THE WOODWARD SCHOOL FOR GIRLS, INC. vs. CITY OF QUINCY, trustee, & another.
Supreme Judicial Court of Massachusetts
July 23, 2014
469 Mass. 151 (2014)
SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.
Trust, Charitable trust, Investments, Trustee‘s accounts. Damages, Breach of fiduciary duty, Interest. Interest. Massachusetts Tort Claims Act. Governmental Immunity. Immunity from Suit. Municipal Corporations, Trusts, Governmental immunity. Waiver. Laches.
In a civil action brought by the income beneficiary of a trust against the trustee, a city, although the judge improperly considered strict compliance with investment advice to be required of a prudent investor [161-163], the judge‘s conclusion that the city had committed a breach of its fiduciary duty of prudent investment of the funds comprising the trust was not clearly erroneous, given that the city‘s failure to protect the principal of the trust against inflation alone was sufficient to constitute a breach of its fiduciary duty [163-166], and given that the city engaged in several shortcomings in its management of the trust‘s investment portfolio that indicated that the city had failed to perform as a prudent investor would under the circumstances [166-167].
In a civil action brought by the income beneficiary of a trust against the trustee, a city, alleging breach of the city‘s fiduciary duties, the judge did not improperly inject into the case a new theory of liability (i.e., the city‘s failure to achieve any capital appreciation for one of the funds comprising the trust), where the issue was present from the beginning of the litigation, and where, even if it had not been raised in the complaint, the city could not claim that it was unaware that the issue might arise, and the judge, in raising the theory, afforded the city numerous opportunities to respond. [167-170]
In a civil action brought by the income beneficiary of a trust against the trustee, a city, the judge, in fashioning an award of damages for the city‘s breach of its duty to invest prudently, erred in employing a specific portfolio diversification plan to calculate unrealized gains [170-172]; however, the judge did not err in crediting the reasonable opinion proffered by the income beneficiary‘s expert as to what costs and expenses a trustee using a hypothetical portfolio would have incurred [172-173]; further, the judge did not err in awarding interest on each measure of damages from the last date on which the damage had been sustained [173-175].
1Of the Adams Temple and School Fund and the Charles Francis Adams Fund.
2The Attorney General, as a nominal party.
The equitable doctrine of laches did not bar the claims of the income beneficiary of a trust against the trustee, a city, where, although common sense might dictate that the income beneficiary knew that the city was mismanaging one of the two funds comprising the trust, the city failed to establish that the income beneficiary had actual knowledge of the city‘s breach of its fiduciary duty. [178-180]
CIVIL ACTION commenced in the Supreme Judicial Court for the county of Suffolk on July 11, 2007.
After transfer to the Norfolk County Division of the Probate and Family Court Department, the case was heard by Robert W. Langlois, J.
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
John S. Leonard (James S. Timmins, City Solicitor, with him) for city of Quincy.
Sarah G. Kim (Josephine M. Deang Chin & Alison K. Eggers with her) for the plaintiff.
CORDY, J. This dispute arises from a trust established in 1822 by former President John Adams and supplemented by a bequest of his grandson in 1886. The city3 of Quincy (Quincy) served as trustee of the Adams Temple and School Fund and the Charles Francis Adams Fund (collectively, Funds) through two boards.4 The Woodward School for Girls, Inc. (Woodward), the income beneficiary of the Funds since 1953, filed suit against Quincy initially seeking an accounting and thereafter asserting that Quincy committed a breach of its fiduciary duties to keep adequate records, invest the trust‘s assets properly, exercise reason-
On appeal, Quincy asserts that the trial judge erred in finding that Quincy committed a breach of its fiduciary duties to the Funds by failing to invest in growth equities to protect the principal when the Funds have only an income beneficiary to provide for, and by not heeding specific investment advice it received in 1973. In addition, Quincy challenges the award of damages, alleging that it was based on an improperly introduced and unsound portfolio theory hypothesizing unrealized gains; that it failed to exclude reasonable costs and expenses Quincy would have incurred had Quincy followed that portfolio theory; and that it improperly included prejudgment interest dating back to the dates of the various breaches. Finally, Quincy avers that Woodward‘s claims should have been barred by the Massachusetts Tort Claims Act,
For the reasons discussed below, we conclude that the claims were not barred, and judgment against Quincy for committing a breach of its fiduciary duties to the Funds was proper, but the award of damages was erroneous in the calculation of unrealized gains on the investment portfolio. Specifically, we conclude that the judge erred in two respects: first, in finding that Quincy‘s failure to heed specific investment advice it had solicited constituted a breach of its duty to act as a prudent investor; and second, in calculating as damages the gains that might have been realized had Quincy followed that advice. Nonetheless, because there was other evidence of Quincy‘s mismanagement of the Funds, the judge did not err in finding that Quincy had committed a breach of its fiduciary duties with regard to them.
