Robertson v. Center Jersey , 47 F.3d 1268 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
2-6-1995
Robertson vs. Center Jersey
Precedential or Non-Precedential:
Docket 94-5010
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 94-5010
___________
MELISSA ROBERTSON,
Appellant
v.
THE CENTRAL JERSEY BANK & TRUST COMPANY,
JOHN DOES, Officers and Directors of the Central Jersey Bank,
and others whose identities are presently unknown,
Appellees
___________
Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 91-cv-03383)
___________
Argued: August 10, 1994
PRESENT: HUTCHINSON and NYGAARD, Circuit Judges,
and KATZ, District Judge*
(Filed February 6, 1995)
____________
Robert B. Reed, Esquire (Argued)
Donald F. Scholl, Jr. Esquire
Reed & Scholl
31 Highway 12
Flemington, NJ 08822
Attorneys for Appellant
Michael J. Canning, Esquire (Argued)
Paul V. Fernicola, Esquire
Giordano, Halleran & Ciesla
125 Half Mile Road
P.O. Box 190
Middletown, NJ 07748
Attorneys for Appellees
_______________
* Hon. Marvin Katz, United States District Judge for the Eastern
District of Pennsylvania, sitting by designation.
____________
OPINION OF THE COURT
____________
HUTCHINSON, Circuit Judge.
Appellant, Melissa L. Robertson ("Robertson" or
"Beneficiary"), appeals an order of the United States District
Court for the District of New Jersey granting summary judgment to
appellee, The Central Jersey Bank and Trust Company ("Bank" or
"Trustee"). Robertson is the beneficiary of a testamentary trust
that names the Bank as trustee. She asserts that the district
court erred in holding that a will provision authorizing the Bank
to retain its own stock protected it from liability for failure
to diversify trust assets when she failed to show that the
Trustee acted either "recklessly or in disregard of [its]
fiduciary duty of loyalty." Robertson v. The Central Jersey Bank
and Trust Company, No. 91-3383, slip op. at 11 (D.N.J. Dec. 9,
1993). Robertson also contends that the district court erred
when it held that she could not recover against the Bank for
alleged mismanagement of the testator's estate prior to
August 12, 1988, the date on which the Superior Court of New
Jersey, Law Division, Probate Part ("Probate Court") approved the
Bank's account of its administration of the testator's estate.
We hold that the district court erred when it granted
the Trustee summary judgment on Robertson's claim that the
Trustee violated its fiduciary duty of care by keeping as much as
95% of the trust assets invested in the Trustee's own corporate
stock. We also believe the district court erred in using
recklessness, instead of due diligence, to define the standard of
care New Jersey fiduciaries must meet when broadly authorized to
retain trust investments. On the present record, there remain
genuine disputed issues of material fact as to whether the
Trustee met the standard of care New Jersey requires fiduciaries
to exercise to protect trust beneficiaries from investment
losses. We will therefore reverse that part of the district
court's order granting the Bank summary judgment on Robertson's
claim that it breached its fiduciary duty of care in retaining
the investment of almost all of Robertson's trust in its own
stock, without any attempt to diversify her trust's investments.
On the preclusion issue, we are in basic agreement with
the district court's legal analysis. We will modify its order,
however, to limit preclusion to the period covered by the Bank's
account, which ended March 21, 1988, rather than extending it, as
the district court did, to August 12, 1988, the date the Probate
Court entered its decree approving the Bank's account.1
1
Although the district court relied on issue preclusion to bar
Robertson's claim, we believe claim preclusion is the appropriate
theory to apply in this case. See Pittman v. LaFontaine, 756
F. Supp. 834, 841 (D.N.J. 1991) ("Claim preclusion refers to the
effect of a judgment in foreclosing litigation of a matter that
never has been litigated, because of a determination that it
should have been advanced in an earlier [proceeding].")
(quotation and citation omitted); Edmundson v. Borough of Kennett
Square, 4 F.3d 186, 189 (3d Cir. 1993) ("Claim
preclusion . . . is broader in effect [than issue preclusion] and
prohibits reexamination not only of matters actually decided in
the prior [proceeding], but also those that the parties might
have, but did not, assert in that proceeding."). The precluded
claims include the Bank's sale of the "Fair Haven Property" which
the Bank included in its accounting as personal representative.
I.
A.
Robertson is the step-granddaughter of Irene Lockwood
Robertson ("Testator"). The Testator died on December 25, 1983.
In her will, she created a trust in which she gave Robertson one
half of any balance remaining in the trust upon the death of
Testator's husband. The will was admitted to probate by the
Surrogate's Court of Monmouth County on January 23, 1984 and
letters were issued to the Bank on the same day.
Article IV of the will gave the Testator's husband,
Abraham Robertson (Robertson's grandfather), a life estate that
included the marital residence, located at 62 Harvard Road, Fair
Haven, New Jersey. Article V placed the Testator's residuary
estate in trust for the life of her husband, Abraham, and named
the Bank trustee. The Bank accepted this residuary trust on
January 26, 1984. Article VI directed the Trustee, upon the
death of Testator's husband, to divide the balance of the
residuary estate equally between Robertson and the Monmouth
County Society for Prevention of Cruelty to Animals. Article VII
of the will deferred distribution of Robertson's share of the
corpus until she reaches age twenty-five.
