Woodward Sch. for Girls, Inc. v. City of Quincy

• Decision Date: 23 July 2014
• Docket Number: SJC–11390.
• Citation: 13 N.E.3d 579,469 Mass. 151
• Parties: THE WOODWARD SCHOOL FOR GIRLS, INC. v. CITY OF QUINCY, trustee, & another.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

469 Mass. 151

13 N.E.3d 579

THE WOODWARD SCHOOL FOR GIRLS, INC.

v.CITY OF QUINCY, trustee¹ & another.²

SJC–11390.

Supreme Judicial Court of Massachusetts, Norfolk.

Argued Dec. 2, 2013.

Decided July 23, 2014.

John S. Leonard, Boston, (James S. Timmins, City Solicitor, with him) for city of Quincy.

Sarah G. Kim (Josephine M. Deang Chin & Alison K. Eggers with her), Boston, for the plaintiff.

Present: SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

Opinion

CORDY

, J.

This dispute arises from a trust established in 1822 by former President John Adams and supplemented by a bequest of his grandson in 1886. The city³ of Quincy (Quincy) served as trustee of the Adams Temple and School Fund and the Charles Francis Adams Fund (collectively, Funds) through two boards.⁴ The Woodward School for Girls, Inc. (Woodward), the income beneficiary of the Funds since 1953, filed suit against Quincy initially seeking an accounting and thereafter asserting that Quincy committed a breach of its fiduciary duties to keep adequate records, invest the trust's assets properly, exercise reasonable

prudence in the sales of real estate, and incur only reasonable expenses related to the management of the Funds. We transferred the case here on our own motion following Quincy's appeal and Woodward's cross appeal from a Probate and Family Court judge's ruling removing Quincy as trustee and ordering it to pay a nearly $3 million judgment.⁵

On appeal, Quincy asserts that the trial judge erred in finding that Quincy committed a breach of its fiduciary duties to the Funds by failing to invest in growth equities to protect the principal when the Funds have only an income beneficiary to provide for, and by not heeding specific investment advice it received in 1973. In addition, Quincy challenges the award of damages, alleging that it was based on an improperly introduced and unsound portfolio theory hypothesizing unrealized gains; that it failed to exclude reasonable costs and expenses Quincy would have incurred had Quincy followed that portfolio theory; and that it improperly included prejudgment interest dating back to the dates of the various breaches. Finally, Quincy avers that Woodward's claims should have been barred by the Massachusetts Tort Claims Act, G.L. c. 258, § 4

, and its accompanying protection of sovereign immunity, and by the equitable doctrine of laches.

For the reasons discussed below, we conclude that the claims were not barred, and judgment against Quincy for committing a breach of its fiduciary duties to the Funds was proper, but the award of damages was erroneous in the calculation of unrealized gains on the investment portfolio. Specifically, we conclude that the judge erred in two respects: first, in finding that Quincy's failure to heed specific investment advice it had solicited constituted a breach of its duty to act as a prudent investor; and second, in calculating as damages the gains that might have been realized had Quincy followed that advice. Nonetheless, because there was other evidence of Quincy's mismanagement of the Funds, the judge did not err in finding that Quincy had committed a breach of its fiduciary duties with regard to them.

We further conclude that the judge did not err in including prejudgment interest or in declining to speculate as to potential costs or expenses Quincy may have incurred with proper management. However, because the judge's calculation of damages with regard to the unrealized gains on the investment portfolio was based on his incorrect assumption that Quincy was required

to follow specific investment advice, that calculation was in error. Accordingly, we affirm the judgment as to liability, reverse with respect to the calculation of damages on the unrealized gains, and remand for further proceedings consistent with this opinion.

Background. In 1822, former President John Adams executed two deeds of trust, conveying a portion of his real estate holdings to a trust, thereafter named the Adams Temple and School Fund (Adams Fund), and naming Quincy as the trustee. The first deed executed by President Adams (Deed A) was supplemented by a bequest of his grandson, Charles Francis Adams, in 1886, to support the objectives of the Adams Fund (Charles Francis Adams Fund, and, collectively with the Adams Fund, Funds). Deed A contained the basic provisions of the trust and directed the trustee to invest earnings from the real estate “in some solid public fund, either of the Commonwealth, or of the United States”; to build a church; and to apply “all future rents, profits, and emoluments, arising from said land” to support a school with particular requirements. The only principal beneficiary identified in the deed was the oldest living male descendant of President Adams, who was to receive the principal only on “gross corruption or mismanagement,” or knowing waste, on the part of Quincy. Shortly after the deeds were executed, the inhabitants of Quincy voted to accept the gifts therein, and Quincy became the trustee.

