Blankenship v. Boyle, Civ. A. No. 2186-69.

• Citation: 337 F. Supp. 296
• Decision Date: 07 January 1972
• Docket Number: Civ. A. No. 2186-69.
• Parties: Willie Ray BLANKENSHIP et al., Plaintiffs, v. W. A. (Tony) BOYLE et al., Defendants.
• Court: U.S. District Court — District of Columbia

337 F. Supp. 296

Willie Ray BLANKENSHIP et al., Plaintiffs, v. W. A. (Tony) BOYLE et al., Defendants.

Civ. A. No. 2186-69.

United States District Court, District of Columbia.

January 7, 1972.

COPYRIGHT MATERIAL OMITTED

Harry Huge, Edgar H. Brenner, Armistead W. Gilliam, Jr., Arnold & Porter, Washington, D. C., for plaintiffs.

Paul R. Connolly, Paul M. Wolff, Williams, Connolly & Califano, Washington, D. C., for defendants United Mine Workers of America and W. A. (Tony) Boyle.

John J. Wilson, Jo V. Morgan, Jr., Whiteford, Hart, Carmody & Wilson, Washington, D. C., for defendants National Bank of Washington and Barnum L. Colton.

Fred M. Vinson, Jr., Reasoner, Davis & Vinson, Washington, D. C., for defendant United Mine Workers Welfare & Retirement Fund.

James F. Reilly, Washington, D. C., for defendant Josephine Roche.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DAMAGE AND RELATED ISSUES

GESELL, District Judge.

The Court now has before it the amount of damages to be assessed and the legal fees to be awarded plaintiffs by reason of the breaches of trust found to have existed. Blankenship v. Boyle, D.C., 329 F.Supp. 1089 (1971). Four defendants are involved in this phase of the case: United Mine Workers of America, The National Bank of Washington, Josephine Roche, and Barnum Colton. All counsel have cooperated in extensive pretrial discovery, exchanging various computations and deposing different experts, following which the Court heard three days of testimony and received numerous exhibits. The matter was then orally argued to the Court and supplemental briefs filed. A number of matters must be considered to conclude this phase of the proceedings and they will be discussed seriatim under appropriate headings.

A. Damages resulting from failure to invest excessive sums held, interest-free, at the Bank.

The Court has already determined that these damages shall run from a period commencing August 4, 1966, and shall be compensatory only. 329 F.Supp. at 1112. At issue is the period of time that should be considered for computing damages subsequent to this date; the extent, if any, to which the award should take into account various tax aspects of the Fund's operations; and, finally, the factors to be weighed in fixing the sum to be awarded.

(i) Period.

Plaintiffs urge that excessive sums remained on deposit at the Bank until September, 1971, when the account was removed from the Bank as directed by this Court's Order. The defendants, on the other hand contend that the period for fixing damages should run only until June 30, 1969, on the theory that the conspiracy in breach of trust terminated when Mr. Boyle replaced Mr. Lewis as the trustee representing the Union and Mr. Davis replaced Mr. Judy as the trustee representing the operators. The Court has determined that it will not accept either of these suggested terminal dates.

There is ample evidence that excessive funds remained on deposit at the Bank following Mr. Lewis's death and that whatever Mr. Boyle's intentions may have been, excessive sums were on deposit at the Bank throughout the litigation and indeed until April 28, 1971, when the Court filed its findings of fact and conclusions of law as to the merits.¹ The fact of the matter is that the breach of trust was deeply engrained by a long continuous course of improper dealing, and the momentum of the violation was never arrested by the affirmative conduct of any of the conspirators before the Court. Neither the retirement of Mr. Colton in January, 1970, nor the earlier death of Mr. Lewis terminated the breach of trust in which each had participated. Until April, 1971, when the Court filed its findings of fact and conclusions of law, none of the four conspirators engaged in actions sufficiently affirmative and explicit to be considered an effective termination or withdrawal from the conspiracy. It was only when the Court entered its Order on May 21, 1971, decreeing various remedial changes in the administration of the Fund, that sufficient affirmative action was thrust upon the conspirators to constitute a termination of the conspiracy. See Hyde v. United States, 225 U.S. 347, 369, 32 S.Ct. 793, 56 L.Ed. 1114 (1912); South-East Coal Co. v. Consolidated Coal Co., 434 F.2d 767, 784 (6th Cir. 1970).