(..continued)
Robertson also contends that the district court erred in
concluding that the New Jersey Consumer Fraud Act, N.J. Stat.
Ann. § 56:8-2 (West 1989), was inapplicable to the Bank's failure
to diversify trust assets. We agree with the district court that
a claim for failure to diversify trust assets is not among the
fraudulent acts proscribed by the New Jersey Consumer Fraud Act.
In addition, we agree with the district court that Robertson
failed to show that the Bank breached its duty of loyalty.
The Testator's husband died in 1985. Robertson's
trust was separately funded in 1988. At that time, 95% of its
corpus was invested in the Bank's own corporate stock. This
stock had been held by the Testator at death. Article X of the
will gave the Trustee the power to retain any investments.
Article X provides in part:
[T]he Trustee, . . . in addition to and not
by way of limitation of the powers provided
by law, shall, except as otherwise provided
in this my Will, have the following powers to
be exercised in its absolute discretion: To
purchase or otherwise acquire and to retain
any and all stocks, bonds, notes, or other
securities, or any such variety of real or
personal property, including interests in
common trust funds and securities of or other
interests in investment companies or
investment trusts, whether or not such
investments be of the character permissible
for investments by fiduciaries and without
regard to the effect of any such investment
or reinvestment may have upon the
diversification of investments . . . .
Appellant's Appendix at 91-92. It also provides:
I specifically authorize my corporate
fiduciary to retain, temporarily or
permanently, any or all of the stock of the
corporate fiduciary owned by me at the time
of my death in the form in which it then
exists.
Id. at 92.
In September 1987, the Bank filed its first account of
its administration of Testator's estate. It reported the
estate's inventory and appraisements at an initial value of
$919,425.19. This included 34,277 shares of the Bank's corporate
stock at a book value of $690,957.56. The account showed that
the Fair Haven property was sold for $138,347.03 on February 11,
1986, following the death of the life tenant, Robertson's
grandfather. The account also showed that the Bank had sold more
than 3,000 shares of its own corporate stock during the period
covered, leaving a balance of 31,000 shares. The shares
remaining had a book value of $625,812.50, but the market value
had increased to almost $1.5 million. The estate's remaining
corpus had a total book or inventory value of $775,837.62.
On March 21, 1988, the Bank supplemented its September
1987 accounting and reported the book or inventory value of the
Testator's estate at $779,670.03; in the six months or so between
September 1987 to March 21, 1988, however, the market value of
the Bank's stock had decreased approximately $300,000 to about
$1.2 million.
In April 1988, the Bank asked the Probate Court to
approve its administration of the estate and its residuary trust
to March 21, 1988. The court appointed Kerry E. Higgins, Esq. as
guardian ad litem to protect Robertson's interest. In June 1988,
Higgins reported to the court that she had met with Robertson's
parents, and they "expressed extreme dissatisfaction" with the
Trustee's administration of the estate and trust, as well as its
failure to communicate adequately with them. Robertson's parents
were particularly disturbed by the Bank's sale of the Fair Haven
property without notice to them, despite their expressed interest
in purchasing it. In addition, they questioned the Bank's sale
of some of its own stock. After investigating these matters,
however, Higgins reported that, in her opinion, both the Fair
Haven property as well as the Bank's own corporate stock were
properly sold for fair value.
On August 12, 1988, the Probate Court entered a
judgment approving the Bank's administration of the estate and
the trust the will created for the life of the Testator's
husband, and discharged the Bank from liability for its conduct
from the Testator's death through March 21, 1988. The Probate
Court held:
[The Bank], individually and as personal
representative and trustee [of] aforesaid are
hereby fully, finally and forever discharged
and released of and from any and all
liability and accountability with respect to
the administration of the Will from the date
they commenced serving as such personal
representative and trustee, through and
including March 21, 1988, the closing date of
their First and Final Account and
Supplemental Account, and thereafter.
See In re Estate of Robertson, No. 134166, slip op. at 4 (N.J.
Super. Ct., Law Div., Probate Part, filed Aug. 12, 1988)
(emphasis added).
In or about September 1988, the Bank transferred
Robertson's one-half share of the estate's residuary balance into
a separate trust for her benefit. Robertson and her parents
received an opening statement that showed the Bank's stock
passing to Robertson's trust at an opening book value of
$309,878.12. These shares again represented more than 95% of the
$325,810.98 total book value of Robertson's trust. On
September 30, 1988, the market price of the Bank's stock was
$21.00 per share. Accordingly, it had a market value of
$644,700.00 at that time.
In her deposition, Robertson testified that the Bank
had begun giving her quarterly financial statements at the end of
1988 and that she had examined them to determine the market value
of the stock in her trust and the trust's total value. Robertson
realized that the Bank stock, which was transferred to her trust
from the testator's estate, was the trust's main asset.
