. Evidently the Trust Company’s representatives felt morally bound to continue with the April 15 agreements even though both of these papers expressly provided that they were subject to board approval by the respective railroads. Both Chinn and Bancroft so testified. Nevertheless, a moral commitment, as opposed to a legal one, is generally not a legally sufficient reason for a trustee to neglect his overriding duty to sell at the maximum price. Buttle v. Saunders, [1950] 2 All Eng.L.Rep. 193. Nor are there special circumstances present here which would compel a different result. Heineman had undoubtedly been a persistent and anxious bidder throughout this entire period, and the other railroads themselves must have known that they had yet to make the April 15 agreements legally binding by their own act. Moreover, the Trust Company’s representatives as well as the purchasers knew that the protective provisions deemed necessary by the trustees had not yet been considered by the parties. Under the circumstances, the trustees having learned that better terms of sale were obtainable from Heineman
The Trust Company contends, even conceding the fact that a better price was obtainable from Heineman and that there was no binding commitment to the other purchasers until April 27, that its representatives honestly believed under all the circumstances that selling to Heineman would have been improvident and unwise. Thus, it is argued, the conduct of the Trust Company was fully justified even though the existing agreement of sale at $100.00 per share would not have obtained for the trust estate the highest possible price.
The principal ground for this contention is that the Trust Company’s representatives honestly believed from information then available to them that a purchase by Heineman would fail to obtain I.C.C. approval in view of the opposition that would arise from the Pennsylvania and the Santa Fe. The Trust Company claims that its officials feared that during the pendency of the M & St. L’s application the opposing railroads would materially injure the TP & W and that once the M & St. L had failed to obtain I.C.C. approval, the trustees would be left with an asset whose value had been impaired and be faced as well with hostile connecting railroads at either end of its line. I think the Trust Company could reasonably anticipate that if the sale to Heineman were blocked by the I.C.C., neither the Pennsylvania nor the Santa Fe would manifest much interest in the further disposition of the TP & W stock. Thus, the Trust Company argues that dealing with Heineman, whether before or after April 15, and at a time when there was considerable apprehension concerning the M & St. L’s fate before the I.C.C., could not as a matter of law have been required of its officials.
The Trust Company suggests certain other reasons for the failure of its representatives to attempt to deal further with Heine-man after April 15, viz., the personal opposition of both Gladson and Mrs. McNear to Heineman. I am persuaded that neither of these reasons would justify the failure of the Trust Company to take
It is clear then that the Trust Company’s case rests at bottom on the contention that its failure to explore the possibility of dealing further with Heineman was justified by the fears of its representatives concerning the I.C.C. The beneficiaries contend that these alleged “fears” were wholly unfounded, that I.C.C. approval of a sale to Heineman could in fact have been obtained, and that the trustees were negligent in failing to make a reasonable investigation to ascertain the facts. This court is of course in no position to determine whether an application for I.C.C. approval by the M & St. L, if it had been the actual purchaser, would have succeeded. The court’s concern, therefore, is directed only to the question whether the Trust Company’s representatives exercised such care in reaching the conclusion that I.C.C. approval could not be obtained that they are not chargeable with negligence in failing to re-consider the possibility of dealing with Heineman.
The record indicates that the problem of I.C.C. approval was never a material consideration in the minds of the Trust Company’s representatives until March 25, 1955. On the previous day Chinn, Bancroft, and Kelley had met with Symes of the Pennsylvania. The latter had indicated forcefully his company’s concern about the possible acquisition of the TP & W by Heineman and discussed
The Trust Company’s representatives were aware at an early date that under certain circumstances I.C.C. approval would have to be obtained by a purchaser of the stock, but it had never been suggested prior to March 25 that Heineman could not obtain such approval. In December 1954, Heineman had in fact notified Bancroft that he had discussed the possible acquisition of the TP & W with the Commission, although the results of that purported meeting do not appear in the record. It is apparent from this record that the difficulties that were anticipated in obtaining I.C.C. approval arose not so much from the merit or lack of merit of the M & St. L’s case, but from the threatened opposition of the Pennsylvania and the Santa Fe before the Commission. There is nothing in this record to suggest the contrary. Moreover, it is clearly established that the interest of the Pennsylvania and the Santa Fe in the TP & W lay principally in defeating Heineman’s Monon scheme. If these other railroads were certain that Heineman could not ob
As trustee, the Trust Company was obligated to choose impartially among the prospective purchasers in the interest of obtaining the highest return for the trust estate. I am faced then with the question whether the Trust Company’s representatives acted with sufficient care in reaching the conclusion that I.C.C. approval was so uncertain that they had no obligation to consider dealing further with Heineman.
