Davison v. Duke University

• Decision Date: 14 March 1973
• Docket Number: No. 37,37
• Parties: , 57 A.L.R.3d 1008 Wilburt C. DAVISON et al. v. DUKE UNIVERSITY et al.
• Court: North Carolina Supreme Court

Page 761

194 S.E.2d 761

282 N.C. 676, 57 A.L.R.3d 1008

Wilburt C. DAVISON et al. v. DUKE UNIVERSITY et al.

No. 37.

Supreme Court of North Carolina.

March 14, 1973.

Fleming, Robinson & Bradshaw, P.A. by Russell M. Robinson, II, Charlotte, for plaintiff-appellees.

Childs & Patrick, Charlotte, Attorneys for Bailey Patrick, Jr., Guardian ad Litem.

Helms, Mulliss & Johnston by E. Osborne Ayscue, Jr., Charlotte, for the defendant-appellee, The Trustees of Davidson College.

Young, Moore & Henderson, by Charles H. Young, Raleigh, for defendant-appellant Mary Jane Walton.

Childs & Patrick by Bailey Patrick, Charlotte, for Charles Walton.

A. Kenneth Pye and Powe, Porter & Alphin, by E. K. Powe, and Willis P. Whichard, Durham, for Duke University, defendant-appellee.

Robert Morgan, Atty. Gen., by Christine Y. Denson, Asst. Atty. Gen., for the State.

BRANCH, Justice.

We first consider whether the trial court erred in broadening the investment powers of the Trustees of the Duke Endowment and in granting authority to the Trustees to distribute principal to the extent necessary to comply with the requirements of certain tax enactments.

Paragraph 4 of the Third Division of the Indenture restricts investment by the Trustees to investments in Duke Power Company, U.S. Government bonds and certain state and municipal bonds. Paragraph 4 provides:

'4. To invest any funds from time to time arising or accruing through the receipt and collection of incomes, revenues and profits, sale of properties, or otherwise, provided the said trustees may not lend the whole or any part of such funds except to said Duke Power Company, nor may said trustees invest the whole or any part of such funds in any property of any kind except in securities of said Duke Power Company, or of a subsidiary thereof, or in bonds validly issued by the United States of America, or by a State thereof, or by a district, county, town or city which has a population in excess of fifty thousand people according to the then last Federal census, which is located in the United States of America, which has not since 1900 defaulted in the payment of any principal or interest upon or with respect to any of its obligations, and the bonded indebtedness of which does not exceed ten per cent of its assessed values. Provided further that whenever the said trustees shall desire to invest any such funds the same shall be either lent to said Duke Power Company or invested in the securities of said Duke Power Company or of a subsidiary thereof, if and to the extent that such a loan or such securities are available upon terms and conditions satisfactory to said trustees.'

This 'restricted' corpus is comprised of securities in Duke Power Company having a value of approximately $306,000,000. The remaining portion of the 'restricted' corpus consists of $67,000,000 in fixed-income government and municipal bonds plus a relatively small amount of common stocks. There is an 'unrestricted' corpus valued at approximately $9 million. We are here concerned only with the 'restricted' corpus. It is noted that plaintiffs do not seek modification of the Indenture with respect to the Trustees' investment authority over Duke Power securities. The Trustees possess the power to sell such securities by unanimous vote.

This Court considered a similar question regarding the powers of investment of the Duke Endowment in the case of Cocke v. Duke University, 260 N.C. 1, 131 S.E.2d 909. There the Court reversed the action of the trial judge in allowing modification. Rodman, J., speaking for the Court, concluded: 'The evidence fails to establish facts necessary for an order authorizing the trustees to disregard the express provisions of the trust indenture. The court should have allowed the motion for nonsuit.'

Certain pertinent propositions and principles of law were established in Cocke v. Duke University, supra:

First. The provision in the Indenture that the law of New Jersey was determinative of the appeal was adopted with the recognition that New Jersey law and North Carolina law governing modification of trust instruments are in substantial accord.

Second. A court may authorize a trustee to ignore the express provisions of the trust instrument limiting his authority with respect to the kind of securities in which he may invest. "But the power of the court should not be used to direct the trustee to depart from the express terms of the trust, except in cases of emergency or to preserve the trust estate.' Penick v. Bank, 218 N.C. 686, 12 S.E.2d 253. 'It must be made to appear that some exigency, contingency, or emergency has arisen which makes the action of the court indispensable to the preservation of the trust and the protection of infants.' Redwine v. Clodfelter, 226 N.C. 366, 38 S.E.2d 203.'