In January 1991, Robertson wrote to the Bank's trust
committee seeking money to purchase a home from her parents near
the college she was attending in Florida. In that letter,
Robertson also said that she was "deeply concerned" about the
decline in value her trust account had suffered over the
preceding year.
On February 8, 1991, the Bank sold 4,000 shares of its
stock at $9.22 per share, for a total of $36,875.00, apparently
to enable Robertson to purchase the Florida home from her
parents. In July 1991, Robertson again wrote to the Bank
complaining about a decline in her quarterly income disbursements
from about $7,000.00 to $5,000.00. She also stated general
dissatisfaction with the Bank's administration of her trust. In
the July letter she estimated that her trust's "long slide into
the financial cellar" had reduced the value of the corpus of her
trust by $500,000.00.
B.
On August 1, 1991, before the Bank responded to her
July 1991 letter, Robertson commenced this action.2 In her
complaint she claimed that the Bank had breached its fiduciary
duties by permitting her trust account to suffer such a large
decline in value, by selling the Fair Haven property below its
fair market value and by violating the New Jersey Consumer Fraud
Act. After completion of discovery, the Bank moved for summary
judgment. The district court granted the Bank's motion on
December 9, 1993. It concluded that the will provisions
authorizing the Bank to retain assets excused it from all but
reckless mismanagement and Robertson had failed to show that the
Bank had acted "recklessly or in disregard of its fiduciary duty
of loyalty." Robertson, No. 91-3383, slip op. at 12. The
district court also concluded that Robertson was precluded from
seeking damages for any alleged mismanagement of the trust during
the period covered by the Bank's account, including its sale of
the Fair Haven property. Finally, the district court held that
Robertson had failed to make out a claim under the New Jersey
Consumer Fraud Act. Accordingly, it granted summary judgment to
the Bank, holding that no material issues of fact remained.
Robertson filed a timely notice of appeal on December 29, 1993.
2
In an August 16, 1991 response to Robertson's letter, the Bank
primarily attributed the decrease in her income distributions to
the liquidation of principal that enabled Robertson to purchase
the Florida home. The Bank referred to its express authority to
retain the stock the Testator had owned at the time of her death,
but stated that it had nevertheless begun to make orderly
reductions of the trust's investment in the Bank's own stock and
would continue to do so.
II.
The district court had diversity jurisdiction over this
case under 28 U.S.C.A. § 1332 (West 1993). We have appellate
jurisdiction over the district court's final order granting
summary judgment to the Trustee under 28 U.S.C.A. § 1291 (West
1993). A district court's order granting summary judgment is
subject to plenary review. Public Interest Research Group of New
Jersey Inc. v. Powell Duffryn Terminals, Inc., 913 F.2d 64, 76
(3d Cir. 1990), cert. denied, 489 U.S. 1109 (1991). Accordingly,
"we apply the same test as the district court should have used
initially." Id. (citation omitted). We evaluate the evidence in
the same manner the district court should have, giving Robertson,
the non-moving party, the benefit of every favorable inference
that can be drawn from the record to determine if there are any
remaining genuine issues of material fact that would enable her
to prevail. Fed. R. Civ. P. 56; Bank of Nova Scotia v. Equitable
Financial Management, Inc., 882 F.2d 81, 83 (3d Cir. 1989);
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
III.
Because the district court exercised diversity
jurisdiction over this matter, we are obliged to apply the
substantive law of New Jersey, the state in which it sits. Erie
R. Co. v. Tompkins, 304 U.S. 64 (1938); Klaxon Co. v. Stentor
Electric Mfg. Co., 313 U.S. 487 (1941). Therefore, we must
decide the extent to which a New Jersey trustee's fiduciary
obligations are affected by trust provisions that not only grant
them broad discretion in the investment of trust assets, but also
broadly authorize retention of any assets the trust receives from
the settlor or testator, without regard to diversification.
A.
The district court concluded that a fiduciary
administering a New Jersey trust is governed by the standards set
forth in the New Jersey Prudent Investment Law. See N.J. Stat.
Ann. § 3B:20-12 et seq. (West 1983) (the "Act" or "Prudent
Investment Law."). This statute was first enacted as N.J. Stat.
Ann. § 3A:15-18 et seq. (West 1951) and has not been amended in
any respect material to this case thereafter. See Fidelity Union
Trust Co. v. Price, 93 A.2d 321, 325 (N.J. 1952) ("Unless the
trust instrument provides otherwise, it is presumed that the
trustor intended that his trustee should have the power to make
such investments of the corpus of the trust as the Legislature in
its wisdom might from time to time permit.").
Under the Prudent Investment Law, a trustee must act
prudently in making or retaining trust investments. N.J. Stat.
Ann. § 3B:20-13 (West 1983). Prudence implies a duty to
diversify. See Commercial Trust Co. of N.J. v. Barnard, 142 A.2d
865, 871 (N.J. 1958); Restatement (Third) of Trusts § 229(d)
(1992). The Prudent Investment Law states:
In investing and reinvesting money and
property of a trust and in acquiring,
retaining, selling, exchanging and managing
investments, a fiduciary shall exercise care
and judgment under the circumstances then
prevailing, which persons of ordinary
prudence and reasonable discretion exercise
in the management of and dealing with the
property and affairs of another, considering
the probable income as well as the probable
safety of capital. If the fiduciary has
special skills or is named as the fiduciary
on the basis of representations of special
skills or expertise, he is under a duty to
exercise those skills.