We further conclude that the judge did not err in including prejudgment interest or in declining to speculate as to potential costs or expenses Quincy may have incurred with proper management. However, because the judge‘s calculation of damages with regard to the unrealized gains on the investment portfolio was based on his incorrect assumption that Quincy was required
Background. In 1822, former President John Adams executed two deeds of trust, conveying a portion of his real estate holdings to a trust, thereafter named the Adams Temple and School Fund (Adams Fund), and naming Quincy as the trustee. The first deed executed by President Adams (Deed A) was supplemented by a bequest of his grandson, Charles Francis Adams, in 1886, to support the objectives of the Adams Fund (Charles Francis Adams Fund, and, collectively with the Adams Fund, Funds). Deed A contained the basic provisions of the trust and directed the trustee to invest earnings from the real estate “in some solid public fund, either of the Commonwealth, or of the United States“; to build a church; and to apply “all future rents, profits, and emoluments, arising from said land” to support a school with particular requirements. The only principal beneficiary identified in the deed was the oldest living male descendant of President Adams, who was to receive the principal only on “gross corruption or mismanagement,” or knowing waste, on the part of Quincy. Shortly after the deeds were executed, the inhabitants of Quincy voted to accept the gifts therein, and Quincy became the trustee.
Two acts of the General Court granted Quincy further authority in executing its responsibilities as trustee of the Funds. In 1827, the General Court appointed the treasurer of Quincy as the treasurer of the Adams Fund, incorporated the board of supervisors, and authorized the board of supervisors and the selectmen of Quincy to execute the intentions of President Adams and to receive and manage gifts from others for the purposes articulated in the deeds. See St. 1826, c. 59, approved on Feb. 3, 1827 (1827 Act). Quincy thereafter established a board of managers for the Adams Fund.6 In 1898, the General Court authorized Quincy as trustee of the Funds to sell and convey the Funds’ real property holdings and to “invest[ ] and re-invest[ ]” the sale proceeds
In 1953, pursuant to an unpublished order of this court, after three prior income beneficiaries, Woodward was designated (and remains) the sole income beneficiary of the Funds.7
1. Investment advice and state of Funds. By the time Woodward became the beneficiary of the Funds, the real estate holdings of the Adams Fund had diminished significantly, presumably due to sale. At the end of 1952, the assets of the Adams Fund consisted of $4,474 in cash, $253,723.02 in investment assets, and an assessed value of $102,325 in real estate. The value of the Adams Fund‘s investment assets in 1973 totaled $321,932.43, an increase that may have been attributable to the further sale of real estate. In April, 1973, the Adams Fund investment assets were invested in a portfolio consisting of ninety per cent fixed income and ten per cent equity securities. That month, Quincy received investment advice it had requested from the South Shore National Bank (bank) with regard to managing the Funds’ investment portfolio. The joint boards of the Funds unanimously voted to adopt an agreement establishing an advisory relationship with the bank and to follow certain diversification investment advice it received from the bank. However, Quincy never implemented the diversification recommendations, and instead, by 1990, nearly one hundred per cent of the Adams Fund‘s assets were invested in fixed income instruments. In 2008, the value of the investment assets in the Adams Fund was reportedly still the same: $321,932.43.
The assets of the Charles Francis Adams Fund, which are far smaller than those of the Adams Fund, have diminished some-
Despite the lack of growth in the Funds, between 1953 and 2008, the Funds generated over $700,000 in income; this income was either paid to Woodward directly or used to pay the Funds’ expenses.
2. Request for accounting and present litigation. The present dispute began in 2005, when Woodward had, for two consecutive years, received a smaller distribution from the Funds than it had anticipated. In light of these discrepancies, the chair of the Woodward board of trustees requested an accounting of the Funds from Quincy. As of nearly one and one-half years later, the school had received some information from Quincy but not a full accounting, which it again requested.9 In July, 2007, after still receiving no response, Woodward filed a complaint and petition for an accounting with a single justice of this court against Quincy as trustee of the Funds. Woodward asserted that “as beneficiary of the Funds, [it] is entitled to know, the real and financial assets currently in the Funds, information about the Funds’ management, and historically what has happened to the Funds’ assets and income.” The single justice transferred the case to the Norfolk County Division of the Probate and Family Court Department.