New Jersey by statutory enactment recognizes the equitable power of the court, under certain circumstances, to modify the provisions of a trust instrument. N.J.S.A. 3A:15--15 (formerly 1937 R.S. 3:16--17, 18). This statute merely codified the earlier decisions of the New Jersey courts. Morriss Community Chest v. Wilentz, 124 N.J.Eq. 580, 3 A.2d 808. See Annot., 170 A.L.R. 1219.

N.J.S.A. 3A:15--15 provides:

'Investment of trust funds; change in conditions; application to court

a. In all cases where by reason of a change in conditions which occurs, or Which may be reasonable foreseen, the objects of any trust heretofore or hereafter created by will or other instrument, or by order of court, might be defeated in whole or in part by the investment or continuance of the investment of all the funds of such trust in the kinds of securities to which the trustee is or shall be limited by the statutes of this state or by the instrument or court order creating such trust, any trustee or beneficiary of such trust may institute an action in the superior court to secure authority permitting or directing the trustee or trustees of such trust to invest all or a part of the funds thereof in other kinds of investments.

b. If the court shall find that by reason of a change in conditions which occurs Which may be reasonably foreseen, the Which may be reasonable foreseen, the objects of the trust might be defeated in whole or in part by the investment, or continuance of the investment, of all the funds of such trust in the kinds of investments to which the trustee is then limited by the statutes of this state or by the instrument or court order creating such trust and that the objects of the trust and the interests of all the beneficiaries thereof, whether vested or contingent, would be promoted by the investment of all, or some part, of the trust funds otherwise, the court shall by its order or judgment, notwithstanding that the trust so created may be in default in respect to the terms of the instrument creating such trust, authorize or direct the trustee of such trust to invest the whole, or such part thereof as it shall designate, in any class of investments, including common or preferred stocks of corporations of this state or of any other state or country, which in its judgment will promote the objects of the trust and the interests of all the beneficiaries thereof. However the court shall not authorize or direct the purchase of any class of common or preferred stock of any corporation unless the corporation shall have been organized and engaged in the conduct of its business for 5 calendar years immediately preceding the purchase of the stock of the corporation.

c. As used in this section 'trust' shall include 'guardianship', 'trustee' shall include 'guardian', and 'beneficiary' shall include 'ward'.' (Our emphasis)

Third. ". . . (T)he condition or emergency asserted must be one not contemplated by the testator, and which, had it been anticipated, would undoubtedly have been provided for; and in affording relief against such exigency or emergency, the court must, as far as possible, place itself in the position of the testator and do with the trust estate what the testator would have done had he anticipated the emergency.' Cutter v. Trust Co., 213 N.C. 686, 197 S.E. 542.' We note that substantially the same language was used by the New Jersey Court in Pennington v. Metropolitan Museum of Art, 65 N.J.Eq. 11, 55 A. 468, to wit: '. . . in an emergency which had not been considered by the creator of the trust, and which, if anticipated, would have been provided for, a court of equity might take the place of the creator of the trust, and do what he would have done.'

There is an abundance of authority in both North Carolina and New Jersey to the effect that the courts will modify a trust instrument to preserve the purpose of the trust or protect its beneficiaries when some exigency or emergency not anticipated by the trustor will defeat his intent. Lambertville Nat Bank v. Bumster, 141 N.J.Eq. 396, 57 A.2d 525; Morris Community Chest v. Wilentz, supra; Wachovia Bank & Trust Co. v. Morgan, 279 N.C. 265, 182 S.E.2d 356; Wachovia Bank & Trust Co. v. John Thomason Const. Co., 275 N.C. 399, 168 S.E.2d 358; Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 153 S.E.2d 449; In Re Trusteeship of Kenan, 261 N.C. 1, 134 S.E.2d 85, later appeal 262 N.C. 627, 138 S.E.2d 547.

Fourth. Finally, Cocke v. Duke University, supra, stands for the proposition that in order to displace or circumvent an express provision in the trust instrument, one must do more than show a change of economic conditions. See also, Reiner v. Fidelity Union Trust Co., 126 N.J.Eq. 78, 8 A.2d 175; Annot., 170 A.L.R. 1219.

The 'restricted' corpus is made up of three funds. The first, or 'original' corpus, was the fund used to create the Duke Endowment. The 'original' corpus in its inception had a value of $40 million and was intended to be the nucleus of the Endowment. The remaining two funds are derived from the will and a codicil to the will which was subsequently executed by Mr. Duke. As of 30 November 1971, these three corpus funds...