Benadom v. Colby

ROSALYN B. BELL, Judge. This appeal and cross-appeal followed a decision rendered by the Circuit Court for Baltimore City. The case involves the construction of a portion of a trust, known as the Hodson Trust, and the deference due to the Trustees’ interpretation of those sections of that Trust. The Trustees 1 brought the action against 68 named defendants 2 and all minors, known and unknown, born and unborn (the Minors), who might have an interest in the income referred to in the Trust provisions at issue.

The widow of Thomas Hodson III (Thomas III) and sole distributee of his estate intervened as a defendant with the consent of the other parties. In 1976, after the death of Thomas III, a grandson of the settlor, the Trustees determined that the five percent income referred to in § 14(e) “reverted” to the Trust and became available for distribution to four colleges. 3 Appellees/cross-appellants (these various parties will be described later) did not believe this was a correct determination. Hence, the Trustees sought a judicial construction of certain clauses in the Trust, confirming their interpretation which they contended was appropriate under the Trust. The trial court agreed with the Hodson III, 4 as well as the ²²⁵ Minors and the descendants of Mary King Hodson Brown, 5 appellees/cross-appellants, that the Trustees’ interpretation was incorrect, and concluded that the income should be distributed to the widow of Thomas III, Bette O. Hodson, with payments to have commenced as of September 1, 1985. 6 In this appeal, the Trustees and the college cross-appellants contend: —The court erred in construing § 14(e) of the Hodson Trust as meaning that the income referred to in that section did not revert to the Trust on Thomas Ill’s death, but vested in Thomas III absolutely and continues for the life of the Trust in Thomas Ill’s widow and her successors in interest. —The court erred in rejecting the Trustees’ contention that their interpretation of § 14(e) was entitled to deferential review and should be confirmed since it was made in good faith and was not unreasonable.

The Hodson III appellees and cross-appellants also claim: —The court erred in limiting the income interest under § 14(e) to $25,000 per year regardless of the number of beneficiaries receiving that income. The Minors are cross-appellants with respect to the construction of § 14(e)-(f) of the Trust. They urge: —The court erred in not construing § 14(f) of the Hodson Trust to mean that one-half of the income referred ²²⁶ to was distributable to the children of Mary King Hodson Brown, per stirpes 7 until there is a failure of issue, but instead reverts to the Trust upon the death of each child of Mary King Hodson Brown. 8 —The court erred in construing § 14(e) of the Hodson Trust to mean that the income referred to therein did not descend to the issue of Thomas Jr., per stirpes, until there is failure of his issue, but instead vested in Thomas III absolutely and continues for the life of the Trust in Thomas Ill’s widow and sole legatee, and her successors in interest. We hold that the trial court erred in its decision regarding § 14(e) and the deference due to the Trustees.

We hold that the trial court was correct in its ruling that the corresponding § 14(f) income reverts to the Trust after the death of each of the named children of Mary King Hodson Brown. Because we hold that the Hodson III appellees are not entitled to any income under § 14(e), we need not and will not address the issue of whether the court erred in limiting such income to $25,000 in accordance with § 14(H). 9 ²²⁷ THE CREATION OF THE TRUST AND THE CONTROVERSY The Hodson Trust, which generated in excess of three million dollars in 1988, was executed on February 17, 1920 by Thomas Sherwood Hodson, Sr. Thomas, Sr. had three children: Clarence, Thomas, Jr. and Mary King Hodson Brown. Clarence founded the Beneficial Loan Society in 1914. The Society became the Beneficial Corporation, a publicly traded corporation with the Hodson Trust as the largest single shareholder.

Clarence became quite wealthy and used the corporate stock as the source of the Trust corpus. Clarence established the Trust to honor his father, Thomas, Sr., who was technically the settlor. The Trust reflected Clarence’s importance by naming himself, his wife and two sons (but not his daughter) as four of the seven Trustees. Moreover, the Trustees were a self-perpetuating group, enabling Clarence, through his family, to exert control over the Trust after his death.

