Krause's Estate, In re

• Decision Date: 28 August 1969
• Docket Number: No. 3,Docket No. 6023,3
• Citation: 19 Mich.App. 155,172 N.W.2d 468
• Parties: , 39 A.L.R.3d 828 In re KRAUSE'S ESTATE. Richard KRAUSE and Adolph Krause, Petitioners-Appellees. v. Frank J. KELLEY, Attorney General, Intervenor-Appellant
• Court: Court of Appeal of Michigan — District of US

Page 468

172 N.W.2d 468

19 Mich.App. 155, 39 A.L.R.3d 828

In re KRAUSE'S ESTATE Richard KRAUSE and Adolph Krause, Petitioners-Appellees. v. Frank J. KELLEY, Attorney General, Intervenor-Appellant.

Docket No. 6023.

Court of Appeals of Michigan, Division No. 3.

Aug. 28, 1969.

Released for Publication Dec. 12, 1969.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Stewart H. Freeman, man, Charles D. Hackney, Asst. Attys. Gen., Lansing, for intervenor-appellant.

R. Malcolm Cumming, Warner, Norcross & Judd, Grand Rapids, for Adolph Krause.

John C. Cary, Grand Rapids, for Richard Krause.

Before J. H. GILLIS, P.J., and R. B. BURNS and V. J. BRENNAN, JJ.

J. H. GILLIS, Presiding Judge.

The question for decision is whether the trustees of a testatementary charitable trust may purchase, pursuant to instructions in the trust instrument, trust assets at a profit. The facts are largely undisputed.

Otto Krause died on May 27, 1950, leaving a will drawn and executed in 1948. Paragraph IV of the will established the 'Community Service Trust,' the corpus of which consisted of $3,200 shares of the testator's holdings of capital stock of Wolverine Shoe and Tanning Corporation, now Wolverine World Wide, Inc. Subsequent stock splits and stock dividends increased the corpus of the trust to 47,520 shares. Five charitable beneficiaries were to share in trust income. Upon termination, trust assets were to be paid over to the public School District of Rockford, Michigan. Named as trustees were Richard and Adolph Krause, sons of Otto Krause.

In sub-paragraph IV(b) of his will, Otto Krause provided:

'The fact that they are the trustees of this trust shall not prevent my said sons, Adolph K. Krause and Richard H. Krause, or either of them, from purchasing all or any portion of the capital stock of Wolverine Shoe & Tanning Corporation, or of any of its successors, which shall be held in this trust at any time; Provided, however, that the purchase price of any of such stock so purchased by them, or either of them, shall be equal to the book value thereof at the time of such purchase. * * 'It is my will and I direct that in case of any proposed sale of all or any portion of such capital stock, my said sons, Adolph K. Krause and Richard H. Krause, shall have the prior right, which right shall be equal as between them, to purchase any of such stock at the then book value thereof, payment for such stock to be completed in not to exceed one year from the date of the contract for the purchase thereof.'

Pursuant to their power of purchase under the will, Richard and Adolph Krause petitioned Kent county probate court for an order authorizing their purchase of the 47,520 Wolverine shares at current book value. Notice was given to all charitable beneficiaries but none appeared. The petition was opposed, however, by the Attorney General for the state of Michigan, a party to the trust by virtue of statute. ¹ After a hearing, the purchase was approved at a price of $6.20 per share, the book value of Wolverine shares as found by the probate court. The Attorney General's appeal to Kent county circuit court was met by what was broadly termed a motion to dismiss the appeal. After a hearing on the motion, the circuit court ordered the appeal dismissed. Upon leave granted, the Attorney General appeals.

Throughout the proceedings below, the Attorney General objected to the profit realized by Richard and Adolph Krause upon purchase of the corpus shares. We are informed that the market value of Wolverine stock exceeds its book value and that, were a purchase at book value approved, the trustees of the 'Community Service Trust' would reap a personal profit at the expense of the charitable beneficiaries. It is the position of the Attorney General that such a purchase is barred by general principles of trust administration and by statute. The validity of the trust itself, Qua charitable trust, is not before us. Cf. Love v. Sullivan (1966), 5 Mich.App. 201, 146 N.W.2d 117.

Firmly established in our jurisprudence is the rule which places trustees under a duty of loyalty to administer the trust solely in the interest of the beneficiaries. In his brief, the Attorney General reminds us of the words of Mr. Justice Cooley in Sheldon v. Estate of Rice (1874), 30 Mich. 296, 300, 301:

'It has been uniformly held that administrators, or other persons standing in the position of trustees, are not to be suffered, either directly or indirectly, to acquire interests in, or bargain for benefits from the property which, in their relation as trustees, they hold, manage, control or sell for others.'

