Case Name: IN THE MATTER OF THE BERNICE P. BISHOP ESTATE
Court: Supreme Court of the Territory of Hawaii
Jurisdiction: Hawaii
Decision Date: 1943-07-08
Citations: 36 Haw. 403
Docket Number: No. 2507
Parties: IN THE MATTER OF THE BERNICE P. BISHOP ESTATE.
Judges: Kemp, C. J., Peters and Le Baron, JJ.
Reporter: Hawaii Reports
Volume: 36
Pages: 403–482

Head Matter:
IN THE MATTER OF THE BERNICE P. BISHOP ESTATE.
No. 2507.
Argued July 16-30, 1942, inclusive. Submitted August 29, 1942.
Decided July 8, 1943.
Kemp, C. J., Peters and Le Baron, JJ.

Opinion:
OPINION OF
KEMP, C. J.
This is an appeal by the attorney general from an order or decree approving accounts of the trustees under the will and of the estate of Bernice Pauahi Bishop, deceased.
The principal issue involves the challenged right of the trustees to employ others to perform services in the management of the properties of the trust at the expense of the trust other than services which are beyond the skill and experience of the ordinary trustee, and services which are menial.
The substance of the argument of the appellant is that since there is no provision in the will authorizing the trustees to employ others at the expense of the estate to assist them, the compensation provided by our statute (R. L. H. 1935, § 3793) is in full for the performance of all services necessary for the proper administration of the trust estate, except such as are beyond the skill of the ordinary trustee or are menial, and that to require the estate to pay for such services would require it to pay twice for the same service. The appellant, therefore, argues that the trustees must either personally perform all such services or procure them to be performed without expense to the estate.
The pertinent provisions of section 3793, supra, follow: "Upon all moneys received in the nature of revenue or income of the estate, such as rents, interest and general profits, executors, administrators, trustees and guardians shall he allowed as commissions payable out of the income, ten per centum for the first thousand dollars, seven per centum for the next four thousand dollars, and five per centum for all over five thousand dollars, such commissions to be allowed upon each accounting when made but not oftener than once a year. Such further allowances may be made as the court shall deem just and reasonable for special services.
"Any trustee required by law or the order of any court or judge to give a bond or other obligation as such, may include' as a part of the lawful and chargeable expense of executing his trust such reasonable sum, paid a company authorized under the laws of the Territory to become surety on such bond or obligation, for becoming his surety thereon, as may be allowed by the court in which, or a judge before whom, he is required to account, not exceeding one per centum per annum on the amount of such bond."
Ever since 1859 our statute has provided a mandatory graduated schedule of fees or compensation for executors, administrators and guardians. The decisions of this court allowing or disallowing such fiduciaries reimbursement of expenses incurred in administering their trusts therefore apply with equal force to trustees under the present statute.
The first statute on the subject is found in the Civil Code of 1859, section 1281, which by its terms applied only to executors, administrators and guardians. The pertinent part of said section follows: "Fees of Executors, Administrators and Guardians: — For receiving and paying out moneys, ten cents for every dollar up to and not exceeding one thousand dollars; seven cents for every dollar over one thousand, up to and not exceeding five thousand dollars; five cents for every dollar over five thousand dollars; and such additional allowance for their actual expenses as the judge or court shall deem just and reasonable."
While the foregoing statute was in force and unamended, this court in Hart v. Kapu, 5 Haw. 196, on September 15, 1884, affirmed the decision of the chancellor rendered May 12, 1884, which announced the law to be that a trustee is entitled to reasonable compensation for his time and trouble and all proper expenses to keep up the estate. This in effect rejected the English common-law rule denying trustees compensation but followed the English common law which allowed trustees indemnity for áll proper and necessary expenses incurred in the management of the trust property.
The authority cited for the foregoing holding was Perry on Trusts, sections 913 and 917. The statute fixing the compensation and expenses of executors, administrators and guardians was not referred to.
In Estate of McBryde, 8 Haw. 472, 477, 478, decided April 26, 1892, after the effective date of Act 98, hereinafter quoted, but involving transactions prior to said statute, this court, in denying compensation to the executors based on the income from a ranch and plantation, gave as its reasons the following: "For if the widow was entitled to the possession, there would be no commissions on account of the income, and if the executors were authorized to take possession and manage the property they have not done so, but have allowed a business firm to attend to the financial management and have themselves handled no part of these receipts as executors. T. H. Davies & Co. have done the work and have doubtless charged and collected their compensation therefor. The executors, therefore, are not entitled to commissions, even if they had the right to receive the moneys." The court, limiting the application of the above, further said: "We do not go so far as to hold that trustees of this character may not hire clerks or business agents to assist in carrying on the business of the trust. This may be done in some circumstances, and often is inevitable, but where trustees abandon the whole management of the trust to others they may not claim commissions."
In 1892 the legislature, by Act 98, approved January 11, 1892, amended section 1281 of the Civil Code to read in part as follows: "FEES OF EXECUTORS, ADMINISTRATORS AND GUARDIANS.
"Executors, administrators and guardians shall be allowed the following commissions upon all moneys received and accounted for by them, that is to say:
"Upon all moneys received in the nature of revenue or income of the estate, such as rents, interest and. general profits, ten per centum for the first thousand dollars, seven per centum for'the next four thousand dollars, and five per centum for all amounts over and above the first five thousand dollars."
It will be noted that this Act by its terms was confined to compensation of executors, administrators and guardians. All reference to expenses was omitted.
On March 9, 1901, while this statute was in force and unamended, In re Estate of Lunalilo, 13 Haw. 317, 318, was decided. This was apparently the first case involving the compensation of trustees to reach this court after the enactment of Act 98 in 1892. That case did not involve the question of expenses but as to the compensation of trustees the court said: "We have no statute that prescribes the compensation of trustees, but we believe it has been the practice here, and as a rule, elsewhere, under similar circumstances, to follow in such cases the statutes which prescribe the fees of executors, administrators and guardians."
The language quoted implies that the 1892 statute had been applied by the courts in fixing the compensation of trustees ever since its passage. The practice described by the court was incorporated in the statute in 1927 and is now section 3793, relied upon by the attorney general in support of his contention that the trustees' compensation covers all services, other than professional and menial, as they find it necessary, for any reason, to employ others to perform.
