The Woodward School for Girls, Inc. v. City of Quincy , 469 Mass. 151 ( 2014 )

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SJC-11390
THE WOODWARD SCHOOL FOR GIRLS, INC. vs. CITY OF QUINCY,
trustee, 1 & another. 2
Norfolk. December 2, 2013. - July 23, 2014.
Present: Spina, Cordy, Botsford, Gants, Duffly, & Lenk, JJ.
Trust, Charitable trust, Investments, Trustee's accounts.
Damages, Breach of fiduciary duty, Interest. Interest.
Massachusetts Tort Claims Act. Governmental Immunity.
Immunity from Suit. Municipal Corporations, Trusts,
Governmental immunity. Waiver. Laches.
Civil action commenced in the Supreme Judicial Court for
the county of Suffolk on July 11, 2007.
After transfer to the Norfolk County Division of the
Probate and Family Court Department, the case was heard by
Robert W. Langlois, J.
The Supreme Judicial Court on its own initiative
transferred the case from the Appeals Court.
John S. Leonard (James S. Timmins, City Solicitor, with
him) for city of Quincy.
1
Of the Adams Temple and School Fund and the Charles
Francis Adams Fund.
2
Attorney General, as a nominal party.
2
Sarah G. Kim (Josephine M. Deang Chin & Alison K. Eggers
with her) for the plaintiff.
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 city 3 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
3
Quincy, originally a town, was incorporated as a city in
1888. See St. 1888, c. 347.
4
For the purposes of this opinion, the city of Quincy,
along with the board of supervisors and the board of managers
(together, joint boards) of the Funds at issue (the Adams Temple
and School Fund, or Adams Fund, and the Charles Francis Adams
Fund, collectively, Funds) are referred to collectively as
"Quincy," except where differentiation is helpful.
3
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
5
The parties have stipulated to the consolidation of the
appeals.
4
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
5
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
6
the purposes articulated in the deeds. See St. 1827, c. 59
(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
6
The board of managers of the Adams Fund was comprised of
the mayor of Quincy, the president of the city council, the
treasurer and collector, and two members elected annually by the
city council. See § 2.144.020 of the General Ordinances of the
City of Quincy. It appears that whereas the board of
supervisors and the board of managers shared responsibility for
overseeing the Adams Fund, only the board of supervisors oversaw
the Charles Francis Adams Fund.
7
The Woodward School for Girls, Inc. (Woodward), was
established and operated by the Woodward Fund, a trust created
by the will of Dr. Ebenezer Woodward, a cousin of President John
Adams, in 1894. This fund was also managed by Quincy, but its
board of managers was separate from those of the Funds. In
1952, Quincy filed a petition asking that the Funds be used to
benefit Woodward, which was experiencing financial troubles.
This court granted the petition and ordered that "the net income
from the [Funds] . . . be paid to and expended by the City of
Quincy in its capacity as trustee of the Woodward Fund and
Property for the conduct, operation, maintenance, management,
and advancement of the Woodward School for Girls." The Woodward
Fund was subsequently liquidated. In his findings in the
present dispute, the judge noted that the cy pres decree "did
not . . . provide a requirement for any annual, quarterly, or
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
even periodic, income payments from the [Funds] to the Woodward
School."
8
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
8
As of 1962, the Charles Francis Adams Fund had a value of
$24,323. The Fund hovered in this range until 1977, when it
dropped to $19,542. As of 1984, the Fund contained $21,975.
9
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
9
Quincy had never previously provided an accounting of its
stewardship of the Funds to Woodward.
10
stewardship as Trustee," and it had sold the Funds' real
property at less than fair market value. 10,11
10
This accounting and report was supplemented by that of a
certified public accountant, who was retained to assist the
special master. Incorporating the accountant's findings, the
special master made numerous findings, the most relevant of
which are summarized here. First, he determined that the return
generated by the Funds' investments was "comparable to the
market return of similar investments." Second, he concluded
that $85,090 in income from the Adams Fund that was not
distributed to Woodward "was maintained in the Fund and
reinvested in market rate instruments," and that $18,864 in
income from the Charles Francis Adams Fund was wrongly withheld
from Woodward. Third, he concluded that real property sales
conducted between 1953 and 1972 were below fair market value,
and that the only remaining parcel of real property held by the
Funds was leased at less than fair market rent. Fourth, he
determined that Quincy's expenses were significant and required
justification. Finally, the special master concluded that
Quincy committed a breach of its duty of care to Woodward and
"may have violated its duty to prudently invest trust assets"
with regard to the land sales between 1955 and 1972; committed
a breach of "its duty of loyalty to Woodward when it engaged in
business dealings which caused trust property to be sold for
below fair market value"; committed a breach of its duty to
furnish information to beneficiaries "by not informing Woodward
of the 1972 petition concerning the lease" of real property
owned by the Funds, which was not a prudent investment, and by
not providing an actual accounting when Woodward requested one
until ordered to do so by the court; and committed a breach of
its duty to keep accurate records and provide reports. In a
supplemental report filed after receipt of additional
documentation, the special master concluded that Quincy "did not
adhere to the investment mandates" articulated in Deed A and
"varied the investment portfolio between equities and bonds"
when the deed seemed to limit investments to bonds only. The
special master also noted that the fifty-five year accounting
period at issue exceeded the recommended record retention period
and therefore questioned the timeliness of Woodward's challenge
to Quincy's actions as trustee.
11
The trial judge subsequently gave "presumptive weight" to
the special master's findings and conclusions. See
Mass. R. Civ. P. 53 (h) (1), as amended, 386 Mass. 1237 (1982).
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
records of its financial stewardship of the Funds, to obtain
appraisals for real property and to sell parcels at fair market
value or greater, 12 to act on professional investment advice it
received, and to comport with its duty of loyalty to the Funds.
The judge characterized Quincy's management of the Adams Fund
specifically as "inattentive, imprudent and neglectful," but not
so neglectful as to "rise to the level of gross corruption or
gross mismanagement," such that the remainder beneficiary would
take the trust property.
With regard to Quincy's investment strategy for the Adams
Fund, the judge made several findings relevant to Quincy's
appeal. 13 First, he concluded that Quincy did not commit a
12
With regard to Quincy's real estate sales on behalf of
the Adams Fund, the judge concluded that Quincy failed to fulfil
its duty to sell realty for the best possible price, or at least
for fair market value, and instead prioritized its own municipal
needs.
13
With regard to the investment strategy for the Charles
Francis Adams Fund, the judge concluded that even though the
Fund's corpus had declined by nearly fifteen per cent between
1953 and 2005, it appeared that Quincy had made "a modest effort
to pay income of this relatively basic trust over to the
12
breach of its fiduciary duty to the Funds by employing
inappropriate investment strategies during the years of 1953 to
1973. 14 Second, with regard to the 1973 investment advice Quincy
received from the bank, the judge found that Quincy received and
unanimously voted to adopt a single portfolio diversification
plan, consisting of sixty per cent in equity securities, thirty-
five per cent in fixed income, and five per cent in savings (60-
35-5 plan). He concluded that Quincy failed to follow this
directive, and that it "ignored the terms of its own April 11,
1973, vote, and the competent, professional . . . advice
contained therein, to the considerable detriment of the [Adams
Fund]." Therefore, Quincy acted imprudently and in violation of
its fiduciary duties.