A judge in that court appointed a special master to gather relevant documents regarding the Funds’ assets, prepare an accounting for the Funds for the period of 1953 to 2008, inclusive, and issue a report assessing the propriety of the Funds’ transactions. See
Following the report of the special master, the dispute proceeded to a thirteen-day bench trial. In February, 2011, an amended judgment and amended findings entered, with 220 findings of fact.
The judge concluded that Quincy failed to keep accurate records of its financial stewardship of the Funds, to obtain appraisals for real property and to sell parcels at fair market value or greater,12 to act on professional investment advice it received, and to comport with its duty of loyalty to the Funds. The judge char-
With regard to Quincy‘s investment strategy for the Adams Fund, the judge made several findings relevant to Quincy‘s appeal.13 First, he concluded that Quincy did not commit a breach of its fiduciary duty to the Funds by employing inappropriate investment strategies during the years of 1953 to 1973.14 Second, with regard to the 1973 investment advice Quincy received from the bank, the judge found that Quincy received and unanimously voted to adopt a single portfolio diversification plan, consisting of sixty per cent in equity securities, thirty-five per cent in fixed income, and five per cent in savings (60-35-5 plan). He concluded that Quincy failed to follow this directive, and that it “ignored the terms of its own April 11, 1973, vote, and the competent, professional . . . advice contained therein, to the considerable detriment of the [Adams Fund].” Therefore, Quincy acted imprudently and in violation of its fiduciary duties.
Third, the judge found that it was imprudent for Quincy to permit the Adams Fund to consist almost entirely of fixed income and cash assets by 1990. The judge rejected Quincy‘s assertion that it maintained the Fund‘s assets in government securities in order to comport with the explicit directive of the trust instrument; rather, the judge concluded that the Fund had acted in derogation of the 1892 legislation directing Quincy to invest real estate sales proceeds “in real estate or in . . . securities,” by instead investing “the fungible portion of the trust corpus in corporate bonds as well as in equities/securities.”15
In light of these findings, the judge awarded Woodward a total judgment of $2,994,868, including prejudgment interest of $1,610,826 and approximately $1.1 million for “[u]nrealized [g]ains
Discussion. We will not disturb the findings of the trial judge or the special master unless they are clearly erroneous. Mass. R. Civ. P. 52 (a), as amended, 423 Mass. 1402 (1996). See Chase v. Pevear, 383 Mass. 350, 359-360 (1981); Matter of Jones, 379 Mass. 826, 839 (1980). “A finding [of fact] is clearly erroneous . . . [if], although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed” (quotations and citations omitted). Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 509 (1997).
1. Breach of fiduciary duties. The primary issue in this case is whether the judge erred in concluding that Quincy committed a breach of its fiduciary duties by failing to invest in growth securities and by failing to heed investment advice it procured from an investment adviser. Because trustees’ conduct with regard to investment strategy and decision-making is governed by the prudent investor standard, we begin by articulating what that standard requires.
a. Prudent investor standard. A trustee‘s obligations with regard to investing and managing a trust‘s assets are dictated by our common law and by the Massachusetts Prudent Investor Act,
A trustee has a duty to invest the trust‘s assets “solely in the interest of the beneficiaries.”
A trustee exercising “reasonable care, skill and caution,”
b. Investment advice. We turn now to Quincy‘s first claim of error. Quincy contends that the judge erred in concluding that Quincy was required to follow specific investment advice it requested and received in 1973. In addition, it asserts that the judge misconstrued the investment advice at issue as providing only one recommendation, when the advice actually consisted of several alternatives, one of which Quincy claims to have followed. We agree that the judge improperly considered strict compliance with investment advice to be required of a prudent investor. We do not, however, consider the judge‘s interpretation of the advice provided to be clearly erroneous.
