O'Hayer v. de St. Aubin

• Decision Date: 19 August 1968
• Citation: 30 A.D.2d 419,293 N.Y.S.2d 147
• Parties: Lorraine O'HAYER, Appellant, v. Honore de ST. AUBIN and Ovide E. de St. Aubin, Executors of the Estate of Ovide de St. Aubin, Jr., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 147

293 N.Y.S.2d 147

30 A.D.2d 419

Lorraine O'HAYER, Appellant, v. Honore de ST. AUBIN and Ovide E. de St. Aubin, Executors of the Estate of Ovide de St. Aubin, Jr., Respondents.

Supreme Court, Appellate Division, Second Department.

Aug. 19, 1968.

Cahill, Gordon, Sonnett, Reindel & Ohl, New York City (John P. Ohl, Paul W. Williams, Jerome Doyle and Allen S. Joslyn, New York City, of counsel), for appellant.

McCarthy, Fingar, Gaynor, Sullivan & Donovan, White Plains (Arthur F. Gaynor and John G. McQuaid, White Plans, of counsel), for respondents.

Before BRENNAN, Acting P.J., and HOPKINS, BENJAMIN, MUNDER and MARTUSCELLO, JJ.

HOPKINS, Justice.

In 1942 Ovide de St. Aubin, Sr., created a revocable Inter vivos trust, which provided that its terms were to be interpreted under the laws of Rhode Island. He designated himself as a trustee, together with Ovide de St. Aubin, Jr., his son, and three Rhode Island residents, as cotrustees. He limited the duration of the trust for the lives of himself and his son, Ovide, Jr., and directed that the income from the trust should be paid wholly to him during his lifetime and, on his death, to Lorraine, his daughter (the appellant), and to Ovide, Jr. in equal shares. Upon the termination of the trust, the principal was directed to be paid one-half to the appellant (or, if she were not living, to her husband and her descendants) and one-half to Honore de St. Aubin, Ovide, Jr.'s wife (or, if she were not living, to Ovide, Jr.'s descendants). ¹

This litigation by the appellant in essence challenges Ovide, Jr.'s right to purchase shares of corporate capital stock from the trust and seeks an accounting of his actions as trustee. After the entry of the interlocutory judgment Ovide, Jr. died and his executors have been substituted as parties defendant and are the respondents on this appeal. ² Our main concern is with the construction of the terms of the trust which grant to Ovide, Jr. broad powers of administration far beyond the traditional notions of trusteeship; the pertinent provisions are set out in full in the appendix to this opinion.

In effect, these provisions command that the rule of undivided loyalty which the law exacts from trustees shall not burden the settlor or Ovide, Jr. in their proceedings as trustees; and we are asked by this appeal to determine the rights and responsibilities of Ovide, Jr. in the light of the settlor's prescription. ³ The appellant contends that the exemption from the rule did not permit Ovide, Jr. to purchase a portion of the trust assets or to deal with the corporate enterprises in which the trust holds a substantial interest so as to gain a personal profit. She alleges breaches of trust by Ovide, Jr. in diverting opportunities open to the trust corporations which he personally controlled, in failing to pay income to the beneficiaries, in obtaining loans from the trust corporations, and in neglecting to petition for the appointment of substituted trustees to replace the original three Rhode Island trustees, the last of whom died in 1955. (The latter claim has been abandoned on this appeal.)

The Special Term held that Ovide, Jr. could legally purchase trust assets at a fair price and directed that a reference be held to determine whether a fair price had been paid. Except in one instance, which Special Term said should be subject to scrutiny by the referee, no improper actions were found to have been committed by Ovide, Jr. In general, we are in accord with the Special Term's comprehensive and well grounded findings, but we are also of the opinion that in certain aspects the reference should include an accounting by the respondents as to specific transactions. We treat at length, accordingly, only certain the principal questions raised by this appeal.

THE PURCHASE OF STOCK BY THE TRUSTEE

The assets set over to the trust by the settlor were all of the outstanding capital stock (1300 shares) of Vesta Corporation (hereafter called 'Vesta') and all his 1300 shares of stock of Vesta Underwear Corporation (hereinafter called 'Underwear'). Ovide, Jr. had a pre-trust option to purchase 1000 of these Underwear shares and it is undisputed that he properly exercised his option in the latter part of 1942 and that at that time the remainder of the Underwear shares (1200), held by the estate of a predeceased other son of the settlor, were transferred to the appellant. The relative stock holdings at the time of the death of the settlor in 1943 were as follows:

                            Vesta  Underwear
                            -----  ---------
                Trust       1300         300
                Appellant   ____        1200
                Ovide, Jr.  ____        1000
                

The subsequent 1962 transfer to Ovide, Jr. from the trust, by sale, of 300 shares of Underwear and 52 shares of Vesta led to the following distribution of stock between the parties (giving effect also to the terms of the trust upon its termination):