Thomas, Sr. and Clarence were committed to promoting higher education in the State of Maryland; after his father died in 1920, Clarence devoted his efforts toward the founding of a new university to be known as Hodson University. Clarence formally amended the Trust in 1927. 10 The amendments provided, inter alia, that if Hodson University was not founded by 1935, the funds were to be distributed to other colleges located in Maryland with which the Hodson family had connections, namely the college cross-appellants. The 1927 amendments also included subsection (n) of § 2; it provided in relevant part: “2. It is hereby declared that the purposes for which said Trust is settled and established and the general powers of the Trustees thereof, are: ²²⁸ “(n) To furnish funds (ultimately and principally) for the charitable cause of Education, in perpetuity, by providing for the incorporation of a University in Maryland, with a perpetual charter and to have affiliated schools, institutes or colleges; ...” The 1927 amendments also included §§ 2(m), 2(m-l) and 2(m-2).

Section 2(m) permitted the Trustees to file suit in a court having equity jurisdiction in Baltimore. Sections 2(m-1) and 2(m-2) provided: “(m-1) The trustees should themselves decide all matters, unless grave doubts of legality arise, for it would be cumbersome and hazardous, if not disastrous, to attempt administration of a Trust estate by frequent petitions to and decrees of Court and would result in transferring mastery of the trust funds from trustees to courts, contrary to the Declaration of Trust. “(m-2) It is not intended that any court shall generally administer the Trust, or prescribe the acts or duties of the trustees, or interfere with the trustees in the exercise of their discretion in administration of the Trust, in any manner whatsoever, except where doubts arise as to legality or practicability or true interpretation of some one or more provisions in the Declaration of Trust or Amendments thereto, or which may become doubtful or in controversy as to their proper interpretation, and then only if any cestui qui trust shall claim some advantage or interpretation of the trust terms, and if a majority of these trustees are unwilling or fail to interpret same or will not act without the instructions, guidance, or decree of a court of equity jurisdiction, except as to the points in doubt or controversy.” It is these two provisions which the Trustees claim require their interpretations be given deference by the court, absent unreasonable conclusions. Clarence Hodson died on January 13, 1928. Three children survived him: George died on October 16, 1929; Clarence, Jr. died without issue on May 13, 1944; and Leila Hodson Hynson is still living. ²²⁹ Clarence’s brother, Thomas, Jr., died on October 18, 1936.

Thomas, Jr. was survived by his son, Thomas III, who died on April 11, 1976, and two daughters, Elizabeth Sherwood Hodson Bennett and Jannas Leas Hodson Harrington. Thomas III was survived by four children. Clarence’s sister, Mary King Hodson Brown, died on April 26, 1965. She was survived by four children, only one of whom is still living, namely, Doris Sherwood Brown Swann.

Mary’s deceased children were all survived by issue of their own. Section 14 of the Trust, which became operative on the death of Clarence in 1928, provided for the distribution of the Trust. Sections 14(e) and (f), the two sections at issue, provided: “14. After December 31, 1940, or upon the death of said Clarence Hodson, whichever shall first occur, disbursements from the increase [according to Trustees, this should be read as “income”] or profits of said Trust estate (not including increasing value of any securities held) after payment of expenses and making provision for losses, may be made, from time to time, as the trustees may deem desirable, as free gifts or grants (and not as property rights), preferably, but not necessarily, by check of the treasurer, countersigned by the chairman or vice-chairman, as follows: “(e) Five (5%) per centum thereof to Thomas Sherwood Hodson, Jr., of Maplewood, New Jersey, for life; “Upon his death, same shall revert to his oldest living lawful son; but if no such son then his other lawful children, per stirpes, and if no such children, then one-half to his widow during her life, while she remains unmarried, and the other half shall revert to Mrs. Mary King Hodson Brown, for life and upon her death shall revert to the said Trust estate during the continuance of said Trust and be thenceforth a part thereof; ²³⁰ “(f) Five (5%) per centum thereof to Thomas Sherwood Hodson, of Crisfield, Maryland, (the setlor) [sic] for life.