The investment advice in dispute was provided by the bank in a letter dated March 29, 1973, and reviewed by the joint boards of the Funds at a meeting on April 11.19 The letter was interpreted by the trial judge as providing a single diversification recommendation of sixty per cent equity securities, thirty-five per cent fixed income, and five per cent savings (60-35-5 plan).20 This repre-sented a drastic change from the Adams Fund‘s portfolio at the time of ninety per cent fixed income and ten per cent equity
Under both the common law and the Prudent Investor Act, a trustee is permitted to consult with and receive advice from accountants and financial advisers. See
Indeed, consulting investment advisers may be part of acting prudently and exercising care. See Restatement (Third) of Trusts, supra at § 77 comment b. “After obtaining advice or consultation, the trustee can properly take the information or suggestions into account but then (unlike delegation) must exercise independent, prudent, and impartial fiduciary judgment on the matters involved.” Id. at § 80 comment b. See Attorney Gen. v. Olson, 346 Mass. 190, 197 (1963) (trustee may employ bank as investment agent, as long as trustee gives independent consideration to
Whether a trustee requested and followed specific investment advice is but one factor in the determination of whether the trustee acted prudently. Receipt of sound investment advice and dismissal or wilful ignorance of it, where the advice was at the time prudent and consistent with the trust beneficiary‘s needs and goals, may be indicative of a lack of prudent investing. But such action or inaction in and of itself does not rise to the level of imprudent investing. The judge‘s reliance on the 1973 investment advice as a default prudent investment strategy resulted in inadequate consideration of the range of investment strategies that would have been prudent for the Adams Fund.25
c. Concern for principal of income-only fund. Quincy also challenges the trial judge‘s finding that it committed a breach of its fiduciary duty by not investing in growth securities. It asserts that as the trustee of a fund with only an income beneficiary, it had a “duty to maximize income, even at the risk of sacrificing growth,” and therefore it was not obligated to invest in growth equities that would protect the principal from inflation. It claims that it acted prudently in structuring the Adams Fund‘s investment portfolio as it did because the Fund produced income for Woodward, and the investments comported with the trust instrument‘s direction to invest the majority of the Fund‘s assets in government-backed bonds.
Where, as here, the current beneficiary of a trust is an income-only beneficiary, courts in at least three other jurisdictions with similar prudent investor standards have concluded that a trustee owes a duty to that beneficiary to prioritize income over growth, and that investing in fixed income assets over equities is not a breach of fiduciary duty where such investments produce income for the beneficiary but may fail to maintain the principal against inflation. See Tovrea v. Nolan, 178 Ariz. 485, 490 (Ct. App. 1993); SunTrust Bank v. Merritt, 272 Ga. App. 485, 488-489 (2005); In re Trust Created by Martin, 266 Neb. 353, 359-360 (2003). See also Shirk v. Walker, 298 Mass. 251, 257-258 (1937). This comports with the obligation under
Although trustees in such cases are required to balance the interests of successive beneficiaries, one of whom is to receive the income during his or her lifetime and the other of whom is to take the principal on the income beneficiary‘s death, these courts have consistently concluded that a trustee does not commit a breach of a fiduciary duty “by investing the trust in such manner as to maximize the income payable to [the income beneficiary] rather than expand the corpus of the trust.” SunTrust Bank, 272 Ga. App. at 489. See Tovrea, 178 Ariz. at 490 (“trustees’ duty was [primarily] to invest in such a manner as to produce an income for [income beneficiary] and, secondarily, [to] preserve the principal“).
In theory, the case for maximizing income over growth is even stronger here, because the income beneficiary is an institution and the remainder beneficiary takes only upon “gross corruption or mismanagement . . . notorious negligence, or any waste knowingly permitted,” thereby justifying complete attention to the
A charitable trust such as this one is designed to support an income beneficiary in perpetuity. See Jackson v. Phillips, 14 Allen 539, 550 (1867) (charitable trusts exempt from rule against perpetuities). As a result, the trustee must necessarily consider both the generation of income and the growth and maintenance of the principal in order to provide income funds to the beneficiary indefinitely. See Restatement (Third) of Trusts, supra at § 90 comment e (“In balancing the return objectives between flow of income and growth of principal,” trustee must consider trust‘s “purposes and distribution requirements“). In effect, Woodward is equivalent to both the lifetime income beneficiary and all subsequent beneficiaries.
As such, acting prudently in managing a charitable trust that benefits an institutional income beneficiary requires considering the specific needs of the beneficiary in the short and long term and balancing prioritization of income with protection and preservation of the principal. At a minimum, a trustee must consider how best to guard the principal against inflation, if not how to grow the principal while simultaneously generating income to support the beneficiary. Where the income beneficiary will continue to exist in perpetuity, the mandate of
In this case, a prudent investor would have realized at some point, long before 2008, that a fund value that is unchanged for decades after 1953 has not kept up with inflation and, given the potential perpetuity of the income beneficiary‘s needs, would have taken or attempted to take steps to protect the principal in order to preserve future income opportunities. If Quincy recognized that the Adams Fund was vulnerable to inflation, likely attributable to its lack of diversification, it had a duty to determine which of its assets could be invested in a manner that would guard against this vulnerability. At a minimum, Quincy could
d. Quincy‘s over-all performance. As the above discussions illustrate, Quincy engaged in several shortcomings in its management of the Adams Fund‘s investment portfolio that indicate that it failed to perform as a prudent investor would under the circumstances. See
We are not persuaded that Quincy was prohibited from following this advice or from otherwise diversifying the Adams Fund‘s portfolio by the restrictions in the trust instrument. See note 26, supra. Rather, as Quincy‘s legal counsel observed and as the 1898 Act required, Quincy was in fact directed to invest the real estate sale proceeds “in real estate or in such securities as trustees are authorized to hold in this Commonwealth.” St. 1898, c. 102, § 2. The limitation articulated in Deed A of investing in government-issued bonds did not apply to these proceeds. Thus, contrary to Quincy‘s assertion that it was following the restrictions on the investment of the Adams Fund, its nearly complete investment in bonds suggests that Quincy actually contravened the applicable investment restrictions.
