Roche v. Boston Safe Deposit and Trust Co.

• Decision Date: 10 May 1984
• Citation: 391 Mass. 785,464 N.E.2d 1341
• Parties: John J. ROCHE, guardian ad litem, 1 v. BOSTON SAFE DEPOSIT AND TRUST COMPANY.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1341

464 N.E.2d 1341

391 Mass. 785

John J. ROCHE, guardian ad litem, ¹ v. BOSTON SAFE DEPOSIT AND TRUST COMPANY.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Jan. 12, 1984.

Decided May 10, 1984.

Edward B. Hanify, Boston (George Marshall Moriarty and Steven A. Kaufman, Boston, with him), for defendant.

James D. St. Clair, Boston (Jeffrey B. Rudman and Richard A. Johnston, Boston, with him), for plaintiff.

Catharine W. Hantzis and Leslie G. Espinoza, Asst. Attys. Gen., for Atty. Gen., amicus curiae, submitted a brief.

Frederic G. Corneel, Philip H. Suter and Roger A. Greenbaum, Boston, for Massachusetts Bankers Ass'n, amicus curiae, submitted a brief.

William H. Smith and Michael F. Crotty, Washington, D.C., of the Dist. of Columbia, for American Bankers Ass'n, amicus curiae, submitted a brief.

Before HENNESSEY, C.J., and WILKINS, LIACOS, ABRAMS, NOLAN, LYNCH & O'CONNOR, JJ.

NOLAN, Justice.

Boston Safe Deposit and Trust Company (Boston Safe), as trustee of its Common Trust Fund "C", has appealed from a probate judge's order reopening the twelfth, thirteenth, and fourteenth accounts. ² The twelfth account was allowed on May 2, 1973, the thirteenth on July 8, 1975, and the fourteenth on September 24, 1975, to each of which guardians ad litem assented.

The plaintiff, John Roche, appointed guardian ad litem in connection with the fifteenth account, objected to the allowance of the fifteenth account and commenced this action in equity to revoke the earlier decrees because of Boston Safe's alleged fraud in failing to disclose material information. After an eleven day trial, the judge ordered the reopening of the twelfth through fourteenth accounts "for all purposes."

Boston Safe filed a notice of appeal and Mr. Roche filed a motion to dismiss the appeal on the ground that the judge's order was interlocutory in nature. This court allowed Boston Safe's application for direct appellate review and deferred action on the motion to dismiss the appeal for consideration following oral argument.

Boston Safe makes the following claims: (1) the judge's findings of fact, which allegedly were adopted wholesale from the guardian ad litem's requests for findings, are clearly erroneous, and (2) the judge's "conclusions of law" that Boston Safe committed fraud in law (a) by failing to disclose that it held an illiquid aggregate amount of stock in a publicly traded company in accounts over which it had investment discretion and (b) by failing to disclose the proper construction of an apparently broad exculpatory clause, are insufficient to constitute fraud for purposes of G.L. c. 206, § 24, and G.L. c. 203A, § 3. We agree with Boston Safe's second argument and conclude that, as a matter of law, the ultimate findings and rulings denominated "conclusions of law" by the judge are insufficient to constitute "fraud in law." Therefore, we need not address Boston Safe's first argument.

The controversy results from the aggregate investment by The Boston Company, Inc. (Boston Company), and its affiliates (of which Boston Safe is one), in a real estate investment trust (REIT) entitled State Mutual Investors, Inc. (SMI). SMI, established by the State Mutual Assurance Company of Worcester, Massachusetts, became listed on the New York Stock Exchange in February, 1971. In 1971, Boston Company Investment Research and Technology, Inc. (BCIRT), a group which advises Boston Company and its affiliates on investment decisions, recommended SMI as a security worthy of investment. BCIRT rated SMI as a mid-range investment, which was the lowest quality stock in which a portfolio manager of Common Trust Fund "C" could invest. At that time, SMI had been established for one year and had been publicly traded for ten months.

In early 1972, Common Trust Fund "C" bought 70,000 shares of SMI. At that time, Boston Company and its affiliates held, in the aggregate, approximately 350,000 shares of SMI in trust accounts over which it had investment discretion. By May, 1974, Boston Company and its affiliates held, in the aggregate, 588,208 shares of SMI, which constituted 21.1% of the outstanding shares.