Estate of A. Enos, 18 Haw. 542, 549, 550, decided January 8, 1908, involved expenditures by executors and trustees for clerical assistance to a master appointed to examine and report upon accounts of T. B. Lyons "as one of the executors and trustees under the will of Enos." It also involved expenditures by the executors to others for perfonning clerical services in assisting the temporary administrators and executors "to discharge their duties, and payment of the premium on an administrator's bond. In disallowing the sums expended by the executors in paying for services employed by the temporary administrators, the court said:
"These amounts, if paid at all, should have been paid by the temporary administrators and not left to be dealt with by the executors who, as such, had nothing to do with them. The amount paid for the premium on a bond cannot under any circumstances be allowed. Estate of Galbraith, 18 Haw.— The amount of $135 paid for clerical assistance to the master and temporary administrators should be disallowed. We do not understand that under any circumstances an estate should pay for clerical assistance to help a master examine accounts. The amount paid for clerical assistance to the administrators was for making up their accounts, examining account books and reporting on an income tax statement. Recognizing that under certain circumstances clerical assistance for an administrator may be necessary and should be paid for by the estate, still the ordinary clerical work must be performed, or paid for, by the administrator himself. One who becomes an administrator must perform the ordinary work of such or else decline to be appointed. See McBryde Estate, 8 Haw. 472. In this case there was no reasonable necessity for employing outside clerical help, and consequently the amount paid therefor is disallowed. We are inclined to allow the other items if they are found to have been necessary and to be reasonable in amount. Commissions should not be charged on any of these amounts that may subsequently be allowed, either for receiving or paying out the same, as they should have been paid before the executors took hold."
As to the expense incurred by the executors, the court said: "The next item questioned is $35 paid to M. K. Keohokalole for services in assisting the executors in making out an inventory, opening a new set of books and adjusting transfers in the bank. As already pointed out, an executor may be allowed to credit himself with the amount paid out for necessary clerical assistance, but, as held in Estate of Kaiu, 17 Haw. 514, an expenditure not shown to have been reasonably necessary will be surcharged."
Prom the foregoing cases under the statutes fixing-mandatory fees for executors and administrators, it appears that the question of the right of fiduciaries, whether an administrator or an executor, to employ others to assist in the discharge of their duties, turned on whether or not sucb employment was necessary under tbe circumstances of tbe particular estate, notwithstanding the statute fixing mandatory fees for them. Tbe question was never confused with tbe right of sucb fiduciaries to their statutory fees. In other words, if under tbe circumstances of tbe case it was necessary to employ assistance, the service was not deemed to be compensated for or covered by tbe statutory commissions. We conclude, therefore, that tbe former decisions of this court declaring that executors and administrators may be allowed to credit themselves with amounts paid out for necessary clerical assistance were made equally applicable to trustees by including them in tbe 1927 amendment. The question then is, what circumstances will render it necessary to employ others to assist the trustees in carrying out the trust? Webster's New International Dictionary defines "necessary" as "Essential to a desirable or projected end or condition; not to be dispensed with without loss, damage, inefficiency, or the like; ." The desirable or projected end to be accomplished by the trustees of any estate is to make it productive of income. If the services of others cannot be dispensed with without loss, damage or inefficiency, they come within the definition above quoted.
The local authorities to which we have referred are also in harmony with the general rule on this subject, as shown by the following excerpts from some of. the leading authorities:
"The trustee can properly incur expenses which are necessary or appropriate for performing his duties as trustee. Thus, he can properly incur expenses necessary or appropriate to get in the trust property, or to preserve it, or to make the trust property productive,- or to perform any other duties which he may have as trustee." Restatement, Trusts § 188, p. 491, Comment a.
"The trustee can properly incur expenses in employing attorneys, brokers or other agents or servants so far as snch employment is reasonably necessary in the administration of the trust. He cannot properly incur expenses, however, in employing agents to do acts which the trustee ought personally to perform, as where it would be an improper delegation of his duties or powers to act through an agent, or where although it would not be an improper delegation to employ an agent yet the service of the agent is one which is covered by the trustee's compensation." Restatement, Trusts § 188, p. 492, Comment c.
"It is the (general) rule that the trustee may incur expenses which are necessary and reasonable in carrying out the purposes of the trust. These necessary and reasonable expenditures, depending on circumstances, may include the expenses of operating and managing the trust property 4 Pom. Eq. Jur. (5 ed.) § 1060c, pp. 162, 163.
"The disbursements that will be allowed to a trustee will depend very much upon the character of the trust and the directions given in the instrument of trust." 2 Perry, Trusts § 913, p. 1539.
"Trustees have an inherent equitable right to be reimbursed all expenses which they reasonably and properly incur in the execution of the trust, and it is immaterial that there are no provisions for such expenses in the instrument of trust." 2 Perry, Trusts § 910, p. 1473.
"A trustee may employ necessary assistants in executing the trust and pay them; thus he may employ agents, collectors, accountants, and other persons properly employed in similar affairs. [But he will not be reimbursed sums paid to others for services which he ought to have performed himself, such as keeping simple accounts.]" 2 Perry, Trusts § 912, p. 1538.
"A trustee can properly incur expenses in employing attorneys or brokers or other agents or servants so far as such employment is reasonably necessary in the administration of the trust. He cannot, however, properly incur expenses in employing agents to do acts which he ought personally to perform. Thus if the trustee employs an agent to do acts which involve an improper delegation, not only may he incur a liability to the beneficiaries for so doing but he is not allowed a credit in his accounts for the expense of employing such agent. Even though the employment of an agent does not involve an improper delegation, he is not justified in charging the trust estate with payments made to the agent if the agent is employed to do acts which are covered by the trustee's compensation. Ordinarily the trustee is expected to keep his own accounts, and although it is proper for him to employ an accountant to assist him, he cannot ordinarily charge the trust estate with payments made to the accountant. In the case of large estates, however, it has been held not improper to employ an accountant or other agent to perform services which in the case of a smaller estate the trustee would be expected personally to perform." 2 Scott, Trusts § 188.3, pp. 1004, 1005.