Finally, and most significantly, Quincy failed to invest with the long-term needs and best interests of the income beneficiary in mind, creating a portfolio that consistently provided income but that left the principal vulnerable to inflation and, as a result, depreciation. See Harvard College, 9 Pick. at 458. Accordingly, based on these considerations, the judge‘s ruling that Quincy committed a breach of its fiduciary duty of prudent investment was not clearly erroneous.
2. Award of damages. We turn next to Quincy‘s allegations of error in the theory and calculation of the award of damages.
a. Theory of damages. Quincy contends that the judge improperly devised a new liability theory, that of Quincy‘s failure to achieve any capital appreciation for the Adams Fund, that had not previously been an issue in the case. Quincy avers that by “in-
We begin with a brief description of what transpired. On the second day of trial, in the presence of counsel, the judge indicated his disbelief that the Adams Fund‘s principal would not have grown significantly over the course of nearly sixty years.28 He then proceeded to ask counsel a number of rhetorical but relevant questions about why the value of the Adams Fund had not appreciated, speculating that perhaps various stock investments had been made that did, at least temporarily, lead to some appreciation, the value of which was then lost through unsuccessful investments, but that such transactions were simply not reflected in the Fund‘s records. Quincy asserts that these statements “injected” the issue of capital appreciation into the case.
Thereafter, Woodward identified Scott Winslow as an expert witness who would testify that the Adams Fund‘s investment portfolio, being primarily invested in bonds, was such that it resulted in significant underperformance. Quincy moved to exclude Winslow‘s testimony, asserting that it “would introduce a new issue in the middle of trial.” In opposition, Woodward contended that Winslow‘s testimony would “respond to the Court‘s questions regarding why it was that despite a period of extraordinary growth in the economy, the principal of [the Funds] did not increase in value.” Woodward further asserted that capital appreciation had been an issue from the beginning. The judge denied the motion but ultimately limited Winslow‘s testimony on
Winslow testified that, had Quincy employed the 60-35-5 diversification plan recommended by the bank in 1973, the Adams Fund would have grown in value significantly. Because Quincy did not do so, the Fund‘s value remained unchanged from 1973 to 2008. The judge credited this testimony and used it to calculate the damages owed to Woodward.
Although the specific calculations employed by Winslow and adopted by the judge were inappropriate for the award of damages, as we discuss infra, there was no error in the process by which this liability theory was introduced. The question of capital appreciation was indeed mentioned in Woodward‘s complaint, in the order appointing a special master, and in Woodward‘s pretrial memorandum. Given this early introduction of the issue, we are not persuaded that Quincy was denied a meaningful opportunity to prepare to defend against this assertion. Contrast Harrington-McGill v. Old Mother Hubbard Dog Food Co., 22 Mass. App. Ct. 966, 968 (1986).
Even if the issue were not raised in the complaint and other documents, the judge may introduce a recovery theory or unpleaded issue at trial if there is “implied consent” of the parties, reflected by evidence “that the parties knew the evidence bearing on the unpleaded issue was in fact aimed at that issue and not some other issue the case involved.” Jensen v. Daniels, 57 Mass. App. Ct. 811, 816 (2003). See Mass. R. Civ. P. 15 (b), 365 Mass. 761 (1974); Harrington-McGill, 22 Mass. App. Ct. at 968. As the above discussion regarding Quincy‘s breach of fiduciary duty evinces, the question whether a trust‘s principal has experienced any capital appreciation is part of the inquiry into whether a trustee has engaged in prudent investments. Accordingly, Quincy cannot claim that, where a breach of fiduciary duty was alleged for improper investment strategies, it was unaware that principal appreciation might be an issue or even unaware of the facts that might be used in support of an argument that there was no appreciation.