N.J. Stat. Ann. § 3B:20-13 (West 1983).
The will creating Robertson's trust has a provision
permitting retention of assets present at the inception of the
trust. For such a case, the Act provides:
If a trust instrument prescribes,
defines, limits or otherwise regulates a
fiduciary's powers, duties, acts, or
obligations in acquiring, investing,
reinvesting, exchanging, retaining, selling,
valuing or otherwise acting with respect to
the property of the trust estate, the trust
instrument shall control notwithstanding this
article; but nothing herein shall affect the
jurisdiction of the Superior Court to order
or authorize a fiduciary to depart from the
express terms or provisions of a trust
investment for the causes, in the manner, and
to the extent otherwise provided by law.
N.J. Stat. Ann. § 3B:20-15 (West 1983) (emphasis added);3 see
also Manufacturers Trust Co. v. Earle, 108 A.2d 115, 116 (N.J.
Super. Ct. Ch. Div. 1954) ("Where . . . the decedent has in
effect drafted a Prudent Man Investment Statute of his own and
included it in his will, specifying in what manner and to what
3
See infra note 6 for discussion of section 3B:20-15's effect
when a trustee's power to retain assets is permissive as opposed
to mandatory.
extent his trustee may deviate from [the Act], the provisions of
the will must prevail over the statute."). The Testator's
inclusion of a broad discretionary power to retain assets in
Robertson's trust, without regard to diversification, brings us
squarely up against the question of what limits, if any, New
Jersey places upon broad retention provisions like the one in
this will.
The Bank contends that the will's authorization to
retain its own stock manifests the Testator's intent wholly to
abrogate the prudent person standard a New Jersey fiduciary would
otherwise owe a trust beneficiary. If so, this will's retention
power would completely insulate the Bank from fiduciary liability
despite its failure to diversify the trust assets and its
continued heavy investment of the trust's resources in its own
stock. Robertson, on the other hand, contends that the Bank's
disproportionate retention of its own stock is so contrary to the
most elementary principles of trust management that it cannot be
excused by even the broadest retention power. In support,
Robertson relies on an expert witness who concluded that the Bank
breached its duty of care, as well as its duty of loyalty, by
continuing to invest so large a percentage of the assets of her
trust in the Bank's own stock.
At first glance, the provisions of the Prudent
Investment Law we have quoted seem to support the Bank's
argument. Examination of New Jersey case law applying the Act
indicates to us, however, that retention provisions similar to
the one before us do not grant trustees the sweeping exemption
from fiduciary duties of care that the Bank proposes.
Generally, if the terms of a trust instrument authorize
a trustee to retain investments that originally passed to it from
the settlor of a testamentary trust, the trustee may retain them
without liability. See Liberty Title & Trust Co. v. Plews, 60
A.2d 630, 641 (N.J. Ch. 1948), rev'd on other grounds, 77 A.2d
219 (1950); N.J. Stat. Ann. § 3B:20-15 (West 1983); Restatement
(Third) of Trusts § 229(d) 1992. Nevertheless, a trustee may not
rely on a power to retain investments when circumstances make
retention imprudent. Plews, 60 A.2d at 648 (quoting Dickerson v.
Camden Trust Co., 53 A.2d 225 (N.J. Ch. 1947), modified, 64 A.2d
214 (N.J. 1949)). Stated differently, "[e]ven where securities
are retained by a trustee pursuant to . . . a direction in the
will, the trustee is privileged to retain them only so long as
they remain safe." Id.; see also In re Munger's Estate, 309 A.2d
205, 209 (N.J. 1973) ("The mere fact that the testator did not
want his fiduciary bound by [the] statute does not of itself
establish that [the testator] desired to authorize [certain
investments]."); Restatement (Third) of Trusts § 229(d) (same).
In short, an authorization to retain investments enhances the
trustee's discretion, but does not wholly insulate it from
liability for its exercise of a power to retain assets. Plews,
93 A.2d at 641.
Thus, the first question that must be decided is the
standard of care the Bank is required to exercise in managing a
trust that permits it to retain its own stock. Viewed from a
different perspective, we might inquire into the extent to which
this Testator wished to absolve her trustee of its usual duty to
diversify.4 In considering these questions, we agree with the
district court that New Jersey has rejected the Bank's broad
argument that the retention clause completely absolves it from
any duty to diversify. See Plews, 60 A.2d at 641 ("The
[retention] clauses adverted to do not of themselves absolve [a
fiduciary] from liability. . . ."). It is, therefore, necessary
to determine "whether the trustee so conducted itself as to
warrant the granting of that protection with which it seeks to
cloak itself under the [retention clause]." Id.
B.
