Manchester v. Cleveland Trust Co. ( 1953 )

This is an appeal on questions of law from a judgment of the Common Pleas Court, dismissing plaintiffs' third amended petition, as amended, on motion of defendant. Defendant's motion was made at the close of plaintiffs' evidence and submitted on the ground "that the proof adduced is insufficient to support the claim for relief asserted by them [plaintiffs] against the defendant and is insufficient as a matter of law."

On application of plaintiffs, a temporary restraining order against defendant was issued by the trial court. Thereafter, the case came on for a protracted trial upon the issues raised upon the third amended petition of plaintiffs, as amended, the answer of defendant and plaintiffs' reply thereto.

The pleadings disclose that plaintiffs, Ida Austin Manchester, Lillian Austin Ferguson, Florence Austin Shimmon (now deceased) and Ethel Austin Whiting, are daughters of Samuel and Sarah J. Austin, and comprise all the life beneficiaries of the Samuel and Sarah J. Austin trusts; that the remaining plaintiffs are the children and grandchildren of such life beneficiaries; that the trusts were established by separate trust agreements entered into on December 22, 1930, with the defendant The Cleveland Trust Company as trustee; that such trust agreements were subsequently modified and amended in certain particulars; that the corpora of the trusts have been and are now substantially made up of the capital stock of The Austin Company, an Ohio corporation founded by Samuel Austin and engaged in the building construction industry; that since the death of Sarah J. Austin in 1933, and the death of Samuel Austin in 1936, all the outstanding stock of The Austin Company has been held by the defendant, as trustee, the W. J. Austin family, George A. Bryant, an officer and director of the company and his wife, and other officers, directors and employees of The Austin Company; that the stock held by the trustee is substantial but represents a minority interest in The Austin Company; that the common shares are and always have been the only shares with voting rights; that the defendant named has been continuously the trustee under such trusts; that Wilbert J. Austin was an associate of his father Samuel Austin, and served as an officer and director, and as president from 1924 until his death in 1940; that the holdings of Wilbert J. Austin and his wife, at and prior to the death of his parents, were more than twice that of his parents in The Austin Company; that the value of the common stock has increased since the death of Samuel Austin; that following the death of Wilbert J. Austin his proportionate share of the trust property was distributed to his children; and that said children and widow of decedent are large stockholders in The Austin Company.

It appears further from the pleadings that George A. Bryant is and has been a director of The Austin Company since 1930 and president since 1940, and has become the largest stockholder of the company; that The Austin Company has been a large depositor in The Cleveland Trust Company for many years and the trust company, for a considerable time, has extended The Austin Company a line of credit in the amount of $1,000,000; that George A. Bryant owns 150 shares of stock in The Cleveland Trust Company and was elected to its board of directors on September 4, 1947, and is now serving thereon; that George A. Bryant, on behalf of The Austin Company, sought to obtain from the trustee in 1947 an option to purchase the common stock of The Austin Company; that the trustee refused to grant such option; and that subsequently George A. Bryant, on behalf of The Austin Company, entered into negotiations with the defendant to buy the common stock of The Austin Company held in trust. It appears further that in August 1937 the trustee considered selling 1,000 shares of the common stock held in trust for $125 per share to provide funds for inheritance and estate taxes and later sold 400 shares to The Austin Company at the price of $100 per share; that in the year 1940 Allan S. Austin, son of W. J. Austin, then president and director of The Austin Company, sought to exchange preferred stock of The Austin Company for common stock held in trust; and that the trustee considered such exchange on a basis of three shares of common stock for four shares of preferred stock, but that no offer was ever received by the trustee and no action taken.

Plaintiffs aver that the trustee has been negligent in the performance of its duties and charges the trustee with mismanagement of the trusts by reason of which plaintiffs have sustained substantial losses and will be subjected to further losses in the future.

