Opinion ID: 1161211
Heading Depth: 1
Heading Rank: 2

Heading: Bank's Alleged Liability as Executor for Retention of Stock in Estate

Text: (1) An executor is not liable for losses suffered by the estate without his fault (§ 920) but may be required to reimburse the estate for losses proximately resulting from his failure to exercise the requisite duty of care in its administration ( Estate of Guiol (1972) 28 Cal. App.3d 818 [105 Cal. Rptr. 35]). The standard of care generally applicable to executors is that degree of prudence and diligence which a man of ordinary judgment would be expected to bestow upon his own affairs of a like nature. ( Estate of Moore (1892) 96 Cal. 522, 525 [31 P. 584]; Estate of Barbikas (1959) 171 Cal. App.2d 452, 457-458 [341 P.2d 32].) However, as a bank engaged in the business of acting as a fiduciary for estates and trusts (see Fin. Code, §§ 106-107, 1502), the executor could be held liable for negligence if it failed to exercise the skill and knowledge ordinarily possessed by such professional fiduciaries. ( Gagne v. Bertran (1954) 43 Cal.2d 481, 489 [275 P.2d 15]; Rest. 2d Torts, § 299A.) (2a) Contestants claim that the judgment is not supported by the evidence. To consider this contention, we review the facts, viewing the evidence in the light most favorable to the executor and indulging in all reasonable intendments and inferences that tend to sustain the judgment. ( McCarthy v. Tally (1956) 46 Cal.2d 577, 581 [297 P.2d 981]; Berniker v. Berniker (1947) 30 Cal.2d 439, 444 [182 P.2d 557]; Estate of Bristol (1943) 23 Cal.2d 221, 223 [143 P.2d 689].) Under the decedent's will the residue of the estate left in trust was to be divided into four shares, one for each of the testator's children. One third of each child's share was to be distributed to him or her at age 25, one third at age 30, and the remaining third at age 35, with periodic distributions of income from the part of the share held in trust. The decedent's four children were: Marianne Beach Edwards, born June 1, 1939; Joette Beach Carter, born January 1, 1942, and twins named Scott Gregory Beach and Schuyler Jean Beach, born November 19, 1952. Thus, upon the decedent's death both Mrs. Edwards and Mrs. Carter were eligible to receive one third of their trust shares, and Mrs. Edwards became eligible for an additional third nine months thereafter. Only Mrs. Carter and the twins are contestants in the present proceeding. The principal assets of the estate and their appraised values as of the date of death were 27,700 shares of Reserve common stock ($391,262.50); Reserve convertible debentures ($117,625); Mother Lode Bank common stock ($300,600); government and public utility bonds ($691,238); real estate ($387,000); a lumber business which was liquidated during administration ($299,389); and cash, notes, insurance and miscellaneous items ($235,680). The Reserve stock was listed on the American Stock Exchange. The company's main activity was the exploration for and production of oil. The stock paid no dividend, and the company's earnings were flat, lacking any significant increase or decrease. The principal attraction of the stock was the prospect of capital growth through oil exploration activities. Donald T. Dooling, the bank's trust officer immediately in charge of the estate, testified that when administration commenced in August 1968 he was concerned about the size of the Reserve holding and discussed the matter with Roger Newell, head of the bank's portfolio management section, who replied within a week or two that no immediate steps were necessary. Newell testified that on receiving Dooling's inquiry he went to the securities research section to read available information concerning Reserve and discuss the stock with the section's security analysts, whose function was to analyze individual securities and industries as well as general economic conditions. Newell concluded there was no reason to recommend immediate sale of the stock because he found no apparent deterioration in the company's balance sheet, management, or other fundamentals. The following December, the bank's trust investment committee (T.I.C.), responsible for portfolio management decisions, made an initial review of the estate's assets and decided to retain the stock because of the absence of deterioration in the company. In January 1969 the same committee considered what assets should be sold to raise cash needed for administration and decided to continue with the program to sell the real estate assets and to defer sale of Reserve. The reasons for this decision were (1) that the real estate required current expenditures from the estate and was not as readily marketable as a listed stock, which could be sold later if and as