4
Diversification is a uniformally recognized characteristic of
prudent investment and, in the absence of specific authorization
to do otherwise, a trustee's lack of diversification would
constitute a breach of its fiduciary obligations. See
Restatement (Third) of Trusts § 229(d); See also Erlich v. First
Nat. Bank of Princeton, 505 A.2d 220, 236 (N.J. Super. Ct. Law
Div. 1984) (An investment manager has an obligation to exercise
prudence in diversifying investments to reduce the risk of large
losses; indeed, diversification has been the accepted practice
since "the early case of Dickinson's Appeal, 152 Mass. 184, 25
N.E. 99 (1890)."); In re Ward Estate, 192 A. 68, 71, 73 (N.J.
Prerog. Ct. 1936) ("No ordinarily prudent man would have
recommended putting 95 per cent. of the fund in common stocks,
certainly not in unlisted securities of a single locality. . . .
This portfolio is too lopsided for safety."), aff'd, 191 A. 772
(N.J. E.&A. 1937). The Bank itself recognizes the importance of
diversification. Its own investment policy provides that
excessive concentration of funds in any one issue should be
avoided and that if greater than 10% of the equity portfolio is
invested in one issue consideration should be given to reducing
this concentration by diversifying.
In holding that the asset-retention provision did not
"abrogate [the Trustee's] general obligation to invest with
prudence," see Robertson, No. 91-3383, slip op. at 11, the
district court decided that the asset-retention provisions of
Article X of the will were "permissive," as opposed to
"mandatory," see id., and that they did not deprive the Bank of
power to sell the stock that it now holds for Robertson's
benefit. The district court analyzed the required standard of
care as follows:
[I]f, by the express terms of the trust[,]
the trustee is permitted but not required to
retain certain investments originally
transferred to the trust from the decedent's
estate, the trustee is not liable for
retaining them absent evidence that said
trustee acted recklessly or in disregard of
the fiduciary duty of loyalty.
See id. (emphasis added).
We believe that this unduly relaxes the standard of
care a trustee owes the beneficiaries. The prohibition against a
fiduciary's retention of its own stock, which the common law once
imposed, had as its rationale the fiduciary's duty of loyalty,5
rather than its duty of care. Like the district court, we do not
think, however, that a permissive power to retain trust assets
wholly absolves a trustee from liability for breach of its duty
of care; but we disagree with the district court that the
standard of care under an explicit power to do so is
5
We reiterate our conclusion that Robertson has failed to show
a breach of the duty of loyalty on this record. See supra
note 1.
recklessness. Instead we believe a trustee should exercise due
diligence in deciding whether to retain its own stock as a trust
investment.6
Here, however, the district court concluded that the
trustee could not be held liable for alleged mismanagement of
Robertson's trust, unless she showed that it acted "recklessly."
See Robertson, No. 91-3383, slip op. at 11. We recognize that a
fiduciary specifically authorized to retain trust assets may
decide to do so even though the value of the retained assets is
declining or market indicators otherwise suggest its disposal.
Still, a trustee must pay attention. Its decision to retain the
asset must be the result of a prudent, reasoned and deliberate
decision-making process. See In re Paterson Nat'l Bank, 4 A.2d
59 (N.J. Prerog. Ct. 1939), aff'd, 12 A.2d 705 (N.J. E.&A. 1940),
discussed infra at 21-23.
6
Even a trustee faced with a mandatory retention provision can
apply to the court for permission to dispose of any investment it
is directed to retain. See N.J. Stat. Ann. § 3B:20-15 (West
1983); Restatement (Second) of Trusts § 167 (1959); see also
Plews, 60 A.2d at 648 (quoting In re Buckelew's Estate, 13 A.2d
855 (N.J. Prerog. Ct. 1940), aff'd, 19 A.2d 779 (N.J. E.&A.
1941)) ("It is the duty of a trustee to use every reasonable
effort to inform itself as to the value and the soundness of the
trust investments and to keep a careful check of fluctuating
values. If it be in doubt in a situation then it behooves it to
seek instructions from the court as to its course of action in
the premises."). In fact, the Restatement concludes that, in
emergency situations, the fiduciary may dispose of the security
without first obtaining the court's permission, although such
action would be subject to the court's subsequent approval. See
Restatement (Second) of Trusts § 167(2) and cmt. e. We believe a
permissive retention provision, like the one in this case, simply
allows the fiduciary to avoid the delay and expense evident to
court approval.
It is clear that the duty of a trustee to exercise care
is affected by a retention provision. See Price, 93 A.2d at 324.
Neverthless, even one as broad as the one in Robertson's trust
does not seem to us to lower the standard to recklessness. Thus,
in Plews, supra, the court analyzed the fiduciary obligations of
a trustee that had wide discretion to retain specific assets and
held that an asset-retention provision in a trust instrument
could not
be said to relieve the [fiduciary] from
exercising that degree of care and prudence
normally required of a fiduciary nor to
excuse a violation of a trust duty. [Such
authorization] does not permit the
[fiduciary] to blindly retain such
investments regardless of their value or
sufficiency. 'Retaining investments is in
effect making them.' Under these clauses,
the same fidelity, faithfulness, care and
prudence is required. . . .