At the center of these charges is the claim that the interests of the trustee are in conflict with its paramount duty to observe at all times an undivided loyalty to the life beneficiaries in the management of the trust property and in the promotion of the best interests of the plaintiffs in and to the trust estate. We shall briefly point out the more material averments upon which the alleged conflict of interest and charges of disloyalty are predicated. These charges are expressly denied by the trustee.

Among other things, plaintiffs allege that they had no knowledge of the real value of the 1,000 shares of common stock which the trustee offered to sell Wilbert J. Austin in August 1937 at the price of $125 per share, and did in fact sell 400 shares of the common stock at the lower price of $100 per share; that plaintiffs were uninformed respecting the value of the common and preferred stock in the contemplated exchange in 1940 of preferred for the common stock held in trust; and that the trustee did nothing to protect the corpus of the trust by reason of the action taken at a special meeting of the stockholders early in 1941 to increase the amount of authorized common stock and the sale of 3,082 shares thereof to the directors and a few executive officers of The Austin Company at the price of $100 per share, payable at the rate of 10 per cent cash and the balance from dividends.

Plaintiffs allege further that the interests of W. B. Stewart and George A. Bryant were in conflict with those of the trusts during all the time that proxies for voting the trust shares were regularly issued to them following the death of W. J. Austin in 1940 to the time of the death of William B. Stewart in 1947, all of which the trustee well knew or should have known; that upon the death of William B. Stewart, Herbert R. Whiting was named as his successor; that the trustee never attended a meeting of the stockholders of The Austin Company; that the trustee refused to assist in electing a representative of the trusts as a director of The Austin Company; that the trustee refused to permit the beneficiaries to examine its files and records or give them information concerning the affairs of The Austin Company which they were entitled to have, so as to enable them to exert their influence for the benefit of the trusts; that the conduct of the trustee has damaged and is causing damage to the trusts; and that the trustee has failed to protect the trust property.

In the second and third causes of action, plaintiffs allege that the trustee has been negligent in conducting the affairs of the trust and indifferent to the best interests and welfare of the beneficiaries and has failed to preserve the trust property, by reason of which the trust estate has been damaged.

In the fourth cause of action, plaintiffs aver that the welfare of the trusts requires the removal of the trustee or the appointment of a committee or cotrustee, and that the beneficiaries since 1947 have lost confidence in the trustee. Plaintiffs set forth also certain terms of the trust agreements, including provisions in each as to distribution of the income and corpus of the trusts following the death of the settlors. It is alleged also that the officers and directors of The Austin Company are antagonistic and hostile to the interests of the trusts as stockholders of the company and that George A. Bryant over a period of years has been attempting to purchase the shares of common stock held by the trustee at a price below their true value in furtherance of a plan whereby all the stock of The Austin Company shall be held by men active in the business of the company.

Plaintiffs pray that the trustee be removed and a substitute trustee be appointed or that two beneficiaries be appointed as a committee or as cotrustees to serve with the present trustee or that such other arrangement be made as will free the trustee from the possible effects of the present trustee's attitude and relationship to The Austin Company; that the trustee be required to make an accounting; and that plaintiffs may have such other and further relief as they may be entitled to.

The answer of the trustee contains special and general denials, and, also, a number of affirmative averments. Issues were raised thereon by the reply of plaintiffs. The issues thus raised, in so far as they are material, are defensive in character and as to which the trustee would have the duty to go forward.

As already pointed out, the trial court entered judgment for the trustee on its motion at the close of plaintiffs' case. At the time the trustee's motion was granted, it had not rested its case and had not had the opportunity to introduce any evidence in its own behalf in support of its special denials and affirmative defenses. Such defenses were without evidential support except where the record discloses that the evidence offered by plaintiffs and any inferences that arose or where evidence of probative value was developed on cross-examination of plaintiffs' witnesses and which tended to sustain such defenses.

Following the granting of the trustee's motion for judgment, plaintiffs duly filed their motion to vacate and set aside the judgment, and for a new trial, which was overruled.

