Vale v. Union Bank

• Court: California Court of Appeals
• Citation: 151 Cal.Rptr. 784,88 Cal.App.3d 330
• Parties: Vernon V. VALE, etc., et al., Plaintiffs, Cross-Defendants, Respondents and Appellants, v. UNION BANK, etc., Defendant, Cross-Complainant, Appellant and Respondent. Civ. 43594.
• Decision Date: 16 January 1979

Page 784

151 Cal.Rptr. 784 88 Cal.App.3d 330 Vernon V. VALE, etc., et al., Plaintiffs, Cross-Defendants, Respondents and Appellants,
v.
UNION BANK, etc., Defendant, Cross-Complainant, Appellant and Respondent. Civ. 43594. Court of Appeal, First District, Division 4, California. Jan. 16, 1979.
Hearing Denied March 29, 1979.

[88 Cal.App.3d 333]

Page 786

Nagle, Vale, McDowall & Cotter by John G. Schwartz, San Mateo, for Vale, et al.

Donovan, Somers, Epman & Spear by Ronald J. Epman, Los Angeles, for Union Bank.

BRUNN, ^* Associate Justice.

Union Bank (hereafter bank) appeals from a judgment awarding plaintiffs $7,779 damages for breach of contract. Plaintiffs cross-appeal from the judgment insofar as it fails to award them [88 Cal.App.3d 334] exemplary damages. On the bank's appeal, we affirm. On the cross-appeal we reverse and remand.

I

THE BANK'S APPEAL

The plaintiff law firm is a professional corporation. Early in 1973 it entered into a written trust agreement with the bank to set up a pension and profit sharing plan for the firm's employees. Under the agreement, the bank became trustee and the firm's board of directors appointed an administrative committee. The committee had broad powers; in particular it had the authority to direct the trustee to make investments. ¹ The bank expressly agreed to follow such investment directives and was absolved from any liability for doing so. ²

Page 787

The agreement also gave the [88 Cal.App.3d 335] bank the right to resign as trustee if it was unwilling to comply with the committee's instructions. ³

For a year and a half the firm contributed monies to the plan, the administrative committee directed investments, the bank followed the instructions. Some of the money was invested in the bank's common funds; some in treasury notes and emeralds. In July 1974, the committee instructed the bank to invest $15,000 of new funds in a limited partnership. The bank declined and told the committee that henceforth the bank would not honor any investment directions other than to invest in its common funds. In addition, the bank took the position that it would resign as trustee if the committee insisted on directing it to make the investment in the partnership.

The committee insisted that the bank follow the instructions. The bank resigned. As a result and as required by law the trust assets were sold, at a loss of $7,779. The loss was due to a decline in the value of the stocks in the bank's common funds. Both sides had been aware of this decline; they had discussed it during the month before the bank's resignation and had at that time agreed that the investment in common funds should not be liquidated at a loss because the stocks' value was likely to increase again.

Plaintiffs the law firm and the new trustees filed an action against the bank for breach of contract, fraud and breach of fiduciary duty. After a nonjury trial, the court below concluded that by resigning under these circumstances the bank breached the trust agreement and that as a consequence plaintiffs suffered damages in the amount we have mentioned.

The bank contends that it did not breach the agreement and that, in any event, the trial court used an improper measure of damages.

[88 Cal.App.3d 336] A. Breach of Contract.

The bank urges that the agreement gave it an unqualified right to resign. This contention is unmeritorious for at least two reasons.

First, a contract must be viewed as a whole and construed to give meaning to all its parts. (People ex rel. Dept. of Parks and Recreation v. West-A-Rama, Inc. (1973) 35 Cal.App.3d 786, 793, 111 Cal.Rptr. 197; Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 760, 128 P.2d 665; Randall v. Bank of America (1941) 48 Cal.App.2d 249, 252, 119 P.2d 754; Civ. Code, § 1641.) Here, the trust agreement used the clearest possible language to give the administrative committee full power and authority to direct investments. The only interpretation that achieves harmony between this provision and the resignation clause and that is consistent with the purpose of the instrument as a whole is that the right to resign based on unwillingness to follow the committee's instructions must be exercised in good faith and in accordance with the trustee's fiduciary obligations. A contrary interpretation would be inconsistent with the bank's fiduciary duties as a trustee and would render illusory the trustee's obligation to accept investment directions.

Secondly, a covenant of good faith and fair dealing is implied in every contract. It requires "each party not to do anything which will deprive the other parties thereto of the benefits of the contract . . . (and) to do everything that the contract presupposes that he will do to accomplish its purpose." (Harm v. Frasher (1960) 181 Cal.App.2d 405, 417, 5 Cal.Rptr.

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367, 374; Nystrom v. First Nat. Bank of Fresno (1978) 81 Cal.App.3d 759, 766, 146 Cal.Rptr. 711; Gherman v. Colburn (1977) 72 Cal.App.3d 544, 564, 140 Cal.Rptr. 330 (stating that this principle is "axiomatic"); Zurn Engineers v. State of California ex rel Dept. Water Resources (1977) 69 Cal.App.3d 798, 833, 138 Cal.Rptr. 478; Steinmeyer v. Warner Cons. Corp. (1974) 42 Cal.App.3d 515, 519, 116 Cal.Rptr. 57; Berkeley Lawn Bowling Club v. City of Berkeley (1974) 42 Cal.App.3d 280, 286-287, 116 Cal.Rptr. 762; 1 Witkin, Summary of Cal. Law (8th ed. 1973) Contracts, § 576, p. 493.) Such a covenant is particularly appropriate in the case of a trustee who "(i)n all matters connected with his trust . . . is bound to act in the highest good faith toward his beneficiary . . . ." (Civ. Code, § 2228.) Therefore, the bank had to exercise its right to become unwilling to follow investment instructions and to resign as trustee in good faith and in a manner that dealt fairly with the plaintiffs.

The evidence clearly shows that the bank failed to act in good faith. It tried to change the rules of the game by insisting that henceforth it would [88 Cal.App.3d 337] only make investments in the bank's common funds. The bank coupled this insistence with a threat to resign, a threat that would cause plaintiffs immediate financial loss from the liquidation of the earlier investment in the common funds and that would require plaintiffs to give up the right that they had expressly bargained for, namely the right to have the administrative committee direct investments. One of the major reasons that plaintiffs set up the pension and profit sharing plan with this particular bank was the bank's willingness to accept a "directed trust," that is, one that would permit plaintiffs to direct the investments. The bank carried out its threat. This evidence fully supports the conclusion that the bank acted in bad faith and for improper purposes, namely to coerce plaintiffs into investing exclusively in the bank's own pooled funds.

The bank's conduct was not only an attempt to abrogate the rights of plaintiffs under the trust agreement, but a manifestation of total disregard for the interests of the beneficiaries, who stood to lose a substantial part of the pension fund as a result of the forced liquidation. The bank's assertion that the decision was made in the exercise of its independent judgment as fiduciary is wholly untenable in light of the facts (a) that the bank expressly refused to make any investments other than in its common funds, and (b) that the trust agreement is...