Baker Boyer Nat. Bank v. Garver
| Decision Date | 15 May 1986 |
| Docket Number | No. 6404-2-III,6404-2-III |
| Citation | 719 P.2d 583,43 Wn.App. 673 |
| Parties | BAKER BOYER NATIONAL BANK, Appellant, v. Richard GARVER, Russell R. Garver, and Gregory L. Garver, Respondents and Cross Appellants. |
| Court | Washington Court of Appeals |
W.L. Minnick, Minnick, Hayner & Zagelow, Walla Walla, for appellant.
Gary Schrag and Kristian Hedine, Reese, Baffney, Schrag & Siegel, Walla Walla, for Richard Garver.
Stephen Palken, Sorrell & Palken, Seattle, for Russell and Gregory Garver.
Baker Boyer National Bank (Bank) appeals a judgment in which it was surcharged, as trustee, for failing to properly diversify trust assets and for the unauthorized transfer of trust property. It contends the court erred: (1) in finding it failed to adequately diversify trust investments under the prudent person rule; (2) in not reducing the surcharge for the unauthorized transfer of the assets by the value of Richard Garver's life estate; (3) in granting Russell and Gregory Garver attorney fees; and (4) in denying trustee and attorney fees. Richard, Russell, and Gregory cross appeal.
In 1960, Leonard R. Garver executed a will which also created and funded a pour-over trust. The trust instrument named the Bank as trustee and included certain farmland designated in Mr. Garver's will. Pursuant to the will, the testator's wife, Hazel, and son, Richard, received successive life interest in the farmland. The remainder interest in the farmland was given to Russell and Gregory Garver (Russell and Gregory), Richard's sons and Mr. Garver's grandsons. The will further provided if Russell and Gregory had not reached the age of 25 upon Richard's death, the Bank was to hold the real property in trust until they reached that age.
Hazel B. Garver, by her will, left Richard a life estate in the residue of her estate including her community interest in the farmland. Upon the death of Richard, the remainder of Hazel's property was to pass in fee to Russell and Gregory. The Bank was to receive this remainder as trustee only if Richard's children were under the age of 25 when Richard died.
Leonard Garver died on July 17, 1964; Hazel Garver died on October 18, 1969. Russell and Gregory were under 25 years of age at the time both grandparents passed away. During the probate of these estates, Richard, as executor of each estate, sold two parcels of real property and invested the proceeds, approximately $194,000, primarily in tax-free municipal bonds. 1
Subsequently, Richard petitioned for final accountings and decrees of distribution in each estate. In Leonard's estate, the decree of distribution provided the cash and bonds, with a value of approximately $97,000, were to be held by the Bank in trust during Richard's lifetime, then to be distributed to Richard's children according to the provisions of Leonard's will. In addition, the Bank was retained as trustee over Russell and Gregory's remainder interest in the farmland.
In Hazel's estate, the other half of the tax-exempt bonds and cash, also totaling approximately $97,000, were distributed to the Bank as trustee of a newly created Hazel Garver Trust. 2 This decree of distribution provided for the contingent remainder in the remaining real estate to be placed in her trust. Both decrees of distribution provided all income from the trusts was to be paid to Richard during his lifetime.
The Bank accepted the trusteeship; each trust contained approximately $97,000 in tax-exempt securities and 846 acres of farmland. During the period of trust administration from 1973 until 1982, the Bank continued to invest in tax-exempt securities, upon the advice of Richard's attorney and his broker.
On May 28, 1975, Richard and the Bank as trustee of Leonard's trust conveyed approximately 5.44 acres of trust real estate to Betty Seavy. A correction deed was executed by the same parties in the same capacities in January of 1979. No bank records exist to explain the transaction and no bank officer had any recollection as to why the deeds were executed. No consideration was received for the deed.
In 1981, Richard, Russell, and Gregory requested the Bank to sell the bonds held in trust. The proceeds were to be used by Russell and Gregory to purchase Richard's interest in a parcel of real estate entitled the Hughes Ranch. The Bank refused to sell in an unfavorable market and decided to resign as trustee. On March 29, 1982, the Bank requested the court approve its final accounting in each trust and appoint a successor trustee. Russell and Gregory, in answer to the Bank's petition, agreed, along with Richard, to become successor co-trustees. However, Russell and Gregory objected to the final accounting alleging the Bank had mismanaged the two trusts.