Third, the judge found that it was imprudent for Quincy to
permit the Adams Fund to consist almost entirely of fixed income
and cash assets by 1990. The judge rejected Quincy's assertion
that it maintained the Fund's assets in government securities in
order to comport with the explicit directive of the trust
instrument; rather, the judge concluded that the Fund had acted
in derogation of the 1892 legislation directing Quincy to invest
Woodward School." The judge therefore declined to speculate as
to any loss in income received by Woodward from this Fund.
14
Nonetheless, the judge expressed "serious reservations
and concerns" regarding the investment approach employed during
this period.
13
real estate sales proceeds "in real estate or in . . .
securities," by instead investing "the fungible portion of the
trust corpus in corporate bonds as well as in
equities/securities." 15
In light of these findings, the judge awarded Woodward a
total judgment of $2,994,868, including prejudgment interest of
$1,610,826 and approximately $1.1 million for "[u]nrealized
[g]ains in portfolio," and removed Quincy as trustee of the
Funds. 16
15
This finding departed from the special master's finding
on this issue.
16
The $2,994,868 total judgment was calculated as follows:
$255,566 in miscellaneous damages due to financial
mismanagement, including recoupment of funds not received by the
Adams Fund as a result of sales of real estate below fair market
value, unrealized income from the sale of a particular parcel,
the value of "missing" funds from the South Shore National Bank
(bank) account where the trust assets were held and from
unreported stock gains, and recoupment of an unexplained account
deficiency; $1,135,494 for the unrealized gain in the investment
portfolio; and a total of $1,610,826 in prejudgment interest on
these items ($475,426 on the miscellaneous damages combined, and
$1,135,400 on the unrealized gains); less a credit for
disallowed expenses of $7,018. Quincy's argument on appeal
focuses primarily on the unrealized gains and the prejudgment
interest portions of the award of damages. It appears to
concede that if the Massachusetts Tort Claims Act, G. L. c. 258,
§§ 1 et seq., does not bar the award, Quincy would remain
responsible for $119,271 of the $255,566 miscellaneous damages
(the amount attributable to unrealized income from the sale of a
particular parcel and the unexplained account deficiency), plus
certain prejudgment interest on that amount. Quincy asserts
that the remainder of the $255,566 (attributable to below-market
real estate sales and missing accounts and gains) is barred by
laches.
14
Discussion. We will not disturb the findings of the trial
judge or the special master unless they are clearly erroneous.
Mass. R. Civ. P. 52 (a), as amended, 423 Mass. 1402 (1996). See
Chase v. Pevear, 383 Mass. 350, 359-360 (1981); Matter of Jones,
379 Mass. 826, 839 (1980). "A finding [of fact] is clearly
erroneous . . . [if], although there is evidence to support it,
the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed"
(quotations and citations omitted). Demoulas v. Demoulas Super
Mkts., Inc., 424 Mass. 501, 509 (1997).
1. Breach of fiduciary duties. The primary issue in this
case is whether the judge erred in concluding that Quincy
committed a breach of its fiduciary duties by failing to invest
in growth securities and by failing to heed investment advice it
procured from an investment adviser. Because trustees' conduct
with regard to investment strategy and decision-making is
governed by the prudent investor standard, we begin by
articulating what that standard requires.
a. Prudent investor standard. A trustee's obligations
with regard to investing and managing a trust's assets are
dictated by our common law and by the Massachusetts Prudent
Investor Act, G. L. c. 203C, §§ 1 et seq. See Kimball v.
15
Whitney, 233 Mass. 321, 331 (1919); Harvard College v. Amory, 9
Pick. 446, 461 (1830). 17
A trustee has a duty to invest the trust's assets "solely
in the interest of the beneficiaries." G. L. c. 203C, § 6. In
performing this duty, a trustee must "exercise reasonable care,
skill, and caution" in "invest[ing] and manag[ing] trust assets
as a prudent investor would, considering the purposes, terms,
and other circumstances of the trust." Id. at § 3 (a). Among
those considerations are "the possible effect of inflation or
deflation"; "the expected total return from income and the
appreciation of capital"; "other resources of the
beneficiaries"; and "needs for liquidity, regularity of income,
and preservation or appreciation of capital." Id. at
§ 3 (c) (2), (5)-(7). See O'Brien v. Dwight, 363 Mass. 256,
17
Because the Massachusetts Prudent Investor Act, G. L.
c. 203C, §§ 1 et seq. (Act), applies only "to decisions or
actions of a trustee occurring on or after" the 1998 effective
date of the Act, we apply the standards of both the common law
and the Act and note distinctions where relevant. See St. 1998,
c. 398, § 3, inserting G. L. c. 203C. In many respects, the Act
mirrors the common-law doctrine that has existed since the mid-
1800s. See Harvard College v. Amory, 9 Pick. 446, 461 (1830).
See also Chase v. Pevear, 383 Mass. 350, 363 (1981). However,
the Act introduced two significant changes: permissive
delegation of duties, and the modern portfolio theory, which
recognizes inflation as a factor to be considered in portfolio
management decision-making and therefore shifts the assessment
of a trustee's actions to the over-all construction of the
portfolio. See Taylor, Massachusetts' Influence in Shaping the
Prudent Investor Rule for Trusts, 78 Mass. L. Rev. 51, 51-52 &
n.5 (1993). Compare Chase, supra at 364 (assessing each
investment individually, but with some consideration of "the
fund as a whole" [citation omitted]).
16
294-295 (1973). We assess investment decisions in the context
of the over-all investment strategy of the trust. 18 G. L.
c. 203C, § 3 (b). See Restatement (Third) of Trusts § 90
(2007).
A trustee exercising "reasonable care, skill and caution,"
G. L. c. 203C, § 3 (a), undoubtedly will approach investment
decisions with some conservatism. This, however, must be
balanced with a degree of risk in order to obtain income for the
trust and protect the principal against inflation. See
Restatement (Third) of Trusts, supra at § 90 comment e;
Restatement (Second) of Trusts § 227 comment e (1959).
Diversification of investments is therefore considered a central
component of prudent investment because it both moderates and
reduces risks. See G. L. c. 203C, § 4; Chase, 383 Mass. at 363.
Accordingly, trustees are discouraged from investing "a
disproportionately large part of the trust estate in a
particular security or type of security." Restatement (Second)
of Trusts, supra at § 228 comment a. Nonetheless, the standard
recognizes that in some circumstances, it may not be prudent to
diversify an investment portfolio, particularly where "the
objectives of both prudent risk management and impartiality can
be satisfied" without diversification. Restatement (Third) of
18
For actions occurring prior to 1998, we evaluate each
investment individually, but also consider investments in the
context of the trust as a whole. See Chase, 383 Mass. at 364.
17
Trusts, supra at § 90 comment g. See G. L. c. 203C, § 4;
Restatement (Second) of Trusts, supra.
b. Investment advice. We turn now to Quincy's first claim
of error. Quincy contends that the judge erred in concluding
that Quincy was required to follow specific investment advice it
requested and received in 1973. In addition, it asserts that
the judge misconstrued the investment advice at issue as
providing only one recommendation, when the advice actually
consisted of several alternatives, one of which Quincy claims to
have followed. We agree that the judge improperly considered
strict compliance with investment advice to be required of a
prudent investor. We do not, however, consider the judge's
interpretation of the advice provided to be clearly erroneous.