"A trustee can properly incur expenses which are necessary or appropriate for the carrying out of the purposes of the trust. When such expenses are properly incurred, they should ultimately be borne by the trust estate rather than by the trustee personally. Although in England at common law trustees were not entitled to compensation for their services, they were allowed indemnity for expenses propeidy incurred by them. Under the English rule The trustee, though allowed nothing for his trouble, is allowed everything for necessary expenses in executing the trust. His duties relate to the property and interests of others, and he is to be indemnified for necessary expenses in protecting such trust property, and has an equitable lien upon it for such expenses.' In the United States where trustees are entitled to compensation for tbeir services they are also, of course, entitled to indemnity for expenses properly incurred by them in the administration of the trust. He is entitled to indemnity for expenses incurred in the proper employment of agents and servants." 2 Scott, Trusts § 244, pp. 1406, 1407.
"The trustees of a charitable trust can properly incur expenses which are necessary or appropriate to carry out the purposes of the trust, and are entitled to indemnity out of the trust estate for such expenses." 3 Scott, Trusts § 380, p. 2043.
1 Perry, Trusts § 404, pp. 656, 657, cites cases holding that "necessity includes the usual course of business."
Anderson v. Roberts, 48 S. W. 847, 848 (Mo.), illustrates the application made of the foregoing conception of what necessity includes. There the court said: "Where the trust consists of a large number of houses, where the rents are small and payable monthly, the trustee could attend to the business himself; but it is not usual for owners to do so themselves, and trustees are not expected to. Or, if the trust consists of a cattle ranch, the trustees could feed and herd the cattle themselves, but it would be unreasonable to expect it. Or, where the trust consists of notes due from persons living in different states, the trustees could go to each state, and collect them, but it is not according to the usual course of business." See also Donaldson v. Allen, 182 Mo. 626, 81 S. W. 1151.
The argument of the attorney general is inconsistent with the foregoing statements of the general rules, as well as the decisions of this court, with the possible exception of the decision in Estate of Mary E. Foster, 34 Haw. 417, 418.
The decision in the Foster case being the principal authority relied upon by the attorney general in support of his argument that the compensation provided for trus tees by our statute provides full compensation for all necessary services, except such, as are menial or beyond the skill and experience of an ordinary trustee, we shall now examine that decision to determine what it authoritatively decided. In order to make that determination, we must know what issue or issues confronted the court in that case. The court has stated what the issue was, as follows:
"The items for which the trustees claim reimbursement uniformly appear in the accounts rendered and filed and of which they prayed approval as a monthly salary paid to a 'bookkeeper.' We shall confine ourselves therefore solely to the question of whether the monthly salary paid a third person employed as a 'bookkeeper' by the trustees continuously during the accounting period is an administrative expense for which the trustees are entitled to reimbursement out of the trust estate."
In view of the foregoing statement of the court, it is clear that no issue other than the right of the trustees of that trust estate to incur an administrative expense by employing a bookkeeper was authoritatively decided. The decision on the stated issue is in harmony with Scott's statement of the rule that "Ordinarily the trustee is expected to keep his own accounts, and although it is proper for him to employ an accountant to assist him, he cannot ordinarily charge the trust estate with payments made to the accountant." 2 Scott, Trusts § 188.3, supra. Following the foregoing, Scott states that "In the case of large estates, however, it has been held not improper to employ an accountant or other agent to perform services which in the case of a smaller estate the trustee would be expected personally to perform." There were no facts before the court in the Foster case calling for a decision on the effect which the size and character of the estate might have on the right of the trustees to employ bookkeepers.
As an additional justification of tfieir right to incur the expense set up in the accounts now before us in employing others to assist them in the administration of the trust, the trustees have interposed a plea of res judicata based on an order or decree of the chancellor approving the 35th annual account in 1920.
It appears from the report of the master appointed to examine the 35th annual account that for the period covered by that account the trustees had employed bookkeepers and rent collectors at the expense of the estate and paid commissions for the collection of rentals made by others on various islands where estate lands are located. The master advised the chancellor that in her opinion the services performed by the employees in keeping the books and making collections were services which the trustees are required to perform or pay for themselves; that the duties required by law of a trustee include the keeping of accurate books of account and the collection of the revenues of the estate. As to the payment of premiums on bonds of employees, the master stated that such bonding is for the convenience and protection of the trustees rather than of the trust and should not be borne as an expense of management of the trust but should be borne by either the trustees or such employees.
To all of these recommendations of the master the trustees excepted and their exceptions were sustained, and the 35th annual account was approved as filed by order of the chancellor. No appeal was taken by the attorney general, the representative of the class of beneficiaries of the trust, although present and taking part in the hearing, and said order has not been otherwise modified or set aside.
The trustees have continued to employ bookkeepers and collectors at the expense of the estate and to pay premiums on the fidelity bonds of employees out of estate funds, and in the accounts now before us the master appointed to examine and report on said accounts at first approved them and the chancellor entered an order approving them. Later, however, the chancellor revoked his order and instructed the master to re-examine said accounts and file a supplemental report covering the matter of expenses charged by the trustees for employees and to report whether -any of them came within the provisions of the case of Estate of Mary E. Foster, 34 Haw. 417, supra. The order authorized the master to subpoena and swear witnesses and to employ a reporter. After an extended hearing, at which numerous witnesses were examined, the master filed his report and a transcript of the evidence adduced before him. He recommended that the trustees be surcharged all sums paid 'out by them in employing bookkeepers and collectors, and all premiums on fidelity bonds of employees as well as for salaries of various other employees. The trustees excepted to each and every recommendation of surcharge made by the master, and after an exhaustive hearing before the chancellor the accounts were again approved as filed and an order of approval entered. This appeal is from the order of the chancellor and is prosecuted by the attorney general in his capacity as parens patriae, who undertakes to justify every recommendation of the master.
Res judicata is twofold. The judgment of a court of competent jurisdiction is a bar to a new action in any court between the same parties or their privies concerning the same subject matter, and precludes the relitigation, not only of the issues which were actually litigated in the first action, but also of all grounds of claim and defense which might have been properly litigated in the first action but were not litigated or decided. Likewise, the adjudication by a court of competent jurisdiction of any right, fact or issue arising between the parties and actually litigated by them bars the relitigation between the same parties or their privies in any court of the same right, fact or issue arising in any subsequent action or suit between the same parties or their privies, and this irrespective of whether the later action or suit relates to the same subject matter. (Makainai v. Lalakea, 29 Haw. 482.)