Following a hearing, the trial court, on June 11, 1982, appointed Richard, Russell, and Gregory as co-trustees, ordered the liquidation of all personal assets with the proceeds to be paid to Richard in exchange for his interest in the Hughes Ranch. The entire portfolio of tax-exempt bonds was sold at a loss of $63,750. 3
Russell and Gregory subsequently amended their answer to the Bank's original petition; they alleged the Bank had failed to adequately diversify and failed to act impartially with respect to their interest as remaindermen. Russell and Gregory also moved to amend their original petition to include a cross claim against Richard. This motion was denied; they filed a motion for discretionary review with this court; that motion was denied. Trial was limited to the Bank's management of the trust assets.
The trial court found: (1) the Bank had acted unreasonably in concentrating investments almost exclusively in the tax-exempt, municipal bonds; (2) Russell and Gregory were injured by the Bank's failure to diversify the investment portfolio; (3) the Bank had no authority to transfer the 5.44 acres of farmland from Leonard's trust; and (4) Leonard's will provided for and intended that a vested remainder interest in real property was to be distributed to the trust. However, with respect to Hazel's trust, the remainder interest in farmland was a contingent interest; the Bank was to act as trustee only if Russell and Gregory were under 25 when Richard died. Thus, the Bank could have conveyed only a one-half interest in the 5.44 acres in 1975. Russell and Gregory were awarded damages of $22,950 for the failure to diversify, $1,900 for the unauthorized transfer of the 5.44 acres, and attorney fees and expenses in the amount of $17,732. The Bank, Richard, and Russell and Gregory appeal.
First, the Bank contends the court erred in surcharging it, as trustee, $22,950 for investing primarily in fixed-income securities. The Bank asserts it did not have an absolute duty to diversify under the prudent person rule (RCW 30.24.020), 4 but if it did have such a duty, the diversification between the fixed-income, tax-exempt securities and equity investment of real property fulfilled this duty.
RCW 30.24.020 codified the prudent person rule:
General criterion specified. In acquiring, investing, reinvesting, exchanging, selling and managing property for the benefit of another, a fiduciary 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, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital. Within the limitations of the foregoing standard, and subject to any express provisions or limitations contained in any particular trust instrument, a fiduciary is authorized to acquire and retain every kind of property, real, personal or mixed, and every kind of investment specifically including but not by way of limitation, debentures and other corporate obligations, and stocks, preferred or common, which men of prudence, discretion and intelligence acquire for their own account.
Whether, under the prudent person rule, a trustee is required to diversify trust investments has not been resolved in Washington. See Baldus v. Bank of California, 12 Wash.App. 621, 629 n. 11, 530 P.2d 1350, review denied, 85 Wash.2d 1011 (1975). However, the weight of decisional and scholarly authority supports the view the trustee as a prudent person has a duty to diversify. 5 In regard to this obligation, the Restatement (Second) of Trusts § 228 (1959) provides:
Except as otherwise provided by the terms of the trust, the trustee is under a duty to the beneficiary to distribute the risk of loss by a reasonable diversification of investments, unless under the circumstances it is prudent not to do so.
Comment a to this section explains:
The trustee is under a duty to the beneficiary to exercise prudence in diversifying the investments so as to minimize the risk of large losses, and therefore he should not invest a disproportionately large part of the trust estate in a particular security or type of security. It is not enough that each of the investments is a proper investment ...
The Bank cites several cases which it contends stand for the proposition there is no absolute duty to diversify trust investments. See, e.g., In re Kilmer's Will, 18 Misc.2d 60, 186 N.Y.S.2d 120, 130-31 (N.Y.Sur.1959); Estate of Knipp, 489 Pa. 509, 414 A.2d 1007, 1009 (1980). Baldus, 12 Wash.App. at 626, 530 P.2d 1350, recognized this split of authority. However, reliance on these cases is misplaced. A close reading of these cases indicates a trustee has a general obligation to diversify, subject to at least two exceptions: (1) an express provision by the settler relieving the trustee of the duty to diversify, or (2) the circumstances dictate that it is not prudent to diversify. See Restatement (Second) of Trusts § 228 comments c, f (1959). Therefore, we hold a trustee by virtue of the prudent investor rule is under a duty to...
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