Shipley v. Crouse

Singley, J., delivered the opinion of the Court. This is an appeal from an order of the Circuit Court of Baltimore City, which in the first instance dismissed a bill of complaint filed by Howard LaMotte Shipley, Georgia Shipley Hoff and Sandra Shipley Jones, the children (the Children) of H. LaMotte Shipley (Mr. Shipley), which had sought (i) the removal of Ralph M. Crouse, Jr. and The Equitable Trust Company (the Trustees) as trustees of a trust estate created by Mr. Shipley; (ii) an injunction ⁶¹⁵ prohibiting the sale of certain assets of Mr. Shipley’s trust, and ... (iii) an accounting and damages. 1 The second part of the order granted the relief prayed in an action brought in the same court by the Trustees against the Children and Mr. Shipley’s widow, Margaret L. Shipley (Mrs. Shipley). The relief sought in this case was (i) the assumption of jurisdiction over the trust for the purpose of considering a contract for the sale of certain assets of the trust estate; (ii) the requirement that the respondents show cause why the contract should not be ratified and approved, and (iii) a consolidation of the cases.

The cases were consolidated for trial, and after the entry of the orders, an appeal was noted to the Court of Special Appeals. We granted certiorari before the matter was heard by that court. Mr. Shipley had died domiciled in Baltimore County, Maryland on 15 May 1969, survived by Mrs. Shipley and the three Children. On 9 March 1960, he had executed a revocable deed of trust, of which he and Ralph M. Crouse, Jr. 2 were trustees.

At the inception of the trust, the trust assets consisted of 494 shares of the capital stock of Shipley Transfer, Inc.; 320 shares of Marva Trucking, Inc.; 10 shares of Shipley of Virginia, Incorporated (the Shipley Companies); policies of insurance on Mr. Shipley’s life in a face amount of $125,000.00, and accidental death policies of $15,000.00. Prior to his death, $3,000.00 of the life policies seem to have been withdrawn from the trust. Subsequent to Mr. Shipley’s death, the trust purchased from his estate the shares of Shipley of Pennsylvania, Inc., which had been owned by him. The provisions of the trust agreement pertinent to the issues before us can be briefly summarized.

Mr. Shipley reserved to himself the right to modify or revoke the trust ⁶¹⁶ agreement; to withdraw assets from the trust estate, and to add assets during his lifetime or by the terms of his will. Upon the death of Mr. Shipley, the trust would become irrevocable, and The Equitable Trust Company would succeed Mr. Shipley as co-trustee. On the death or resignation of Mr. Crouse, Mr. Shipley’s son, Howard LaMotte Shipley, would succeed Mr. Crouse as individual co-trustee. Income was to be paid to Mr. Shipley for life.

Upon his death, the entire net income was to be paid to Mrs. Shipley, together with such sums from the principal of the trust as the Trustees might deem advisable to meet the exigencies of any emergency. On the death of Mrs. Shipley, the principal of the trust was to be equally divided among the children of Mr. Shipley, the descendants of any deceased child to take the parent’s share, subject, however, to the provision that the share of any child who had not attained age 85 would continue to be held in trust until the child reached that age. The Trustees were vested with broad discretionary powers, including the power to retain the assets which comprised the principal of the trust estate, and to purchase any asset from Mr. Shipley’s estate, without liability for any loss incurred as a result of such retention or purchase. 3 There were two further provisions, which we quote because of their significance: “SIXTH: * * * * “V. No individual acting as Trustee hereunder shall be disqualified, because of his fiduciary ⁶¹⁷ relationship, from serving and from receiving reasonable compensation for his services as an officer and/or director (or in otherwise taking an active part in the management and operation of the business) of any corporation the stock of which, in whole or in part, is held in trust hereunder.” * * * “TWELFTH: No individual or corporation acting as a Trustee under this Agreement shall at any time be held liable for mistake of law or of fact, or of both law and fact, or errors of judgment, or for any loss coming to the trust or trusts or to any beneficiary hereunder, or to any other person, except through actual fraud or willful misconduct on the part of the Trustee to be charged. If this provision should be held invalid as to any class of persons or instances, such fact shall not impair its application to all other classes of persons and instances.” 4 The Shipley Companies were engaged in the interstate and intrastate transportation of bulk cargoes (cement, latex, petroleum products, and dry chemicals) by truck.