The Supreme Court of the United States has expressed the same doctrine in slightly different language in Southern Pacific Railr'd v. United States, 168 U. S. 1, 48, 49, as follows:
"The general principle announced in numerous cases is that a right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question or fact once so determined must, as between the same parties or their privies, be taken as conclusively established, so long as the judgment in the first suit remains unmodified. This general rule is demanded by the very object for which civil courts have been established, which is to secure the peace and repose of society by the settlement of matters capable of judicial determination. Its enforcement is essential to the maintenance of social order; for, the aid of judicial tribunals would not be invoked for the vindication of rights of person and property, if, as between parties and their privies, conclusiveness did not attend the judgments of such tribunals in respect of all matters properly put in issue and actually determined by them."
The governing principles to be applied when the defense of res judicata, or estoppel by judgment, is interposed are so clearly set forth by our own court and by the Supreme Court of the United States in the foregoing-citations that further authority need not be cited here.
The pleadings in the proceedings for the settlement of the 35th annual account consisted of the trustees' petition and the account filed with it, the report of the master thereon and the trustees' exceptions to the recommendations of the master. "The petition for an accounting and the objections thereto are pleadings similar to a complaint and an answer and they define the issues and limit the relief." In re Doelger's Estate, 4 N. Y. S. (2d) 334, 339. From the master's report and the exceptions thereto the issues or questions tried and decided by the chancellor are easily ascertained. As to bond premiums the master asserted that the bonding of employees is for the convenience and protection of the trustees rather than of the trust and should therefore be carried as a personal expense of either the trustees or the employees rather than as an expense of management of the trust. The exception of the trustees to this recommendation of the master put in issue the conclusion of the master and the facts upon which the conclusion was based, and the decree or order of the chancellor determined both. The trustees have continued to pay the premium on the bonds of employees out of estate funds under identical circumstances and the accounts now before us show a like expenditure, Avhich the attorney general seeks to have surcharged.
As to the salaries and commissions paid to bookkeepers and collectors, the master questioned whether these charges, in addition to the statutory commissions allowed to trustees, are permissible. She asserted that the statutory commissions are intended as a reward for the services required of the trustees by the terms of the trust instrument or by law; that the duties required by law of trustees include the keeping of accurate books of account and the collection of the revenues of the estate; and if the trustees personally did the collecting of rents, or kept the books, there could be no claim to compensation aside from the commissions allowed by law. From the foregoing the master drew the conclusion and asserted that the trustees must either perform such services or procure them to he' performed without expense to the estate. The chancellor decided otherwise and the trustees have continued to employ bookkeepers and collectors, at the expense of the estate. In the accounts now before us the attorney general objects to the allowance of salaries of bookkeepers' and collectors on the same grounds urged by the master in the hearing on the 35th annual account.
As to others employed and paid a commission on rents collected, the master reported that this practice is clearly not allowable, for the reason that the statute authorizes compensation to the trustees of ten per cent, seven per cent and five per cent on income collections, "for the performance of just such duties as these." The master advised the chancellor that the payment of commissions to others on rents collected by them "is an objectionable practice, in derogation of the terms and spirit of the statute, and should end." The exception of the trustees to this recommendation of the master was sustained.
In support of his contention that the doctrine of res judicata does not apply to disbursements for like services made subsequent to the order or decree relied upon as res judicata, the attorney general cites the following Hawaii cases: In re Estate of Banning, 9 Haw. 453; Estate of A. Enos, 18 Haw. 542; Estate of D. H. Davis, 22 Haw. 436; Estate of Baker, 34 Haw. 263, and Estate of Allen, 35 Haw. 501. Of these cases Estate of Allen is the only one in which the plea of res judicata was interposed. In that case the plea Avas based upon an order or decree approving an annual account. From the opinion of this court it appears that said estate owned various corporate shares on which the trustees received stock dividends which they retáined as corpus. The first stock dividend was received August 15, 1916. The accounts of the trustees for the period in which, said stock dividend was received made no mention of said stock dividend. In examining the next annual account, the master discovered and called attention to the receipt by the trustees of the stock dividend and recommended that it be apportioned between capital and income, under the rules adopted in Carter v. Crehore, 12 Haw. 309, and Evans v. Garvie, 23 Haw. 651. Notwithstanding the master's recommendation, the accounts were approved and the trustees, in succeeding years down to 1935, received various other stock dividends from other corporations in which they owned stock, all of Avhich they retained and treated as corpus. Finally, in 1936, the trustees being in doubt as to the correctness of their action, filed their bill for instructions, reciting the facts as to stock dividends and asking to be advised in what manner, if any, they shall readjust their accounts and apportion the stock dividends issued to them as such trustees since the death of the testatrix. There were two classes of beneficiaries — life tenants and remaindermen — all of whom were made parties respondent and participated in the hearing on the bill for instructions. Certain of the remaindermen set up the defense of res juclieata, or estop-pel by judgment, and relied upon' the orders or decrees approving the accounts which disclosed the receipt of stock dividends. The chancellor rejected this plea but refused to follow the former decisions of this court and by decree advised the trustees that they had properly treated stock dividends. Certain of the respondents appealed to this court, and its opinion is relied upon by both parties to this case on the question of whether or not an order or decree approving an annual account can become res judicata or operate as an estoppel on a subsequent accounting as to an issue of law therein determined. In rejecting the plea of res judicata, which Avas renewed on appeal to support the decree, this court pointed out that in no instance when the receipt of stock dividends was disclosed by the annual accounts of the trustees were the life tenants either present or represented at the hearing.
In discussing this issue this court said: "It is Veil settled that a fact or question in issue and litigated in a former action between parties is conclusively settled by the judgment therein and they are bound by the adjudication in another action between them.' But an order or decree approving an annual trust account does not become res adjudicata as to matters not actually adjudicated by the court nor is it binding upon parties not duly notified and who do not participate in the proceedings."
We are unable to see that any of the Hawaii cases relied upon by the attorney general are in point, and we must look elsewhere for authority directly in point on the question now under consideration.
The attorney general relies upon the following cases from other jurisdictions: In re Jackson's Will, 258 N. Y. 281, 179 N. E. 496; Parsons v. Lyman, 32 Conn. 566, 18 Fed. Cas. 1263, and Megrue v. Megrue, 247 N. Y. S. 95.