SMI did not prove to be a fruitful investment. In the fourth quarter of 1974, the highly leveraged ³ company, experienced an earnings "squeeze" caused by increased interest rates and defaults on large loans. As a result, SMI announced that it was required to forgo its dividend. In June, 1974, which fell within the time period covered by the fifteenth account, Boston Safe sold 25,000 of the 70,000 shares of SMI held in the account of Common Trust Fund "C". The 45,000 shares remaining were not sold until late June of 1975. However, the total number of shares of SMI held in accounts other than Common Trust Fund "C" over which Boston Company and its affiliates had investment discretion was reduced by approximately one-half from June, 1974, to June, 1975. During this same period, the price of SMI shares fell from a high of $8.59 to a low of $1.50. The 45,000 shares remaining in Common Trust Fund "C" were sold at $1.50 per share following the close of the period covered by the fifteenth account.

Boston Safe filed the fifteenth account in the Probate Court on November 19, 1975. The Probate Court appointed Mr. Roche guardian ad litem in February, 1976. Upon his appointment, he took notice that substantial losses were incurred during the fifteenth accounting period. He also surveyed the trust instrument thoroughly and noticed an "exculpatory clause" in the miscellaneous section of the document. Section 12.1 of the document provides that "[t]he discretion of the Trustee and of the Trust Committee, when exercised in good faith, shall be binding upon all persons." Upon inquiry of Boston Safe's attorney, Mr. Roche discovered that the clause only referred to discretion concerning ministerial acts, such as selection of fiscal years, valuation dates, and the like and that it did not bar a surcharge for imprudent investments. This interpretation admittedly had not been disclosed to previous guardians ad litem, but the record does not demonstrate that these guardians were in fact misled by the clause. Having received this information, Mr. Roche proceeded to investigate the twelfth through fourteenth accounts. His investigation revealed an exceedingly high percentage of shares of SMI among accounts governed by Boston Safe and its affiliates.

This information prompted Mr. Roche not only to object to the fifteenth account, but also to commence an action pursuant to G.L. c. 206, § 24, to revoke the prior decrees which had allowed the twelfth through fourteenth accounts. In the original complaint, Mr. Roche alleged that during the period from 1972 [391 Mass. 789] to 1974, there existed a well-recognized rule of practice among corporate fiduciaries that a corporate trustee and its corporate affiliates should not hold in their aggregate trust accounts more than five per cent of any publicly traded stock. He stated in that complaint that Boston Safe and its corporate affiliates had violated this rule by holding more than five per cent of the outstanding shares of SMI, and, therefore, Boston Safe had committed "fraud in law" by failing to disclose this information in its twelfth through fourteenth accounts.

Mr. Roche later filed an amended complaint which repeated the allegations of the original complaint and also requested that the trustee's previously allowed accounts be reopened "for all purposes." ⁴ The basis for this contention was the exculpatory clause within the trust document. The amended complaint alleged that this clause may have misled prior guardians ad litem and beneficiaries into believing that the trustee was subject to surcharge only upon proof of "bad faith."

At trial, Mr. Roche produced expert witnesses who testified to the existence of the five per cent rule of thumb. In particular, Martin Earl Lybecker, employed at the Securities and Exchange Commission, opined that the basis for the rule lay in (1) the potential marketability problems which result from the difficulty of trading a large block of securities, and (2) the potential conflicts of interest among various accounts which result when large amounts of stock are sold piecemeal at varying times. He testified that if a corporate fiduciary were to sell a large aggregate of the type held by Boston Company all at once, it would be forced to sell at a discount of the market price. Thus the trust accounts would incur a substantial loss. Conversely, he stated, that if the shares from the various accounts were sold piecemeal, inevitably the first shares traded in the market would receive a better price than the last shares traded. He noted that internal conflicts of interest among various accounts would result if the corporate fiduciary sold the shares in this manner. Thus, he concluded, that a large holding of seventeen per cent or more of such shares would be imprudent. Sumner Kaufman, an expert in investment banking, said that, in his opinion, in June, 1974, the aggregate holdings were illiquid. He defined illiquidity as the inability to sell stock or securities at prevailing prices in a reasonable fashion. Retired Professor Roger F. Murray, Mr. Roche's rebuttal witness, reinforced these opinions.

Mr. Dana Mauch, a portfolio manager of Common Trust Fund "C" during the pertinent time period, maintained that his decision not to sell the remaining 45,000 shares of SMI during the period of the fifteenth account was based on account considerations. He explained that each account manager made individual decisions and that no internal plan or policy existed with respect to aggregate holdings within the entire trust department. He also testified that during the entire time he dealt with SMI he considered it to be liquid. His definition of liquidity was the ability to sell if necessary.

Boston Safe presented numerous expert witnesses who denied the existence of the five per cent rule....