The investment advice in dispute was provided by the bank
in a letter dated March 29, 1973, and reviewed by the joint
boards of the Funds at a meeting on April 11. 19 The letter was
interpreted by the trial judge as providing a single
diversification recommendation of sixty per cent equity
securities, thirty-five per cent fixed income, and five per cent
savings (60-35-5 plan). 20 This represented a drastic change from
19
Quincy had requested this advice after receiving guidance
from its legal counsel that it was permissible to seek
professional advice regarding investments, but that Quincy would
retain responsibility for making investment decisions.
18
the Adams Fund's portfolio at the time of ninety per cent fixed
income and ten per cent equity securities. On receiving the
investment advice, the joint boards unanimously voted to enter
into an advisory relationship with the bank, 21 and to "mak[e]
investments and changes of investments in said Funds
substantially within the outline as presented" by the bank in
its letter. 22 However, Quincy did not make changes to its
20
The letter lends itself to several interpretations. It
ambiguously refers to three proposals, giving some credence to
Quincy's suggestion that the letter did not provide only one
directive. We agree with Quincy that one of the proposals
included in the letter was for "a modest upgrading of the
balance of the bond portfolio into higher rate bonds," which
Quincy purports to have followed. However, we are not persuaded
that the recommendations contained in the letter were meant to
be alternatives rather than complements to each other. Our own
review of the letter suggests that the primary emphasis with
regard to the Adams Fund was the adoption of a diversification
plan consisting of sixty per cent in equity securities, thirty-
five per cent in fixed income, and five per cent in savings (60-
35-5 plan). Accordingly, the judge's understanding of the
letter as providing this recommendation is plausible and not
clearly erroneous.
21
The agreement authorized the bank "to review periodically
and to advise or recommend to [Quincy] the retention, sale or
exchange of the securities and other property in the [Funds] and
to advise or recommend the purchase of stocks, bonds and other
securities." The agreement indicated that Quincy would
ultimately be responsible for making decisions regarding "the
acquisition or disposition of securities and other property."
22
The trial judge found that the boards adopted the
specific 60-35-5 diversification proposal discussed above.
However, the meeting minutes do not reflect such a precise vote.
Accordingly, we conclude that the boards did not adopt any
specific reading of the investment advice provided in the letter
but rather resolved to follow more generally the advice
provided.
19
portfolio consistent with the advice it received, and instead
increased the percentage of investments in fixed income assets
so that, by 1990, nearly one hundred per cent of the assets of
the Adams Fund were in fixed income investments. 23
Under both the common law and the Prudent Investor Act, a
trustee is permitted to consult with and receive advice from
accountants and financial advisers. See G. L. c. 203C,
§ 10 (a); Milbank v. J.C. Littlefield, Inc., 310 Mass. 55, 62
(1941) ("A trustee may avail himself of the services of
others"); Restatement (Third) of Trusts, supra at § 77 comment b
& § 80 comment b. Cf. Rothwell v. Rothwell, 283 Mass. 563, 571
(1933) (trust disbursements paying agents and attorneys who
assisted in trust management were appropriate); Hanscom v.
Malden & Melrose Gas Light Co., 234 Mass. 374, 381 (1920)
(same).
Indeed, consulting investment advisers may be part of
acting prudently and exercising care. See Restatement (Third)
of Trusts, supra at § 77 comment b. "After obtaining advice or
consultation, the trustee can properly take the information or
suggestions into account but then (unlike delegation) must
exercise independent, prudent, and impartial fiduciary judgment
23
Although Quincy avers that it followed some of the advice
in the letter by upgrading the Adams Fund's bond portfolio to
higher rate bonds, as noted above we are not persuaded that this
was more than a secondary component of the bank's broader
diversification recommendation.
20
on the matters involved." Id. at § 80 comment b. See Attorney
Gen. v. Olson, 346 Mass. 190, 197 (1963) (trustee may employ
bank as investment agent, as long as trustee gives independent
consideration to agent's recommendation). In contrast, were we
to require a trustee to follow investment advice it receives, we
would in effect mandate delegation of a trustee's fiduciary
duties. 24 We decline to require a trustee to abdicate this
fundamental function of a trustee to make investment decisions
merely because the trustee seeks advice on acting prudently.
See Boston v. Curley, 279 Mass. 549, 562 (1931). However
prudent the advice may be, a trustee is not required to follow
it. To the extent the judge considered the failure to follow
specific advice a per se breach of Quincy's fiduciary duty of
prudent investment, this was in error.
Whether a trustee requested and followed specific
investment advice is but one factor in the determination of
whether the trustee acted prudently. Receipt of sound
investment advice and dismissal or wilful ignorance of it, where
the advice was at the time prudent and consistent with the trust
24
The common law and the Prudent Investor Act take
different approaches to delegation of a trustee's
responsibilities. Compare G. L. c. 203C, § 10 (a) (permitting
trustee to "delegate investment and management functions if it
is prudent to do so"), with Milbank v. J.C. Littlefield, Inc.,
310 Mass. 55, 62 (1941) (trustee may not "delegate his authority
as trustee"), and Boston v. Curley, 276 Mass. 549, 562 (1931).
Merely receiving, considering, and adopting investment advice,
however, does not constitute delegation under either standard.
21
beneficiary's needs and goals, may be indicative of a lack of
prudent investing. But such action or inaction in and of itself
does not rise to the level of imprudent investing. The judge's
reliance on the 1973 investment advice as a default prudent
investment strategy resulted in inadequate consideration of the
range of investment strategies that would have been prudent for
the Adams Fund. 25
c. Concern for principal of income-only fund. Quincy also
challenges the trial judge's finding that it committed a breach
of its fiduciary duty by not investing in growth securities. It
asserts that as the trustee of a fund with only an income
beneficiary, it had a "duty to maximize income, even at the risk
of sacrificing growth," and therefore it was not obligated to
invest in growth equities that would protect the principal from
inflation. It claims that it acted prudently in structuring the
Adams Fund's investment portfolio as it did because the Fund
produced income for Woodward, and the investments comported with
the trust instrument's direction to invest the majority of the
Fund's assets in government-backed bonds.
The judge's findings regarding the Adams Fund's investment
portfolio demonstrate that the Fund has been primarily invested
25
We reserve our discussion of the impact of Quincy's
failure to follow the bank's investment advice for a more
holistic analysis of whether it acted prudently. See part 1.d,
infra.
22
in fixed income assets since Woodward became the income
beneficiary. As a result, the value of the Fund has remained
largely unchanged since 1973. Despite this lack of principal
growth, between 1973 and 2008, the Funds generated over $700,000
in income, benefiting from a 7.54 per cent rate of annual
return, which was either paid to Woodward directly or used to
pay the Funds' expenses. Nonetheless, the judge found that it
was imprudent for Quincy "to permit, by 1990, the [Adams Fund]
to consist of essentially 100% fixed income/cash assets," and
that this imprudence significantly harmed the Adams Fund.
Where, as here, the current beneficiary of a trust is an
income-only beneficiary, courts in at least three other
jurisdictions with similar prudent investor standards have
concluded that a trustee owes a duty to that beneficiary to
prioritize income over growth, and that investing in fixed
income assets over equities is not a breach of fiduciary duty
where such investments produce income for the beneficiary but
may fail to maintain the principal against inflation. See
Tovrea v. Nolan, 178 Ariz. 485, 490 (Ct. App. 1993); SunTrust
Bank v. Merritt, 272 Ga. App. 485, 488-489 (2005); In re Trust
Created by Martin, 266 Neb. 353, 359-360 (2003). See also Shirk
v. Walker, 298 Mass. 251, 257-258 (1937). This comports with
the obligation under G. L. c. 203C, § 6, to invest for the
benefit of the beneficiaries.