What sources of information led the Trust Company to reach its decision concerning the I.C.C.? The Trust Company argues that its representatives relied heavily on the opinions of both Coulter and Gladson and on the “manifest logic” of the situation once they learned of the opposition of the Pennsylvania and the Santa Fe. There is, however, no indication in Bancroft’s memoranda, other than the conversation of March 25, that the question of I.C.C. approval was pursued at all by the Trust Company until May 25, 1955. And there is no evidence that any inquiry was ever directed to anyone knowledgeable in such matters or that any investigation was made through persons other than Coulter and possibly Gladson. I infer from the record that the matter was never discussed with Heineman or the beneficiaries, and no effort was made to see whether Heineman would approve an agreement that could have protected the trust estate from the consequences of a failure to obtain I.C.C. approval. In short, the Trust Company’s representatives, having obtained a certain opinion concerning I.C.C. approval of a sale to Heineman, made no further effort to test the validity of the conclusions drawn or even to communicate their concern to other interested parties.
Was the nature of the information such that the Trust Company’s representatives were justified in following the course of conduct they ultimately adopted with regard to Heineman ? The question in effect is whether their decision not to deal with Heineman based solely upon the purported advice of Coulter and Gladson was proper under the circumstances. I note first with respect to Coulter that through May 25 his advice on the subject of I.C.C. approval
Next, the Trust Company points to a memorandum by Bancroft dated April 22, 1955, the same day on which Heineman made his $133.33 offer, and entitled “Factors Considered In Connection With The Sale of 52% of The TP & W Stock” :
“It was apparent that the logical purchasers were the Pennsylvania and Santa Fe Railroads because of their positions at the eastern and western ends of the Railroad and the fact that they were the Railroad’s two most important connections. Furthermore, it was definitely indicated that a sale to any other railroad would be strongly opposed before the I.C.C. by the Pennsylvania and Santa Fe and considered opinion was that these roads’ opposition would possibly prevail with the Commission. With the two most important connections vigorously opposing sale to another railroad, the TP & W’s revenues would undoubtedly suffer and if the sale was not approved by the Commission, the TP & W would be faced with the problem of continuing its operations with two unfriendly roads at its two ends.”
“* * * These offers [by the Pennsylvania and the Santa Fe] were accepted, and the following are some of the important reasons for doing so:
*613 “1. It was felt that these railroads were the logical purchasers even though they were unwilling to purchase the Trustees’ entire holding and that a sale to them had the best chance for approval.
“2. An agreement to sell to any other railroad operating in the TP & W area would meet with strong and possibly successful opposition on the part of the Santa Fe and Pennsylvania.
“3. In the meantime the operation of the TP & W could be seriously affected by the loss of the friendly arrangements with these two railroads, from which the TP & W might never recover * *
This memorandum in my opinion lends no support to the Trust Company’s contention that its agents had reasonable grounds for refusing to deal with Heineman. First, it indicates no further grounds for the Trust Company’s conclusion with regard to I.C.C. approval other than those which have already been described. Secondly, it states nothing more definite than that the opposition of the Pennsylvania and the Santa Fe might “possibly prevail” with the Commission, a sentiment which under the circumstances could hardly be treated as more than a truism.
The parties are in dispute as to when the threatened “reprisals” against the TP & W were to take place. Assuming in favor to the Trust Company that these were to occur during the pendency of the M & St. L application, they would be of no concern to the trust estate except in the event final approval was not obtained. Thus, I do not think that the Trust Company’s agents can justify their action on this basis.
I start with the proposition that if a sale of all the stock to Heineman were consummáted, the trust estate would thereafter have no concern with the continuing operation of the TP & W. At bottom, then, the principal objective of the Trust Company should have been to obtain the highest possible dollar, keeping in mind the likelihood of opposition in the I.C.C. by parties whose interest lay in preventing
Applying these principles to the present case, I am of the opinion that the Trust Company’s representatives did not exercise the diligence or care ordinarily required of a trustee. I am persuaded from the record before me that the question of I.C.C. approval was never considered a serious obstacle to a sale to Heineman except as an afterthought when it became apparent that the trustees had failed to obtain the high dollar for the stock. It was no doubt true that the M & St. L would face strong opposition before the I.C.C. and that in obtaining Coulter’s opinion on this matter the Trust Company had the benefit of the advice of a person with wide railroad experience, but I do not think that its representatives devoted much attention to this problem at all during what I consider to be the crucial period in this case.
