First Alabama Bank of Montgomery, N.A. v. Martin

• Decision Date: 20 August 1982
• Parties: FIRST ALABAMA BANK OF MONTGOMERY, N.A. v. Charlotte Kyle MARTIN, Kathleen Gerson, Gloria Alleta Parker, and Virginia G. Weldon. 80-853.
• Court: Alabama Supreme Court

Page 415

425 So.2d 415

FIRST ALABAMA BANK OF MONTGOMERY, N.A. v. Charlotte Kyle MARTIN, Kathleen Gerson, Gloria Alleta Parker, and Virginia G. Weldon.

80-853.

Supreme Court of Alabama.

Aug. 20, 1982.

As Modified on Rehearing Jan. 14, 1983.

M.R. Nachman, Jr., R.E. Steiner, III, and Eric G. Bruggink of Steiner, Crum & Baker, Montgomery, for appellant.

Jack Crenshaw and Albert W. Copeland and Richard H. Gill of Copeland, Franco, Screws & Gill, Montgomery, for appellees.

William H. Smith, Gen. Counsel and Michael F. Crotty, Asst. Gen. Counsel, Washington, D.C., for amicus curiae American Bankers Ass'n.

TORBERT, Chief Justice.

This is a class action. The plaintiffs are beneficiaries of approximately 1,250 individual trusts, of which the bank is trustee. As trustee of these individual trusts, the bank invested certain assets comprising the principal of those trusts in participating units of two common trust funds, a bond fund and an equity fund.

After First Alabama purchased and sold certain units and made certain investments that resulted in substantial losses to those funds, the plaintiffs sought a declaration as to the duty of the bank and its liability to account, a declaration that certain investments were imprudent, and affirmative relief requiring the bank to restore to the common trust funds the losses sustained because of the bank's allegedly improper investments.

Prior to the certification of the class, First Alabama took the position that this The case then proceeded to trial on the issue of whether the bank was prudent or imprudent in the purchase or sale of thirty specified securities. Over First Alabama's objection, the trial court impaneled an advisory jury pursuant to Rule 39(c), ARCP, to aid the court in its determination of these issues. ² The testimony was then heard orally by the trial court and the advisory jury. Special interrogatories requiring a "yes" or "no" answer were submitted to the advisory jury and, while it was unable to reach a unanimous verdict, as to the majority of issues it ruled ten to two against First Alabama.

action would require a full accounting of each of approximately 1,250 individual trusts. The trial court did not agree. After the original appeal to this Court, ¹ First Alabama filed a delayed counterclaim, requesting a full accounting of its own acts as the trustee of the individual trusts. The court subsequently struck this counterclaim, without prejudice to First Alabama's right to maintain individual suits for an accounting.

At that time, the trial judge made his own findings of fact and on June 24, 1981, the court entered an order which found that the defendant as trustee of the common bond fund purchased the following debentures: ATICO Mortgage Investors, Barnett Mortgage Trust, Guardian Mortgage Investors, Justice Mortgage Investors, Midland Mortgage Investors, and Security Mortgage Investors. The trial court concluded that the purchase of these securities by the bank as trustee did not measure up to the "prudent man" standard and were, therefore, imprudent. Because it found the purchase of these securities imprudent, the court found it unnecessary to decide whether the sale of these securities also had been imprudent. These securities were Real Estate Investment Trusts (REIT's), as described later in this opinion.

In its order, the court also found that the bank as trustee of the common equity fund purchased stock of the following companies as investments for the common equity fund: American Garden Products; Ames Department Stores; Beverage Canners; CNA Financial; Elixir Industries; First Mortgage Investors; Hav-a-Tampa; Kinney Services; Loomis Corporation; Mortgage Associates; Transamerica Corporation; Universal Oil Products; Wynn Oil Co.; Associated Coca-Cola Bottling Company; Cox Broadcasting; Rust Craft Greeting Cards; and Sealed Power. The trial court concluded that the purchase of these securities by the bank as trustee did not measure up to the "prudent man" standard and were, therefore, imprudent. Because it found the purchases of these securities imprudent, the court found it unnecessary to decide whether the sale of these securities also had been imprudent.

The court also found that the bank as trustee of the common equity fund purchased the following securities: Allied Chemicals; Amfac; Blue Bell; Pabst Brewing Company; and Purolator. The court concluded that the bank's purchases of these securities did meet the "prudent man" standard but that their sale did not. The trial court concluded that both the purchase and the sale of Green Giant stock and Syntex stock were prudent. The court based its conclusions upon the test set out in Birmingham Trust National Bank v. Henley, 371 So.2d 883 (Ala.1979).