23
Although trustees in such cases are required to balance the
interests of successive beneficiaries, one of whom is to receive
the income during his or her lifetime and the other of whom is
to take the principal on the income beneficiary's death, these
courts have consistently concluded that a trustee does not
commit a breach of a fiduciary duty "by investing the trust in
such manner as to maximize the income payable to [the income
beneficiary] rather than expand the corpus of the trust."
SunTrust Bank, 272 Ga. App. at 489. See Tovrea, 178 Ariz. at
490 ("trustees' duty was [primarily] to invest in such a manner
as to produce an income for [income beneficiary] and,
secondarily, [to] preserve the principal").
In theory, the case for maximizing income over growth is
even stronger here, because the income beneficiary is an
institution and the remainder beneficiary takes only upon "gross
corruption or mismanagement . . . notorious negligence, or any
waste knowingly permitted," thereby justifying complete
attention to the interests of Woodward. See G. L. c. 203C, § 6.
However, the Adams Fund's status as a charitable trust and
Woodward's institutional status makes this case distinctly
different from those involving trusts with a lifetime
beneficiary.
A charitable trust such as this one is designed to support
an income beneficiary in perpetuity. See Jackson v. Phillips,
24
14 Allen 539, 550 (1867) (charitable trusts exempt from rule
against perpetuities). As a result, the trustee must
necessarily consider both the generation of income and the
growth and maintenance of the principal in order to provide
income funds to the beneficiary indefinitely. See Restatement
(Third) of Trusts, supra at § 90 comment e ("In balancing the
return objectives between flow of income and growth of
principal," trustee must consider trust's "purposes and
distribution requirements"). In effect, Woodward is equivalent
to both the lifetime income beneficiary and all subsequent
beneficiaries.
As such, acting prudently in managing a charitable trust
that benefits an institutional income beneficiary requires
considering the specific needs of the beneficiary in the short
and long term and balancing prioritization of income with
protection and preservation of the principal. At a minimum, a
trustee must consider how best to guard the principal against
inflation, if not how to grow the principal while simultaneously
generating income to support the beneficiary. Where the income
beneficiary will continue to exist in perpetuity, the mandate of
G. L. c. 203C, § 3 (a), to act with "caution" necessarily
entails considering "the possible effect of inflation or
deflation," id. at § 3 (c) (2), and the "preservation or
appreciation of capital," id. at § 3 (c) (7). A trustee must
25
accordingly "invest with a view both to safety" -- "seeking to
avoid or reduce loss of the trust estate's purchasing power as a
result of inflation" -- and "to securing a reasonable return."
Restatement (Third) of Trusts, supra at § 90 comment e.
In this case, a prudent investor would have realized at
some point, long before 2008, that a fund value that is
unchanged for decades after 1953 has not kept up with inflation,
and, given the potential perpetuity of the income beneficiary's
needs, would have taken or attempted to take steps to protect
the principal in order to preserve future income opportunities.
If Quincy recognized that the Adams Fund was vulnerable to
inflation, likely attributable to its lack of diversification,
it had a duty to determine which of its assets could be invested
in a manner that would guard against this vulnerability. At a
minimum, Quincy could have invested the proceeds from the sale
of real estate in investments that would potentially protect the
principal. See St. 1898, c. 102. Instead, Quincy chose to keep
the Adams Fund's investment assets exclusively in bonds, which
produced a higher rate of return than a more diversified
portfolio but resulted in stagnation of the trust principal. 26
26
Quincy asserts that the terms of the trust instrument,
Deed A, required it to invest most of the principal, with the
exception of real property sales proceeds, in State and Federal
bonds. Under the Prudent Investor Act, a trustee may be
relieved from the obligations set forth in the Act where the
trust instrument requires the trustee to act otherwise and "the
26
Where, in most instances, an increase in principal will lead to
an increase in income, this decision not to diversify was
imprudent in light of the Adams Fund's need to support Woodward
in perpetuity and not merely during a human lifetime. Even
without the benefit of hindsight, see G. L. c. 203C, § 9, it is
clear that Quincy did not take any steps to protect the Adams
Fund's principal against inflation. We therefore conclude that
Quincy's failure to protect the principal against inflation
alone was sufficient to constitute a breach of its fiduciary
duty.
trustee acted in reasonable reliance on the provisions of the
trust." G. L. c. 203C, § 2 (b). See Restatement (Second) of
Trusts § 228 comment f (1959) ("By the terms of the trust the
requirement of diversification may be dispensed with").
However, we are not persuaded that Quincy's complete reliance on
this particularly restrictive trust provision was reasonable.
Quincy failed to keep adequate records reflecting which assets
could be invested only in bonds and which assets could be more
broadly invested and used to diversify the portfolio and secure
the principal against inflation. Instead, Quincy invested
nearly all of its assets in bonds, which undoubtedly exceeded
the allocation that was required by the trust.
Further, if the express terms of the trust proved too
restrictive to achieve the trust's goals, Quincy could have
appealed to the court to revise the trust's terms to better
serve its original purpose. See Trustees of Dartmouth College
v. Quincy, 357 Mass. 521, 531 (1970) ("courts of equity" have
general power "in the administration of charitable trusts to
permit deviations short of cy pres applications"); Briggs v.
Merchants Nat'l Bank of Boston, 323 Mass. 261, 274-275 (1948)
(applying cy pres doctrine because "[equity] will presume that
the donor would attach so much more importance to the object of
the gift than to the mechanism by which he intended to
accomplish it that he would prefer to alter the mechanism to the
extent necessary to save the object").
27
d. Quincy's over-all performance. As the above
discussions illustrate, Quincy engaged in several shortcomings
in its management of the Adams Fund's investment portfolio that
indicate that it failed to perform as a prudent investor would
under the circumstances. See G. L. c. 203C, § 3 (a). Although
Quincy sought and received ongoing investment advice from the
bank in 1973 and thereafter, 27 it does not appear that it ever
heeded the most significant, and seemingly prudent, advice the
bank provided, construed in even the most general terms: to
diversify the Adams Fund's portfolio in such a way that would
decrease slightly the annual rate of return but would realize
some appreciation for the principal. This factor, while not
dispositive, is illustrative of Quincy's general lack of
consideration of diversification, long considered a prudent
investment strategy, see G. L. c. 203C, § 4; Chase, 383 Mass. at
363, and its disregard for both the 1898 legislative directive
and the long-term needs of the income beneficiary.
We are not persuaded that Quincy was prohibited from
following this advice or from otherwise diversifying the Adams
Fund's portfolio by the restrictions in the trust instrument.
See note 26, supra. Rather, as Quincy's legal counsel observed
27
The board meeting minutes reflect that an investment
representative from the bank attended the board meetings and
provided reports to Quincy in the decades following the 1973
advice.
28
and as the 1898 Act required, Quincy was in fact directed to
invest the real estate sale proceeds "in real estate or in such
securities as trustees are authorized to hold in this
Commonwealth." St. 1898, c. 102, § 2. The limitation
articulated in Deed A of investing in government-issued bonds
did not apply to these proceeds. Thus, contrary to Quincy's
assertion that it was following the restrictions on the
investment of the Adams Fund, its nearly complete investment in
bonds suggests that Quincy actually contravened the applicable
investment restrictions.