The only one of these cases which tends to support the proposition for which they are cited is the case of Megrue v. Megrue. The will of Megrue devised 100 shares of the capital stock of the Standard Oil Company of New Jersey to his executor and trustee, the net income of which was to be paid to his wife for life with remainder to his son. By a codicil he expressly provided that' should the said oil company make a stock dividend or increase its capitalization he gave such increase to his executor and trustee on the same trust, to be held by him as part of the principal of such trust, and directed that such increase, if any, should follow the original shares as finally disposed of. In 1915 a stock dividend was received by the trustee, and on his accounting a decree was entered by the surrogate's court on October 18, 1915, adjudging that to follow the direction of the testator as to the disposition of said stock dividend, in so far as it represented profits since the death of the testator, would constitute an unlawful accumulation of income. An apportionment between principal and income Avas accordingly ordered. In 1931 another stock dividend having been received on said stock, the question of its disposition was before the court, and the effect of the decree of 1915 was considered. Said the court: "We are of the opinion that the decree of the Surrogate's Court of October 18, 1915, does not affect the question here for decision. The former decree of the Surrogate's Court was entered in an accounting proceeding upon objections to specific items in the executor's account." (p. 97.) The court further said: "The decree of the surrogate in the former accounting is res ad judicata only as to matters adjudicated in that accounting, and does not prevent the allocation to principal of the stock dividends as required by the will and codicil ." (p. 99.)
On the question now under consideration, counsel for the trustees have cited Gossom's Adm'r v. Gossom, 133 S. W. 1162 (Ky.); In re Leupp, 153 Atl. 842 (N. J.), and In re Lafferty's Estate, 230 Pa. 496, 79 Atl. 712.
In the Gossom case the testator devised $3000 to one of his sons in trust for the support of an incompetent son of the testator. The trustee assumed that the will authorized the use of corpus for the support of said incompetent. In 1890, some nineteen years after the inception of the trust, the trustee having used approximately one half of the corpus in the support of the incompetent, filed a petition for the settlement of his accounts as of that date. All interested persons, including the incompetent and residuary legatees, were made parties, and following a report of the master appointed to examine said accounts showing the use of corpus, the account was approved.
In 1903 the trustee filed another account, covering the period from his 1890 account, and asked for its settlement. At the time this account was filed the beneficiary of the $3000 fund was dead and the account showed that the trustee had continued to use corpus for his support and that said fund had been entirely exhausted. The residuary legatees were made parties and contended that the income alone was to be used for the support of the beneficiary and that the trustee should be surcharged the $3000.
The court, after expressing the opinion that the view taken by the trustee and approved by the court in 1890 was a reasonable one, said: "But, even if there were any doubt as to the meaning of the testator, we are of opinion that it would be inequitable, at this late day, to give the will a different construction. All of appellee's brothers and his sister were parties to the action brought by ap-pellee in 1890 to settle his accounts as trustee. The imbecile son was likewise a party. While the papers were lost, it does appear that the court held that there was a certain balance in the trustee's hands, and that that balance be taken as the basis for future settlements. For appellee it is contended that the balance was $1,500, while appellants contend it was as much as $1,800. It is perfectly clear, then, that, whichever of these amounts is correct, appellee, at the time of that settlement, had used a portion of the trust fund, and the court in effect held that he was entitled to do so, for he directed that that settlement be made the basis of future settlements. Evidently the same contention was made in that action that is now being made. The court's judgment was in effect a holding contrary to that contention. Appellee's sister and brothers did not appeal from the judgment in that case. That being true, and appellee having settled upon the theory that he could use the corpus of the trust fund for the reasonable support and maintenance of J. T. Gossom, and -having, since the settlement, acted upon the same theory, it Avould not now be fair and just to him to require a settlement upon a different basis." (p. 1164.)
The case of In re Leupp involved the question of allocation of bond premiums between capital and income. Said the court: "In bis intermediary accounts filed in 1917 and 1922, accountant specifically set up the identical allocation of bond premiums, which now constitutes the subject of complaint. The propriety or legality of said allocation was a matter entering into the court's determination to approve and allow said accounts, and hence, of necessity, the order of this court, dated October 8, 1917, approving the first of these accounts, determined this issue adversely to exceptant's present contentions, and thereby rendered it res adjudicata as against exceptant's cestui que trust; he having been one of the parties involved in said proceedings. In conformity with this judicial declaration, accountant continued to allocate said bond premiums in the manner thereby sanctioned and approved. It would thus seem that exceptant is now estopped and precluded from questioning the propriety or legality of said allocation, during the years following, as well as those preceding, the making of said order, in conformity with which all parties in interest acted." (p. 847.)
In re Laferty's Estate, 230 Pa. 496, 79 Atl. 712, supra, involved the effect of a former decision in the same estate. This former decision turned on the question of whether or not the will of Francis Lafferty (a son of the testator) was a valid exercise of the power of appointment given to him in the will of his father. The same question was raised on the present accounting. Said the court: "In Rafferty's Estate, 209 Pa. 44, 57 Atl. 1112, this court affirmed the decree of the orphans' court, by which the share of the annuity to which, under the will of her grandfather, Rose E. Carr would have been entitled, if living, Avas awarded to her executor. That decision necessarily in volved the determination of the question whether or not the will of Francis Lafferty was a valid exercise of the power of appointment given to him in the will of his father. After the lapse of some six years, precisely the same question, in the same estates, under the same wills, is again presented by the decree from which the present appeal is taken.
"The decision in Lafferty's Estate, 209 Pa. 44, 57 Atl. 1112, became the law of the case, and stands as such. It must be accepted as a final adjudication of the question involved. In Bolton v. Hey, 168 Pa. 418, 421, 31 Atl. 1097, 1098, Chief Justice Sterrett referring to a former ruling in the same case, says: 'That judgment thus became the law of the case, and, having never been reversed or set aside, it is still the law of that case, notwithstanding a different rule of construction may have been since applied, with a different result, to contracts of like tenor and effect.'
"The assignments of error are sustained, and the decree of the orphans' court is reversed, in so far as it awards income to the minor children of Rose E. Carr."
