Buder v. Sartore, 88SC226
| Citation | 774 P.2d 1383 |
| Decision Date | 19 June 1989 |
| Docket Number | No. 88SC226,88SC226 |
| Parties | Theodore Alexander BUDER, Petitioner, v. Pamela Morrow SARTORE, as Mother, Legal Custodian, Natural Guardian, and Next Friend of Theodore Alexander Buder, Jr., and Cori Marie Buder, Respondent. |
| Court | Supreme Court of Colorado |
Hall & Evans, Eugene O. Daniels, Alan Epstein, Denver, for petitioner.
Hoyt, Graveley & Thorpe, Wesley W. Hoyt, Englewood, for respondent.
This case arose out of an action brought by respondent on behalf of Theodore Alexander Buder, Jr. and Cori Marie Buder, the then minor children of respondent and petitioner, alleging that petitioner breached the fiduciary duty he owed to his children by failing to prudently invest certain of their funds. Following a bench trial, the court found that petitioner had breached his fiduciary duty and assessed damages and attorney fees. The court of appeals affirmed the judgment and award of attorney fees, and in addition awarded respondent attorney fees incurred on appeal. Sartore v. Buder, 759 P.2d 785 (Colo.App.1988). We granted certiorari to determine whether the court of appeals, in affirming the trial court, applied the appropriate standard of care when reviewing the petitioner's investment activities and whether damages and attorney fees could be imposed against petitioner. We affirm.
Between 1972 and 1984, the father of petitioner Theodore Alexander Buder made substantial cash gifts to the two minor children of Buder and his then wife, respondent Pamela Sartore. 1 The cash gifts, typically in the form of checks made directly payable to the children, were given to Buder with the tacit understanding that he was to safeguard the money and invest it on behalf of the children. Buder would then deposit the funds in bank accounts marked either "Theodore A. Buder, in Trust for Theodore A. Buder, Jr." or "Theodore A. Buder, in Trust for Cori Marie Buder."
From 1972 until the date of trial Buder invested various amounts of the children's money in "blue chip" stocks traded over the New York or American Stock exchange. In 1974, Buder also began investing substantial sums of the children's funds in penny stocks. When the stocks were acquired they were purchased in Buder's name as custodian for the children under the Uniform Gifts to Minors Act (UGMA). 2 At one point, almost half of the children's capital was invested in penny stocks. 3 While the "blue chip" stocks sustained gains and losses reflecting general economic trends, all of the penny stocks, except one, suffered substantial losses.
On April 16, 1984, Sartore sued Buder in the Arapahoe County District Court claiming that Buder had breached his fiduciary duty to their children under the UGMA. Specifically, Sartore alleged that Buder breached his duty by failing to invest the children's funds as a prudent person would, failing to provide an accounting, converting the funds to his own use, and commingling his funds with those of his children. Buder continued to invest the funds entrusted to him as a custodian after the complaint was filed in this case. After a bench trial, the court found that Buder had breached his fiduciary duty as custodian of the children's funds under the UGMA.
The trial court reviewed three statutes which set out the prudent-person rule and defined a custodian's duty of care in investing for a minor. § 11-50-105(5), 4 C.R.S. (1973); § 11-50-113(2), 4B C.R.S. (1987); § 15-1-304, 6 C.R.S. (1973). These three statutes contain what is commonly referred to as the prudent-person rule. Under the first statute cited by the court, the UGMA, the prudent-person rule states that "[t]he custodian, notwithstanding statutes restricting investments by fiduciaries, shall invest and reinvest the custodial property as would a prudent man of discretion and intelligence who is seeking a reasonable income and the preservation of his capital." § 11-50-105(5), 4 C.R.S. (1973) (emphasis added). This prudent-investor rule was superseded when the legislature repealed and reenacted the UGMA. Ch. 74, sec. 1, § 11-50-113(2), 1984 Colo.Sess.Laws 383, 388-89. The statute as reenacted, was entitled the Uniform Transfers to Minors Act (UTMA), 4 and now provides that "[i]n dealing with custodial property, a custodian shall observe the standard of care that would be observed by a prudent person dealing with property of another and is not limited by any other statute restricting investments by fiduciaries." § 11-50-113(2), 4B C.R.S. (1987) (emphasis added).
