Dennis v. Rhode Island Hosp. Trust Nat. Bank

• Decision Date: 28 September 1984
• Docket Number: Nos. 84-1084,84-1149,s. 84-1084
• Citation: 744 F.2d 893
• Parties: Robert B. DENNIS, etc., et al., Plaintiffs, Appellees, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Defendant, Appellant. Robert B. DENNIS, etc., et al., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 893

744 F.2d 893

Robert B. DENNIS, etc., et al., Plaintiffs, Appellees, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Defendant, Appellant.

Robert B. DENNIS, etc., et al., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, Defendant, Appellee.

Nos. 84-1084, 84-1149.

United States Court of Appeals First Circuit.

Argued June 5, 1984.

Decided Sept. 28, 1984.

John L. Warden, New York City, with whom Robert J. Lack, Richard E. Simpson, Sullivan & Cromwell, Edwin H. Hastings, Edward J. Regan, Peter J. McGinn, and Tillinghast, Collins & Graham, Providence, R.I., were on brief, for Rhode Island Hospital Trust Nat. Bank.

Gerard A. Dupuis, New York City, with whom Barbara T. Barrantes, New York City, Peter J. McNamara, Baltimore, Md., Paul P. Baillargeon, Woonsocket, R.I., and Ober, Kaler, Grimes & Shriver, New York City, were on brief, for Robert B. Dennis, etc., et al.

Before COFFIN and BREYER, Circuit Judges, and DOYLE, ^* Senior District Judge.

BREYER, Circuit Judge.

The plaintiffs are the great-grandchildren of Alice M. Sullivan and beneficiaries of a trust created under her will. They claimed in the district court that the Bank trustee had breached various fiduciary obligations owed them as beneficiaries of that trust. The trust came into existence in 1920. It will cease to exist in 1991 (twenty-one years after the 1970 death of Alice Sullivan's last surviving child). The trust distributes all its income for the benefit of Alice Sullivan's living issue; the principal is to go to her issue surviving in 1991. Evidently, since the death of their mother, the two plaintiffs are the sole surviving issue, entitled to the trust's income until 1991, and then, as remaindermen, entitled to the principal.

The controversy arises out of the trustee's handling of the most important trust assets, undivided interests in three multi-story commercial buildings in downtown Providence. The buildings (the Jones, Wheaton-Anthony, and Alice Buildings) were all constructed before the beginning of the century, in an area where the value of the property has declined markedly over the last thirty years. During the period that the trust held these interests the buildings were leased to a number of different tenants, including corporations which subsequently subleased the premises. Income distribution from the trust to the life tenants has averaged over $34,000 annually.

At the time of the creation of the trust in 1920, its interests in the three buildings were worth more than $300,000. The trustee was authorized by the will to sell real estate. When the trustee finally sold the buildings in 1945, 1970, and 1979, respectively, it did so at or near the lowest point of their value; the trust received a total of only $185,000 for its interests in them. These losses, in plaintiffs' view, reflect a serious mishandling of assets over the years.

The district court, 571 F.Supp. 623, while rejecting many of plaintiffs' arguments, nonetheless found that the trustee had failed to act impartially, as between the trust's income beneficiaries and the remaindermen; it had favored the former over the latter, and, in doing so, it had reduced the value of the trust assets. To avoid improper favoritism, the trustee should have sold the real estate interests, at least by 1950, and reinvested the proceeds elsewhere. By 1950 the trustee must have, or should have, known that the buildings' value to the remaindermen would be small; the character of downtown commercial Providence was beginning to change; retention of the buildings would work to the disadvantage of the remaindermen. The court ordered a surcharge of $365,000, apparently designed to restore the real value of the trust's principal to its 1950 level.

On appeal, plaintiffs and defendants attack different aspects of the district court's judgment. We have reviewed the record in light of their arguments. We will not overturn a district court's factual determination unless it is "clearly erroneous," Fed.R.Civ.P. 52(a). And, in a diversity case such as this one, involving a technical subject matter primarily of state concern, we are "reluctant to interfere with a reasonable construction of state law made by a district judge, sitting in the state, who is familiar with that state's law and practices." Rose v. Nashua Board of Education, 679 F.2d 279, 281 (1st Cir.1982); see Berrios Rivera v. British Ropes, Ltd., 575 F.2d 966, 970 (1st Cir.1978); Guy v. Mohave County, 701 F.2d 73, 77 (9th Cir.1982); cf. Bishop v. Wood, 426 U.S. 341, 346-47 & n. 10, 96 S.Ct. 2074, 2078-2079 & n. 10, 48 L.Ed.2d 684 (1976). Application of these principles leads us, with one minor exception, to affirm the district court's judgment.