Under the provisions of Section 11575, General Code, a new trial is defined as a "re-examination, in the same court, of the issues." The "issues" include both issues of fact and issues of law, and in determining these issues the trial court had the duty to consider the whole record, although the trustee had not presented its evidence and rested its case.

The trustee's motion for judgment was in effect a demurrer to the evidence, and the issue raised was the sufficiency of plaintiffs' evidence as a matter of law. It follows that if the evidence offered by plaintiffs in support of a material issue in the case was substantial and of a credible character and preponderated in plaintiffs' favor, the motion should not have been sustained. If it be determined that such was the state of the record, plaintiffs have made a prima facie case and the defendant would be required to go forward.

In other words, the quantum of proof required to support plaintiffs' prayer for equitable relief, when plaintiffs rested their case, need not necessarily have the same probative value as would be required to support a judgment at the close of all the evidence.

Plaintiffs assign numerous errors. Restated and abridged, the material errors assigned are substantially as follows:

1. That the trial court erred in dismissing plaintiffs' third amended petition, as amended, on the ground that the evidence adduced by plaintiffs was insufficient to support plaintiffs' prayer for any relief, as a matter of law, and also erred in overruling plaintiffs' motion to vacate said judgment and grant a new trial.

2. That certain conclusions of fact are contrary to law and against the manifest weight of the evidence.

3. That certain conclusions of law are erroneous.

4. That the trial court erred in excluding exhibit No. 179.

5. That the trial court erred in dissolving the temporary restraining order and in finding that the temporary injunction ought not to have been granted is contrary to the evidence, not supported by the evidence and is against the weight of the evidence.

1. The issue raised on plaintiffs' first assignment of error is proximately related to the quantum of proof. If the evidence adduced by plaintiffs, together with all reasonable inferences arising thereon, tended to provide a basis for any relief cognizant in a court of equity and as prayed for by plaintiffs, the motion of the trustee for judgment should not have been granted.

It is pertinent also to note that the statute (Section 11421-3, General Code) expressly provides that:

"So far as in their nature applicable, the provisions of this chapter respecting trials by jury, apply to trials by the court."

From a procedural standpoint, it is apparent that a case tried to a jury is not comparable in every particular to a case tried to the court. However, in a case tried to the court, and where defendant moves for judgment at the close of plaintiff's case, on the ground that the evidence adduced by plaintiff, as amatter of law, does not entitle him to any relief, there is close analogy to a motion for a directed verdict in a jury trial.

The case of Euclid Arcade Bldg. Co. v. H. A. Stahl Co.,99 Ohio St. 47, 121 N.E. 820, negatively charts the procedural course which we believe should be taken here. That case originated in the Municipal Court and was tried to the court. At the close of plaintiff's case, on motion of defendant, the court found in its favor. The judgment of the trial court on error to the Common Pleas Court was reversed and this latter judgment was affirmed by the Court of Appeals. On appeal to the Supreme Court, the judgments of the Common Pleas Court and the Court of Appeals were reversed, and that of the Municipal Court affirmed. We quote from the opinion by the court, page 49, as follows:

"* * * Unquestionably, the defendant had the right at theclose of the plaintiff's evidence to rest its case and submit itupon the facts proven. We see no reason why, at the close of plaintiff's case, if the evidence of the plaintiff preponderates in favor of the defendant, the case should proceed further, incurring useless expense and for an unavailing purpose unless the defendant were unfortunate enough to offer testimony that would bolster up his opponent's case.

"The trial of a law case to the court without the intervention of a jury is tantamount to the trial of a chancery case. If the plaintiff at the close of his case has offered no evidence upon a material fact required to be proved, or has offered evidence of such a character as to overwhelm any primafacie case made by him, common sense would require that at the instance of the defendant the litigation should be then terminated. * * *" (Emphasis ours.)

See, also, 39 Ohio Jurisprudence, 1193, Section 450; Matthews v. State Mortgage Inv. Co., 119 Ohio St. 419, 164 N.E. 418;Bartel v. Brooks (Ohio App.), 94 N.E.2d 640; 53 American Jurisprudence, 782, Section 1126.

