Newton v. Old-Merchants Nat. Bank & Trust Co. of Battle Creek

• Decision Date: 02 December 1941
• Docket Number: No. 30.,30.
• Citation: 299 Mich. 499,300 N.W. 859
• Court: Michigan Supreme Court
• Parties: NEWTON v. OLD-MERCHANTS NAT. BANK & TRUST CO. OF BATTLE CREEK et al.

299 Mich. 499

300 N.W. 859

NEWTON

v.OLD-MERCHANTS NAT. BANK & TRUST CO. OF BATTLE CREEK et al.

No. 30.

Supreme Court of Michigan.

Dec. 2, 1941.

Action by Frances W. Newton, as administratrix of the estate of Cora S. Way, deceased, against the Old-Merchants National Bank & Trust Company of Battle Creek and others for cancellation of a trust agreement and a release given defendant bank as trustee and acccounting for losses incident to the trust. From the decree entered, defendants appeal and plaintiff cross-appeals.

Decree dismissing the bill of complaint.Appeal from Circuit Court, Calhoun County in Chancery; Blaine W. Hatch, Judge.

Argued before the Entire Bench.

Burritt Hamilton and James Cleary, both of Battle Creek, for appellants.

Donald R. Gordon, of Battle Creek, for appellee.

NORTH, Justice.

Plaintiff is the daughter of Cora S. Way, deceased. She is also the possessor of the residuary or remainderman rights in the Cora Way trust involved in this suit. By this action plaintiff seeks cancellation of a trust agreement entered into between Mrs. Way and the Old-Merchants National Bank and Trust Company of Battle Creek and cancellation of a release given to the trustee, and an accounting for losses sustained incident to the trust. The grounds upon which plaintiff asserts right to the relief sought are that (1) the trustee failed to diversify investments of the trust fund, (2) the trustee failed to exercise due care in making the investments, (3) the trustee purchased securities for the trust from its own bond department without so informing the settlor, and (4) the trustee failed to inform the settlor that it made a profit by the sale of its own securities to the trust. After hearing the case in open court the circuit judge denied relief to plaintiff except in the following particular. As to the investments of trust funds by the trustee in securities held by the bond department of the trustee bank which investments were made prior to the execution of the trust instrument, the trustee was required to account to plaintiff for losses sustained by the trust. From the decree entered the defendants appealed and plaintiff perfected a cross-appeal.

In the latter part of 1929, Mrs. Cora S. Way was residing in Honolulu, Territory of Hawaii, with her daughter, Frances W. Newton. At the time Mrs. Way had left in the custody of the Old-Merchants National Bank and Trust Company of Battle Creek, Michigan, 849 shares of Cities Service stock. She communicated by letter dated September 25, 1929, to the bank her desire to sell all except 100 shares of this stock and after paying a small indebtedness to the bank to have the balance of the money received ‘put into a trust fund with the Old-Merchants National Bank. This fund is to be established jointly in the names of Cora S. Way and Frances Way Newton’. In accordance with directions received the bank sold the Cities Service stock and after paying Mrs. Way's indebtedness to the bank the balance of $40,652.87 was held by the bank in Mrs. Way's general deposit account. Thereafter by letter from Honolulu dated October 29, 1929, Mrs. Way gave the bank the following directions:

‘You may now follow out what I wrote you in regard to establishing a trust jointly to myself and Frances Way Newton.’

On November 4, 1929, the bank's trust officer mailed to Mrs. Way duplicate copies of a proposed trust agreement and requested Mrs. Way to indicate such changes as she might wish and return to him one of the copies with appropriate notations. In a letter of November 15, 1929, Mrs. Way complied with this request and the only material suggested change embodied in the trust instrument as finally executed is indicated by the following portion of her letter:

‘I would like to specify that investments on this trust be made on contracts, bonds or mortgages, never on stocks without my consent.’

As just indicated, the suggested provision was embodied in the revised trust instrument which was prepared by the bank's trust officer and mailed for execution in duplicate to Mrs. Way November 27, 1929. Mrs. Way signed the revised trust agreement December 11, 1929, returned the same to the bank, and acceptance of the trust was signed by the bank through its trust officers December 24, 1929. Instead of creating a ‘joint’ trust, Mrs. Way, the settlor, was designated in the trust instrument as the sole beneficiary for life and her daughter, Frances W. Newton, as remainderman. This provision was explained to and approved by Mrs. Way.