The foregoing authorities demonstrate that in view of the order or decree of the chancellor sustaining the exceptions to the recommendations of the master appointed to examine and report on the 35th annual account, it would now be unjust and inequitable to surcharge the trustees the expense incurred in employing bookkeepers and rent collectors, including premiums on their bonds. They have the right to rely upon that order or decree to protect them, so long as it stands unchallenged and they act in accordance with it. That is so even though, strictly speaking, the doctrine of res judicata may be of doubtful application.
For the future the whole question of the right of trustees of a charitable trust to employ bookkeepers and other necessary clerical assistance has been rendered moot by Act 149 of the Session Laws of 1943, which amends section 3793 of the Revised Laws of Hawaii 1935 by providing that, in addition to their commissions, "Such trustees shall also be entitled to just and reasonable allowances for bookkeeping, clerical, and special services and expenses incidental thereto."
A brief history of this estate and the character and extent of its assets Avill point the way to a correct decision on the question of the necessity of employing others to assist the trustees in the management of its affairs, other than those already discussed.
By her will, which was admitted to probate December 2, 1884, Mrs. Bishop devised life estates to various persons in particular portions of her vast real estate holdings, and devised to various other persons life annuities and specific sums of money, and by paragraph thirteenth she devised all of the rest, residue and remainder of her estate to five trustees upon the following trust, namely: "to erect and maintain in the Hawaiian Islands two schools, each for boarding and day scholars, one for boys and one for girls, to be known as, and called the Kamehameha Schools." By the same paragraph she directed her trustees as follows: "I direct my trustees to expend such amount as they may deem best, not to exceed however one-half of the fund which may come into their hands, in the purchase of suitable premises, the erection of school buildings and in furnishing the same with the necessary and appropriate fixtures, furniture and apparatus. I direct my trustees to invest the remainder of my estate in such manner as they may' think best, and to expend the annual income in the maintenance of said schools; meaning thereby the salaries of teachers, the repairing of buildings and other incidental expenses; and to devote a portion of each year's income to the support and education of orphans and others in indigent circumstances, giving the preference to Hawaiians of pure or part aboriginal blood; the proportion in which said annual income is to be divided among the various objects above mentioned to be determined solely by my said trustees, they to have full discretion." The reference in the foregoing to "the annual income" clearly refers to the net annual income, and the statement of what the income was to be expended for has no bearing on the right of the trustees to employ others in the management of the trust property.
The life tenants and annuitants have long since died and the whole of the vast area of lands has fallen into the general fund to be administered by the trustees. Both schools were established many years ago and are in operation. The master pointed out that the trustees have a dual function: they manage the endowment to produce income; they also manage the schools and spend the income for the support of the schools, duties specifically imposed by the will.
The trustees, by virtue-of their office, are trustees of two other trusts, namely, the Charles R. Bishop Trust (the income of which is to be devoted to the same charity as the income of the Bernice P. Bishop Trust) and the Bishop Museum Trust (the income of which the trustees must expend in the maintenance of the Bishop Museum). Prom this it will be seen that the trustees must manage the endowment of the three trusts and must also manage and direct the spending of the income for the maintenance of the two institutions.
The assets of Bernice P. Bishop Trust consist largely of real estate comprising an area of more than 378,000 acres. The lands are classified and leased as follows: 57,662 acres of agricultural lands, leased to 34 sugar plantations and one pineapple plantation, and 7031 acres divided into 983 small farms, and leased to as many individual farmers; 254 acres of industrial and business lands, subdivided and covered by 291 leases; 232,757 acres of grazing lands leased to 48 cattle ranches; 335 acres of residential lands subdivided into homesites, with 1024 tenants. Other lands are leased for miscellaneous purposes to 56 tenants. The gross rentals for the year ending June 30, 1938, were $1,011,769. Other income for the same period was approximately $36,000. The net rentals for that year were approximately $597,000. At the inception of the trust, in 1884, the gross revenues of the estate were approximately $50,000 per annum and the net approximately $35,000.
Most of the lands now owned by the estate are lands which the testatrix devised to her trustees, and the trustees (past and present) have so managed and developed the lands as to greatly increase the income derived from them. Some of the increased revenue can no doubt be attributed to the expiration of the life estates and to the general development of the Territory. But the development work carried on under the direction of the trustees has had no small part in increasing the revenues of the estate. The subdivision of the lands into small areas for leasing to home owners, small farmers, business men and corporations has greatly increased the revenues of the estate and at the same time multiplied the detail of work required to properly administer the trust. The most recent report of the trustees shows that more of the lands of the estate are being subdivided, surveyed and mapped preparatory to making them revenue-producing.
For the management of this vast estate the trustees have for many years maintained an office on Kaahumanu Street in Honolulu, divided into two departments, the general office and the land department, each responsible to the trustees. In the general office there are fourteen employees and in the land department there are fifteen; the employment of fourteen of the fifteen employees in the land department, which is at the expense of the estate, was approved by the master and the attorney general does not question the correctness of his decision. It appears from the record and from an opinion of this court (Damon v. Hyde, 11 Haw. 153, 154) that as early as 1897 the trustees of this estate were employing a complete staff of assistants to do the regular delegable work of the trust. Without going into detail, it may be said that the evidence shows and the master found and stated in his report that because of the large amount of business done by the Bishop Estate it would be impossible for the trustees to transact that business without the assistance of a competent staff, such as they now employ and have employed for years past.
PENSIONS AND ANNUITIES.
The record discloses that in 1919 the trustees began a study of retirement systems then in operation, particularly in educational institutions, the object being the adoption of a retirement system for their employees. Mr. Trent, one of the then trustees, was appointed a committee of one to assemble information on the subject. From time to time he reported to the board of trustees the information thus far obtained. The minutes of the proceedings of the board disclose that lengthy discussions of the subject were had each time a report was made. The minutes also disclose that on several occasions legal advice was obtained on the question and finally in 1921 a decision was made adopting the system which has since been followed to become effective September 1, 1922.
It was found that seven of the employees were too old to procure annuities. As they reached the limit of their usefulness they were to be retired on pensions, while those who were eligible were given the privilege of taking out an annuity policy with the Teachers Insurance and Annuity Association of America to the cost of which the estate would contribute not to exceed five per cent of the individual's salary. This privilege was extended not only to the employees at the schools but also to those in the estate office. The system adopted was exclusive but was not compulsory. In other words, an eligible employee could decline to apply for an annuity policy, in which event he could not look forward to being pensioned regardless of how long he continued in the employment. The teachers were given written contracts of employment for one year at a time in which the annuity privilege was recited. Those Avho work in the estate office are not employed on written contract. They are, however, given the privilege of having the estate contribute to the cost of an annuity policy if they elect to apply for a policy.