As already pointed out, the charges made by plaintiffs against the trustee are centered in the claim that the interests of the trustee conflict with the duties it owes to the beneficiaries. It is a cardinal rule that the welfare of the cestui que trust is the focal point of every consideration of duty and loyalty of the trustee. In re Estate of Binder,137 Ohio St. 26, 47, 27 N.E.2d 939, 129 A. L. R., 130.

The evidence discloses instances of good faith and diligence on the part of the trustee in dealing with matters relating to the Austin trusts. However, the commendable conduct of the trustee in these respects is hardly sufficient to meet the inferences that arise on the record by reason of Mr. Bryant's official relationship to the trustee as an active and influential member of the board of directors of the defendant and his dominant position with The Austin Company. These relationships and Mr. Bryant's avowed purpose to acquire on behalf of his company all of the Austin stock in the trusts, the benefit that will accrue to him as the largest stockholder of The Austin Company on a reissue of the stock to its officers, directors and employes, his antagonism toward the life beneficiaries, his opposition to their representation on the board of directors of The Austin Company, all tend to give greater probative value to plaintiffs' evidence and the inferences that clearly arise.

The advantageous position of Mr. Bryant as a member of the directorate of defendant, together with his predominant and controlling position with The Austin Company, tends to create an environment of conflict and divided loyalty in which the trustee finds itself. It is an anomalous state of affairs and analogous to those situations, everywhere condemned, wherein the fiduciary undertakes to deal with himself.

The following statement in the opinion of the court in In reTrusteeship of Stone, 138 Ohio St. 293, 302, 303,34 N.E.2d 755, 134 A. L. R., 1306, is appropriate here:

"Since a trustee is a fiduciary of the highest order and is charged with the utmost fidelity to his trust, he must refrain from creating situations where his own interests are brought into conflict with those of the trust, and from doing those things which would tend to interfere with the exercise of a wholly disinterested and independent judgment. In accepting a trust, the trustee is presumed to know the obligations and limitations connected with his high office and, if he transgresses, must abide the consequences."

See, also, 2 Restatement of the Law of Trusts, 432, Section 170, Comments c and d; 4 Pomeroy's Equity Jurisprudence (5 Ed.), 222, Section 1077; Meinhard v. Salmon, 249 N.Y. 458, 464,164 N.E. 545, 62 A. L. R., 1; In re Lewisohn, 294 N.Y. 596,63 N.E.2d 589; 2 Scott on Trusts, 856, Section 170.

It is easily inferred from the record that Mr. Bryant proposes to make the best deal he can for The Austin Company, in fact he owes a duty to do so. As against this situation, his membership and influence on the board of directors of the defendant provides a basis of conflict of interest of the trustee and a potential breach of loyalty of which a court of equity will take cognizance.

It should be noted further that the life beneficiaries are not estopped to complain or take appropriate action to protect their interests by reason of their earlier request that Mr. Bryant be appointed to vote the trust stock. The record discloses that the life beneficiaries had not had training in business or in corporate matters and that at the time they requested Mr. Bryant's appointment, they had no notice or knowledge of the studied purpose of Mr. Bryant to acquire the trust shares under circumstances probably violative of their interests, and there is no evidence that they should have anticipated such purpose and determination. Clearly, the remaindermen were in no way affected.

It is not practical or possible, due to limitation of time and energy, to analyze and comment on the abundant number of cases and authorities cited and relied on by counsel. We have examined many of them, and it appears that they uniformly require the trustee at all times to sustain an undivided loyalty towards the beneficiaries of the trust and that undivided loyalty of the trustee towards the cestui que trust is incompatible with a conflict of interest.

The trustee contends that there has been no showing that the alleged conflict of interest had been prejudicial to the beneficiaries and, further, that there is no proof that the trustee has been in any way disloyal in the administration of the trust estates. The trustee concedes, however, "that a court of equity should primarily consider the welfare of the trusts and its beneficiaries when a conflict of interest has been established."