Upon his death same shall be payable thereafter one-half to his wife Clara Miles Hodson, if she survives him, the other half to go to said Mrs. Mary King Hodson Brown, if living, and upon her death such income shall revert to her lawful children, Alice Hodson Brown, Lillian Brown Berg, Doris Brown and Donaldine Brown, and her other lawful children, if any, per stirpes, during their lives, and upon their respective deaths, if during the continuance of said Trust, shall revert to said Trust estate, and be thenceforth a part thereof[.]” Section 14(g) further provides for how income will be paid should the Clarence Hodson family line fail. The Clarence Hodson line has not failed. But the 1927 amendments clearly set out limitations on the distributions to the lines of both Thomas, Jr. and Mary King Hodson Brown. Section 14(j-l) stated in pertinent part: “It is also hereby expressly provided that the maximum distribution in any calendar year shall not exceed Twenty-five Thousand ($25,000) Dollars, at any time during the duration of the trust, to any one of the following named or designated persons, or to any one of their lawful issue, whether male or female, or to their spouses as widow or widower, viz.: T. Sherwood Hodson, Jr., or his widow (Thomas, Jr.); Mrs. Mary King Hodson Brown, or her daughters, Doris Brown, Donaldine Brown, Mrs. Lillian Brown Berg____” Upon the death of Thomas III, the Trustees concluded that no further sums were payable to anyone under § 14(e).

Rather, they believed that these sums remained with the Trust. The case was heard on May 9 and June 15-16, 1988. The trial court received testimony of Lelia Hodson Hynson, daughter of Clarence Hodson and granddaughter of the ²³¹ settlor, and Finn M.W. Caspersen, chairman of the Trustees. Over 100 exhibits were introduced without objection.

On July 11, 1988, the trial court filed a “Memorandum of Reasons for Decision,” rejecting the Trustees’ contention that their interpretation of the Trust was entitled to deference. The court ruled that § 14(e) of the Trust granted Thomas III an “absolute estate” for the duration of the Trust in the income referred to in that section. Consequently, that money now goes to the widow of Thomas III under his will. Subsequently, on April 4, 1989, the court ruled that § 14(j—1) imposed a cap of $25,000 annually on that income interest.

This appeal followed. DEFERENCE TO TRUSTEES The Trustees argue that the trial court erred when it rejected their interpretation of § 14(e). They assert that the standard the court should have used when reviewing their construction was whether it was made in good faith and whether it was reasonable. Since the Trustees complied with both these rules, the court should have deferred to their interpretation.

All of the appellees, the Hodson III, the Minors and the Mary King Hodson Brown descendants, oppose this view. They contend that the Trustees have waived their preferential role. The trial court agreed with the appellees. We, however, agree with the Trustees.

The Trustees do not contest the jurisdiction of the court over the Trust under Md. Est. & Trusts Code Ann. § 14-101 (1974), which provides in pertinent part: “A court having equity jurisdiction has general superintending power with respect to trusts.” The Trustees do contest the action of the court in failing to give their interpretation of the Trust deference in light of the terms of the Trust. During the hearing, the trial court candidly stated what it saw as the issue before the court: “[Y]ou look at an ambiguous phrase and if reasonable persons can differ as to what it means, how can you say that an adoption of one of the possible interpretations is unreasonable?” While we ²³² agree with the trial court’s statement, especially in the instant case where the Trust was so poorly written and the two constructions are both plausible, we differ with where it takes us. One authority in the area of trusts has said: “To the extent to which the trustee has discretion, the court will not control his exercise of it as long as he does not exceed the limits of the discretion conferred upon him.” 2 Scott on Trusts (2d ed. 1956) § 187 at 1374. Thus, the real question is, “To what extent do these Trustees have the discretion to interpret the Trust?” The sections of the Trust which are of paramount importance in answering this question are §§ 2(m), 2(m-l) and 2(m-2). —Section 2(m)— Although there is no language which explicitly sets forth the parameters of the Trustees’ discretion to interpret, § 2(m) does provide that if any provision or purpose becomes “obscure, doubtful, [or] conflicting” the Trustees may take appropriate action.