On the foregoing facts we have no difficulty in determining that the trustees, in setting up the annuity system, acted within the broad power conferred upon them by the Avill to manage the estate and to maintain the schools for the support of which the trust Avas created. Their power to manage is very general and of course the terms upon Avhich they will contract with an employee is left to their discretion, subject only to review by a court of equity for abuse. The obligation of the estate to. contribute to the cost of an annuity policy became a term of the contract of employment. The trustees having the authority to thus contract with those employed, they not only acted within that authority but Ave think they should be commended for having taken this forward step at a time which places them among the pioneers in adopting a plan for old-age security of employees which has become almost universal. (53 Harv. L. Rev. 1375 [1939, 1940].)
The contract feature does not enter into the case of the superannuated employees who were pensioned. The copious minutes kept of the trustees' meetings disclose that the case of the small group of employees (all of whom were employed at the schools) who were unable to pro cure annuity policies because of tbeir age was thoroughly discussed, and on April 1, 1921, it was decided that they should be pensioned when compelled to retire provided this was not prohibited by the terms of Mrs. Bishop's will. Accordingly, they called upon their attorney for an opinion as to their authority to take such action. They were advised that they had such authority by virtue of the general direction to manage the schools and to make all such rules and regulations as they may deem necessary for the government of the schools. Of the group of seven to be pensioned upon retirement four were teachers, one a nurse, one a janitor and one a night watchman. On May 5, 1921, the trustees unanimously adopted the recommendation of the president of the schools, of which the following are the pertinent terms: "(1) That no members of the staff be retired prior to June 1922; (2) That before January 1, 1922 a comprehensive plan of retirement on pension adapted to all classes of employees and involving some suitable scheme of joint contribution toward the expense involved by the Kamehameha Schools and the individuals who may elect to avail themselves of the opportunity, be formulated and adopted and presented to all members of the staff — such plan to become effective September 1, 1922; ." The plan was formulated and adopted. The document containing the terms circulated by the trustees among their employees bears date March 24, 1922.
The first to be retired Avas one of the four teachers. He was retired in 1922, presumably on September 1 of that year. He was then seventy-three years of age and had been employed at the schools for thirty-three years; one Avas retired in 1923, aged sixty years, after thirty-one years of service; one was retired in 1929, aged sixty-eight years, after tAventy-four years of service; and one Avas retired in 1931, aged sixty-nine years, after thirty-four years of serv ice. Two others of the group were retired in 1933: the nurse, on account of sickness, aged fifty-sis years, after eighteen years of service, and the night watchman, aged sixty-seven years, after twenty-nine years of service. The janitor was retired in 1938, aged sixty-seven years, after twenty-one years of service.
The foregoing demonstrates that the trustees moved with caution and deliberation in adopting the annuity and pension systems. If they had been in doubt as to their authority after consulting their attorney, they could for their protection have sought the advice of the chancellor having jurisdiction of the trust on a bill for instructions. Unless they had such doubt, no basis for calling upon the chancellor for advice existed. (Bishop v. Pittman, 33 Haw. 647, 654.) Under the circumstances, we must determine whether the action taken transcended their authority.
"Trustees, in carrying the trust into execution, are not confined to the very letter of the provisions. They have authority to adopt measures and to do acts which, though not specified in the instrument, are implied in its general directions, and are reasonable and proper means for making them effectual. Whenever the instrument of trust expressly confers upon trustees a discretion as to acts and measures in carrying out the general object of the trust, a court of equity will not generally interfere to control such discretion, except to prevent its abuse or unreasonable exercise to the actual or probable prejudice of the beneficiaries." 4 Pom. Eq. Jur. (5th ed.) § 1062a.
"Where the power is general to perform and carry out a particular object, a resort to the ordinary and usual methods or means comes within the scope of the power." Faulk v. Dashiell, 62 Tex. 642, 50 Am. Rep. 542.
"It is the ordinary doctrine that when an act is authorized to be done by a trustee or other agent, every authority requisite to the doing of such act is, by intendment of law, comprised in such grant of power." Hesketh v. Murphy, 36 N. J. Eq. 304, 310.
Although a pension is, by some courts, referred to as. a gratuity in which the pensioner has no vested right, on the theory that it may be discontinued, it is held by many of the same courts to be of kin to wages and salaries in that it is payable in stated installments for the maintenance of the servant after his productive years have ended and is basically a recompense for past services. (Bowler v. Nagel, 228 Mich. 434, 200 N. W. 258; Passaic Nat. Bank & Trust Co. v. Eelman, 116 N. J. L. 279, 183 Atl. 677.)
It is also held by many courts that public funds appropriated in conformity with legislative authority to pay pensions to retired employees or by a private corporation for the same purpose are not properly termed a gratuity but are expended for a public or corporate purpose, whether the object be to compensate the employee for services rendered or to stimulate others similarly engaged to continue in the service and properly discharge their duties. (See State v. Love, 89 Neb. 149, 131 N. W. 196; Heinz v. National Bank of Commerce, 237 Fed. 942, and authorities cited.)
All of those granted free pensions continued in the service after the adoption of the plan. That one was retired after only one year of service after the plan was adopted and another after two years, while others were compelled to serve much longer, is immaterial. (State v. Love, supra.)
It may be said that the authority of a trustee to grant pensions to superannuated employees is not analagous to the authority of a State or municipality to appropriate public funds for the payment of pensions to their employees who come within the terms of the legislative Act. However, in a jurisdiction which limits the expenditure of public funds to a public purpose, the analogy is very close if not complete. Trustees directed to manage such an institution as the Kamehameha Schools, in the absence of a direction to the contrary in the trust instrument, are authorized to employ the necessary staff of teachers and others upon such terms as in the exercise of a sound discretion they find to be necessary, and their right to similarly provide for the retirement of the same employees when their years of usefulness have ended is quite anala-gous to the right of a legislature, operating under a constitution Avhich limits appropriations to a public purpose, to appropriate public funds for a like purpose.
