Lead Opinion
[372] Action to .remove trustee of a testamentary trust, seeking an accounting and to surcharge the trustee with a judgment against him and the-surety on his bond. Plaintiffs have appealed from a decree dismissing their suit and making allowances for the-trustee’s expenses and attorneys’ fees.
Defendants rai-se the question of our jurisdiction, pointing'out that the petition asks for no specific amount. It is true, as they state (citing Juden v. Houck, Mo. Sup.,
The trust involved was established by the will (executed December 4, 1943) of jfiaintiffs’ mother who died December 12, 1943. It was drafted by defendant Bialson (hereinafter referred to as -defendant) who was named therein as executor and trustee. There was a will con-, test by plaintiffs on the grounds of mental incapacity and defendant’s undue, influence, but there ivas no trial on these issues and the validity of the will was upheld. The trust was to continue until plaintiffs (daughters of testatrix) reached the age of 35; Mary was born February 21, 1923 and Caroline January-25, 1926. It was also provided that if either daughter died during the trust period leaving a minor child or children, the trust continued during minority. The trustee wras given (by III (a) of the will) the following investment powers: “To hold, possess, manage and control said trust estate and every part thereof, with full power to sell,' transfer, convey and dispose of the same upon such terms and in such manner, and for such prices, as to the said Trustee shall seem meet and proper. Said Trustee shall have, and is hereby given and granted, full power and authority to invest and reinvest all or any part of said trust estate in such manner, and in such loans, bonds, stocks, securities or other property, personal or real, and upon such terms and for such lengths of time, as to the said Trustee shall seem meet and proper, and ivithout his being restricted to a class of investments which a Trustee is or may hereafter be permitted by law to make; it being intended hereby to give said Trustee full and complete authority to hold, possess, manage, control, sell, convey, exchange, encumber, pledge, lease, invest, and re-invest the whole and every part of said trust estate according to his sole judgment and discretion, without any limitation upon his power and authority so to do. The trustee may employ counsel and other agents in the discharge of his duties and determine and pay to them a reasonable compensation.”
The duty and discretion of the trustee as to the beneficiaries (by 111(b) and (f) of the will) was as follows: “(b) The trustee shall hold the trust estate in trust for the benefit of my two daughters. Mary Bader Otts and Caroline Bader and shall pay over and distribute the entire net income derived therefrom in equal monthly or other convenient installments unto my said daughters Mary Bader Otts and Caroline Bader, each to receive one-half of said amount, share and share alike, until they reach the age of thirty-five (35) years.”
The will (IV) provided: “The Trustee shall receive as compensation for his services hereunder, fifteen (15%) percent upon the gross income accruing each year to the [374] trust estate and five (5%) percent upon the fair market value of the principal of the trust estate, as and when the same is dispersed or distributed free from trust. In no event the Trustee shall receive less than fifty ($50.00) Dollars per year as his minimum compensation.”
The corpus of the trust estate in 1945 consisted of corporation stocks with a market value of more than $15,000.00; unencumbered real estate on South Broadway valued at $12,250.00 (testatrix had paid that amount for it in 1943) ; real estate on Accomac Street (subject to a $3,750.00 trust deed) valued at $5,000.00 (which was also subject to Caroline’s homestead rights until she became of age in 1947); and $2,272.47 cash at the end of the year. Defendant sold most of these stocks in 1946 and 1947; and they were sold at a profit over the value as of the date of testatrix’ death so that a capital gains tax was paid for the trust estate. Defendant invested the money received in two apartment buildings (one on Miami Street and one on Russell Street) so that by the end of 1947 all of the corpus was in real estate. One of the principal charges made against defendant is that by investing all of the corpus in real estate he failed to maintain a prudent diversification of investments and recklessly concentrated the risk of loss of trust assets. It is also contended that defendant acted recklessly, without due care, skill and caution in making these two purchases, that he was guilty of a breach of trust in failing to maintain the trust real estate in proper repair and that he invested in the Russell Street apartment with the improper motive of increasing his commission (computed on gross income) a motive which conflicted with the interest of the beneficiaries. The following facts concerning these investments appear from the record.