At the time of Mr. .Shipley’s death, the stocks of the companies, which comprised the bulk of the assets of the trust estate, had been valued for Federal Estate Tax purposes at about $364,000.00. At time of trial, the assets of the trust, in addition to the stock, consisted of a mortgage on Mrs. Shipley’s residence and approximately $25,000.00 invested in The Equitable Trust Company’s common trust fund, remaining after discretionary payments of $15,000.00 from principal to Mrs. Shipley from July of 1975 through January of 1976. ⁶¹⁸ Consolidated net profit, after income taxes for the Shipley Companies, was as follows: 1970 ($151,876.81) loss 1971 $103,159.08 1972 $85,377.28 1973 $99,450.07 1974 ($233,533.15) loss 5 1975 $134,131.24 During the same six-year period, Mrs. Shipley’s income ranged from $7,040.00 to $35,100.00 per year, aggregating $136,946.00 6 for an annual average of $22,824.33. From the outset, the Trustees were faced with the classic dilemma not infrequently faced by trustees: that of administering a trust which held virtually only one asset, the stock of a group of companies with fluctuating earnings records, which were perennially short of cash. 7 It was to the dividends from these Shipley Companies that Mrs. Shipley, the primary object of Mr. Shipley’s bounty, looked for support. On the other hand, the desire of the Children for capital appreciation could not be reconciled with their mother’s need for income.

See, for example, Maryland Nat’l Bank v. Merson, 249 Md. 353 , 239 A. 2d 905 (1968) as to the duty of impartiality as between successive beneficiaries; Restatement (Second) of Trusts, swpra, § 232 at 555; 3 A. Scott, Law of Trusts § 232 at 1894-97 (3d ed. 1967). The dilemma is somewhat reminiscent of that faced by our predecessors in York v. Maryland Trust Co., 149 Md. 608 , 131 A. 829 (1926). There, Roy F. York, a grandson of Lamon Harkness, left in trust a net estate of about $600,000.00 ⁶¹⁹ invested almost entirely in stock of the several Standard Oil companies, which he had inherited from his grandfather, which produced a yield of 3V2% or about $19,000.00, most of which was payable to his widow. On her death, the principal of the trust became payable to York’s brothers and sister and their issue.

The will contained a provision that “. . . it is my wish that the stocks ... [in the Standard Oil companies] be retained by my trustees so far as it is reasonably possible so to do.” When the Atlantic Refining Company suspended dividend payments, Mrs. York sought to require the sale of the stock and the reinvestment of the proceeds. Our predecessors, speaking through Judge Offutt, said: “The whole question, therefore, comes to this: Should the court, upon the facts of this case, require the trustee to dispose of securities which are safe, but which yield a low current return, and invest the proceeds in others which will yield a higher current return, but which may not be as safe, or in securities having the same margin of safety, which are likely to yield a higher current income, but a lower ultimate return, when the probability of future stock dividends is considered? “In dealing with that question some weight must be given to the wishes and the intention of the testator, as well as to the conflicting duties owed by the trustee to the life tenant and the remaindermen. In Vickery v. Evans, 33 Beav. 382, it was said: ‘It is also quite clear that the plaintiff (the remainderman) cannot insist that the fund shall be invested at the smallest possible rate of interest, so as to increase the amount ultimately payable to him,’ nor ‘can the trustees, by fraud or collusion, so exercise their discretion as unduly to reduce the amount payable to the plaintiff’ (the remainderman). Ibid.

In this case the desire of the remaindermen to retain the investment in its present form, manifestly is induced by the ⁶²⁰ probability that the ultimate value of their respective shares will be increased by the declaration of stock dividends, and they are indifferent to the consideration that that increase be brought by keeping the current dividends below the rate which the earnings of the companies declaring them would justify. On the other hand, the life tenant is interested in securing the largest possible present income from the investments, and is not at all concerned in increasing the ultimate value of the shares which the remaindermen will receive. The testator was of course aware of that conflict in interest between the several objects of his bounty, as well as of the delicate nature of the discretion necessary to adjust it so as to fairly protect the interests of both the life tenant and the remaindermen, and with that knowledge he committed that discretion to the trustee in this case, and at the same time indicated to it the course he desired it to pursue. It is true that his directions are precatory rather than mandatory in character, but nevertheless they are sufficiently specific to warrant the trustee in taking them as its guide, if it can do so without manifest prejudice to the rights of any of the cestuis que trust, and we find it difficult to say that, in following the request of the testator in retaining stock owned by him at his death, that the trustee has abused the discretion reposed in it, upon the facts which we have stated.