The principles applied to determine whether a contract or act of a corporation is ultra vires the corporation or its board of directors are also analagous to those applied to determine whether a contract or act of a trustee is within his powers. In the case of a corporation its powers are defined in its charter and are of two classes: (1) Those expressly granted, and (2) those impliedly granted, as reasonably incident and necessary to the carrying out of the powers expressly granted. (Heinz v. National Bank of Commerce, supra.) A trustee's powers are defined in the trust instrument and are likewise express and implied. (Hesketh v. Murphy, Faulk v. Dashiell, 4 Pom. Eq. Jur. [5th ed.] § 1062a, all supra.)
RICE REHABILITATION AND ROAD REPAIR.
The trustees contributed $304 toward the expense of an experiment conducted by the Experiment Station of the University of Hawaii looking to the development of means to rehabilitate the rice industry in Hawaii. The Bishop Estate owns large areas of lands formerly leased to rice planters at good rentals. Modern methods in vogue elsewhere rendered rice culture in Hawaii unprofitable unless by the use of modern machinery the cost of production conld be lowered. The Federal Government and the Experiment Station of the University became interested and proposed that if the landowners would furnish the required machinery they would conduct the experiment. Accordingly, the trustees and other owners of rice land supplied the funds for the purchase of the required machinery and the experiment was conducted as agreed.
The master reported that this contribution constituted a gift and recommended that the trustees be surcharged the amount contributed. The exception of the trustees to this recommendation was sustained and the appellant has assigned the ruling as error.
The trustees also contributed $40.60 toward the repair of a private road on Bishop Estate lands at Waialae originally built by Waialae Ranch, a former Bishop Estate tenant. After the termination of the lease to the ranch the lands in the small valley served by the road were leased to various tenants in small parcels abutting upon the existing road. The road in question belongs to the estate and is the only means of access to the various leaseholds. The tenants were principally pig raisers and they used the road to haul in their feed and their pigs out to market. The road having gotten in bad shape the tenants asked the trustees to repair it. The trustees knowing that the Board of Health had objected to the raising of pigs in that area hesitated to expend estate funds for that purpose. Despite the objection of the Board of Health the tenants, with the help of their customers, went ahead with the repairs. Having exhausted their resources by expending more than |700 on the road the trustees, at the request of the tenants, purchased $40.60 worth of material with which the tenants completed the repairs by their own labor without charge.
The two foregoing expenditures were condemned by the master as gifts of trust funds. The chancellor took a different view and sustained the exception of the trustees to the master's recommendation that they be surcharged the amounts expended.
It requires no citation of authority to sustain the proposition that these expenditures were for the benefit of the estate and were not gifts of estate funds.
RENT OF LOCK BOXES.
The vault in the building belonging to the Bishop Estate and occupied by the trustees and their staff of employees for the conduct of estate business contains six lock boxes. Two of the boxes are used for the safekeeping of bonds and other securities belonging to the estate. Two are rented to the Charles R. Bishop Trust and one to the Bishop Museum Trust. The remaining box is termed an over-night box and is used by all three of the trusts when they have coupons to clip.
The master recommended that the trustees be charged rent for the use of the lock boxes used by them for the safekeeping of estate bonds and securities on the theory that they must, at their own expense, safely keep the bonds and other securities belonging to the estate. There is no suggestion of a surcharge as to this item, but to follow the master's suggestion would subject the trustees to a charge of the reasonable rental value of the boxes used by them.
Again the chancellor disagreed with the master and sustained the exception of the trustees to his recommendation.
In this we think the chancellor was right. The estate owns not only the lock boxes but also the vault in which they are situated, the building in which the vault is situated, and the land upon which the building stands. And yet there is no suggestion that the trustees should be charged rent for the nse of the land, building or vault of which the lock boxes are an integral part.
SAFE DEPOSIT RENT.
The trustees, exercising the discretion reposed in them, decided to offer for sale $50,000 worth of Home Owners Loan Corporation Bonds and $100,000 worth of Federal Farm Mortgage Bonds to raise funds to pay for new school buildings being erected. There was no market in Honolulu for the selected bonds. The market was in the States. A broker in San Francisco was engaged to sell the bonds. He advised the trustees that it would facilitate the sale if the bonds were available for prompt delivery as sales were made. In order to facilitate their sale the trustees deposited the selected bonds with the Bank of California for safekeeping and delivery as sold. The trustees paid the bank $41.68 for this service and the master recommended that they be surcharged. The Home Owners Loan Corporation Bonds having been sold the trustees decided that the other bonds need not be sold and had them returned. The expenditure in question was essentially an expense of the sale of the bonds, as much so as a broker's fee, postage or express and insurance necessary to make delivery of the bonds when sold. We think it is immaterial that the trustees subsequently decided not to sell all of the bonds. The law does not require trustees to be infallible. If the fee of the bank was measured by the value of the bonds deposited, it is nevertheless true that circumstances which developed after the bonds were deposited with the bank caused the trustees to decide to withdraw them from sale.
We think it is clear that the action of the trustees conformed to the usual course of business and is not to be condemned.
E. K. Kai, Attorney General, and J. V. Hodgson, former Attorney General (W. Z. Fairbanks with them on supplemental brief), for appellant.
A. G. M. Robertson (Robertson, Castle & Anthony on the briefs) for trustees of Bishop Estate and executors of A. F. Judd Estate, appellees.
G. D. Crozier for Theo. F. Trent and Cooke Trust Co., Ltd., co-executors under the will of R. H. Trent, deceased, appellees, filed a brief but did not argue.
PALM RENTALS.
The master recommended that the trustees be surcharged $19.50 expended by them for the rental of palms to decorate the office. The evidence is to the effect that Honolulu business houses very generally use palms and other plants to brighten the appearance of their places of business as a stimulus to their employees. The trustees learned from experience that it was cheaper to rent palms than to grow them. Since the estate must maintain a business office where its employees perform their duties, it is for the trustees to decide (subject only to review by a court of equity for abuse of discretion) what character of office is to be maintained. If they should decide to inordinately adorn their office instead of following the usual business practice of providing agreeable surroundings for their employees the chancellor would doubtless refuse to approve the expenditure.
The decree sustaining the exceptions to the findings and recommendations of the master is affirmed.