Miami Street Apartments. Defendant contracted to purchase this building consisting of three apartments on May 3, 1946 for $9,250.00 from Peter Kintzele, a real estate broker who also dealt in real estate on his own account. The deal Avas closed June 1, 1946. -Kintzele bought this property for $5,750.00 in February, 1946 and made repairs costing $1,200.00. It also had been sold for $5,750.00 to Kintzele’s vendor. It had three apartments, subject to Federal rent controls and a first floor unit not subject to rent control, rented as a tavern. This property wa.s sold in July 1953 for $9,500.00 out of Avhich a sale
YEAR GROSS INCOME EXPENSES NET INCOME
1946 $ 571.68 (7 mo.) $311.08 (7 mo.) $260.60 (7 mo.)
1947 1113.50 834.46 279.04
1948 1340.40 498.39 842.01
1949 1380.40 392.92 987.48
1950 1460.40 598.77 861.63
1951 1467.30 491.39 975.91
1952 1488.00 345.32 1142.68
[375] These expenses included $120.00 interest annually after 1947, which should have been charged to the Russell Street property because this was interest on $3,000.00 borrowed to pay on the Russell purchase. However, defendant’s 15% commission on the gross income is not deducted from the income shown. Nevertheless (considering these factors) it appears that, after 1947, the net income on the $9,250.00 invested was always in excess of 8% (not considering depreciation) and averaged about 10% for 1949 to 1952 inclusive. There was evidence that Miami was built between 1910 and 1912. Some repairs were required in 1947 which was the reason for the low net income that year.
Russell Street Apartments. On September 25, 1947, defendant contracted to purchase from Kintzele an apartment on Russell Street (built in 1914) with seven apartments, including one in the basement, and completed the purchase on October 28, 1947. He said he also advised with Texier before making this purchase. At that time, the trust had three unencumbered properties (Accomac, Broadway, and Miami), the trust deed on Accomac having been paid in August. The Russell Street purchase was set up by defendant in his trustee’s report as a $29,250.00 deal. However, the Accomac property (two apartments) was traded in at $7,250.00 so that the cash involved was
YEAR GROSS INCOME EXPENSES NET INCOME
1948 $2974.40 $3020.09 $ 45.69 loss
1949 3345.60 2584.24 761.36
1950 3425.60 2656.34 769.26
1951 3399.70 2704.24 695.46
1952 3494.50 2486.40 1008.10
The 1948 income loss was due partly to roof repairs and partly because rents were not increased until late in that year. (Plaintiffs say rents could have been increased a year earlier with proper diligence by defendant, since a 15% increase was authorized.) However, to reflect the true situation, these expenses should include an additional [376] $120.00 annually for interest on the $3,000.00 borrowed to purchase the Russell property, which was secured by .a trust deed on the Miami property. Defendant’s 15% commission on gross income should also be considered to determine the actual income for distribution to the beneficiaries produced by this property. Considering these factors, the income left from the Russell property to be divided between the beneficiaries, wras as follows:
1948 $2,974.40 $3,586.19 $611.79 loss (none)
1949 3.345.60 3,206.08 139.52 1.08%
1950 3.425.60 3,289.74 135.86 .9 %
1951 3,399.70 3,334.20 65.50 .5 %
1952 3,494.50 3,130.23 364.27 2.5 %
Total Net Income Available for Distribution to Beneficiaries ’48-’52 ..................... .$93.36 (705.15 — 611.79)
Plaintiffs’ calculation shows that at 3% the corpus invested in the Russell property (figured at $12,858.00, 1948-1949 and at $14,-559.00, 1950-1952 after replacing the heating plant), deducting trustee’s commissions on the amount that 3% would have produced, the total amount of $1,770.54 (for these five years) would have been available for distribution to- them. ($327.88 annually, 1948-1949 and $371.26 annually, 1950-1952.) This is the basis of" plaintiffs’ claim-for a surcharge of $1,677.18 for income loss caused by investing in the Russell property ($1,770.54 — $93.36 actually available.) Plaintiffs also calculate from the trustee’s reports that the amount and proportion of the trustee’s commissions on gross income from the Russel property and the other properties was as follows:
Commissions Year Trustee’s Commissions Total Income from Russell Commissions Property from Broad- Ru,ssell way and Commissions Miami Prop- % of Total erties Commissions
1948 $1,032.27 $ 446.16 $ 586.11 43%
1949 1,117.68 501.84 615.84 45%
1950 1,202.30 513.84 688.46 43%
1951 1,186.15 509.95 676.20 43%
1952 1,209.35 519.17 690.18 42%
$5,747.75 $2490.96 $3256.79 43%
Broadway Property and Other Matters Concerning Real Estate. The Broadway property (built before 1875) was the best net income producer of the three properties (netting more than'the combined net of the other two 1948-1952 inclusive) and was sold at a profit of
Periods in which assets were not invested 100% in Real Estate for full yearly periods.