(ii) Taxes.

A more complicated and difficult issue is presented by tax considerations which are brought forward with varying emphasis by the parties. Damages awarded will be paid to the Fund for eventual distribution to the beneficiaries. The Fund is required to pay income tax on all taxable investment income which exceeds the Fund's administrative expenses. Plaintiffs urged that the award should not be reduced by any possible year-to-year tax liability and that the Fund should be assumed to have reinvested and cumulated income assumed to have been received from investment of the excessive sums without tax adjustment. Plaintiffs point to the fact that it is impossible to ascertain whether the Fund will or will not be required to pay taxes and, if so, what the amount of such taxes will be. They point to complicated accounting questions necessarily involved and to other tax uncertainties. Defendants, on the other hand, urge that payment of taxes would have reduced the amount of income available for reinvestment and that a damage claim that fails to recognize this is unrealistic. Thus plaintiffs complain of the possibility of double taxation if allowance is made for taxes in the Court's award of damages and then the award itself is subsequently taxed, and defendants contend that some tax adjustment is necessary in the interest of fairness.

The Court has concluded that the possible but by no means certain application of some kind of tax to the award should be ignored and that the award should be made without allowing any opportunity to reopen the matter if any adverse tax consequences eventuate.

This determination is strongly reinforced by an aspect of the decision which has been uppermost in the Court's mind throughout the proceedings relating to damages. The record thoroughly establishes that the trustees were always extremely tax conscious. A damage computation in this case must recognize that the trustees functioning as prudent individuals, absent the conspiracy to breach trust, would have conducted the affairs of the Fund in a manner to minimize or avoid taxes. Accordingly, the Court will compute damages on the assumption that the excessive funds would all have been invested only in tax-free municipals. This is consistent not only with the reality of the Fund's tax situation, but wholly consistent with investments made by the Fund during the period under review.

Thus the award of damages to be made is an award of damages in the form of reconstructed income from an investment in tax-free municipals and the reinvestment of any interest obtained on such municipals again into tax-free municipals.

(iii) The damages.

This brings the Court then to a determination of the amount of the award. Before discussing the evidence in more detail it may be appropriate to indicate the standard to which the defendants responsible in damages must be held. The award must be of an amount representing what prudent trustees attempting to maximize tax-free income absent a conspiracy could reasonably be expected to have earned for the beneficiaries. Plaintiffs apparently accept this standard, but they have offered computations which the Court believes are inconsistent with its proper application.

From August 4, 1966, until April 28, 1971, the average daily balance on the Fund's books averaged around $50 million, reaching a peak of $87 million in May, 1968, and decreasing to about $20 million in early 1971. During this same period, the average daily float, or the difference between the average daily balance as shown on the Bank's books as compared with the average daily balance as shown on the Fund's books, ranged, month-to-month, from $2.9 million to $8.8 million. Following the Court's opinion in April, 1971, The Riggs National Bank won the competitive bidding for the Fund's account with a draft system which required a daily balance on the Bank's books of only a little over $1 million to compensate the Bank for its services. During the damage period, funds that actually were invested by the Fund performed at an overall yield of 5.39%.

Plaintiffs estimate the damages due to the excessive sums kept in demand deposits in the Bank to be at somewhat above $17 million. In support of this claim, plaintiffs presented the testimony of Dr. Roger Murray, an extremely experienced, informed, sophisticated money manager. The techniques used by Dr. Murray presented a comprehensive investment plan. He assumed that the Fund would maintain a minimal balance of $1,000 on its books and aided by the advantage of hindsight he reconstructed a sophisticated investment program which assumed different amounts in various types of balances and different types of investments with varying levels of yield for each separate balance.² His computations contemplate immediate reinvestment of interest on a continuing month-by-month basis in desirable types of Government securities. Overall, Dr. Murray's reconstructed investment program would have resulted in an average yield of 5.85%.

The Court has no doubt the techniques used by Dr. Murray were available, albeit highly specialized, and that a result such as he has reconstructed might have been achieved under proper techniques of money management. But the Court is unwilling to accept this approach since it reflects a higher level of investment conduct than could reasonably be expected of a prudent trustee responsible for this particular Fund at the time. The Court has concluded that it would be prudent and within the permissible legal standard for the trustees to maintain a larger balance uninvested on the Fund's books pending periodic meetings of the trustees, and that it would be entirely prudent to...