needed, and (2) the absence of any evidence of deterioration in Reserve. [4] In February 1969, the bank's trust securities committee (T.S.C.) recommended that holdings of Reserve stock be sold. However, the T.S.C.'s recommendation was based on information furnished by the securities research section concerning the stock itself, without regard to the nature of the trust or estate in which the stock might be held. Despite the T.S.C.'s recommendation, the T.I.C. decided to retain the Beach estate's holding of the stock because of the continued absence of any sign of deterioration in the company. In May 1969, Dooling reported to John Pierson of the portfolio management section that the estate required $390,000 of additional cash to conclude administration and suggested consideration of a sale of part of the Reserve holding for this purpose. [5] About this time it was learned that the Reserve convertible debentures held by the estate would be called for redemption on July 16th at a price below the current market price. To avoid a loss through redemption the estate would have either to sell the debentures or to convert them into some 7,600 shares of common stock thereby increasing its stock holding to some 35,300 shares. Under these circumstances the T.I.C., on advice from the portfolio management section, decided to raise the needed cash by selling the debentures, 3,000 shares of the stock, and certain short-term government bonds. Based on court authorization received on June 24, 1969, the executor sold the debentures for $119,500 and the 3,000 shares of stock for $47,607, reducing the estate's holding of the stock to 24,700 shares. Newell testified that in recommending this sale the portfolio management section felt that some reduction of Reserve was in order, that the one-third reduction (35,300 to 24,700 shares) was appropriate, and that the remaining Reserve stock was acceptable for distribution into the trust because the company remained fundamentally sound and the stock had some long-term potential for increase in value. In July and August of 1969 the stock's market price commenced a gradual decline which continued into the following May and was followed by a moderate rise until distribution to the trustee in the fall. [6] The bank's security analysts interpreted this decline as a reflection of a downward trend in stocks generally which was particularly pronounced in oil stocks and not as indicating any deterioration in Reserve's operations or prospects. [7] In determining that the Reserve stock was suitable for inclusion in the trust, the bank's portfolio management section considered the circumstances and resources of the trust beneficiaries and determined that the tentative objectives of the trust should include not only the production of income but also long-term capital growth as a protection against inflation. None of the beneficiaries or their families had any special problems of ill health or disability which would require unusual amounts of income. The twins in addition to having interests under the trust were the beneficiaries of a settlement agreement between their mother and the decedent under which the estate was paying $500 per month for their benefit in child support and was obligated to pay the expenses of their college educations. Assets distributable to the trust other than the Reserve stock were producing substantial amounts of income. [8] Under these circumstances the growth potential of Reserve was deemed to make it a desirable trust asset despite the fact that it paid no dividends. (3) (See fn. 9.) On the other hand, the portfolio management section did not base its decision to retain the 24,700 shares of Reserve stock on any standard of diversification. [9] Its practice was not to attempt to diversify particular investment holdings during probate because of the restrictions on the executor's power to reinvest. [10] Thus the retention of the stock in the estate was based on the executor's determination that Reserve was not in a deteriorating condition, that no further cash was needed to complete administration of the estate, and that the stock was a suitable asset for inclusion in the trust. (4) The bank concedes that as a professional fiduciary its liability must be determined by more stringent standards than would the liability of a lay executor. Those undertaking to render expert services in the practice of a profession or trade are required to have and apply the skill, knowledge and competence ordinarily possessed by their fellow practitioners under similar circumstances, and failure to do so subjects them to liability for negligence. ( Lucas v. Hamm (1961) 56 Cal.2d 583, 591 [15 Cal. Rptr. 821, 364 P.2d 685] (attorney); Gagne v. Bertran, supra, 43 Cal.2d 481, 