It is true that that part of the estate which is invested in the Atlantic Refining Company is at present wholly unproductive, since that company paid no dividends in 1925. But since it had regularly paid dividends for the nine preceding years, it cannot be said that because the trustee did not immediately dispose of its stock in that company when it failed to declare a dividend in 1925, that it acted arbitrarily or unwisely, in view of the fact that its present value is said to be greater than ⁶²¹ when it was distributed, although we do not hold that it would be justified in retaining that investment for an unreasonable period of time if it continues to be unproductive, even though it be likely that it will ultimately declare a stock dividend sufficient to yield a fair average return for the unproductive period. “Giving its legitimate value to the language of the will and the manifest intention of the testator, that the trustee should retain his Standard Oil Company investments as far as possible, for the purpose of increasing the value of the corpus of the estate, we have been unable to discover in this case anything which could justify the conclusion that the trustee has been guilty of bad faith or arbitrary conduct, or has failed to exercise reasonably sound judgment in retaining those investments.” 149 Md. at 619 -20 Concededly, the factual situation in York differs from that presented here, but the case is illustrative of the broad discretionary powers vested in a conventional trustee, Webb & Knapp v. Hanover Bank, 214 Md. 230, 242 , 133 A. 2d 450, 456 (1957), which may be exercised absent evidence of bad faith, misconduct or a want of ordinary skill or judgment, Kramme v. Mewshaw, 147 Md. 535, 548 , 128 A. 468, 473 (1925), compare Fox v. Harris, 141 Md. 495 , 119 A. 256 (1922) and Baer v. Kahn, 131 Md. 17 , 101 A. 596 (1917) with Gilbert v. Kolb, 85 Md. 627, 636 , 37 A. 423, 424 (1897). G. Bogert, The Law of Trusts and Trustees (2d ed. 1960) § 541 at 446, puts it this way: “A trustee is required to manifest in all his management of the trust the care, skill, prudence, and diligence of an ordinarily prudent man engaged in similar business affairs and with objectives similar to those of the trust in question. “A trustee with a duty to provide an income for a widow for her life, and to conserve the capital for ⁶²² children until they reach 21, should use the same care that a husband and father would normally take in investing and managing his own property to assure his family of an income during the lives of the parents and to conserve the principal for distribution to the children at their maturities.” (at 449) The record shows that as early as June of 1969, immediately following Mr. Shipley’s death, consideration had been given to the sale of the Shipley Companies. On Mr. Shipley’s death, Wilson Corroum, an employee of the Shipley Companies, was elected president.

After the unsatisfactory operating results experienced in 1970, his resignation was requested; Corroum was given a year’s severance pay, and Crouse was elected president in his stead. Under Crouse’s presidency the Shipley Companies enjoyed satisfactory profits in 1971, 1972 and 1973. On 15 January of 1975, Crouse resigned, was given six months’ severance pay, the use of a car, and was succeeded as president by George B. Eckels, until then vice president. Crouse’s proposal that he be permitted to seek a purchaser for the Shipley Companies on a commission basis was opposed by the Children, and was not pursued, but there is evidence that immediately following his resignation, Crouse devoted his efforts to finding a purchaser.

The Equitable Trust Company, however, agreed to compensate him by paying him 25% of its commissions as trustee. Within a week of Crouse’s resignation, he initiated the efforts which ultimately led to the contracts dated 21 November 1975 with O’Boyle Tank Lines, Inc. (O’Boyle), a Virginia corporation, similarly engaged in the business of an interstate and intrastate carrier. Because the parties recognized that the agreement of purchase and sale would require the approval of the Interstate Commerce Commission (the I.C.C.) as to the interstate routes, and of state regulatory commissions as to the intrastate routes, the agreements took the form of a ⁶²³ management agreement 8 which would remain in effect until regulatory approval of the purchase and sale agreement could be obtained. The agreement of purchase and sale was to be effective when necessary approvals had been granted.

The salient features of the management agreement were that O’Boyle would assume responsibility for the management of the Shipley Companies on the first of the month following the grant of temporary approval by the regulatory authorities; would pay to the Trustees the sum of $4,500.00 per month; and would, in the event that permanent approval of the proposed transfer was not forthcoming, retain the profits derived from the operation of the Shipley Companies during the O’Boyle management, but return the Shipley Companies to the Trustees with a net worth equivalent to that which existed at the date of the assumption of management responsibilities by O’Boyle. The agreement of purchase and sale, while necessarily more prolix, provided for the purchase of the stock of the Shipley Companies owned by the Trustees for $1,350,000.00, of which $33,750.00 would be paid in cash within 60 days of obtaining final regulatory approval. The balance of the purchase price was to be evidenced by a promissory note bearing interest at 6%, payable in 39 quarterly installments of $33,750.00 each. Provision was made for withdrawal by O’Boyle from the purchase contract or for the renegotiation of the agreement in the event that: judicial ratification was not obtained; regulatory approval was conditioned on modification of the agreement, or if operating authorities were canceled or disallowed by the regulatory authorities.

Additionally, the agreement contains the representations and warranties customarily found in such agreements. The attack mounted by the three Children on the order entered below is bifurcated. ⁶²⁴ (i) The Children rely on Maryland Code (1974), Estates and Trusts Article § 15-112, which tracks the language of Maryland Rule V84: “REMOVAL OF FIDUCIARY “(a) Grounds (1) Mandatory grounds. A court shall remove a fiduciary who has: ^ * * * (ii)* * * (iii) Shown himself incapable, with or without fault to properly perform the duties of his office; (iv) Breached his duty of good faith or loyalty in the management of property of the fiduciary estate. (2) Discretionary grounds.

A court may remove a fiduciary who has: (i)* * * (ii)* * * (iii) Failed to perform any of his duties as fiduciary,, or to competently administer the