Sinclair v. Industrial Nat. Bank of Providence, 2778

• Decision Date: 21 July 1959
• Docket Number: No. 2778,2778
• Citation: 89 R.I. 461,153 A.2d 547
• Parties: Joseph Samuels SINCLAIR et al. v. INDUSTRIAL NATIONAL BANK OF PROVIDENCE et al. Eq.
• Court: Rhode Island Supreme Court

Page 547

153 A.2d 547

89 R.I. 461

Joseph Samuels SINCLAIR et al. v. INDUSTRIAL NATIONAL BANK OF PROVIDENCE et al.

Eq. No. 2778.

Supreme Court of Rhode Island.

July 21, 1959.

Bruce G. Sundlun, Washington, D. C., John H. Chafee, Providence, Philip W. Amram, Washington, D. C., Amram, Hahn & Sundlun, Washington, D. C., for complainant Joseph Samuels Sinclair.

John H. Chafee, Providence, for complainant Bertha Samuels Sinclair.

Ernest A. Jenckes, Providence, guardian ad litem.

Hinckley, Allen, Salisbury & Parsons, Providence, for respondents Industrial Nat. Bank of Providence and Walter F. Farrell, Trustee.

Higgins, Cavanagh & Williamson, Joseph V. Cavanagh, Providence, amicus curiae.

FROST, Justice.

This is an appeal by the respondents from an interlocutory decree entered in the superior court following a hearing on the complainants' prayer for a preliminary injunction wherein the trial justice restrained the respondents until further order of the court from selling to Roger L. Stevens, of the city and state of New York, or his assignees certain shares of The Outlet Company stock pursuant to an agreement dated November 10, 1958.

The bill was originally brought by Joseph Samuels Sinclair, and later his mother Bertha Samuels Sinclair, now deceased, on her own motion was made a party complainant. The amended bill of complaint was brought against the Industrial National Bank of Providence, Walter F. Farrell and Daniel H. Morrissey, all trustees under an indenture of Joseph Samuels dated December 28, 1934, and against the Industrial National Bank Walter F. Farrell, Daniel H. Morrissey and James Sinclair, trustees under clause Eleventh of the will of Joseph Samuels, and against the Industrial National Bank of Providence as escrow agent pursuant to a contract entered into on or about November 10, 1958 between said trustees and Roger L. Stevens. Hereafter the Industrial National Bank of Providence will be called the bank.

The amended bill avers among other things that the complainant Joseph Samuels Sinclair is the contingent beneficiary of the said two trusts; that Joseph Samuels died on February 13, 1939; that Bertha S. Sinclair is the income beneficiary of both trusts; and that upon her death, provided complainant Joseph Samuels Sinclair is then living and is then forty years of age or more, the principal of both trusts is to be paid to him, free and clear of all trusts.

It is also averred that the bank, Farrell and Morrissey have been trustees of both trusts since the death of Joseph Samuels; that the bulk of the principal of the trust under the indenture consists of approximately 31,225 shares of The Outlet Company stock, and the bulk of the principal of the trust under clause Eleventh of the will consists of 1,955 shares, more or less, of The Outlet Company stock; that The Outlet Company, a Rhode Island corporation located in Providence, is engaged in the retail merchandising business and owns and operates a radio and television station; that the bank, Farrell, and Morrissey are also trustees of three other trusts holding 22,050 shares, more or less, of the stock of The Outlet Company; and that the shares in all of said trusts, which total 55,230, constitute a majority of the stock of the company and represent a controlling interest in the company, there being, upon information and belief, 99,240 shares of the company outstanding.

It is further averred that the trustees entered into a contract with Stevens whereby he was given an option to purchase all the stock in all of the said trusts at a price of $120 per share; that the option was exercised; that Stevens will tender offers to other shareholders to purchase their stock for $120 per share; and that the contract with Stevens provides that the trustees shall have the right under certain conditions to accept offers of other buyers who are willing to pay more than $120 per share for such stock.

It is also averred that the stock is listed on the New York Stock Exchange; that on December 1, 1958 the closing price was $112; and that it is the intention of the trustees to invest the major portion of the proceeds of the sale of the stock of the Joseph Samuels trusts in tax-exempt securities.

It is averred further upon information and belief that two major factors in the decision of the trustees to sell The Outlet Company stock were the desire of Farrell and Morrissey to withdraw from the management of a demanding commercial enterprise and the reluctance of the bank to continue to hold the stock without their continued participation in the active management of The Outlet Company, and that a further major factor was the desire to sell the stock held in certain other trusts referred to as the Quinn and Leon Samuels trusts, which stock could not so advantageously be sold as a separate unit.