Further, in raising the theory, the judge afforded numerous opportunities for Quincy to respond. Quincy was permitted to depose Winslow prior to cross-examination and to retain an expert and prepare a response to Winslow‘s testimony, which it
b. Calculation of damages. Quincy also alleges that the judge erred in calculating the award of damages award in three respects: first, by basing the award for unrealized gains on what the value of the Adams Fund would have been had Quincy followed the specific investment advice the judge found that Quincy received in 1973; second, in deciding not to subtract from the unrealized gains the costs and expenses Quincy theoretically would have incurred had it followed the diversification plan; and third, in awarding prejudgment interest dating back to the date of each breach.29 We agree that the formula used to calculate unrealized gains was inappropriate, but reject Quincy‘s other claims.
i. Basis for unrealized gains. Quincy first asserts that the judge‘s finding that Quincy should have adopted a specific portfolio diversification plan recommended by the bank in 1973, and the judge‘s employment of this plan by way of Winslow‘s testimony to calculate the unrealized gains, was clearly erroneous. We agree.
In awarding damages, the judge concluded that the Adams Fund was “entitled to a return on monies it would have reasonably realized but for the imprudent actions of the Trustee.” Because the judge determined that it was imprudent for Quincy to ignore the bank‘s investment advice, and interpreted this advice as providing a 60-35-5 diversification plan, the judge calculated the return the Adams Fund would have realized based on this
To the extent the damages here were based on the judge‘s finding that Quincy ignored the specific investment advice it received in 1973, the finding and calculation were in error.31 As discussed above, a trustee is not required to follow investment advice strictly but rather must invest prudently. See
The award must be based on more than just the unheeded investment advice a trustee received, and should instead consider the totality of the circumstances as they would have informed prudent investment decisions over the relevant time period. See Quinton v. Galvin, 64 Mass. App. Ct. 792, 800 (2005) (judge must reach “approximate estimate of the plaintiffs’ damages” in considering variety of factors). Cf. Bernier v. Bernier, 449 Mass. 774, 785 (2007) (valuation of business for purposes of divorce proceeding must not be “materially at odds with the totality of the circumstances“). Factors to consider in this case include the state of the relevant bond and equities markets when various investment decisions were made, not just at one point in time decades ago; the terms and limitations of the trust instrument; the specific needs of the income beneficiary in the short and long term; and any risk calculations that may have influenced the trustee‘s decisions, including subsequent advice from the bank, the Funds’ financial advisor. Cf. Black v. Parker Mfg. Co., 329 Mass. 105, 112, 116-117 (1952) (assessment of value of unique services involves consideration of variety of tangible and intangible factors). As another factor, the judge may “take into account his general knowledge of economic conditions during the period of [the trustee‘s] transgressions.” Quinton, supra. These factors can appropriately guide the judge‘s determination of “what asset mix a prudent fiduciary would have maintained” for the Adams Fund during the lengthy time frame at issue. See Meyer v. Berkshire Life Ins. Co., 250 F. Supp. 2d 544, 573 (D. Md. 2003).
Because the judge here considered merely one possible investment approach and did not account for these other factors, we reverse the award for unrealized gains in the portfolio and remand for further proceedings on this measure. On remand, an assessment of what a prudent investor would have done requires expert testimony on the minimum level of growth equities that would have been prudent for an income-only fund, with consideration of the potential shifts over the lengthy period at issue. A prudent investor may well have followed the 60-35-5 plan, or could have chosen a portfolio with a lower allocation to growth equities. At a minimum, the record must be thoroughly developed and findings made regarding the range of prudent strategies, so that the award, particularly with regard to unrealized gains, is calculated with a fuller understanding of the minimum growth equities allocation in mind.32
ii. Accounting for costs and expenses. Quincy also asserts that the judge erred in failing to subtract from the damages related to the return on investment the costs and expenses the Adams Fund would have incurred in realizing those investment gains. See
The plaintiff bears the burden “to introduce evidence proving its damages to a reasonable certainty.” See Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass. App. Ct. 582, 609 (2007). The theory or explanation for the damages requested need not be the soundest one; it need only “provide[ ] a sufficiently (if minimally) rational basis” for the award. Id. at 611. Cf. Bernier, 449 Mass. at 785. Woodward met this burden by presenting Winslow‘s testimony. There is no obligation on the part of the judge to decrease potential damages sua sponte because of costs or expenses not admitted in evidence. In the absence of contrary testimony from Quincy regarding what its costs were or would have been had it implemented the investment strategy on which the award was based, the judge did not err in crediting the reasonable opinion proffered by Woodward‘s expert as to what costs and expenses a trustee using a hypothetical portfolio would have incurred. Cf. Bernier, supra.