As against the position taken by the trustee and ardently presented, which is defensive in character, the plaintiffs have shown by substantial evidence that there is a conflict of interest and upon this showing have made a prima facie case entitling the beneficiaries to some form of equitable relief at the conclusion of plaintiffs' case. With the foregoing brief analysis, a majority of the court concludes that plaintiffs' first assignment of error should be sustained.

2. On application of plaintiffs, conclusions of fact and law were made by the trial court under authority of Section 11421-2, General Code. Errors are assigned by plaintiffs to certain of these conclusions. The above section of the Code provides:

"When questions of fact are tried by the court, its findings may be general for the plaintiff or defendant, unless, with a view of excepting to the court's decision upon questions of law involved in the trial, one of the parties so requests, in which case, the court shall state in writing the conclusions of fact found separately from the conclusions of law."

The express purpose of requiring the court to enter special findings is to provide a basis on which a party may except to the "court's decision upon questions of law involved in the trial." When a party is entitled to findings and the request is timely made, as it was in this case, a mandatory duty is imposed on the court. 39 American Jurisprudence, 1199, Section 454;Shunk v. Shunk Mfg. Co., 86 Ohio App. 467, 93 N.E.2d 321.

The rule is well established that conclusions of fact found pursuant to the statute are limited to ultimate facts in issue. It follows that the mere recital or narration of the evidence is neither contemplated by the statute nor in accord with the rule. 39 Ohio Jurisprudence, 1205, Section 459; Cleveland Produce Co. v. Dennert, 104 Ohio St. 149, 135 N.E. 531; Bauer v.Cleveland Ry. Co., 141 Ohio St. 197, 203, 47 N.E.2d 225.

The trial court entered 80 separate conclusions of fact, not including a number of subheadings, and 12 conclusions of law. A number of findings of fact are incorporated in the judgment entry, some of which are similar to those in the separate conclusions. Where the court states its conclusions of fact and law separately, we do not approve incorporating conclusions of fact thus stated in part or in entirety in the judgment entry.

Plaintiffs challenge certain conclusions of fact designated by the following numbers: 10, 11, 12, 13, 14, 19, 20, 22, 23, 25, 50, 51, 53, 54, 65, 70, 71, 73, 74, 75, 76, 77, 78, 79 and 80, and assign the above numbered conclusions as error on the grounds that each are not supported by the evidence or are against the manifest weight of the evidence or are ambiguous, indefinite and contrary to law.

It is not practical to discuss separately each of the conclusions that have been challenged. They have been individually considered in the light of the evidence, and we find that each conclusion is condemned on one or more of the following grounds, to wit, not a conclusion of ultimate fact in issue, not supported by the evidence, argumentative, immaterial, narrative, or mixed conclusion of fact and law. It is our opinion that plaintiffs' assignments of error as to the several conclusions of fact called in question are well taken and should be sustained.

3. Plaintiffs assign also as error certain conclusions of law entered by the trial court, as follows, Nos. 5, 6, 7, 10 and 12. Upon consideration of each of these assignments, it is our opinion that the assignment of error as to conclusion No. 10 is not well taken and should not be sustained, and as to the remaining assignments, Nos. 5, 6, 7 and 12, a majority of the court have reached the conclusion that each assignment is well taken and should be sustained.

With respect to conclusion No. 10, it appears that upon the whole record plaintiffs failed to clearly establish any ground as a basis for the removal of the trustee, that is to say, plaintiffs' evidence did not make a prima facie case for the trustee's removal and that this conclusion of law should be approved.

In so far as conclusions Nos. 5, 6 and 7 finding that, as a matter of law, there is no conflict of interest or divided loyalty shown by plaintiffs' evidence, particularly by reason of the dominant position held by George A. Bryant in The Austin Company on the one hand and his active participation in the business affairs of the trustee, together with the conflict of interest and evident antagonism between the beneficiaries and Mr. Bryant, a majority of the court is of the opinion that each of these conclusions of law, made at the close of plaintiffs' evidence, should not be sustained.