Finally, and most significantly, Quincy failed to invest
with the long-term needs and best interests of the income
beneficiary in mind, creating a portfolio that consistently
provided income but that left the principal vulnerable to
inflation and, as a result, depreciation. See Harvard College,
9 Pick. at 458. Accordingly, based on these considerations, the
judge's ruling that Quincy committed a breach of its fiduciary
duty of prudent investment was not clearly erroneous.
2. Award of damages. We turn next to Quincy's allegations
of error in the theory and calculation of the award of damages.
a. Theory of damages. Quincy contends that the judge
improperly devised a new liability theory, that of Quincy's
failure to achieve any capital appreciation for the Adams Fund,
that had not previously been an issue in the case. Quincy avers
29
that by "injecting" this issue into the case, enabling Woodward
to assert the issue by permitting its expert witness to testify
based on the theory, and making a finding based on this
testimony, the judge engaged in an inappropriate fact-finding
method and denied Quincy an adequate opportunity to prepare to
defend against the theory. We agree with Woodward that the
issue of lack of capital appreciation was present from the
beginning of the litigation, and further note that even if it
were not, a judge has the authority to raise an issue in the
case as long as adequate notice is afforded to the parties.
We begin with a brief description of what transpired. On
the second day of trial, in the presence of counsel, the judge
indicated his disbelief that the Adams Fund's principal would
not have grown significantly over the course of nearly sixty
years. 28 He then proceeded to ask counsel a number of rhetorical
but relevant questions about why the value of the Adams Fund had
not appreciated, speculating that perhaps various stock
28
Specifically, the judge stated, "It is inconceivable to
me that the value of the portfolio has not doubled, tripled,
quadrupled over [sixty] years." He observed that there had been
no growth in the Adams Fund's portfolio but that "[t]he
investments seemed reasonable" and "didn't seem inappropriate."
In encouraging the parties to seek a settlement, the judge noted
that he had "no idea what the end result of this case [was]
going to be" and that it was "unusual that a trust fund, whereby
there would be no invasion of the principal, doesn't grow over
[sixty] years of an incredible period of time of growth in the
country. . . . It is inconceivable that there would not be an
increase."
30
investments had been made that did, at least temporarily, lead
to some appreciation, the value of which was then lost through
unsuccessful investments, but that such transactions were simply
not reflected in the Fund's records. Quincy asserts that these
statements "injected" the issue of capital appreciation into the
case.
Thereafter, Woodward identified Scott Winslow as an expert
witness who would testify that the Adams Fund's investment
portfolio, being primarily invested in bonds, was such that it
resulted in significant underperformance. Quincy moved to
exclude Winslow's testimony, asserting that it "would introduce
a new issue in the middle of trial." In opposition, Woodward
contended that Winslow's testimony would "respond to the Court's
questions regarding why it was that despite a period of
extraordinary growth in the economy, the principal of [the
Funds] did not increase in value." Woodward further asserted
that capital appreciation had been an issue from the beginning.
The judge denied the motion but ultimately limited Winslow's
testimony on this issue to whether the investments were
consistent with the advice Quincy had received from the bank,
and prohibited Winslow from testifying about a theoretical
proposal that Quincy could have followed.
Winslow testified that, had Quincy employed the 60-35-5
diversification plan recommended by the bank in 1973, the Adams
31
Fund would have grown in value significantly. Because Quincy
did not do so, the Fund's value remained unchanged from 1973 to
2008. The judge credited this testimony and used it to
calculate the damages owed to Woodward.
Although the specific calculations employed by Winslow and
adopted by the judge were inappropriate for the award of
damages, as we discuss infra, there was no error in the process
by which this liability theory was introduced. The question of
capital appreciation was indeed mentioned in Woodward's
complaint, in the order appointing a special master, and in
Woodward's pretrial memorandum. Given this early introduction
of the issue, we are not persuaded that Quincy was denied a
meaningful opportunity to prepare to defend against this
assertion. Contrast Harrington-McGill v. Old Mother Hubbard Dog
Food Co., 22 Mass. App. Ct. 966, 968 (1986).
Even if the issue were not raised in the complaint and
other documents, the judge may introduce a recovery theory or
unpleaded issue at trial if there is "implied consent" of the
parties, reflected by evidence "that the parties knew the
evidence bearing on the unpleaded issue was in fact aimed at
that issue and not some other issue the case involved." Jensen
v. Daniels, 57 Mass. App. Ct. 811, 816 (2003). See
Mass. R. Civ. P. 15 (b), 365 Mass. 761 (1974); Harrington-
McGill, 22 Mass. App. Ct. at 968. As the above discussion
32
regarding Quincy's breach of fiduciary duty evinces, the
question whether a trust's principal has experienced any capital
appreciation is part of the inquiry into whether a trustee has
engaged in prudent investments. Accordingly, Quincy cannot
claim that, where a breach of fiduciary duty was alleged for
improper investment strategies, it was unaware that principal
appreciation might be an issue or even unaware of the facts that
might be used in support of an argument that there was no
appreciation.
Further, in raising the theory, the judge afforded numerous
opportunities for Quincy to respond. Quincy was permitted to
depose Winslow prior to cross-examination and to retain an
expert and prepare a response to Winslow's testimony, which it
did. In addition, the judge limited Winslow's testimony on this
issue. Thus, Quincy suffered no prejudice in the way the
liability theory was introduced, see Cormier v. Grant, 14 Mass.
App. Ct. 965, 965 (1982), and there was no issue of "fundamental
fairness" in the inclusion of the theory at trial. See Jensen,
57 Mass. App. Ct. at 816.
b. Calculation of damages. Quincy also alleges that the
judge erred in calculating the award of damages award in three
respects: first, by basing the award for unrealized gains on
what the value of the Adams Fund would have been had Quincy
followed the specific investment advice the judge found that
33
Quincy received in 1973; second, in deciding not to subtract
from the unrealized gains the costs and expenses Quincy
theoretically would have incurred had it followed the
diversification plan; and third, in awarding prejudgment
interest dating back to the date of each breach. 29 We agree that
the formula used to calculate unrealized gains was
inappropriate, but reject Quincy's other claims.
i. Basis for unrealized gains. Quincy first asserts that
the judge's finding that Quincy should have adopted a specific
portfolio diversification plan recommended by the bank in 1973,
and the judge's employment of this plan by way of Winslow's
testimony to calculate the unrealized gains, was clearly
erroneous. We agree.
In awarding damages, the judge concluded that the Adams
Fund was "entitled to a return on monies it would have
29
Quincy also asserts that the judge's findings were
inadequate to support the award. While we agree with Quincy
that the judge is required to make subsidiary findings of fact
in support of an award, see Mass. R. Civ. P. 52 (a), as amended,
423 Mass. 1402 (1996), we are not persuaded that the judge did
not adequately do so here. See Willis v. Selectmen of Easton,
405 Mass. 159, 161-162 (1989) (judge need only "articulate the
essential grounds for a decision" and demonstrate that he or she
"has dealt fully and properly with all the issues"). Further,
to the extent Quincy challenges the judge's crediting of the
testimony of Scott Winslow generally, and his discrediting of
the testimony of Quincy's expert witness, we note that the judge
is entitled to credit any properly admitted expert testimony he
or she deems credible, and that the judge here explicitly found
that Winslow's opinion was credible. See Delano Growers' Coop.
Winery v. Supreme Wine Co., 393 Mass. 666, 682 (1985).
