Chase v. Pevear
| Decision Date | 09 April 1981 |
| Citation | 419 N.E.2d 1358,383 Mass. 350 |
| Parties | John P. CHASE, trustee v. Alice B. PEVEAR et al. |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Edward R. Lev, Boston (Harvey E. Bines, Boston, with him), for plaintiff.
Raymond H. Young and James D. St. Clair, Boston, for the guardian ad litem.
John Clarke Kane, Boston, for Alice B. Pevear and others.
Catharine W. Hantzis, Asst. Atty. Gen., for the Attorney General.
Weld S. Henshaw, Boston, for Museum of Fine Arts.
Nicholas U. Sommerfeld, Peter M. Saparoff and Susan E. Johnson, Boston, for The Investment Counsel Association of America, Inc. and others, amici curiae, submitted a brief.
Before HENNESSEY, C. J., and BRAUCHER, KAPLAN, LIACOS and ABRAMS, JJ.
The trustee of a testamentary trust appeals from a judgment and orders of the Probate Court removing him as trustee, surcharging him in the amount of $119,902.04, plus interest, denying his claim for fees and expenses, and ordering him personally to pay fees and expenses of adverse parties in the amount of $107,896.71. The appeal presents important questions with respect to the application of the "prudent man rule" of Harvard College v. Amory, 9 Pick. 446, 461 (1830), and a number of subsidiary questions of probate and trust law and practice. We uphold the removal, reduce the amount of the surcharge, and remand the case for reconsideration of fees and expenses in accordance with our opinion.
1. The proceedings. The testator, Everett H. Black, died on January 7, 1965. Alfred E. Chase was appointed executor and trustee; he resigned and his first and final account was allowed. Pursuant to the will, John P. Chase (trustee), nephew of Alfred E. Chase, was appointed successor trustee on September 24, 1968. In July and August, 1975, the trustee filed his first through seventh accounts, covering the period from September 24, 1968, through December 31, 1974. The income beneficiaries of the trust (Alice B. Pevear, the testator's niece, and her two children) entered an appearance in September, 1975, and in October a guardian ad litem was appointed for minors and persons unborn and unascertained.
The guardian ad litem filed his report on May 26, 1976, recommending surcharges in the total amount of about $114,000, plus interest. In November, 1976, one of the income beneficiaries filed a petition for removal of the trustee. That petition and the accounts were referred to a master on January 18, 1977. The Boston Museum of Fine Arts (Museum) as remainderman and the Attorney General filed appearances thereafter. Hearings were held before the master on eighteen trial days. The master served his final report of 198 pages plus appendices on May 2, 1978, and filed it in June. He recommended surcharges in a total amount of about $12,000, plus some $25,000 if in the court's opinion there was a sufficient causal connection between two improper investments and the subsequent losses, plus interest. He did not recommend removal of the trustee, stating that removal lay in the discretion of the court rather than the master.
All parties filed objections to the master's report and motions to modify and confirm the report. The guardian ad litem in substance repeated the recommendations he had made in his 1976 report. In September, 1978, without opinion, the probate judge allowed all of the objections of the guardian ad litem and denied conflicting objections of other parties. In October and November orders were entered surcharging the trustee, and decrees removed the trustee and appointed successor trustees. The parties also moved for the award of costs and counsel fees, and counsel fee hearings began December 28, 1978. During a recess, counsel for the trustee discovered a letter from the judge to the guardian ad litem dated May 19, 1976, shortly before the guardian ad litem filed his report. That letter, discussed hereafter, led to the judge's withdrawal from the case on January 10, 1979.
A second judge was assigned to the case, and on March 16, 1979, the second judge vacated all the orders made by the first judge in 1978 except the decrees removing the trustee and appointing successor trustees. After new hearings before the second judge on the objections to the master's report and on costs and counsel fees, the second judge on August 31, 1979, in effect reinstated the orders of the first judge and awarded counsel fees and expenses. This appeal followed, and we transferred the case to this court on our own motion.