As already indicated, the case must be reversed. It follows that plaintiffs' assignment as to conclusion No. 12 should be sustained.

4. The trial court sustained defendant's objection to plaintiffs' exhibit No. 179, and it was not received in evidence. This action of the court has been assigned as error.

Plaintiffs' exhibit No. 179 is a letter to W. B. Stewart from George A. Bryant, under date of March 20, 1941, relative to the matter of making common stock of The Austin Company available for purchase by key men of the company. The letter contains a list of names, presumably key men, who would be interested, including G. A. Bryant.

Both Stewart and Bryant were at the time officers and directors of The Austin Company. Mr. Stewart was counsel for the company. The trial court excluded the exhibit on the ground of privilege, pursuant to the statute (subdivision 1 of Section 11494, General Code).

After a careful examination of the briefs and authorities cited, we have come to the conclusion that the action of the trial court should be sustained. Even if the exclusion of this exhibit were error, such ruling of the court could hardly be prejudicial to plaintiffs, for the reason that the subject matter of the letter is substantially in the record by reason of evidence admitted without objection. This assignment should not be sustained.

5. The trial court vacated the temporary restraining order and found as a matter of law that the order should not have been issued. Plaintiffs assign this action of the court as error on the ground that it is contrary to and not supported by the evidence.

Unless otherwise provided by statute, the conduct of fiduciaries is subject to review in a court of equity. Equity takes cognizance of transactions between persons occupying a fiduciary relation to each other. This source of equitable jurisdiction is uniformly recognized, and when equity assumes jurisdiction in this field, it acts in personam and gives aid to the vigilant rather than to those who slumber on their rights.

The evidence offered by plaintiffs shows clearly that George A. Bryant, on behalf of The Austin Company, has actively undertaken over a period of years to acquire by purchase for a given consideration the stock of The Austin Company held in trust by the trustee. The record discloses also that the trustee has given consideration to this undeviating purpose of Mr. Bryant and has taken steps to ascertain the value of this stock and was inferentially at the point of concluding the sale when this action was begun and the restraining order issued.

It should be noted that the threatened violation of rights which are contingent, or uncertain, or where there is an adequate remedy at law for any contemplated action, does not provide a basis upon which to invoke injunctive relief. However, where there is reasonable apprehension of impending injury, one thus threatened need not wait until the injury is actually sustained. "One of the most valuable characteristics of equity is its power to prevent injury." 16 Ohio Jurisprudence, 47, Section 18.

Scott on Trusts, 1077, Section 199, discusses "Equitable Remedies of Beneficiary." We quote as follows:

"A court of equity, having jurisdiction over the administration of trusts, will give to the beneficiaries of a trust such remedies as are necessary for the protection of their interests. * * * These remedies include (1) the specific enforcement of the duties of the trustee under the trust; (2) an injunction against a threatened breach of trust; (3) redress for a breach of trust; (4) the appointment of a receiver; (5) the removal of the trustee."

See, also, Scott on Trusts, 1078, Section 199.2., and 21 Ohio Jurisprudence, 1081, "Threatened or anticipated Injuries," Section 68.

When a court of equity has taken jurisdiction over a given controversy, it will retain jurisdiction in order to provide present relief and do complete justice between the parties. This rule is applicable to the instant case.

On the allegations in the pleadings and on the evidence at the close of plaintiffs' case, it clearly appears that the beneficiaries had reasonable ground for apprehension that a sale of the trust stock was imminent and a reasonable probability that such sale under the circumstances shown might work irreparable harm and damage to plaintiffs, for which they had no adequate remedy at law. A majority of the court has reached the conclusion that the assignment of error now being considered should be sustained.

The judgment of the trial court is reversed and the cause is remanded for further proceedings according to law and the established principles of equity as the situation of the parties may require.

Judgment reversed.

DEEDS, J., concurs.

FESS, J., dissents.