Baldus v. Bank of California

• Decision Date: 20 January 1975
• Docket Number: No. 2204--I,2204--I
• Parties: Ronald BALDUS et al., Respondents, v. BANK OF CALIFORNIA, a national association, Appellant.
• Court: Washington Court of Appeals

Page 621

12 Wn.App. 621

530 P.2d 1350

Ronald BALDUS et al., Respondents, v. BANK OF CALIFORNIA, a national association, Appellant.

No. 2204--I.

Court of Appeals of Washington, Division 1.

Jan. 20, 1975.

Bogle, Gates, Dobrin, Wakefield & Long, Paul W. Steere, Ronald T. Schaps, Michael W. Dundy, Seattle, for appellant.

Trethewey & Brink, Joseph H. Trethewey, John D. Wilson, Jr., Seattle, for respondents.

SWANSON, Chief Judge.

This case involves a claim of breach of trust based on the trustee's failure to diversify trust assets.

The Bank of California, a national association ('Bank'), trustee of Raymond Krueger's testamentary trust, appeals from a judgment which awarded to the remainderman beneficiaries, Ronald and Bruce Baldus ¹, $108,159 for damages which the trial court concluded 'they incurred as a result of the bank's failure to diversify 80% Of the National Lead stock within one year after receipt of the original trust assets.' Conclusion of law No. 9, in part.

The will of Raymond Krueger, who died in September, 1951, created a testamentary trust to pay his wife Thelma Anita Krueger an income for life and to provide for the educational expenses of his stepsons Ronald and Bruce Baldus, with the residue to go to the stepsons upon Mrs. Krueger's death. The Bank accepted its appointment as trustee and in 1954--55 received from the executor of the Krueger estate 2,871 shares of National Lead Company common stock. ² When the National Lead stock was received, it constituted 99 percent of the corpus of the trust, the remainder being cash. Except for the sale of 200 shares of National Lead stock in 1955 for reinvestment and some subsequent sales, involving an invasion of principal agreed to by the beneficiaries in order to make cash distributions to Mrs. Krueger, the Bank did not diversify the assets. ³ Further, the court found that such sales did not at any time from March, 1954 to January 5, 1971, reduce the concentration of National Lead stock held in the trust below 81 percent of the total asset value of the trust estate; however, Raymond Krueger who was a long time employee of National Lead Company, included as paragraph IV(b) of his will creating the trust the following provision:

The trustee is authorized to secure any securities or investments or other property received from my estate in the same form of investment even though it is not such as a trustee might originally purchase with trust funds until such time as the trustee deems it for the best interest of the trust estate to sell or convert the same. In this respect should the assets of my estate be so invested as to have a disproportionate, from a trust standpoint, share of the estate invested in stock of the National Lead Company, it is nevertheless may desire that the trustee retain said stock if in the trustee's judgment it is desirable or to dispose of it as the trustee deems expedient and to the best interest of the estate. There shall be no criticism or complaint of trustee's action in retaining said stock should it deem it advisable.

After consistently maintaining a price per share higher than it was when received, the National Lead stock deteriorated substantially in value during the summer of 1969. In the fall of 1970, after the company announced a reduction of its dividend, the Bank decided to sell the stock. On January 5, 1971, the Bank sold all of the National Lead stock then remaining in the Krueger trust for $54,939 which represented a price of $18 per share, reflecting a 1969 two-for-one stock split. ⁴

On May 24, 1971, Mrs. Krueger filed her complaint against the Bank, essentially alleging that the Bank's retention of a high concentration of National Lead stock constituted a breach of trust resulting in a substantial loss of value in the trust assets. The Bank denied any mismanagement and claimed that the provisions of Raymond Krueger's will creating the trust, including the previously quoted paragraph IV(b), authorized the Bank as trustee, in its discretion, to retain a disproportionate amount of National Lead stock.

In August, 1972, the trust was terminated and distribution of the residue made to Ronald and Bruce Baldus, each receiving $21,881.32 and 200 shares of Public Service Electric & Gas Company stock.

The trial court sitting with a jury, which the court subsequent to the return of the verdict treated as advisory only, ⁵ included in its findings of fact and conclusions of law the following:

If 80% Or 2297 shares of National Lead stock had been sold within the first year, and the proceeds reinvested in diversified holdings, the trust fund would have generated sufficient income to make the required income payments to the life beneficiary, provide for education expenses and, after the death of the life beneficiary, the trust fund would have available for distribution to the residuary beneficiaries a residue in the amount of approximately $163,000.