This section also allows the Trustees to ask a court “to interpret the facts and conditions which may have arisen ...” to effectuate the intent of the Trust as near as may be. 11 Since the Trustees “may” take action, instead of an imperative “must,” it is possible to infer that they may also not take action. That is to say that, if the Trustees believe they have correctly construed the Trust in accordance with the intent of the instrument, they may choose not to go to court and await the challenge of a beneficiary. In any event, § 2(m) does not clarify the issue of whether the Trustees have discretion to interpret the Trust. We move to the other sections. —Section 2(m-l)— Section 2(m-l) provides: ²³³ “The trustees should themselves decide all matters, unless grave doubts of legality arise, for it would be cumbersome and hazardous, if not disastrous, to attempt administration of a Trust estate by frequent petitions to and decrees of Court and would result in transferring mastery of the trust funds from trustees to courts, contrary to the Declaration of Trust.” The Trustees argue that the phrase “decide all matters” gives them discretion to interpret the Trust.

On the other hand, the Hodson III appellees contend that the Trustees’ discretion only extends to “administration” of the Trust, not to interpretation. We agree with the Trustees. We explain. The Hodson Trust is not crystal clear regarding the role of the Trustees in interpreting the Trust.

Indeed, it is safe to say that much of this Trust is unclear. Nonetheless, we read the language “decide all matters” literally and accord it such meaning. When read this way, the phrase encompasses the Trustees’ power to interpret the Trust. Our reading is supported by the word “decide” which is defined as “arriving at a solution that ends uncertainty.” Webster’s Ninth New Collegiate Dictionary (1985) at 330.

Interpreting the Trust fits squarely under this definition and is precisely what the Trustees in this case did. They did not act capriciously, but obtained competent legal advice which confirmed their interpretation. By implication, the Trustees’ interpretation of the Trust controls the vast majority of issues. It is only when there are “grave doubts” concerning the legality of an interpretation that the Trustees would be well advised to go to court for confirmation of their interpretation.

This, again, is exactly what the Trustees did. The trial court’s response was that, once the court was called upon “to interpret”, the purpose of § 2(m-l) no longer existed. This is patently incorrect. In effect, the ruling of the trial court penalizes the Trustees for having their interpretation seriously questioned.

This is illogical. Rather, the court should determine: (1) the extent of the Trustees’ discretion under the ²³⁴ Trust; (2) if the Trust instrument confers discretion on the Trustees regarding the matter in issue; and (3) if the court determines there is discretion on the matter at bar, the court defers, assuming the Trustees have acted honestly and reasonably. (Restatement (Second) of Trusts § 187 (1959); Scott, supra.) Here, the language of § 2(m-l) fulfills both (1) and (2). “All matters” means the extent of the Trustees’ power is unbounded, except when the legality of an issue arises. The same phrase answers the question of whether this issue of interpretation is covered: all issues are included in the Trustees’ power, so interpretation must be included.

Finally, the court did not ever allude to any illegality in the Trustees’ interpretation. Rather, the court, after ruling that there was no deference due to the Trustees’ interpretation, analyzed each section and interpreted the instrument section by section. Since we read § 2(m-l) as a grant to the Trustees of the power to interpret the Trust, which does not dissipate when the Trustees go to court, we hold that the trial court erred by not deferring to the Trustees’ interpretation. Not only did the trial court err, but the Hodson III contention that the Trustees’ power in § 2(m-l) is limited to the administration of the Trust is flawed.

In addition to the literal reading of the phrase “all matters” which supports the Trustees’ position, the Trustees were authorized to do more than simply take care of the administration of the Trust. The Trustees were also authorized to sue or defend, to effectuate the purposes of the Trust and to amend the Trust, albeit with Clarence’s approval. Thus, we hold that § 2(m-l) bestows the power to interpret the Trust to the Trustees. This, however, is not the end of our inquiry. —Section 2(m-2)— Section 2(m-2) acknowledged the general jurisdiction of the equity courts as they relate to Trusts and specified the court may “generally administer,” “prescribe the acts or duties of the trustees,” and “interfere with the Trustees in the exercise of their discretion” if three facts exist.