iii. Award of prejudgment interest. Finally, Quincy challenges the judge‘s award of interest on each measure of damages from the last date on which the damage was sustained, consistent with the judge‘s findings on these issues.34 Quincy avers that the judge erred in including this prejudgment interest because, in tort actions, such interest can be awarded only from the date of the filing of the complaint, and not from the date of the breach itself, pur-
General Laws c. 231, § 6B, provides for the addition of interest to the amount of damages awarded in an action involving damage to property and other such tort actions, at a rate of twelve per cent per year from the date of commencement of the action. The statute is intended “to compensate a damaged party for the loss of use or the unlawful detention of money.” McEvoy Travel Bur., Inc. v. Norton Co., 408 Mass. 704, 717 (1990), quoting Conway v. Electro Switch Corp., 402 Mass. 385, 390 (1988). The primary goal of this statutory interest award is not to make the aggrieved party whole but, rather, “to compensate for the delay in the plaintiff‘s obtaining his money.” See Bernier v. Boston Edison Co., 380 Mass. 372, 388 (1980). To achieve this goal, § 6B affords a standard return that the aggrieved party “would have had but for the other party‘s wrongdoing,” regardless of what the theory of liability or underlying damages calculation is. See McEvoy, supra.
In contrast, “[w]hen a breach of trust occurs, the beneficiary of the trust is ‘entitled to be put in the position he would have been in if no breach of fiduciary duty had been committed.’ ” Berish v. Bornstein, 437 Mass. 252, 270 (2002), quoting Fine v. Cohen, 35 Mass. App. Ct. 610, 616 (1993). Making the beneficiary whole, particularly where the breach stems from imprudent investment decisions having an impact on the growth of the trust‘s assets, may require awarding interest beginning from the time of the breach, such that the trust‘s assets resemble what they would have but for the breach. In such circumstances, the award of prejudgment interest is part and parcel of the award of damages itself, and is not compensation for the delay of litigation in the same sense as interest awarded under
3. Claimed bars to recovery. We discuss briefly Quincy‘s remaining assertion that Woodward‘s claims should have been barred on the grounds of sovereign immunity; the Massachusetts Tort Claims Act,
a. Sovereign immunity and applicability of Tort Claims Act. Quincy first argues that because Woodward ultimately brought a breach of fiduciary duty claim, which sounds in tort, Woodward was obligated to follow the requirements of the Tort Claims Act or else Quincy, as a municipality, would be effectively protected against the claim by sovereign immunity. Further, Quincy avers that Woodward failed to satisfy the Tort Claims Act‘s presentment requirement specifically, and therefore its claim should have been barred. See
In determining whether a claim arises in tort or contract, we look to “the essential nature of the plaintiff‘s claim.” Hendrickson v. Sears, 365 Mass. 83, 85 (1974). When Quincy accepted the responsibility to manage President Adams‘s property in trust, Quincy and President Adams entered into a contract, see Dunphy v. Commonwealth, 368 Mass. 376, 383 (1975), of which Woodward is an intended third-party beneficiary and therefore is entitled to enforce the contract‘s terms. See Miller v. Mooney, 431 Mass. 57, 61-62 (2000); Anderson v. Fox Hill Village Homeowners Corp., 424 Mass. 365, 366-367 (1997), and cases cited. However, although Woodward initiated this action seeking an accounting, a purely contractual claim, the case evolved into an action for breach of fiduciary duty, a claim that sounds in tort, see Doe v. Harbor Schs., Inc., 446 Mass. 245, 254 (2006); Lattuca v. Robsham, 442 Mass. 205, 210, 213 (2004), and arises by operation of law rather than by contractual obligation. See, e.g.,
As Woodward‘s claim sounds in tort, Quincy asserts that the Tort Claims Act imposes numerous conditions that Woodward failed to fulfil.38 See
Because the Tort Claims Act is in effect a mechanism for both limiting and preserving sovereign immunity from certain tort claims,39 see Morrissey, 458 Mass. at 587, and cases cited, its restrictions do not apply where a municipality has waived sov-
First, when Quincy agreed to serve as trustee, it assumed the fiduciary duties of that role, including the consequences for not fulfilling these duties. The policy purposes of sovereign immunity are not served where, as here, a municipality takes on a responsibility beyond its inherent or core government functions and therefore serves in a capacity that could just as easily be accomplished by a nongovernmental entity. See Morrissey, 458 Mass. at 587. See also Minton Constr. Corp. v. Commonwealth, 397 Mass. 879, 880 (1986) (where municipality has assumed certain obligations through contract, it has waived sovereign immunity against actions brought to enforce such obligations). In essence, by choosing to accept the obligations of trusteeship, Quincy waived any sovereign immunity from claims arising from its duties as a trustee.