The court then looked to the general prudent-person rule governing fiduciaries. Under section 15-1-304, 6 C.R.S. (1973),
[i]n acquiring ... property for the benefit of others, fiduciaries 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.
(Emphasis added.) 5 Addressing the interrelationship of the three prudent-person rules, the court concluded that the "fiduciary duty owed by a trustee under General Trust Law [section 15-1-304], and a custodian under the Uniform Gifts to Minors Act are the same."
The trial court rejected Buder's argument that since he invested his own funds in the same penny stocks as he invested the children's funds, he was not accountable for the loss of the children's money. In essence, Buder argued that the UGMA created a subjective standard whereby his conduct as a custodian would be appropriate so long as he invested his personal capital identically to that of the children's. The court pointed out that under Rippey v. Denver U.S. Nat'l Bank, 273 F.Supp. 718 (D.Colo.1967),
the "reasonable prudence" standard applies to protecting and caring for the property and does not permit one to prudently speculate.... The trustee may not subject his trust property to hazards which a man dealing with his own property might consider warranted if to do so would create danger to the trust estate.
Id. at 735 (emphasis added). Based upon this passage from Rippey, the court held that Buder was required as custodian to invest in a manner reasonably calculated to safeguard and preserve the children's funds. Because the court found that Buder knew penny stocks were not safe investments which would preserve the children's funds, the trial court concluded that he had "breached the Prudent Man Standard as it relates to a custodian's duty to the preservation of capital under U.G.M.A., and thus breached his fiduciary duty to the beneficiaries and is liable in damages therefor."
The court substituted Sartore for Buder as custodian and ordered Buder to account for the children's funds. The court ordered that all penny stocks purchased by Buder on the children's behalf be transferred to him and, in return, that he pay $32,506.27 to Cori and $32,596.27 to Alex, those amounts representing the amount of the gifts from Buder's father to the children that Buder invested in penny stocks. An additional $7,493.21 to Cori and $7,532.99 to Alex was awarded, representing damages for the loss of appreciation of the funds invested in the penny stocks. The court also awarded damages against Buder for interest in the amount of $337.02 to Cori and $281.41 to Alex on the money he borrowed from the children. Sartore was also granted attorney fees. The court did not, however, hold Buder liable for any of the losses sustained by the "blue chip" stocks.
Buder appealed, alleging that the trial court applied an improper custodial standard of care when it reviewed the investments he made on behalf of his children. Buder also claimed that the trial court awarded damages and attorney fees not authorized by statute. The court of appeals rejected Buder's allegations and affirmed the trial court in all respects. Rejecting Buder's arguments, the court of appeals stated that the trial court applied the standard of care set forth in section 11-50-105(5) of the UGMA, which required a custodian to invest as a prudent man would invest his own money. The court of appeals went on to state:
This standard of care was similar to the standard owed by a trustee under the general trust law before July 1, 1975. See § 15-1-304, C.R.S. Both standards focused on the element of how a prudent man would invest his own capital or account.
The trial court appropriately did not apply the higher standard of care for a trustee as alleged by defendant. The higher standard went into effect after July 1, 1975, as set out in § 15-1-304, C.R.S. . Nor did the court apply the newer standard for a custodian enacted in 1984 under § 11-50-113, C.R.S. , of the U.T.M.A. The higher standard set forth in the amendments requires the custodian to act as a prudent person to deal with greater care for the property of another than for his own. However, both the statutes, on the issue of standard of care, paralleled each other prior to the July 1, 1975 changes in the general trust law.
We conclude that in this case the fiduciary duty owed by a trustee under general trust law, and a custodian under the Act are the same. See Restatement (Second) of Trusts § 227(a) comment f(1) and (2) (1959). That section states that a trustee may not purchase for the purpose of speculation nor purchase new and untried securities. The evidence reflects and the trial court found that penny stocks were highly speculative. Thus, defendant had no authority to invest in penny stocks. Such investments violated the reasonable prudence standard for the protection and care of the children's property. Rippey v. U.S. National Bank, 273 F.Supp. 718 (D.Colo.1967).
Sartore v. Buder, 759 P.2d 785, 787 (Colo.App.1988).
Accordingly, although we apply a different analysis, we conclude that the court of appeals reached the right result by...
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