34
reasonably realized but for the imprudent actions of the
Trustee." Because the judge determined that it was imprudent
for Quincy to ignore the bank's investment advice, and
interpreted this advice as providing a 60-35-5 diversification
plan, the judge calculated the return the Adams Fund would have
realized based on this recommended portfolio and the five per
cent rate of return the bank anticipated that such a portfolio
would receive. Using this information, Winslow had testified
that, had Quincy employed this diversification plan, given the
growth in the equity market between 1973 and 2008, the Adams
Fund would have grown from its 1973 value of $321,932.43 to a
value of $1,457,426 in 2008. 30 The judge therefore determined
that the Fund suffered a loss in value of $1,135,494, or an
average annual loss of income of $31,542, from Quincy's failure
to act prudently and to employ the bank's portfolio
recommendation. Accordingly, he included this amount, plus
prejudgment interest, in the total award.
To the extent the damages here were based on the judge's
finding that Quincy ignored the specific investment advice it
received in 1973, the finding and calculation were in error. 31
30
Quincy takes issue with the bond indexes employed by
Winslow in calculating these numbers. Because we conclude that
the formula used to calculate the unrealized gains was
inappropriate, we decline to assess whether the indexes Winslow
used were appropriate here.
35
As discussed above, a trustee is not required to follow
investment advice strictly but rather must invest prudently.
See G. L. c. 203C, §§ 1 et seq. Therefore, an award of damages
cannot be based solely on what the trust's investment portfolio
performance would have been had the trustee complied with
certain, specific advice. Such reliance on a potential
investment portfolio necessarily and improperly employs the
benefit of hindsight. See id. at § 9. Unfortunately, this is
precisely the formula the trial judge employed here.
The award must be based on more than just the unheeded
investment advice a trustee received, and should instead
consider the totality of the circumstances as they would have
informed prudent investment decisions over the relevant time
period. See Quinton v. Galvin, 64 Mass. App. Ct. 792, 800
(2005) (judge must reach "approximate estimate of the
plaintiffs' damages" in considering variety of factors). Cf.
Bernier v. Bernier, 449 Mass. 774, 785 (2007) (valuation of
business for purposes of divorce proceeding must not be
31
We disagree with Woodward's assertion that it was proper
for the judge to rely on Winslow's testimony in calculating the
award where Quincy did not present any contrary methodology or
challenge Winslow's calculations. Were the methodology employed
by the judge sound, and simply not the approach most favorable
to Quincy, we would uphold the judge's calculation. However, we
cannot permit a judge's ruling to stand where it is clearly
erroneous, as we conclude it is here. See Mass. R. Civ. P.
52 (a), as amended, 423 Mass. 1402 (1996). See also Young Men's
Christian Ass'n of Quincy v. Sandwich Water Dist., 16 Mass. App.
Ct. 666, 672-673 (1983).
36
"materially at odds with the totality of the circumstances").
Factors to consider in this case include the state of the
relevant bond and equities markets when various investment
decisions were made, not just at one point in time decades ago;
the terms and limitations of the trust instrument; the specific
needs of the income beneficiary in the short and long term; and
any risk calculations that may have influenced the trustee's
decisions, including subsequent advice from the bank, the Funds'
financial advisor. Cf. Black v. Parker Mfg. Co., 329 Mass. 105,
112, 116-117 (1952) (assessment of value of unique services
involves consideration of variety of tangible and intangible
factors). As another factor, the judge may "take into account
his general knowledge of economic conditions during the period
of [the trustee's] transgressions." Quinton, supra. These
factors can appropriately guide the judge's determination of
"what asset mix a prudent fiduciary would have maintained" for
the Adams Fund during the lengthy time frame at issue. See
Meyer v. Berkshire Life Ins. Co., 250 F. Supp. 2d 544, 573 (D.
Md. 2003).
Because the judge here considered merely one possible
investment approach and did not account for these other factors,
we reverse the award for unrealized gains in the portfolio and
remand for further proceedings on this measure. On remand, an
assessment of what a prudent investor would have done requires
37
expert testimony on the minimum level of growth equities that
would have been prudent for an income-only fund, with
consideration of the potential shifts over the lengthy period at
issue. A prudent investor may well have followed the 60-35-5
plan, or could have chosen a portfolio with a lower allocation
to growth equities. At a minimum, the record must be thoroughly
developed and findings made regarding the range of prudent
strategies, so that the award, particularly with regard to
unrealized gains, is calculated with a fuller understanding of
the minimum growth equities allocation in mind. 32
ii. Accounting for costs and expenses. Quincy also
asserts that the judge erred in failing to subtract from the
damages related to the return on investment the costs and
expenses the Adams Fund would have incurred in realizing those
investment gains. See G. L. c. 203C, § 8 (trustee may incur
"costs that are appropriate and reasonable in relation to the
assets, the purpose of the trust, and the skills of the
trustee"). 33
32
Recalculating the unrealized gains on the portfolio also
requires careful consideration of the extent of likely stock
appreciation and the appropriate rate of return corresponding
with the portfolio or portfolios on which the award is based.
33
Although the judge did not exclude any costs or expenses
from the calculation of the unrealized return on investments, he
did exclude from the total award expenses that he found to be
allowable, including reasonable compensation for Quincy's
services, despite the fact that Quincy never submitted a bill
38
The plaintiff bears the burden "to introduce evidence
proving its damages to a reasonable certainty." See Brewster
Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass.
App. Ct. 582, 609 (2007). The theory or explanation for the
damages requested need not be the soundest one; it need only
"provide[] a sufficiently (if minimally) rational basis" for the
award. Id. at 611. Cf. Bernier, 449 Mass. at 785. Woodward
met this burden by presenting Winslow's testimony. There is no
obligation on the part of the judge to decrease potential
damages sua sponte because of costs or expenses not admitted in
evidence. In the absence of contrary testimony from Quincy
regarding what its costs were or would have been had it
implemented the investment strategy on which the award was
based, the judge did not err in crediting the reasonable opinion
proffered by Woodward's expert as to what costs and expenses a
trustee using a hypothetical portfolio would have incurred. Cf.
Bernier, supra.
iii. Award of prejudgment interest. Finally, Quincy
challenges the judge's award of interest on each measure of
damages from the last date on which the damage was sustained,
for this compensation. In fact, the judge found that Quincy
would be due a credit against other funds owed to the Adams Fund
of $7,018, given $157,025 in allowed expenses offset by $150,007
in disallowed expenses. This credit was factored into the total
award.
39
consistent with the judge's findings on these issues. 34 Quincy
avers that the judge erred in including this prejudgment
interest because, in tort actions, such interest can be awarded
only from the date of the filing of the complaint, and not from
the date of the breach itself, pursuant to G. L. c. 231, § 6B. 35
We conclude that G. L. c. 231, § 6B, does not apply here, and
affirm the awards of prejudgment interest. 36
General Laws c. 231, § 6B, provides for the addition of
interest to the amount of damages awarded in an action involving
damage to property and other such tort actions, at a rate of
twelve per cent per year from the date of commencement of the
action. The statute is intended "to compensate a damaged party
34
For example, the judge found that 1962 was the year of
the Adams Fund's last sale of real estate below fair market
value, and thus he included interest from the end of 1962 on the
monies not received as a result of these below-market real
estate sales. In addition, the judge found that the sale of a
property referred to as "Vigoda" should have occurred in 1972
but did not occur at all, and therefore he awarded interest from
January 1, 1972. The judge employed two different rates of
return in calculating the prejudgment interest: five per cent
for the unrealized gain in the investment portfolio, and 7.54
per cent for all other measures.