                                     Vesta(wt)     Vesta(nt)    Underwear(wt)  Underwear(nt)
                                    ------------  ------------  -------------  -------------
                Appellant's family   624 (48%)     650 (50%)     1200 (48%)     1350 (54%)
                Ovide Jr.'s family   676 (52%)     650 (50%)     1300 (52%)     1150 (46%)
                (wt:--"with transfer"; nt:--"no transfer")
                

No doubt, the rule of undivided loyalty due from a trustee (Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1; Dutton v. Willner, 52 N.Y. 312; Munson v. Syracuse, G. & C. R.R. Co., 103 N.Y. 58, 74, 8 N.E. 355, 358) may be relaxed by a settlor by appropriate language in the trust instrument in which he, either expressly or by necessary implication, recognizes that the trustee may have interests potentially in conflict with the trust (2 Scott on Trusts (3rd ed.), § 170.09, p. 1321; cf. Rosencrans v. Fry, 12 N.J. 88, 95 A.2d 905; In re Steele's Estate, 377 Pa. 250, 103 A.2d 409); at least, our courts under these conditions enforce the desire of the settlor to secure the services of a person to act as trustee in whom he has confidence, when, without the existence of exculpatory provisions, the trusteeship would be declined by the designee (Matter of Balfe's Will, 245 App.Div. 22, 280 N.Y.S. 128; Matter of Hammer's Will, 16 A.D.2d 111, 225 N.Y.S.2d 868, affd. 12 N.Y.2d 893, 237 N.Y.S.2d 1001, 188 N.E.2d 266; Heyman v. Heyman, Sup., 33 N.Y.S.2d 235). That is not to say that the settlor's directions allow the trustee free rein to deal with the trust; the law interposes to require that the trustee always exercise good faith in his administration (Industrial & General Trust v. Tod, 180 N.Y. 215, 225, 73 N.E. 7, 9; Matter of Balfe's Will, supra). 'No matter how broad the provision may be, the trustee is liable if he commits a breach of trust in bad faith or intentionally or with reckless indifference to the interests of the beneficiaries, or if he has personally profited through a breach of trust' (3 Scott on Trusts (3rd ed.), § 222.3, p. 1777). Moreover, the language limiting the general rule is strictly construed so that the trustee's actions will not be approved if he trespasses outside the boundaries of the powers granted (see note, 'Directory Trusts and the Exculpatory Clause', 65 Col.L.Rev. 138, 139--140; note, 'Trusts: Effect of exculpatory clause', 26 Cor.L.Q. 165).

Here the settlor, in appointing his son a trustee, clearly had in mind the operation and continuation of the family corporations in which his fortune was invested to the end that the fullest control should be wielded by the son. The settlor in express language provided that the general rule prohibiting individual profit by the trustee should not apply; and he indeed said that it was his 'express wish and desire that my said son and myself shall benefit and profit from our trusteeships hereunder by the control of the majority of the stock of said corporations herein effectuated * * *' (par. 4).

In express language, too, the settlor authorized his son to purchase at any time any part or the whole of the shares of stock held in the trust, subject only to the proviso that 'the amount of the purchase price and the terms of sale must be approved of by an instrument in writing delivered to the trustees hereunder executed by my said son Ovide de St. Aubin, Junior, and by said daughter Lorraine * * *' (par. 5).

Special Term correctly held that this language conferred power on Ovide Jr. to purchase the stock in issue from himself as trustee. Perhaps, technically, the language chosen by the settlor does not signify that an option to purchase was granted to the son; certainly, the language permits self-dealing in the stock by the son at any time during the existence of the trust. We need not justify the purchase by resort to the terms of the settlor's will and codicil, which divided the stock between the son and daughter at the same proportion (52%--48%) achieved by the son through his purchase. The codicil itself provided that the stock held in trust was to be disposed of according to the trust. Yet, the son's good faith in electing to make a partial purchase of the stock held in trust may be judged in the light of the settlor's own testamentary desires.

The appellant argues that her approval of the price and terms of sale required by the trust instrument logically extends to the sale itself. The proviso requiring approval in the settlor's language is clearly restricted to the price and terms of sale. With the latter we are not concerned, as no sale on credit is contemplated. If the instrument had prescribed an approval of the Purchase by the appellant, without the approval the son could not have acquired the stock (O'Connor v. Waldo, 83 Hun 489, 31 N.Y.S. 1105, affd. 158 N.Y. 672, 52 N.E. 1125; Suarez v. De Montigny, 1 App.Div. 494, 37 N.Y.S. 503, affd. 153 N.Y. 678, 48 N.E. 1107; Matter of Rolston's Estate, 162 Misc. 194, 294 N.Y.S. 112; Dyer v. Blair, 62 R.I. 498, 6 A.2d 673). But the settlor quite evidently did not condition the purchase on the appellant's approval; his true...