60 A.2d at 641 (quotation omitted) (emphasis added).
The Plews court reasoned that asset retention clauses
merely "permit the retention of [the] testator's investments for
such length of time as [the fiduciary] might deem proper,"
without regard to any statutory provision. Id. They do not
absolve a fiduciary from exercising care and diligence in
managing trust investments. Id. ("Even if [an authorization]
clause serve[s] to permit [a] trustee to make [certain
investments, otherwise inappropriate] it is still required to
exercise that degree of care and prudence in handing [sic] the
monies and affairs of the trust estate as is normally required of
fiduciaries.") (emphasis added).
The Plews court reasoned further that fiduciaries which
possess or hold themselves out to possess expertise in investment
management can be more readily found to breach this standard. It
stated:
Normally, a trustee is required to
exercise that degree of care and caution,
skill, sagacity, and judgment, industry and
diligence, circumspection and foresight, that
an ordinary discreet and prudent person would
employ in like matters of his own.
In the present case, the corporate
trustee held itself out as an expert in the
handling of estates and trust accounts. It
also held itself out as having particular
departments for investments and statistical
information, and especial skill in this
respect. It had so advertised for a number
of years, and with the knowledge of the
deceased, who had been a director at the time
of his death and for many years theretofore.
It therefore represented itself as being
possessed of greater knowledge and skill than
the average man and . . . so it was incumbent
upon the trustees to exercise such care,
skill, diligence, and caution as a man of
ordinary prudence would practice in like
matters of his own. . . . And if the trustee
possesses greater skill than a man of
ordinary prudence, he is under a duty to
exercise such skill as he has. It was under
a duty to exercise a skill greater than that
of an ordinary man. The manner in which
investments were handled must be viewed and
assayed in the light of such superior skill
and ability.
Id. at 642 (quotations and other citations omitted) (emphasis
added).7
7
See also N.J. Stat. Ann. § 3B:20-13; In re Estate of Killey,
326 A.2d 372, 375 (Pa. 1974) (citing Plews in rejecting trial
court's use of ordinary negligence standard and holding instead
that a trustee bank, which "held itself out as an expert in the
Applying these general principles to the facts before
it, the Plews court held that the trustee had failed to exercise
the degree of care, skill, diligence and fidelity generally
required of a person with its skills and that the securities in
question "were held beyond the time when they were safe." Id. at
648. The court reached this conclusion even though it decided
that there was no proof of wilful wrong, bad faith, fraud or
gross misconduct. We believe the Plews court's rejection of a
gross misconduct standard forecloses use of the "reckless"
standard the district court applied in the present case.
Robertson, No. 91-3383, slip op. at 11.
Moreover, in Behrman v. Egan, 95 A.2d 599 (N.J. Super.
Ct. Ch. Div. 1953), the court held trustees liable for a trust's
losses despite an exculpatory provision insulating them from
liability for mismanagement. The court rejected the trustees'
argument that the trust agreement "relieve[d] them from all
responsibility for actions other than those which were the result
of conscious wrongdoing." Id. at 601 (emphasis added). Rather
the court held, "the [trustees] contention that the exculpatory
clause saves the trustees from any penalty for conduct other than
that which would, in effect, constitute an indictable offense, is
untenable." Id. It reasoned:
While consideration is given to such
exculpatory provisions the courts construe
(..continued)
handling of estates and trust accounts[,]" was "under a duty to
exercise a skill greater than that of an ordinary man and the
manner in which investments were handled must accordingly be
evaluated in light of such superior skill.") (footnote and
citations omitted).
them strictly and there appears to be a
tendency to view such provisions with a
searching scrutiny of the relation existing
between the parties and the circumstances of
the insertion of such a clause in a trust
instrument. Our courts have applied a strict
construction to such exculpatory clauses and
have said that they do not relieve a trustee
of liability where a loss results from
negligence in the administration of the
trust. Liberty Title & Trust Co. v. Plews,
142 N.J.Eq. 493, 60 A.2d 630 (Ch. 1948).
Id. (emphasis added) (other citations omitted). The Behrman
court then held that "[t]he conduct of [a] trustee [is] to be
measured by the principle that a trustee owes an obligation to
the Cestuis and a duty to exercise that degree of care, prudence,
circumspection and foresight, that an ordinary prudent person
would employ in like matters of his own." Id. at 601-02 (emphasis
added) (citing, among other cases, Paterson Nat'l Bank, supra).
We think the district court mistakenly relied on
Paterson Nat'l Bank, supra, and Beam v. Paterson Safe Deposit &
Trust Co., 92 A. 351 (N.J. E.&A. 1914), as authority for a
standard of recklessness. In Paterson Nat'l Bank, the will not
only authorized and empowered the trustee to retain certain
stock, but also expressly exempted it from liability for any loss
resulting from such retention. Paterson Nat'l Bank, 4 A.2d at
61. The court held that the trustees were not liable because
"the trust was discussed and considered at practically every
meeting" and the directors were "always of the opinion that the
said stock should be retained." Id. at 62. It so held because
there was no "proof that [the] trustee did not give diligent and
careful consideration to the administration of its trust." Id.