489 (professional soil tester); Huffman v. Lindquist (1951) 37 Cal.2d 465, 473 [234 P.2d 34, 29 A.L.R.2d 485] (physician); Rest. 2d Torts, § 299A; cf. Coberly v. Superior Court (1965) 231 Cal. App.2d 685, 689 [42 Cal. Rptr. 64] (bank's liability as trustee despite exculpatory provisions of trust).) Proof of liability for failure to possess or exercise these professional attributes requires the testimony of a qualified expert where the claimed injury and its causes are beyond common knowledge. ( Brown v. Colm (1974) 11 Cal.3d 639, 643 [114 Cal. Rptr. 128, 522 P.2d 688]; Cobbs v. Grant (1972) 8 Cal.3d 229, 236 [104 Cal. Rptr. 505, 502 P.2d 1]; Lysick v. Walcom (1968) 258 Cal. App.2d 136, 156 [65 Cal. Rptr. 406, 28 A.L.R.3d 368] (liability of attorney).) (2b) The bank contends we should accept the findings of its freedom from negligence simply for lack of testimony by qualified experts sufficient to prove its noncompliance with the relevant professional standards. Plaintiff called three expert witnesses who gave reasoned opinions that the bank should have sold more or all of the Reserve stock during the administration of the probate estate. One of these witnesses was president of an investment management firm; another had been in charge of the trust department of a title company [11] from 1952 to 1966; and a third was director of research for a stock brokerage firm. It is unnecessary for us to consider the sufficiency of these witnesses' expert qualifications or testimony because the findings are fully supported by the testimony of the bank's expert witnesses, who included not only those of its employees already mentioned but also an independent securities analyst and a senior trust officer of a competing bank with 38 years of banking experience. The latter witness testified in answer to a hypothetical question that in his opinion and based on his professional experience, the executor's retention of the 24,700 shares of Reserve stock in the estate was prudent and did not deviate from any investment standard in California known to the witness. It is suggested that the trial court's findings and memorandum decision show that it failed to give proper weight to the requirement that the bank use the skills and knowledge ordinarily possessed by professional fiduciaries in similar circumstances. However, the memorandum decision refers to the last mentioned expert as [t]he most persuasive witness produced ... who had excellent qualifications, vast experience, vast knowledge and who impressed the Court as being totally impartial and further commends the bank's committee set-up of checks and balances and review within [its] trust department as excellent. The findings uphold the bank's exercise of due care in the manner in which it utilized all of its available relevant internal banking services and procedures in making the decisions for which contestants seek to impose liability. (See fn. 12, post. ) Under these circumstances we are satisfied that the trial court properly judged the bank's conduct by professional rather than lay standards. (5) Contestants claim that the trial court erred in determining the bank's liability according to its exercise of care as an executor rather than as a testamentary trustee. [12] They contend that because the bank received title to the trust assets upon the decedent's death by operation of his will, subject only to probate administration (§§ 28, 300; Estate of Lefranc (1952) 38 Cal.2d 289, 297 [239 P.2d 617]; Estate of Muhammad (1971) 16 Cal. App.3d 726, 733 [94 Cal. Rptr. 856]), the bank acted during probate administration in a dual capacity as executor and trustee, and that its supposed capacity as trustee subjected the bank's decisions concerning the retention or disposition of the Reserve stock in the probate estate to the prudent investor rule of Civil Code section 2261. [13] Contestants are particularly concerned with the requirement implicit in the rule that investments be diversified ( Mandel v. Cemetery Board, supra, 185 Cal. App.2d 583, 587) and argue that by judging the bank solely on its performance as executor the trial court erroneously failed to consider whether the retention of the unsold shares of Reserve stock in the estate violated this diversification requirement. Although contestants recognize that apart from sections 584.5-584.6 (see fn. 10, ante ) the executor could not have invested the proceeds from any sale of Reserve stock in anything but savings accounts or government securities (§§ 584, 584.1, 585), they argue that even those forms of interest-bearing investments would have been preferable to retention in the estate of a disproportionately large holding of a speculative stock yielding no dividends. In making this argument contestants