On August 19, 1981, the court ruled against First Alabama on all of its special and affirmative defenses, readopted its class action order of June 24, 1981, and ordered First Alabama to pay $1,226,798.00 into the bond fund and $1,426,354.88 into the equity fund. These sums represented the difference between the purchase and At trial, the plaintiffs introduced evidence of a "common trust plan" that had been adopted by First Alabama and approved by the Comptroller of the Currency. Testimony showed that the essential investment purpose of the bond fund was to produce income and that the essential investment purposes of the equity fund were the appreciation of equity and production of income. The plan recognized that the valuation of the investments of the common trust funds would vary periodically and it had specific provisions as to how the funds would be valued quarterly to reflect the market value of investments. The evidence showed that the method of valuation was carefully spelled out in that plan, but that First Alabama did not follow that method.

sales prices of the six bond fund securities and twenty-two of the equity fund securities. The bank was further ordered to pay interest on these sums.

I. Evidence as to Imprudence of Investments in the Equity Fund.

In regard to the equity fund, the court found that the purchase of seventeen of the twenty-four designated equity fund securities had been imprudent. As to these seventeen securities, the court found it unnecessary to decide whether their sale was imprudent but did conclude that the sale of five of the remaining seven securities had been imprudent.

Evidence was introduced showing that in 1973 the board of directors of First Alabama reduced to writing what it considered to be minimum standards of safety. Al Byrne, the vice president and senior trust officer of the bank admitted, however, that these standards were followed prior to 1973 as unwritten guidelines and were generally so followed at the time in which the sales and purchases in question were made. These standards were: (1) A rating of B+ or better by the Standard and Poor ratings (S & P) (B+ being an average rating and B being a speculative rating); (2) a minimum of 1,500,000 shares of stock in the hands of the public; and (3) annual sales of at least $100 million. Byrne testified that the bank generally invested in companies with at least ten years' experience in business and a record of increased earnings. He stated that the companies would generally be rated by one of the rating services. First Alabama claimed that the bank's minimum standards were primarily designed for individual trusts, rather than common trust funds, yet Byrne stated that when purchases were made for the two common funds, bank policy required that those minimum standards adopted by the bank be followed. Evidence was also presented showing that deviations were permitted from these standards adopted by the board of directors with the approval of the trust investment committee so as to accomplish its goals.

The plaintiffs offered evidence that these standards had not been followed. For example, Associated Coca-Cola, Cox Broadcasting, Rust Craft Greeting Cards and Sealed Power were rated B+ but failed to meet the Bank's requirement of one hundred million dollars in annual sales. In addition, the following stocks failed to meet the minimum requirement of a B+ rating: American Garden Products; Ames Department Stores; Beverage Canners; CNA Financial; Elixir Industries; First Mortgage Investors; Hav-a-Tampa; Kinney Services; Loomis Corp.; Mortgage Associates; Transamerica Corp.; Universal Oil Products; and Wynn Oil Co.

Dr. Robert Johnston, chairman of the finance faculty of the School of Business of George Mason University and expert witness for the plaintiffs, testified that First Alabama, as trustee, should have invested defensively. According to Johnston, a trustee should first provide for the safety of the principal and then obtain an adequate return. He based his conclusions upon a treatise by Dr. Benjamin Graham, which stated seven criteria for testing the safety of investments. These criteria were (1) a minimum of $100 million in annual sales; (2) a current ratio of at least two to one (current assets should be twice current liabilities); (3) a net working capital to long-term debt ratio of at least one to one (net working capital being current assets less current liabilities and long-term debt meaning obligations 1. The purchase of the Allied Chemicals stock did not meet standards 6 and 7.

that mature in more than one year); (4) earnings stability (positive earnings for the last ten years); (5) a good dividend record; (6) an earnings growth measure of at least one-third per share over a ten-year period, averaging the first three years and the last three years to remove extremes; (7) a moderate price earnings ratio of no more than fifteen to one; and (8) a moderate ratio of price to assets of no more than one and one half to one. Johnston believed that a trustee should not purchase stocks which failed to meet any one of these standards. Applying these standards, Johnston concluded that:

^*2. The purchase of the American Garden Products stock...