I do not think that the conduct of the Trust Company’s representatives in negotiating the sale, though perhaps understandable, was legally excusable. Taking into consideration the numerous factors that made selling to Heineman unattractive, they might possibly have concluded on April 15 that whatever advantage they might receive in price from him would be more than offset by the cumulative disadvantages. These “disadvantages” were of course the opposition of Gladson and Mrs. McNear to Heineman, the fear on the Trust Company’s part of losing its “bird in hand”, the assurances given the Pennsylvania and the Santa Fe that the trustees would not haggle, Heineman’s threat to pursue his “second choice” by the middle of April, which would have released the pressure on
The point to be kept in mind is that as of April 15, the trustees were not under any compulsion to investigate the question of I.C.C. approval. Their attention was largely directed to their overriding obligation to obtain the maximum price for the stock. The record I think fairly supports this conclusion. From March 25, when Coulter first suggested that the M & St. L might face difficulties before the I.C.C., until April 22 there was only one reference to the I.C.C. problem. That was Coulter’s volunteered statement to Bancroft that Mrs. McNear strongly opposed selling to Heineman and was threatening to appear before the Commission to block any sale to him. Thus, the only information which the Trust Company had concerning the I.C.C. was that approval of the M & St. L was not “assured” because of the likelihood of vigorous opposition by other railroads and possibly by Mrs. McNear. That approval of any railroad by the I.C.C. was not “assured” was of course true, and as Heineman subsequently indicated, he would himself fight to prevent such approval. There is no evidence that the Trust Company’s representatives ever weighed the relative prospects of success of the several competing railroads. If I.C.C. approval were thought to be a serious obstacle, one would have expected them to consider the likelihood of Heine-man’s successfully blocking a sale to Pennsylvania and Santa Fe. The consequences to the trust estate of such action by Heineman would certainly have lessened the potential selling price of the stock. In short, the Trust Company’s representatives did not treat the problem of I.C.C. approval as a critical one in determining to sell the stock to the Pennsylvania and Santa Fe on April 15.
Thereafter, the Trust Company’s representatives continued to feel no pressing need to investigate the I.C.C. problem even when they received Heineman’s offer of April 19, to increase the $100.00 purchase price by five per cent. To a certain extent they may have been lulled by the assurances of certain of the beneficiaries that they were satisfied with the existing deal. They knew that Heineman
Heineman’s offer of $133.33 on April 22 created an essentially new situation for the trustees. Assuming without deciding that the Trust Company’s representatives exercised reasoned judgment in refusing to consider Heineman’s April 19 offer, nevertheless they could not justifiably dismiss Heineman’s larger offer without reexamining the factors weighing on either side. Heineman’s offer of $133.33 per share, if accepted, would increase the amount per share received by the trust estate by a full one-third, and the Trust Company would be able to dispose of all rather than part of the TP & W stock. The Trust Company’s representatives could no longer 'claim that they had doubts about Heineman’s interest in the railroad and were hardly in danger of not being able to sell the stock for at least $100.00. The Trust Company does not contend that it could not have imposed some delay on legal consummation of the April 15 transaction.
That the Trust Company’s representatives gave no more consideration to the I.C.C. problem after April 15 than before is substantiated by the April 22 memorandum itself. That memorandum, though written on April 22, makes no reference to Heineman’s offers of April 19 and April 22. In other words it was an attempt to
Another factor leads me to conclude that the Trust Company’s representatives did not rely on the I.C.C. problem in deciding not to deal with Heineman. That was their failure to communicate to Gladson or the beneficiaries Heineman’s April 22 offer of $133.33. At the meeting of April 22, Heineman proposed a sale of all the stock at $12,000,000 and also offered to enter into competitive bidding, if that were required by him by the trustees. Bancroft wrote in his memorandum of that meeting that “Inasmuch as an agreement had been made, the answer was ‘no’ ”. When Bancroft subsequently talked to Denman McNear and Leo Korbel, no mention was made of Heineman’s proposal. The same was true of his telephone conversation with Gladson on the 25th. And when Gladson on the 29th wrote to Bancroft inquiring about Heineman’s latest offer which he had learned of indirectly from an unknown source, Chinn called him and said that an “actual offer” had not been made. No mention was made that a sale to Heineman might not receive I.C.C. approval. Moreover, in a memorandum from Bancroft to Gladson dated May 2, the reason for failing to respond both to Heineman’s $133.33 offer and also to a new expression of interest from Mr. Mulligan was stated to be the existence of a prior deal.
From the record before me I conclude that the Trust Company’s representatives made no reasonable investigation of the alleged I.C.C. problem and relied, if at all, solely on Coulter’s stated opinion that I.C.C. approval was “by no means assured”. If this were the basis for the Trust Company’s refusal to deal with Heineman, I am of the opinion that its agents failed to exercise the required degree of diligence and care in attempting to arrive at a considered judgment as to whether I.C.C. approval could be obtained and in deciding that they were justified in refusing to negotiate with him for a higher price. However, I am convinced that after April 15 the Trust Company’s representatives reacted to the agreements as if they were binding although they gave little consideration to the matter and had not obtained the advice of their attorneys. I conclude therefrom that the question of I.C.C. approval played little or no part in their decision not to re-open negotiations with Heineman. The record I think fairly supports the conclusion that they acted on an erroneous assumption concerning the effect of the April 15 agreements, at least prior to their approval by the respective boards, and on that basis deprived the trust estate of the opportunity of freely withdrawing from a “contract” which was less advantageous than that offered by Heineman. In consequence, the Trust Company must be held to have failed to observe the standard of conduct required by the applicable Delaware statute.