12-14-43 to 12-31-45 — 2 years — 2343.24 net income
1- 1-46 to 12-31-46 — 1 year —1649.43 ” ” —5.32%
1- 1-47 to 12-31-47 — 1 year — 557.87 ” ” —1.80%
Total —4 years — 4550.54 = 1137.65 average income per year.
Periods in which assets were invested 100% in Real Estate for full yearly periods.
1-1-48 12-31-48 — 1 jrear — 1659.78 net income — 5.35%
1-1-49 12-31-49 — 1 year — 1903.01 ” ” —6.13%
1-1-50 12-31-50 — 1 year — 2603.34 ” ” —8.39%
1-1-51 12-31-51 — 1 year^ — 2369.03 ” ” —7.64%
1-1-52 12-31-52 — 1 year — 2766.51 ” ” —8.92%
Total —5 years 11301.67 = 2260.33 average income per year.
[378] Distributions t.o Beneficiaries and Trustee’s Commissions. The amount and payment of trustee’s commissions and the distribution to beneficiaries from income and corpus was as follows:
One year periods ending as shown Trustee Paid to Total Pay-Trustee Commis- Paid to Beneficiaries ments to Commission sion Pay-Beneficiaries from Earned ments. from Income Corpus Beneficiaries
12-31-45 864.80 700.00 2343.24 859.44 3202.68
12-31-46 573.66 164.80 1649.43 150.57 1800.00
12-31-47 768.77 973.66 557.87 1282.13 1840.00
12-31-48 1063.28 368.77 1659.78 620.22 2280.00
12-31-49 1119.03 363.28 1903.01 26.99 1930.00
12-31-50 1202.30 963.28 1680.00 1680.00
12-31-51 1186.15 2058.05 1680.00 1680.00
12-31-52 1209.35 1186.15 1840.00 1840.00
1953 1209.35
7987.34 7987.34 13313.33 2939.35 16252.68
Defendant retained 5% commission on these payments from corpus. It will be noted that the full amount of net income for 1950, 1951 and 1952 was not distributed to the beneficiaries. The undistributed excess for each year was 1950 — $923.34, 1951 — $689.03, 1952 — $926.51, a total of $2,538.88. These amounts were shown on the trustee’s reports for each of these years as transferred to corpus. Defendant did this on the theory that he could replace from current income the distributions to beneficiaries from corpus made in prior years. Plaintiffs contend this was in violation of paragraph 111(b) of the will and ask that the trustee be surcharged for interest on these undistributed amounts at 6% which they calculate would total $428.18. This,
As a result of the sales of the three parcels of real estate (all made in 1953 after this suit was commenced) defendant received more than $32,000.00. At the time of the trial, the corpus of the trust consisted of $30,000.00 face value II. S. 2 5/8% Certificates of Indebtedness and $2,746.65 in cash. At the end of each year, defendant made and sent to plaintiffs detailed reports showing all his annual receipts and disbursements. The accuracy of these reports is not questioned and they are the basis for all figures and calculations supra. (Included in the corpus figures, at the time of the trial, wras the undistributed income of $2,538.88 withheld on the theory that previous corpus distributions could be replaced from subsequent income.) Other facts will be stated in connection with rulings hereinafter made.