2. The history of the trust. We summarize briefly the history of the trust as disclosed by the master's report, leaving details for discussion in connection with particular issues. Pursuant to the will income was accumulated and added to principal for six years after the testator's death on January 7, 1965. After January 7, 1971, the income beneficiaries were the testator's niece and her two children. Upon the death of the last survivor of the three, and after pecuniary bequests to named charities, issue then living will become income beneficiaries. The remainder goes to the Museum.
The original executor and trustee employed John P. Chase, Inc. (Company), a registered investment adviser, as a consultant on investments at a cost of $2,000 a year. Early in 1969, a few months after his appointment, the trustee employed the Company under an "advisory agreement" at an annual cost of one half of one per cent of the assets of the trust, or about $9,000 at that time. The trustee was the president, treasurer, chief executive officer and controlling stockholder of the Company. The will contained no provision authorizing the employment of investment counsel, and the guardian ad litem and the income beneficiaries contended that the fees paid to the Company were not chargeable to the trust. The master concluded that the employment of the Company "was prima facie reasonable and necessary" in view of the fact that the trustee took no fee, that there was no improper conflict of interest, and that the amounts paid were reasonable and proper and were properly charged to the trust. He recommended no surcharge on this item.
The Massachusetts inheritance tax on the future interests of the life beneficiaries became due on January 7, 1972, "one year from the date when the right of possession accrues to the persons so entitled." G.L. c. 65, § 7, as appearing in St. 1957, c. 429, § 1. Without excuse, the trustee failed to pay the tax, some $72,000, until May 17, 1974. No penalty was assessed, but interest was paid in the amount of $13,868.63. During the period of delay the securities in the trust included short term Treasury notes sufficient to pay the tax. If the trustee had paid the tax when due, he would have obtained the funds from those notes, as he did when he paid the tax. The master recommended a surcharge in the amount of the difference between the interest paid and the income on the Treasury notes during the period of delay. That difference came to $1,591.79.
At the death of the testator, his estate consisted of "excessively diversified" common stocks. The will provided that the trustee might retain without liability any investments held by the testator at his death. On his appointment the trustee took over twenty-nine common stocks and ten issues of bonds, debentures and notes. The market value of the trust assets rose from less than.$1.8 million at the end of 1968 to more than $2 million at the end of 1972. It then fell to some $1.7 million at the end of 1973, and to $1.24 million at the end of 1974. Of some $630,000 of market value of common stocks held at the end of 1974, about 60% consisted of six blocks of stock held by the testator at his death. During the period from January 7, 1971, to May, 1974, the average annual rate of return on the securities of the trust was 3.5%. At the end of 1974, it was 5.1%.
The guardian ad litem challenged seven specific investments, four of them, amounting to less than 4% of the trust assets, in the "shelter" (housing) industry. In 1970 through 1972 that industry was "in a real growth period" and was a popular area for investors. The stock market A fair return during the period from 1968 through 1974 would have been in a range from 3% to 6%, with a higher percentage toward the end of the period.
As to the surcharges sought by the guardian ad litem, the following table shows the master's findings and the rulings of the probate judge, without interest.
Item 1 Guardian (1976) Master (1978) Judge (1979)
-------------- --------------- ------------- ------------
Advisory fees $ 13,854.88 None $ 13,793.92
Tax interest 1,558.18 $ 1,591.79 7,803.33
CMI 7,564.39 918.31 7,564.39
MGIC 7,168.16 2,898.82 7,168.16
Evans Products 13,531.44 13,531.44 * 13,531.44
USI 12,273.39 12,273.39 * 12,273.39
Meredith 4,769.03 None 4,769.03
W.T. Grant 17,627.60 6,315.10 17,627.60
Penn Central 35,370.78 None 35,370.78
--------------- ------------- ------------
Total $113,717.85 $37,528.85 $119,902.04
1. The abbreviations are explained hereafter
* If causal connection sufficient
3. Procedural issues.
a. Summaries of evidence. The order...
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