First, ²³⁵ doubts must have arisen regarding the “legality or practicability or true interpretation of one or more trust provisions.” The Trustees accede to this requirement. They also use it as proof that interpretation is part of “whatever the trustees do as trustees.” Next, a beneficiary must claim some advantage. But the rest of § 2(m-2) requires that the “majority of the trustees are unwilling or fail to interpret same or will not act without the instructions ... of a court of equity jurisdiction.... ” The Trustees claim that this last condition has not been met so the court should not generally administer the Trust, or interfere with the exercise of their discretion. They argue that they were not “unwilling” to act, nor did they “fail” to interpret §§ 14(e) and (f).

We agree with the Trustees regarding the third requirement of § 2(m-2). The Trustees “resolved” this situation in 1985, two years before this case commenced. They are in court only because some of the appellees in this case threatened to institute litigation. Although the Hodson III appellees observe that the Trustees’ Complaint prayed for, inter alia, “judgment declaring the proper distribution of the income referred to in §§ 14(e) and (f) of the Hodson Trust Agreement,” the Trustees first asked for confirmation of their resolution.

This prayer was based on their initial belief that they had discretion to make such a resolution which would be the adopted perspective unless it was illegal or dishonest. The Minors clearly understood that the Trustees’ threshold position was that the Trust granted them discretion to interpret the Trust, and that the court should overturn the Trustees’ determination only if it were unreasonable. The court itself admitted that the language was ambiguous and open to at least two interpretations. Given the dubious state of the Trust instrument, it is in keeping with the language of the Trust to prevent the court from interpreting it unless absolutely necessary. —Summary— The court is not, as the Hodson III appellees suggest, handcuffed when dealing with this petition.

Nor are the ²³⁶ Trustees the “sole repository of wisdom on interpretation.” They do, however, have more experience with the Hodson Trust than a court and consequently deserve deference. As the Trustees state, the court, when looking to see whether they have acted honestly and reasonably, is in much the same position as a court reviewing the action of an administrative agency or an appellate court using the substantial evidence with due deference to expertise standard. 12 THE TRUST The key to interpreting a trust is to discern the intent of the settlor. The trial court stated: “Very broadly speaking, the general intent of the settlor as seen within the four corners of the trust instrument is to establish a trust estate, to utilize part of the income for educational purposes and part for members of the Hod-son family and to distribute the corpus to the Hodson family and for educational purposes.” The court also noted that the extent to which the settlor intended to have the corpus go to the family versus educational purposes could only be determined by looking at the specific distributive provisions. —Section 14(e)— We start with an analysis of § 14(e). Section 14 provides for disbursements of “the increase or profits” with ²³⁷ subsection (e) distributing five percent of the Trust to Thomas Hodson, Jr., a son of the settlor.

Section 14 clearly stated that these disbursements are made as gifts or grants, followed by a parenthetical “and not as property rights.” Upon his death, “the same reverts” to the oldest living son. There were alternative provisions in case there was no such son. —Absolute Interest— The Trustees contend that the court erred in its construction of this section as meaning that an absolute interest in the income vested in Thomas III and continued for the life of the Trust in Thomas Ill’s widow and sole distributee, and her successors in interest. The Trustees interpreted § 14(e) to mean that the income referred to in that section reverted to the Trust upon Thomas Ill’s death. The Hodson III appellees, however, contend that § 14(e) created an income interest which did not terminate upon the death of Thomas III.

The Hodson III appellees cite several Maryland cases to support their argument. They cite Boutelle v. Boutelle, 231 Md. 69 , 188 A.2d 559 (1963), for the proposition chat “an interest will not be cut back to a life interest unless the language of the trust clearly so provides.” The Hodson III appellees are not quite right. Boutelle states, “[I]t is the general rule that an absolute gift is not reduced by subsequent language, in the absence of clear evidence of an