(emphasis added). It found instead that the trustee
exercised its best judgment and
circumspection in determining whether to sell
or retain the very stock which the testator
himself had acquired and held as an
investment. Even if it could then have been
definitely said and determined that it erred
in its judgment, nevertheless that alone
could not render it now liable to being
surcharged.
Id. (emphasis added) (citations omitted).
Thus, although Paterson Nat'l Bank held that the
trustee was not liable, it plainly said that even a trustee who
is expressly absolved from liability for retention has to
exercise due diligence in its exercise of a power to retain
investments. Specifically, the court stated:
[A] careful examination of the proofs here
adduced fails to disclose any evidence of
negligence on the part of the trustee either
in the administration of the trust or in the
retention of the stock in question. All that
the law exact[s] of [a] trustee in the
administration of its stewardship [is] an
obligation of faithfulness to the cestuis and
a duty to exercise ordinary care, prudence
and diligence.
Id. at 61 (emphasis added) (citations omitted).
Paterson, therefore, does not relieve a fiduciary with a power to
retain trust assets from its duty to exercise due diligence. See
Blauvelt v. Citizens Trust Co., 71 A.2d 184, 188-189 (N.J. 1950)
(citing Paterson Nat'l Bank in framing the issue as "whether the
retention of the stock constituted negligence," as opposed to
recklessness) (emphasis added); Berhman, 95 A.2d at 602 (citing
Paterson Nat'l Bank as standing for the same proposition).
Likewise, we do not read Beam, 92 A. 351, to stand for
the proposition that the standard of care governing a fiduciary
administering a trust with broad retention powers like those we
have here is recklessness. Though the stocks and bonds the Beam
trustee retained were, as here, those a testator had invested in
during his lifetime, the record in Beam showed that the trustee
had acted diligently to protect the beneficiary's interest.
Thus, as in Paterson, the trustee was not held liable for the
losses the trust suffered.8
8
In the present case, during oral argument, the Bank's counsel
stated that it decided to retain the stock in the Robertson trust
account because it viewed itself as a candidate for takeover. If
supported by evidence, this could provide support for the
proposition that the Bank exercised an appropriate degree of
care. Whether this would be sufficient to bring the Bank within
the protection the asset-retention clause was intended to provide
seems to us, however, to be a question of fact that cannot be
decided on a Rule 56 summary judgment motion. Robertson points
to conflicting evidence, such as the Bank's policy on
diversification and its conduct in the administration of similar
accounts. Resolution of these conflicts involves questions of
fact, not law.
C.
Furthermore, since Paterson and Beam were decided, the
New Jersey courts have been increasingly reluctant to excuse
mismanagement by professional fiduciaries who hold themselves out
to have expertise in trust administration. See Erlich, 505 A.2d
at 232 ("The policy of this State, expressed in both case law and
statute, dictates that professionals be held to the standards of
their professions in delivering services to their clients.").
In Erlich, for example, an investor brought an action
against a corporate trustee and its former employee, seeking
damages for alleged mismanagement of a custodian management
account ("CMA"). There, 80%-90% of the portfolio (based on
market value) was invested in the stock of one company. When the
value of this company's stock declined substantially the person
who had created the account filed a claim against the Bank
alleging negligence, malpractice, breach of fiduciary duty and
breach of contract.
The Ehrlich beneficiary had significant control over
investments and "[n]o stock was ever purchased or sold without
[his] written authorization." Id. at 228. In addition, the
custodial agreement between the bank and investor had an
exculpatory clause relieving the bank from liability not only for
investment recommendations it made in good faith, but also for
failure to make recommendations. The court held that this
exculpatory clause was void and unenforceable, reasoning that to
"allow investment advisers to exculpate themselves from the
mischief caused by their breach of duty would violate the public
policy of this State." Id. at 233. Instead, it held the trustee
to the following standard of care:
A professional must exercise that degree
of care, knowledge and skill ordinarily
possessed and exercised in similar situations
by the average member of the profession
practicing in his field. . . . It is
therefore the degree of care, knowledge and
skill expected of professional investment
advisors to which we must look for the
standard of care.
Id. (citations omitted).
The Ehrlich court concluded that "it was not prudent of the Bank
to use a single stock strategy for plaintiff, given his
circumstances," id. at 235, and held the bank "negligent in its
supervision and periodic review of the account, its failure to
provide for diversification and its failure to consider the risks
[of non-diversification] to plaintiff." Id. at 238.9
In In re Estate of Bayles, 261 A.2d 684 (N.J. Super.
Ct. App. Div. 1970), the court similarly held an executor liable
for retaining approximately 60% of a trust's corpus in a stock as
it declined in value.10 Because the executor was an attorney who
was experienced in the administration of estates, the court
9
In this case, there is a similar agreement between the Bank
and Testator, separate from her will. Erlich clearly shows that
this agreement cannot insulate the Bank from liability for
mismanagement of Robertson's trust.