A trustee, regardless of whether it is a municipality, a corporation, or a private individual, is accountable to courts for its conduct in fulfilling, or committing a breach of, the fiduciary duties it owes.40 See Fox of Boylston St. Ltd. Partnership v. Mayor of Boston, 418 Mass. 816, 818 (1994). Unlike the statute at issue in Woodbridge, 384 Mass. at 42, 44-45, where we determined that sovereign immunity was not waived, the Prudent Investor Act creates “a formal system of actionable guaranties,” id. at 42, and expects the same level of conduct from any trustee. See
Several legislative acts specific to the Funds further signal that Quincy is liable for any breach of the trustee responsibilities it
To effectuate the purposes of these acts, we must consider sovereign immunity to be impliedly waived. The Legislature could not have intended to enable a municipality to serve as a trustee, by way of the Prudent Investor Act and the 1827 and 1898 Acts, and simultaneously relieve it of the fiduciary duties inherent in the role of a trustee. Reading Quincy‘s obligations otherwise would frustrate the general intent of the Prudent Investor Act that trustees further the interests of trust beneficiaries, by eliminating any recourse for mismanagement, and would be illogical in light of the specific acts of the Legislature empowering Quincy to take on such fiduciary responsibilities on behalf of the Funds. Accordingly, the Tort Claims Act cannot be read to limit tort liability where a municipality has agreed to serve as a trustee.41
b. Laches. Quincy also argues that the equitable doctrine of laches bars Woodward‘s claim. We agree with Woodward, the trial judge, and the special master that the claim is not barred on this ground.
Quincy avers that Woodward unduly delayed in bringing this action, and that this delay prejudiced Quincy because several of its key witnesses had died since the alleged breaches occurred. Quincy‘s primary contention on appeal is that the judge improperly required actual knowledge by Woodward of Quincy‘s mismanagement of the Funds in order to satisfy the laches standard; instead, Quincy asserts that an opportunity to ascertain such facts
At trial, Quincy identified two occasions on which it asserted that Woodward had constructive knowledge of Quincy‘s failings as a trustee. First, Quincy suggested that Woodward knew of Quincy‘s inadequacies as early as the 1960s, when the headmistress of Woodward communicated to Quincy‘s primary record-keeper that she was disappointed that Quincy had sold at least one parcel owned by the Funds for less than fair market value. Second, Quincy alleged that as a result of litigation in the late 1980s between Woodward and Quincy regarding Quincy‘s mismanagement of the Woodward Fund, a separate trust, Woodward knew or should have known that Quincy was engaging in similar mismanagement of the Funds at issue here. Quincy contends on appeal that this constructive notice should have been adequate to satisfy the laches standard.
Both the special master and the trial judge rejected Quincy‘s laches claim because it had not established that Woodward had actual knowledge of Quincy‘s breach prior to its seeking of an accounting in 2005.42 There is no flaw in the legal analysis employed by the trial judge. To establish a laches defense, the asserting party must establish both actual knowledge, see Lattuca, 442 Mass. at 213-214; Demoulas, 424 Mass. at 518-519; and prejudice. See Stuck v. Schumm, 290 Mass. 159, 166 (1935); Stewart v. Finkelstone, 206 Mass. 28, 36 (1910). “Constructive knowledge is insufficient,” Lattuca, supra at 213, as is “[m]ere suspicion or mere knowledge that the fiduciary has acted improperly.” Doe, 446 Mass. at 255. This requirement of actual knowledge “protects the beneficiary‘s legitimate expectation that the fiduciary will act with the utmost probity in all matters concerning the relationship.” Id. Contrary to Quincy‘s implication, a plaintiff is not required to conduct “an independent investigation” to determine if a breach of fiduciary duty has occurred. Demoulas, supra at 520.
We agree with the special master‘s characterization that although “[c]ommon sense would dictate that if Woodward knew [Quincy] was mismanaging the Woodward Fund . . . [then Quincy was] engaging in the same practices with regards to the Adams Fund [,] . . . common sense and constructive notice are not
Conclusion. The further amended judgment of the Probate and Family Court, and the amended judgment incorporated therein, is affirmed as to liability. We affirm the judge‘s award of damages in part, but remand the case to the Probate and Family Court for recalculation of the damages related to the unrealized investment gains, including prejudgment interest thereon, and for further proceedings consistent with this opinion.
So ordered.