Two acts of the General Court granted Quincy further authority in executing its responsibilities as trustee of the Funds. In 1827, the General Court appointed the treasurer of Quincy as the treasurer of the Adams Fund, incorporated the board of supervisors, and authorized the board of supervisors and the selectmen of Quincy to execute the intentions of President Adams and to receive and manage gifts from others for the purposes articulated in the deeds. See St. 1826, c. 59, approved on Feb. 3, 1827 (1827 Act). Quincy thereafter established a board of managers for the Adams Fund.⁶ In 1898, the General Court authorized Quincy as trustee of the Funds to sell and convey the Funds' real property holdings and to “invest[ ] and re-invest [ ]” the sale proceeds

“from time to time ... in real estate or in such securities as trustees are authorized to hold in this Commonwealth.” See St. 1898, c. 102 (1898 Act).

In 1953, pursuant to an unpublished order of this court, after three prior income beneficiaries, Woodward was designated (and remains) the sole income beneficiary of the Funds.⁷

1. Investment advice and state of Funds. By the time Woodward became the beneficiary of the Funds, the real estate holdings of the Adams Fund had diminished significantly, presumably due to sale. At the end of 1952, the assets of the Adams Fund consisted of $4,474 in cash, $253,723.02 in investment assets, and an assessed value of $102,325 in real estate. The value of the Adams Fund's investment assets in 1973 totaled $321,932.43, an increase that may have been attributable to the further sale of real estate. In April, 1973, the Adams Fund investment assets were invested in a portfolio consisting of ninety per cent fixed income and ten per cent equity securities. That month, Quincy received investment advice it had requested from the South Shore National Bank (bank) with regard to managing the Funds' investment portfolio. The joint boards of the Funds unanimously voted to adopt an agreement establishing an advisory relationship with the bank and to follow certain diversification investment advice it received from the bank. However, Quincy never implemented the diversification recommendations, and instead, by 1990, nearly one hundred per cent of the Adams Fund's assets were invested in fixed income instruments. In 2008, the value of the investment assets in the Adams Fund was reportedly still the same: $321,932.43.

The assets of the Charles Francis Adams Fund, which are far smaller than those of the Adams Fund, have diminished somewhat

over time. As of 1953, the Fund had a value of $23,428, consisting of $1,453 in cash and $21,975 in securities (primarily in corporate bonds). It has since declined to $19,982 as of 2005, when it consisted of $2,530 in cash and $17,452 in investments.⁸

Despite the lack of growth in the Funds, between 1953 and 2008, the Funds generated over $700,000 in income; this income was either paid to Woodward directly or used to pay the Funds' expenses.

2. Request for accounting and present litigation. The present dispute began in 2005, when Woodward had, for two consecutive years, received a smaller distribution from the Funds than it had anticipated. In light of these discrepancies, the chair of the Woodward board of trustees requested an accounting of the Funds from Quincy. As of nearly one and one-half years later, the school had received some information from Quincy but not a full accounting, which it again requested.⁹ In July, 2007, after still receiving no response, Woodward filed a complaint and petition for an accounting with a single justice of this court against Quincy as trustee of the Funds. Woodward asserted that “as beneficiary of the Funds, [it] is entitled to know, the real and financial assets currently in the Funds, information about the Funds' management, and historically what has happened to the Funds' assets and income.” The single justice transferred the case to the Norfolk County Division of the Probate and Family Court Department.

A judge in that court appointed a special master to gather relevant documents regarding the Funds' assets, prepare an accounting for the Funds for the period of 1953 to 2008, inclusive, and issue a report assessing the propriety of the Funds' transactions. See G.L. c. 206, § 2

; Rule 20 of the Rules of the Probate and Family Court, Massachusetts Rules of Court, at 1051 (Thomson Reuters 2014). Overall, the special master concluded that Quincy had committed a breach of its fiduciary duties in several respects, primarily because it had “not maintained adequate books and records to substantiate its stewardship as Trustee,” and it had sold the Funds' real property at less than fair

market value.^{10 , 11}

Following the report of the special master, the dispute proceeded to a thirteen-day bench trial. In February, 2011, an amended judgment and amended findings entered, with 220 findings of fact.

The judge concluded that Quincy failed to keep accurate...