Evidently relying upon the contents of the preliminary communications and assuming it had authority so to do notwithstanding the final written trust instrument had not been executed, the bank on November 26, 1929, changed Mrs. Way's general deposit account to a trust deposit set up in the bank's trust department; and on November 29, 1929, out of this trust fund the bank invested $40,345.03 in bonds, all of which were purchased from the bank's own bond department. But the trial judge found and the record discloses that these bank securities were placed in the trust at their then fair market price. The bank by letter dated November 30th advised Mrs. Way of the details of this first investment in bonds, including a description of each bond and the price paid. The bank did not inform her of the purchases from the bank's own holdings. On December 26, 1929, Mrs. Way wrote the bank's trust officer: ‘I also received list of investments, which as far as I know are all right. I feel I have no cause for worry as I am sure you will do everything all right.’ The bank made subsequent investment in bonds for the trust; and throughout the life of the trust the trustee made semi-annual accounts to the settlor showing receipts and disbursements of the trust estate and gave complete inventory and description of the securities held in the trust. Some of these subsequent investments were in bonds purchased from the trust department of the bank. All such purchases were at the then fair market value of the securities, but the bank at no time notified Mrs. Way that its own securities had been sold to the trust nor did the trustee inform Mrs. Way that the bank as a result of the sale of its securities to the trust had realized a profit of $773.50. Of this amount $672.50 was the profit on bonds placed in the trust before Mrs. Way signed the trust instrument.

The Old-Merchants National Bank and Trust Company went into voluntary liquidation on June 11, 1934. Later it requested the closing of this trust by the settlor. On October 4, 1935, Mrs. Way and her daughter Frances W. Newton, plaintiff herein, executed a revocation of the trust created in 1929. And, with the exception of certain securities reserved by the settlor, the corpus of the trust was transferred and conveyed to the Security National Bank of Battle Creek as trustee to be administered under a newly created trust. The revocation instrument provided that upon the transfer of the trust assets to the new trustee and the obtaining of a receipt therefor the Old-Merchants National Bank and Trust Company, as trustee in the original trust, was fully and completely discharged ‘from all liabilities and further duties under the trust hereby revoked’. Thereafter neither the defendant Old-Merchants National Bank and Trust Company nor its liquidating trustees were in any way connected with the operation or management of the Cora Way trust.

During the period that the defendant Old-Merchants National Bank and Trust Company was administering this trust estate certain of the securities were either paid in full or sold without loss. But there is evidence that beginning about the middle of 1931 the remainder of the securities decreased in value. While there is some conflict in the testimony as to the state of the bond market when the first of the securities were purchased for this trust, the trial court found from the testimony, and we think correctly so, that the bond market at the time was ‘on the rise’. Mrs. Way died on February 25, 1939. The bill of complaint was filed July 9, 1940, and the suit is being prosecuted by Frances W. Newton as the administratrix of the estate of Cora S. Way, deceased.

As hereinbefore noted, the circuit judge held the trustee and its liquidating agents should account to or be surcharged with loss sustained by the trust incident to investments made by the trustee in bonds belonging to the bank in so far as such investments were made prior to the execution of the trust instrument by Mrs. Way; but that neither trustee nor its liquidating agents should be held to account for losses incident to investments made after the execution of the trust instrument by Mrs. Way.

As bearing upon the right of the trustee to purchase securities held by it for this trust, it should be noted that in both the original draft of the trust instrument and in the subsequent draft executed by Mrs. Way and the trustee it was provided:

‘The Trustor hereby expressly agrees, consents and directs that said Trustee may purchase any or all securities, for any trust fund herein created, either from Old-Merchants National Bank & Trust Company of Battle Creek, it successor or successors, or from others, and that all securities so purchased for such purpose shall be put in and charged to said trust fund at the then current market price at which like securities of the same issue are sold or offered to the general public, or if there be no current market price, then at the price at which securities of the same issue shall have been then most recently sold by said Bank to other patrons of its Bond Department, and as to securities purchased by said Bank on its own account and thereafter from its own files to such trust fund, neither said Bank nor said Trustee shall sustain any other or different relation or liability than would have been sustained by them respectively if such securities had been purchased for such trust fund by the Trustee in the open market.

‘The...