The trial court’s decree makes the following finding's: “1. That the evidence adduced herein does not show any reckless or improperly motivated acts or conduct on the part of the Trustee herein. 2. That such Trustee -was not guilty of any incompetency requiring his removal. That the beneficiaries accepted the benefits of the- investments made by the Trustee over a long period of time and beneficiaries consulted with and had the benefit of counsel practically all during the period of the administration of the trust by the Trustee. 4. That the Trustee was given broad powders under the trust instrument and that said Trustee did not violate his duties or any of the terms of said trust instrument. 5. That the Estate sustained no loss, and the beneficiaries [379] have been paid a substantial income. 6. That the Trustee should not be ordered removed, and further finds that the evidence .fails to show that he should be surcharged with any amounts. ’ ’
In this kind of case, while it is our duty to pass on the -weight of the evidence and make our own findings, we accord due deference to the Chancellor’s determination of factual questions which it is necessary to determine from conflicting oral evidence of witnesses who appeared before him. (Shelton v. McHaney,
TIoAvever, these facts alone do not show breach of trust, because a trustee is not an insurer nor required to be .infallible in his judgment. (Boland v. Mercantile-Commerce Bank & Trust Co.,
Nevertheless, although defendant was given the widest discretion in making and managing investments, that does not mean he is beyond all control and accountability. “A court of equity will never favor a construction that confers on the trustee absolute and uncontrollable powers.” (Garesche v. Levering Inv. Co.,
While we construe the trust provisions as giving defendant sole and complete discretion as to class of investments, nevertheless, this did not authorize speculative or hazardous investments in any class or dispense with all requirements of care, skill, caution and reasonable diversification of risk. Certainly such requirements are not specifically excluded. Although real estate was an authorized investment under the provisions of this trust and the trust owned Broadway and Aecomac when it began, nevertheless, the fact that real estate was an authorized investment did not necessarily make it prudent to have the entire corpus invested in real estate. (See Bogert, Trusts and [381] Trustees, Sec. 678.) When the trust began, about half of the corpus value was in corporate stocks, which provided some diversification of investments. The sale of these stocks at a profit, the payment of the mortgage on Aecomac and the purchase of Miami, under the evidence, cannot be held to be an abuse of discretion in view of the trial court’s findings and our own view of the evidence. However, the purchase of Russell put all the trust corpus in real estate and Russell had no commercial units, free from rent control, as did the other two. Moreover, on the basis of probable operating expenses, which the evidence shows could have been estimated, it was apparent that it would produce very little net income available for distribution to the beneficiaries as long as it was subject to the existing rent controls. Thus it was essentially a speculative investment, both as to probable net income and future value, dependent upon early termination of rent controls which the evidence shows was anticipated by defendant. To purchase this property, subject to a $14,000.00 mortgage, and to encumber Miami for $3,000.00 to obtain part of the purchase price, incurred an indebtedness of $17,000.00 against the trust estate with annual interest charges of $680.00. (This was yi of the gross Russell rentals; another yi went for commissions; trustee’s commissions, 15%, and rent collection agent’s commissions, 5%.) It is true that Aceomac, in which Caroline’s homestead had just expired, required extensive repairs if it was to be kept; but Russell also required repairs which reduced net income and increased the corpus investment. (After repairs Aecomac was sold for $8,000.00 by Kintzele.) We must, of course, consider this transaction upon the basis of the circumstances existing at the time it was made and not upon subsequent events. (Restatement of Trusts, Sec. 227, comment m, p. 652; Scott on Trusts, See. 227.12, p. 1224;
Furthermore, there is another important factor to be considered, namely, that under the circumstances the trustee permitted himself to be placed in a position in which there was a conflict of interest between himself and the beneficiaries. This was due to the fact that he would receive 15% of substantial gross income regardless of whether this investment produced any net income available for the beneficiaries. Thus a substantial return to him was certain while income for the beneficiaries was highly speculative. (The result was that from 1948 to 1952 inclusive defendant received $2,490.96 commission on Russell gross income, while the total net available for distribution to beneficiaries was $93.36.) Therefore, the risk of loss of income was placed almost entirely on the beneficiaries. While we do not mean to hold that this was defendant’s motive or purpose in making this investment, we do hold that it was a failure to comply with his duty to administer the trust solely in the interest of the beneficiaries and amounted to an abuse of discretion in making this investment, when considered in connection with all of the other circumstances hereinabove discussed. No doubt, he had great hope for considerable increase both in income and in value from early termination of rent controls but that indicates the speculative character of the transaction. Our conclusion, under all these circumstances, is that defendant should be subject to liability for the corpus loss on this investment and we hold that he should be surcharged in the sum of $2,700.00. This surcharge is not much more than defendant received in commissions on the gross Russell income [382] and the result will be that he will not gain anything from the Russell transaction; and as hereinabove shown plaintiffs did not gain anything substantial from it.