35
Quincy also avers that prejudgment interest is barred in
claims against municipalities under the Massachusetts Tort
Claims Act. See G. L. c. 258, § 2. Because, as discussed
infra, we conclude that Quincy waived its sovereign immunity on
these claims and therefore that the Tort Claims Act does not
govern here, we decline to address this claim.
36
However, the rate of return the judge employed for the
unrealized gain in the investment portfolio may require
reconsideration on remand, consistent with our discussion above
regarding the flaws in this particular analysis.
40
for the loss of use or the unlawful detention of money." McEvoy
Travel Bur., Inc. v. Norton Co., 408 Mass. 704, 717 (1990),
quoting Conway v. Electro Switch Corp., 402 Mass. 385, 390
(1988). The primary goal of this statutory interest award is
not to make the aggrieved party whole, but rather "to compensate
for the delay in the plaintiff's obtaining his money." See
Bernier v. Boston Edison Co., 380 Mass. 372, 388 (1980). To
achieve this goal, § 6B affords a standard return that the
aggrieved party "would have had but for the other party's
wrongdoing," regardless of what the theory of liability or
underlying damages calculation is. See McEvoy, supra.
In contrast, "[w]hen a breach of trust occurs, the
beneficiary of the trust is 'entitled to be put in the position
he would have been in if no breach of fiduciary duty had been
committed.'" Berish v. Bornstein, 437 Mass. 252, 270 (2002),
quoting Fine v. Cohen, 35 Mass. App. Ct. 610, 616 (1993).
Making the beneficiary whole, particularly where the breach
stems from imprudent investment decisions having an impact on
the growth of the trust's assets, may require awarding interest
beginning from the time of the breach, such that the trust's
assets resemble what they would have but for the breach. In
such circumstances, the award of prejudgment interest is part
and parcel of the award of damages itself, and is not
compensation for the delay of litigation in the same sense as
41
interest awarded under G. L. c. 231, § 6B. Accordingly, it was
not erroneous for the judge here to find that the Adams Fund was
entitled to a return on monies that it would have reasonably
realized but for Quincy's imprudent actions, and to award
prejudgment interest stemming from the last date of breach in
order to make the Adams Fund whole. 37
3. Claimed bars to recovery. We discuss briefly Quincy's
remaining assertion that Woodward's claims should have been
barred on the grounds of sovereign immunity; the Massachusetts
Tort Claims Act, G. L. c. 258, §§ 1 et seq.; and laches. We
conclude that Woodward's claims were not so barred, and recovery
against Quincy was proper.
a. Sovereign immunity and applicability of Tort Claims
Act. Quincy first argues that because Woodward ultimately
brought a breach of fiduciary duty claim, which sounds in tort,
Woodward was obligated to follow the requirements of the Tort
Claims Act or else Quincy, as a municipality, would be
effectively protected against the claim by sovereign immunity.
Further, Quincy avers that Woodward failed to satisfy the Tort
37
There may be circumstances in which it is proper to apply
G. L. c. 231, § 6B, to tort actions arising from the breach of a
fiduciary duty of a trustee. See, e.g., Lattuca v. Robsham, 442
Mass. 205, 210 (2004). Where, however, the judge determines
that an award of prejudgment interest is necessary to make the
beneficiary whole, the additional award of interest under § 6B
would be excessive and improper, as such an award is not
punitive in nature. See McEvoy Travel Bur., Inc. v. Norton Co.,
408 Mass. 704, 717 (1990).
42
Claims Act's presentment requirement specifically, and therefore
its claim should have been barred. See G. L. c. 258, § 4.
Woodward, in contrast, asserts that its claim sounds in contract
rather than tort, because Quincy's obligations to manage the
Funds arose through a contractual relationship with President
Adams, and therefore the Tort Claims Act does not place any
conditions on its claim. Alternatively, if its claim does sound
in tort rather than contract, Woodward contends that Quincy's
sovereign immunity is impliedly waived, due to Quincy's
acceptance of the role of trustee and subsequent acts by the
Legislature affirming this role, such that Woodward's claim
properly survived.
In determining whether a claim arises in tort or contract,
we look to "the essential nature of the plaintiff's claim."
Hendrickson v. Sears, 365 Mass. 83, 85 (1974). When Quincy
accepted the responsibility to manage President Adams's property
in trust, Quincy and President Adams entered into a contract,
see Dunphy v. Commonwealth, 368 Mass. 376, 383 (1975), of which
Woodward is an intended third-party beneficiary and therefore is
entitled to enforce the contract's terms. See Miller v. Mooney,
431 Mass. 57, 61-62 (2000); Anderson v. Fox Hill Village
Homeowners Corp., 424 Mass. 365, 366-367 (1997), and cases
cited. However, although Woodward initiated this action seeking
an accounting, a purely contractual claim, the case evolved into
43
an action for breach of fiduciary duty, a claim that sounds in
tort, see Doe v. Harbor Schs., Inc., 446 Mass. 245, 254 (2006);
Lattuca v. Robsham, 442 Mass. 205, 210, 213 (2004), and arises
by operation of law rather than by contractual obligation. See,
e.g., G. L. c. 203C, §§ 1 et seq. See also LeBlanc v. Logan
Hilton Joint Venture, 463 Mass. 316, 328 (2012) ("Where a
contractual relationship creates a duty of care to third
parties, the duty rests in tort, not contract"). Accordingly,
the present case is a tort action. To the extent Woodward asks
us to frame its claim as a contractual one, we decline to do so.
See Anthony's Pier Four, Inc. v. Crandall Dry Dock Eng'rs, Inc.,
396 Mass. 818, 823 (1986).
As Woodward's claim sounds in tort, Quincy asserts that the
Tort Claims Act imposes numerous conditions that Woodward failed
to fulfil. 38 See G. L. c. 258, §§ 1 et seq.; Morrissey v. New
England Deaconess Ass'n -- Abundant Life Communities, Inc., 458
Mass. 580, 587 (2010). The purpose of the conditions imposed by
the Tort Claims Act is to limit tort claims against
municipalities in order to maintain effective government. See
id.; Vasys v. Metropolitan Dist. Comm'n, 387 Mass. 51, 57
38
Among these is the requirement that the plaintiff present
its claim to the executive officer of the municipality within
two years of when the cause of action arises. See G. L. c. 258,
§ 4; Richardson v. Dailey, 424 Mass. 258, 261-262 (1997). The
parties do not dispute that Woodward did not comply with this
presentment requirement. In addition, the Tort Claims Act
places a $100,000 limit on damages. G. L. c. 258, § 2.
44
(1982). See also Whitney v. Worcester, 373 Mass. 208, 217
(1977). Hence, G. L. c. 258, § 10, explicitly excludes certain
types of claims that the Legislature clearly decided must give
way to sovereign immunity.
Because the Tort Claims Act is in effect a mechanism for
both limiting and preserving sovereign immunity from certain
tort claims, 39 see Morrissey, 458 Mass. at 587, and cases cited,
its restrictions do not apply where a municipality has waived
sovereign immunity, and thereby implicitly waived the
protections afforded by the Tort Claims Act. Sovereign immunity
may be waived expressly by statute or implicitly, where
"governmental liability is necessary to effectuate the
legislative purpose." Todino v. Wellfleet, 448 Mass. 234, 238
(2007). See Woodbridge v. Worcester State Hosp., 384 Mass. 38,
42 (1981), and cases cited. We conclude that Quincy's sovereign
immunity is impliedly waived here.