The beneficiaries and co-trustee assert as an alternative basis for liability that the Trust Company committed a breach of trust
I have referred earlier to Heineman’s April 22 proposal. The Trust Company makes the contention that that proposal did not constitute a “firm” or “formal” offer. Assuming, without deciding, that such were in fact the case, I think- that that would have no bearing on the legal consequences of the Trust Company’s actions. I say this because both Chinn and Bancroft concede that they could easily have requested Heineman to satisfy whatever formalities they might have required of him. Instead they told him that an agreement had already been made.
What was the Trust Company’s duty under the circumstances when they received a substantially higher bid for the trust property before the existing agreements of sale with the Pennsylvania or Santa Fe became legally binding? Where there are two or more trustees, action by all of them is necessary to the exercise of the powers conferred upon them as trustees. Restatement (Second), Trusts § 194. Under the - terms of the trust instrument Gladson’s written consent was required for a sale of these assets. The Trust Company’s representatives apparently had not received such written authority from Gladson at the time of the $133.33 Heine-man “offer”. Thus, under ordinary principles of trust law, they had a duty to keep Gladson fully informed of any offers or proposals received by them so that both trustees might perform their duties in connection with the sale of the property. See Loud v. Winchester, 52 Mich. 174, 17 N.W. 784. I would add that where a unique asset of the character of this stock was involved, constituting the principal asset of the estate, the Trust Company should have endeavored to keep its co-trustee as fully informed as possible with respect to any information concerning its disposition. Whatever may have been the sentiments of the Trust Company’s representatives concerning a possible deal with Heineman, they had no authority to prevent Gladson from exercising his own, independent judgment on the matter. If Gladson had been informed of the offer at any time prior
Gladson was not informed of Heineman’s April 22 proposal when he spoke to Bancroft on April 25. He only learned of that proposal indirectly and on April 29 wrote a letter to Bancroft to find out why it had not been accepted. Pennsylvania’s board had approved the April 15 agreement with the trustees on April 27, but neither Chinn nor Bancroft learned of that vote until May 4. Thus, when Chinn replied to Gladson’s letter on May 2, he did not then know that the agreement of the 15th had been approved by the Pennsylvania. The substance of this significant conversation is related in Bancroft’s memorandum of May 2 :
“Upon receipt of Mr. Gladson’s letter of April 29, which is attached, Mr. Chinn telephoned him to explain that Mr. Heineman had not made an actual offer and if he had it could not have been accepted without Mr. Gladson’s approval. As it was, there seemed to be no reason to unnecessarily upset Mr. Gladson in bringing him up-to-date with respect to Mr. Heine-man’s visit, the alternative of telling him about it at the next railroad meeting appearing more desirable * *
Thus, it would appear that Chinn’s reply to Gladson, while perhaps technically accurate, failed to convey the really important aspects of the April 22 interview with Heineman. It was designed to avoid “upsetting” him and admittedly was not “up-to-date”. Clearly Gladson was not given the information to which he was entitled as co-trustee. Rockwell v. Dow, 85 N.H. 58, 154 A. 229. He thus cannot be deemed in any way to have acquiesced in the Trust Company’s decision to refuse to deal with Heineman. When the parties to the April 15 agreements subsequently met on May 4 to execute formal contracts, Gladson refused to sign without the advice of counsel. On May 5, Heineman mailed drafts of his $133.33 offer to both trustees and to the beneficiaries. As a result, the formal con
I conclude that as a matter of law, under the circumstances in which Heineman’s April 22 offer was received, the Trust Company had a duty to communicate that offer to its co-trustee and that having deprived Gladson of an opportunity to save the trust estate from a loss occasioned by its delay in withdrawing from the April 15 agreements, it must bear the cost of such action on its part. This, then, is a second and independent basis for concluding that the Trust Company must be held responsible.
Finally, the Trust Company has urged that the beneficiaries are estopped to complain of the position taken by its representatives with respect to the April 15 transaction. Having reviewed the evidence I find that at least with regard to Heineman’s $133.33 offer the beneficiaries had no information at all until after April 27. When they learned of Heineman’s proposal, they recommended through their attorneys that that offer be given due consideration by the trustees. By that time, however, the trustees were no longer free to resist the claim of the Pennsylvania Company without possible legal liability. Thus, there is in this regard no substance to a claim of estoppel. The Trust Company must bear the burden of a surcharge in an appropriate amount because of its failure to act at an earlier time when it could admittedly have escaped any claim of liability by Pennsylvania based on the April 15 agreements.
Present order on notice.