See also, 1 Restatement Trusts, 2d, § 170, p. 364; Sloan v. Silberstein (1966), 2 Mich.App. 660, 673, 141 N.W.2d 332. So frequently is Meinhard v. Salmon (1928), 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1, acknowledged that quotation therefrom is unnecessary. Mr. Justice Cardozo's words constitute hornbook law.

Nevertheless, it is also true that to most general rules there are exceptions. In Sheldon, supra, 30 Mich. p. 300, it was said:

'The rule is clear, but it is still possible that it may not be applicable to this case, in view of its peculiar facts.'

In this case, we discern a peculiar fact. By subparagraph IV(b) of his will, Otto Krause specifically empowered his sons to purchase Wolverine shares at book value. Any profit upon purchase of the stock accrued to Richard and Adolph Krause by the terms of the trust. For the purpose of argument, the Attorney General concedes that the settlor intended to empower his trustees to deal with the stock at a profit. It is in the light of this peculiar fact that we consider the merits.

In 90 C.J.S. Trusts § 248(e), p. 269, we find stated:

'By the terms of the trust, the trustee may be permitted to do what, in the absence of such provision in the trust instrument, would be a violation of his duty of loyalty; and within limitations, the trustee may be authorized by the trust instrument to act in matters involving a divided interest. So, in the absence of any question of public policy, a settlor may validly authorize self-dealing by a trustee, such as purchase of property for the trust from himself as an individual, * * *.'

Of like import is 54 Am.Jur., Trusts, § 453, p. 361:

'In the absence of a statute forbidding the same, the terms of a trust may validly provide and confer authority upon the trustee to buy property owned or held by the trust estate.'

Professors Scott and Bogert are of the same view. See Scott, 'The Trustee's Duty of Loyalty,' 49 Harv.L.Rev. 521, 536 (1936); Bogert, Trusts and Trustees (2d ed.), § 543, pp. 494, 495.

Case authority also sustains the position that self-dealing when authorized in the trust instrument is permissible. Boston Safe Deposit & Trust Co. v. Lewis (1944), 317 Mass. 137, 57 N.W.2d 638; Rosencrans v. Fry (1953), 12 N.J. 88, 95 A.2d 905; Appeal of Burke (1954), 378 Pa. 616, 108 A.2d 58, 47 A.L.R.2d 1367. Even in New York, see O'Hayer v. de St. Aubin (1968), 30 A.D.2d 419, 293 N.Y.S.2d 147, the rule of undivided loyalty may be relaxed by appropriate language in the trust instrument, Meinhard v. Salmon, Supra, notwithstanding.

The Attorney General would have us distinguish the above authorities on the ground that here the issue is controlled by statute. The provision relied on is section 37 of Chapter IV of the Probate Code of 1939:

'Except with the written approval of the probate court, a fiduciary in his personal capacity shall not engage in any transaction whatsoever with the estate which he represents, nor shall he invest estate funds in any company, corporation or association with which he is affiliated, other than as a bondholder or minority stockholder. A fiduciary in his personal capacity shall not personally derive any profit from the purchase, sale or transfer of any property of said estate.' C.L.1948, § 704.37 (Stat.Ann.1962 Rev. § 27.3178 (288)).

An argument is made that this statutory prohibition against self-dealing by a fiduciary has been enacted in the public interest and cannot be relaxed by testamentary declaration. We are cited to In re Tolfree Estate (1956), 347 Mich. 272, 79 N.W.2d 629, 65 A.L.R.2d 1008.

Reliance upon In re Tolfree Estate is misplaced. Since testamentary instructions were there in accord with statutory requirements, no issue of apparent conflict between settlor intent and statutory requirement was before the Court. Although the Court construed section 37 as indicative of the public policy of this state, the decisive question here is the content of that policy.

Nor are we persuaded that, if the legislature intends relaxation of a statutory prohibition by the terms of a trust, it explicitly so provides. The Attorney General argues that the absence of a specific provision allowing self-dealing when authorized by the terms of a trust is significant. Equally significant is the absence of an explicit statutory provision condemning attempted modification of statutory requirements by settlor declaration. Cf. N.Y. Decedent Estate Law McKinney's Consol. Laws, c. 13, § 125; In re Schecter's Estate (1962), Sur., 229 N.Y.S.2d 702.

The prohibition against self-dealing expressed in section 37 is but a restatement of the common-law rule of the duties imposed upon trustees. We hold that section 37 is no bar to trustee purchase of corpus assets at a profit when the purchase is specifically authorized by the terms of the trust. We approve the language of the circuit court below:

'The Michigan Statute contained in Section 37 of Chapter IV of the Probate Code of 1939 * * * is but a restatement of the common-law rule of the duties imposed upon trustees. As such, the exceptions to the common-law rule must be read into the Statute. Statutes are to be construed with reference to the common law, and it is never to be presumed that the legislature intended to make any innovation of the common law further than was necessary to carry the act into effect.'

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