First, when Quincy agreed to serve as trustee, it assumed
the fiduciary duties of that role, including the consequences
for not fulfilling these duties. The policy purposes of
39
Indeed, the Tort Claims Act replaced any prior common-law
sovereign immunity doctrine with regard to tort claims and was
designed to provide "a comprehensive and uniform regime of tort
liability for public employers." Morrissey v. New England
Deaconess Ass'n -- Abundant Life Communities, Inc., 458 Mass.
580, 588 (2010), quoting Lafayette Place Assocs. v. Boston
Redev. Auth., 427 Mass. 509, 534 (1998), cert. denied, 525 U.S.
1177 (1999).
45
sovereign immunity are not served where, as here, a municipality
takes on a responsibility beyond its inherent or core government
functions and therefore serves in a capacity that could just as
easily be accomplished by a nongovernmental entity. See
Morrissey, 458 Mass. at 587. See also Minton Constr. Corp. v.
Commonwealth, 397 Mass. 879, 880 (1986) (where municipality has
assumed certain obligations through contract, it has waived
sovereign immunity against actions brought to enforce such
obligations). In essence, by choosing to accept the obligations
of trusteeship, Quincy waived any sovereign immunity from claims
arising from its duties as a trustee.
A trustee, regardless of whether it is a municipality, a
corporation, or a private individual, is accountable to courts
for its conduct in fulfilling, or committing a breach of, the
fiduciary duties it owes. 40 See Fox of Boylston St. Ltd.
Partnership v. Mayor of Boston, 418 Mass. 816, 818 (1994).
Unlike the statute at issue in Woodbridge, 384 Mass. at 42, 44-
45, where we determined that sovereign immunity was not waived,
the Prudent Investor Act creates "a formal system of actionable
guaranties," id. at 42, and expects the same level of conduct
from any trustee. See G. L. c. 203C, §§ 1 et seq. "[A] natural
and ordinary reading" of the Prudent Investor Act indicates that
40
Indeed, Quincy has sought court direction regarding the
administration of the Funds previously, and therefore has
subjected itself to court supervision on these matters.
46
where a municipality accepts the obligations of serving as a
trustee, it will be held to the same standards and subject to
the same penalties as any other trustee. See DeRoche v.
Massachusetts Comm'n Against Discrimination, 447 Mass. 1, 14
(2006).
Several legislative acts specific to the Funds further
signal that Quincy is liable for any breach of the trustee
responsibilities it has assumed. The 1827 Act appointed the
treasurer of Quincy as treasurer of the Adams Fund and
authorized a board of supervisors and the selectmen of Quincy to
execute President Adams's intentions. See St. 1827, c. 59. It
further required the treasurer to "render an account of his
doings, and exhibit a fair and regular statement of the property
in his hands." St. 1827, c. 59, § 9. The 1898 Act authorized
Quincy, as trustee, to sell and convey the Adams Fund's real
property holdings, and in effect confirmed Quincy's legal
responsibility to administer the Fund and invest its assets.
See St. 1898, c. 102. In neither of these acts did the
Legislature indicate that Quincy would be held to standards
different from those applicable to other trustees.
To effectuate the purposes of these acts, we must consider
sovereign immunity to be impliedly waived. The Legislature
could not have intended to enable a municipality to serve as a
trustee, by way of the Prudent Investor Act and the 1827 and
47
1898 Acts, and simultaneously relieve it of the fiduciary duties
inherent in the role of a trustee. Reading Quincy's obligations
otherwise would frustrate the general intent of the Prudent
Investor Act that trustees further the interests of trust
beneficiaries, by eliminating any recourse for mismanagement,
and would be illogical in light of the specific acts of the
Legislature empowering Quincy to take on such fiduciary
responsibilities on behalf of the Funds. Accordingly, the Tort
Claims Act cannot be read to limit tort liability where a
municipality has agreed to serve as a trustee. 41
b. Laches. Quincy also argues that the equitable doctrine
of laches bars Woodward's claim. We agree with Woodward, the
trial judge, and the special master that the claim is not barred
on this ground.
Quincy avers that Woodward unduly delayed in bringing this
action, and that this delay prejudiced Quincy because several of
its key witnesses had died since the alleged breaches occurred.
Quincy's primary contention on appeal is that the judge
improperly required actual knowledge by Woodward of Quincy's
41
Because we conclude that Quincy waived the provisions of
the Tort Claims Act, including its exceptions, we decline to
address Quincy's claim that the Probate and Family Court lacked
subject matter jurisdiction for the claim under G. L. c. 258,
§ 3.
For the same reason, we need not decide whether Quincy's
assertion that it is immune from suit on this claim under G. L.
c. 258, § 10 (b), is a valid one.
48
mismanagement of the Funds in order to satisfy the laches
standard; instead, Quincy asserts that an opportunity to
ascertain such facts is all that is required for a laches
defense.
At trial, Quincy identified two occasions on which it
asserted that Woodward had constructive knowledge of Quincy's
failings as a trustee. First, Quincy suggested that Woodward
knew of Quincy's inadequacies as early as the 1960s, when the
headmistress of Woodward communicated to Quincy's primary
record-keeper that she was disappointed that Quincy had sold at
least one parcel owned by the Funds for less than fair market
value. Second, Quincy alleged that as a result of litigation in
the late 1980s between Woodward and Quincy regarding Quincy's
mismanagement of the Woodward Fund, a separate trust, Woodward
knew or should have known that Quincy was engaging in similar
mismanagement of the Funds at issue here. Quincy contends on
appeal that this constructive notice should have been adequate
to satisfy the laches standard.
Both the special master and the trial judge rejected
Quincy's laches claim because it had not established that
Woodward had actual knowledge of Quincy's breach prior to its
seeking of an accounting in 2005. 42 There is no flaw in the
42
The trial judge specifically rejected Quincy's assertion
that Woodward should have known of Quincy's mismanagement as a
49
legal analysis employed by the trial judge. To establish a
laches defense, the asserting party must establish both actual
knowledge, see Lattuca, 442 Mass. at 213-214; Demoulas, 424
Mass. at 518-519; and prejudice. See Stuck v. Schumm, 290 Mass.
159, 166 (1935); Stewart v. Finkelstone, 206 Mass. 28, 36
(1910). "Constructive knowledge is insufficient," Lattuca,
supra at 213, as is "[m]ere suspicion or mere knowledge that the
fiduciary has acted improperly." Doe, 446 Mass. at 255. This
requirement of actual knowledge "protects the beneficiary's
legitimate expectation that the fiduciary will act with the
utmost probity in all matters concerning the relationship." Id.
Contrary to Quincy's implication, a plaintiff is not required to
conduct "an independent investigation" to determine if a breach
of fiduciary duty has occurred. Demoulas, supra at 520.
We agree with the special master's characterization that
although "[c]ommon sense would dictate that if Woodward knew
[Quincy] was mismanaging the Woodward Fund . . . , [then Quincy
was] engaging in the same practices with regards to the Adams
Fund [,] . . . common sense and constructive notice are not the
standards here." As the special master and trial judge properly
concluded, the laches standard simply was not satisfied.
result of the Woodward Fund litigation and emphasized that the
Funds were not parties to that litigation and therefore were not
officially on notice of it.
50
Conclusion. The further amended judgment of the Probate
and Family Court, and the amended judgment incorporated therein,
is affirmed as to liability. We affirm the judge's award of
damages in part, but remand the case to the Probate and Family
Court for recalculation of the damages related to the unrealized
investment gains, including prejudgment interest thereon, and
for further proceedings consistent with this opinion.
So ordered.