Finding of fact No. 22.

Neither paragraphs IV(b) and IV(c), nor any other provision of the Raymond C. Krueger Will, nor the opinion letter from the bank's counsel dated October 24, 1957, relieved the Bank of California from liability for failure to diversify the assets in the Krueger trust within the first year of the trust.

Conclusion of law No. 8.

The exercise of prudent trust administration, required by statute as well as the common law, imposed upon the Bank of California a duty to the life beneficiary and the residuary beneficiaries of the Krueger trust to conserve the assets and minimize the risk of loss to the trust fund by selling 80% Of the National Lead stock and investing the proceeds in more diversified holdings within one year after the Bank of California received the National Lead stock.

Conclusion of law No. 6, in part. The court also determined that the remainderman beneficiaries Ronald and Bruce Baldus incurred $108,159 in damages because of the Bank's failure to diversify, and entered judgment in that amount. ⁶

The appellant Bank makes 28 separate assignments of error directed primarily to the trial court's findings of fact and conclusions of law, all of which challenge two basic premises underlying the trial court's ruling: (1) the trustee had a mandatory duty as a matter of law to diversify the assets of the Krueger trust within 1 year; and, (2) the language of the will creating the trust did not relieve the trustee from that duty. ⁷ While there is substantial authority for the position taken by the trial court that a trustee, as a prudent man, has a duty to diversify trust investments, courts also have taken the view that although a lack of diversification in trust investments may be evidence that a trustee has failed to exercise proper skill and prudence, there is no mandatory duty imposed on a trustee to diversify. Thus, it is stated in 54 Am.Jur. Trusts § 417 (1945) at page 331:

In the absence of any statutory provision regulating the proportions of a trust estate that can be placed in certain investments, the cases involving the duty of trustees to diversify investments appear, at first impression at least, to be in some conflict, and many approach the question differently, although the actual results reached do not differ greatly. There is little, if any, authority which holds that there is an absolute duty to diversify trust investments under all circumstances.

(Footnotes omitted.) It is stated in 90 C.J.S. Trusts § 324 (1955) at page 513:

According to some authorities, a trustee is required to diversify his investments; he should not invest more than a reasonable proportion of the estate in a single security or type of security so as to minimize the risk of a large loss. This rule has been held to be particularly applicable where the trustee invests in corporate stocks and bonds. On the other hand, there is authority that trust investments, otherwise proper, are not improvident for lack of diversification, although failure to diversify is a factor to be considered in determining if the trustee acted with due skill, prudence, and caution.

(Footnotes omitted.) See generally, Annot., 24 A.L.R.3d 730 (1969), and cases collected therein at 737 and 754.

Appellant contends, however, that it is almost uniformly recognized that any duty to diversify may be modified by the terms of the instrument creating the trust and urges that the language of the trust instrument here in question fully supports its actions in administering the Krueger trust. ⁸ We agree. The rule is succinctly stated in Restatement (Second) of Trusts § 228 (1959) in the following language at page 541:

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.

(Italics ours.) In this connection, both appellant and respondent recognize that Washington recognizes the 'prudent investor' rule, as codified in RCW 30.24.020. ⁹ See In re Parks' Trust, 39 Wash.2d 763, 238 P.2d 1205 (1951); Monroe v. Winn, 16 Wash.2d 497, 133 P.2d 952 (1943). Significantly, the statute itself recognizes that 'prudent investor' standard is 'subject to any express provisions or limitations contained in any particular trust instrument, . . .' RCW 30.24.020, and, in addition, RCW 30.24.070 ¹⁰ specifically indicates that the terms of the trust instrument are controlling of investments by a trustee. In other words, a trustor can authorize the trustee not to diversify. The rule is stated as follows in 3 A. Scott, Trusts § 228 (3d ed. 1967) at page 1859:

By the terms of the trust it may be provided that the trustee shall be permitted to invest a larger proportion of the estate in a single security than would otherwise be proper, or to retain securities which were part of the trust estate at the time of its creation even though they constitute a larger proportion of the estate than would otherwise be proper.

(Footnote...