We must further hold that defendant failed to comply with the terms of the trust (111(b) of the will) providing that the trustee “shall pay over and distribute the entire net income derived therefrom (the trust estate) in equal monthly or other convenient installments unto my said daughers’’ (naming plaintiffs). This is mandatory (McMillan v. Barnard Free Skin & Cancer Hospital,
Plaintiffs urge that, regardless of whether or not there are other grounds, the long standing ill-will and hostility between the trustee and the beneficiaries requires his removal. The trial court’s memorandum states: “There is no doubt that a strong personal antagonism has developed between the beneficiaries and the trustee but fortunately the trustee has assured that he will resign after he has proven that he has not defrauded the beneficiaries and after his handling of the estate has been proven to be such that he is not guilty of the charges laid against him.” The trial court thus recognized that it would be in the best interest of the trust estate to have a new trustee and in its final decree provided that the additional allowance which the court made for defendant was to be paid to him “upon resignation and turning over the assets of the estate to his successor trustee. ’ ’
Hostility between a trustee and beneficiaries generally does not in itself constitute a ground for the removal or discharge of the trustee; but it is a factor to be taken into consideration; especially where the exercise of discretion by the trustee requires personal relationship between the trustee and the beneficiary, and under some circumstances may require removal of the trustee even though he has been1 without fault in the administration of the trust. (
We further hold that, under these circumstances, the court should not have made allowances to defendant of $1,650.00 for additional fees for preparation of his defense, $167.80 for expenses and $5,000.00-for attorney’s fees or for any additional amount for such purposes. (See Re Drake, Minn.,
It is said: “Allowance of compensation to a trustee who has committed' a breach of trust, upon a finding that the trustee was not incompetent or chargeable with actual bad faith or fraud, ‘is largely a matter-of judicial discretion and will not ordinarily be disturbed on appeal. In the case of minor faults of a trustee, resulting only in partial losses of trust funds for which his account has been surcharged, a court, in its discretion, may diminish the amount of the trustee’s compensation.” (
The decree and judgment is reversed and remanded with directions to enter decree and judgment in accordance with the views herein expressed.
Lead Opinion
On Motion for Rehearing
Defendant says he accounted for the 5% commission on the corpus distributions to the beneficiaries in his 1953 report. (Made after the trial herein.) Of course, if he has done so the trial court may take that into consideration in its final decree.
Other matters raised in the motion reargue rulings made in our opinion and we adhere to these rulings for the reasons stated therein. However, we note one argument made by defendant as follows: “The annual interest charge of $120.00 on the $3,000.00 deed of trust put on the Miami property to get funds to buy the Russell property cannot be considered (as the Court erroneously did) as a charge on the Russell property income and at the same time the principal amount of $3000.00 be considered as money invested in the Russell Avenue equity. If the loan is to be treated as a purchase money mortgage for the Russell property with the interest charged against Russell property income, the corpus invested in Russell is only $9500.00. The assets of the trust invested in the Russell property, were the Accomac property, valued at $4,500.00, and cash in the sum of $5,000.00. The Court] simultaneously eharg'ed $120.00 interest against Russell income and computed the yield from the investment on the. basis of $Í2,50Ó,00 investment.”
The only bearing this matter has- is in' fixing the amount of the investment in Russell for the purpose of figuring the annual percent of yield produced by it. Actually our mistake was that, in computing this yield, we failed to consider the $14,000.00 mortgage on Russell in-
It should also be said that it is not true as suggested that there would be a conflict of interest between trustee and beneficiary in every case in which the trustee’s compensation was fixed as a percentage of gross income. The determination of a real conflict would depend on the percentage involved, the proportion of the net income to gross income, and the way in which the estate was managed with reference to increasing gross income disproportionally to net income.
The motion for rehearing is overruled.