The complainants allege that the sale by the trustees of The Outlet Company stock held by the two Joseph Samuels trusts is an act of negligence on the part of the trustees and they give the following as reasons therefor:

(a) that the principal of the said trusts will be substantially reduced by sale of the stock since the federal tax resulting therefrom will amount to $800,000, a sum which may not be recovered through appreciation since the trustees intend to invest the proceeds in tax-exempt securities.

(b) that the sale of The Outlet Company stock would diminish the principal by $800,000 thus reducing the potential share of complainant Joseph Samuels Sinclair and will not substantially assist the present income beneficiary.

(c) that the sale of stock control in The Outlet Company should yield a price greater than $120 per share.

(d) that the trustees, despite the provisions of said option agreement, refused to negotiate with or to receive offers from third persons during the period from November 10 to December 1, 1958, who were prepared to offer a higher price for the stock than that offered by Stevens and were also prepared to protect the managerial status of complainant Joseph Samuels Sinclair.

(e) that the trustees in making said sale preferred the interest of the beneficiary of the Quinn trusts, the interest of the life tenant of the Samuels trusts and the interest of the outside shareholders of The Outlet Company, all at the expense of complainant Joseph Samuels Sinclair.

(f) that the trustees prior to signing the said contract with Stevens never informed complainant Joseph Samuels Sinclair of the proposed sale and never offered him an opportunity to buy the stock or to form a syndicate to do so.

(g) that the trustees failed in their said contract with Stevens to provide the customary provision for the employment security of Joseph Samuels Sinclair in the general managership of the radio and television station.

(h) that the trustees failed to use adequate care and reasonable diligence in ascertaining the value of The Outlet Company stock held by the so-called Samuels trusts.

The complainants further allege that the sale by the trustees of the stock held by the Joseph Samuels trusts would be an act contrary to the intention of the settlor or testator in that the principal of the trusts would be reduced by the sum of $800,000, since the settlor or testator in the trust instructions requires that the principal be preserved as shown by the instructions therein.

The complainants further allege that to permit the sale by the trustees of the Joseph Samuels stock in The Outlet Company would wrongfully deprive complainant Joseph Samuels Sinclair of his inheritance of the major block of stock of the family business since he could quite probably inherit said stock within three and one-half years; that it was the intention of Joseph Samuels as repeatedly evidenced in the trust instructions that the health, welfare and well-being of his grandson, a complainant herein, be attended to.

The complainants pray that pending the final hearing upon the bill, the trustees be restrained and enjoined from selling or delivering the Joseph Samuels stock held by the trusts to Stevens or his assignees.

It appears from the evidence that Joseph and Leon Samuels were brothers and were the founders of The Outlet Company; and that Mildred E. Samuels is the widow of Leon Samuels who died September 24, 1929, and the mother of Clare S. Quinn. In addition to the two trusts created by Joseph Samuels there are three other trusts referred to in the bill whose trustees are parties to the contract of sale, performance of which is enjoined; that the bank and Clare S. Quinn are trustees under the will of Leon Samuels and hold 16,100 shares of The Outlet Company stock; that the bank and Farrell, since the decease of Morrissey, are the surviving trustees under an indenture of Clare S. Quinn, dated January 17, 1949, and hold 700 shares of said stock; and that they are also the surviving trustees under an indenture of Clare S. Quinn, dated April 3, 1952, and hold 5,250 shares of said stock. It appears that the five trusts hold a total of 55,230 shares out of a total of 99,420 shares of The Outlet Company stock, which is a controlling interest in the company; that Clare S. Quinn is the beneficiary of the two trusts created by her, while her mother Mildred E. Samuels is the income beneficiary under the Leon Samuels trust and her daughter Clare S. Quinn is the remainderman.

Much testimony was taken and thereafter the trial justice filed a rescript. It is unnecessary for the purposes of this opinion to discuss all of his findings and we shall confine ourselves to a consideration of those which he made as a basis for the injunction which he later decreed.

The trial justice found that complainants had proved at least prima facie that the bank by its acts had placed its private interests in conflict with its interests as one of the trustees of the Joseph Samuels trusts; that this conflict was not a mere matter of form but involved a very substantial interest, and that the decision of the corporate tr...