I

a. The trustee first argues that the district court's conclusions rest on "hindsight." It points out that Rhode Island law requires a trustee to be "prudent and vigilant and exercise sound judgment," Rhode Island Hospital Trust Co. v. Copeland, 39 R.I. 193, 98 A. 273, 279 (1916), but "[n]either prophecy nor prescience is expected." Stark v. United States Trust Co. of New York, 445 F.Supp. 670, 678 (S.D.N.Y.1978). It adds that a trustee can indulge a preference for keeping the trust's "inception assets," those placed in trust by the settlor and commended to the trustee for retention. See Peckham v. Newton, 15 R.I. 321, 4 A. 758, 760 (1886); Rhode Island Hospital Trust Co. v. Copeland, supra. How then, the trustee asks, can the court have found that it should have sold these property interests in 1950?

The trustee's claim might be persuasive had the district court found that it had acted imprudently in 1950, in retaining the buildings. If that were the case, one might note that every 1950 sale involved both a pessimistic seller and an optimistic buyer; and one might ask how the court could expect the trustee to have known then (in 1950) whose prediction would turn out to be correct. The trustee's argument is less plausible, however, where, as here, the district court basically found that in 1950 the trustee had acted not imprudently, but unfairly, between income beneficiaries and remaindermen.

Suppose, for example, that a trustee of farmland over a number of years overplants the land, thereby increasing short run income, but ruining the soil and making the farm worthless in the long run. The trustee's duty to take corrective action would arise from the fact that he knows (or plainly ought to know) that his present course of action will injure the remaindermen; settled law requires him to act impartially, "with due regard" for the "respective interests" of both the life tenant and the remainderman. Restatement (Second) of Trusts Sec. 232 (1959). See also A. Scott, The Law of Trusts Sec. 183 (1967); G.G. Bogert & G.T. Bogert, The Law of Trusts and Trustees Sec. 612 (1980). The district court here found that a sale in 1950 would have represented one way (perhaps the only practical way) to correct this type of favoritism. It held that instead of correcting the problem, the trustee continued to favor the life tenant to the "very real disadvantage" of the remainder interests, in violation of Rhode Island law. See Industrial Trust Co. v. Parks, 57 R.I. 363, 190 A. 32, 38 (1937); Rhode Island Hospital Trust Co. v. Tucker, 52 R.I. 277, 160 A. 465, 466 (1932).

To be more specific, in the court's view the problem arose out of the trustee's failure to keep up the buildings, to renovate them, to modernize them, or to take other reasonably obvious steps that might have given the remaindermen property roughly capable of continuing to produce a reasonable income. This failure allowed the trustee to make larger income payments during the life of the trust; but the size of those payments reflected the trustee's acquiescence in the gradual deterioration of the property. In a sense, the payments ate away the trust's capital.

The trustee correctly points out that it did take certain steps to keep up the buildings; and events beyond its control made it difficult to do more. In the 1920's, the trustee, with court approval, entered into very longterm leases on the Alice and Wheaton-Anthony buildings. The lessees and the subtenants were supposed to keep the buildings in good repair; some improvements were made. Moreover, the depression made it difficult during the 1930's to find tenants who would pay a high rent and keep up the buildings. After World War II the neighborhood enjoyed a brief renaissance; but, then, with the 1950's flight to the suburbs, it simply deteriorated.

Even if we accept these trustee claims, however, the record provides adequate support for the district court's conclusions. There is considerable evidence indicating that, at least by 1950, the trustee should have been aware of the way in which the buildings' high rents, the upkeep problem, the changing neighborhood, the buildings' age, the failure to modernize, all together were consuming the buildings' value. There is evidence that the trustee did not come to grips with the problem. Indeed, the trustee did not appraise the properties periodically, and it did not keep proper records. It made no formal or informal accounting in 55 years. There is no indication in the record that the trust's officers focused upon the problem or consulted real estate experts about it or made any further rehabilitation efforts. Rather, there is evidence that the trustee did little more than routinely agree to the requests of the trust's income beneficiaries that it manage the trust corpus to produce the largest possible income. The New Jersey courts have pointed out that an impartial trustee must

view the overall picture as it is presented from all the facts, and not close its eyes to any relevant facts which might result in excessive burden to the one class in preference to the other.

Pennsylvania Co. v. Gillmore, 137 N.J.Eq. 51, 43 A.2d 667, 672 (1945). The record supports a conclusion of failure to satisfy that duty.

The district...