10
Distinguishing the duties of trustees and executors, the
Bayles court stated that trustees are usually held to higher
standards than personal representatives, but nevertheless held
that even "[an executor] may be held liable for loss if he
retains stock or other securities beyond a reasonable time for
sale." Bayles, 261 A.2d at 689.
stated that he should have taken prompt steps to liquidate the
stock of a single company that represented more than half the
value of the estate's investments and was undergoing volatile
price changes. The Court held him liable, despite a finding that
he did not act recklessly or in bad faith.11
D.
We believe these decisions also require us to consider
asset-retention powers in conjunction with the Testator's purpose
and her objective in creating the trust in light of the trust
agreement read as a whole. See Restatement (Third) of Trusts
§ 229(d) (Retention authorization and other exculpatory language
"does not allow the trustee to act in a state of mind not
contemplated by the settlor.") (emphasis added); Plews, 60 A.2d
at 639-40 (same); In re Munger's Estate, 309 A.2d at 208 (same).
This Testator created a trust to postpone distribution of
substantial wealth. Its preservation requires skillful and
diligent investment until Robertson attains age twenty-five, now
two years in the future. We do not believe the Testator intended
to authorize the Bank to retain an inordinate percentage of the
trust's assets in its own stock without exercising due diligence.
11
See also Hy-Grade Oil Co. v. New Jersey Bank, 350 A.2d 279,
282 (N.J. Super. Ct. App. Div. 1975) ("'We find the public need
for professional and competent banking services too great and the
legitimate and justifiable reliance upon the integrity and safety
of financial institutions too strong to permit a bank to contract
away its liability for its failure to provide the service and
protections its customers justifiably expect, that is, for its
failure to exercise due care and good faith. . . .") (quotation
omitted), certif. denied, 361 A.2d 532 (N.J. 1976).
Were we to so hold, we believe we would permit this Trustee to
act without regard for the Testator's purpose of protecting
Robertson against inept or rash youthful investment.12
Based on all these cases, we believe New Jersey holds a
Trustee who has a broad discretionary power to retain its own
stock, to a due diligence standard, rather than recklessness.13
Under a due diligence standard, the question whether the Bank's
liability for breach of the fiduciary duty of care it owes
Robertson cannot be decided in the Bank's favor on the record now
before us on a summary judgment motion.14
12
It also seems to us that the Testator's intent may be a fact
question, which would be inappropriately disposed of on a summary
judgment motion. See Shanley & Fisher, P.C. v. Sisselman, 521
A.2d 872, 878 (N.J. Super. Ct. App. Div. 1987) ("[T]he court
should be particularly hesitant in granting summary judgment
where questions dealing with subjective elements such as
intent . . . [is] involved.") (citations omitted).
13
New Jersey's due diligence standard is not in conflict with
the Restatement of Trusts, nor does it seem precluded by the
dicta in Paterson Nat'l Bank on which the district court relied
when it adopted a standard of recklessness to judge the Bank's
continued investment of almost the entire corpus of Robertson's
trust in its own stock.
14
Our conclusion is supported by the decisions of courts in
other states. See First Alabama Bank of Huntsville v. Spragins,
475 So. 2d 512, 516 (Ala. 1985) ("We agree with the general
proposition that the duties and obligations of the trustee are
governed in large measure by the terms of the trust instrument.
We do not agree, however, that this proposition can be applied
here to lessen the duty imposed by the "prudent person"
standard.") (emphasis added) (citations omitted); Union Commerce
Bank v. Kusse, 251 N.E.2d 884, 890 (Ohio Prob. 1969)
("[U]nlimited investment authority given to [a trustee in a] will
does not relieve the fiduciary from the obligation of due care
and prudence. . . . When the fiduciary is a corporate executor
and trustee, with greater skill and facilities for handling trust
estates than those possessed by the 'ordinary prudent man,' such
fiduciary is held to a higher degree of care, consonant with its
V. Conclusion
We will reverse the district court's order granting the
Bank summary judgment. We will modify that part of the district
court's order precluding claims for mismanagement on the basis of
claim preclusion to bar Robertson's claims up to March 21, 1988,
instead of August 12, 1988. Finally, we will affirm the holding
of the district court that the Bank did not violate its duty of
loyalty and remand this case to the district court for further
proceedings consistent with this opinion.
(..continued)
greater skill and facilities.") (citations omitted); Starks v.
United States Trust Co. of N.Y., 445 F. Supp. 670, 678 (S.D.N.Y.
1978) ("A trustee's performance is not judged by success or
failure . . . and while negligence may result in liability, a
mere error in judgment will not.") (emphasis added) (footnotes
omitted); Estate of Killey, 326 A.2d 372, 375 (Pa. 1974) (citing
Plews, 60 A.2d 630) (rejecting trial court's use of ordinary
negligence standard and holding, when a trustee bank "held itself
out as an expert in the handling of estates and trust
accounts[,] . . . [i]t was . . . under a duty to exercise a skill
greater than that of an ordinary man and the manner in which
investments were handled must accordingly be evaluated in light
of such superior skill.") (footnote and other citations omitted).