overlook or misconceive basic distinctions between the bank's duties as executor and its duties as trustee. In the first place, the fact that the same bank was named as both executor and trustee in the will is immaterial. Even though the executor in handling estate assets may sometimes be required to take into account the fact that all or part of the net estate will be distributed to a testamentary trust with particular terms and beneficiaries, the executor's duty in this regard does not vary according to whether the executor and trustee are the same or different entities. The present bank's powers and duties as executor were just as distinct from its powers and duties as trustee as if the will had named another bank as trustee. ( Goad v. Montgomery (1898) 119 Cal. 552, 561 [51 P. 681] (powers of executor and trustee are distinct); Estate of de Laveaga (1958) 50 Cal.2d 480, 486 [326 P.2d 129] (beneficiaries' rights in trust not before court on decree of distribution to trustee); Estate of Freman (1960) 185 Cal. App.2d 527, 530 [8 Cal. Rptr. 311] (same).) Moreover, the anticipation that the bulk of the estate would be transferred to a testamentary trustee, which in this case happened to be the same bank, did not require the executor to manage the estate assets as if they were already being held under the terms of the trust. The executor has numerous functions and obligations not normally imposed upon a testamentary trustee, such as presenting the will for probate (§§ 320, 323, 324), locating assets (§§ 571, 581), locating beneficiaries (§ 326, subd. (3)), handling creditors' claims (§§ 700-719, 730-738), providing for any immediate needs of the decedent's family through a family allowance (§ 680), preparing returns for and paying estate and inheritance taxes (Int. Rev. Code, § 2002 (26 U.S.C. § 2002); Rev. & Tax. Code, § 14101) as well as income taxes of the decedent and the estate (Int. Rev. Code, §§ 641 (b), 6012(b) (26 U.S.C. §§ 641(b), 6012(b)); Rev. & Tax Code, § 18405) and distributing the remaining assets to the beneficiaries (§§ 1000-1003, 1020-1029). The executor holds and manages the estate assets incidentally to performance of the various duties of administering the estate, in contrast to the testamentary trustee, whose primary mission is to serve the trust beneficiaries under the terms of the trust. Usually, as in the instant case, such management by the executor concerns the interests of the trust beneficiaries only through its effect on the nature and value of the property distributed to the trustee and the timing of such distribution or distributions. (See Estate of de Laveaga, supra, 50 Cal.2d 480, 486; Estate of Marre' (1941) 18 Cal.2d 184, 190 [114 P.2d 586].) The present record reveals that in handling the Reserve stock in the probate estate the executor made three kinds of decision affecting the contestants' interests as trust beneficiaries and supports the trial court's conclusion that in all three areas the executor applied the requisite skills and knowledge and exercised the requisite degree of care. These decisions related to (1) preservation of the estate assets, (2) selection of assets to sell for needed cash and (3) timing of distributions to the trust. Each area of decision will be considered in turn. (6) A primary duty of the executor is to take reasonable steps to preserve the assets of the estate. ( Estate of King (1942) 19 Cal.2d 354, 358 [121 P.2d 716]; Estate of McSweeney (1954) 123 Cal. App.2d 787, 793 [268 P.2d 107]; Estate of Smith (1931) 112 Cal. App. 680, 685 [297 P. 927]. [14] ) The duty of preservation may require the executor to take affirmative steps to prevent deterioration in value. ( Estate of Porter (1900) 129 Cal. 86 [61 P. 659] (sale of vineyard-orchard to avoid maintenance expenses pending escheat proceeding); Estate of Fernandez (1898) 119 Cal. 579, 585 [51 P. 851] (care of livestock until sold); Estate of Smith (1897) 118 Cal. 462 [50 P. 701] (maintenance of vineyard); cf. § 770, authorizing executor's sale without notice of [p]erishable property and other personal property which will depreciate in value if not disposed of promptly.) However, an executor or administrator is not liable for any decreases in the value of estate assets on account of his acts or omissions done in good faith and without negligence. (§ 920 (He shall not ... suffer loss by the decrease or destruction without his fault, of any part of the estate); Estate of Armstrong (1899) 125 Cal. 603, 604-606 [58 P. 183]; cf. Estate of Fraysher (1956) 47 Cal.2d 131, 138-139 [301 P.2d 848].) (7) Contestants argue that the executor's duty of preservation required it in the exercise of due care to sell the Reserve stock before it depreciated in market value, but the authorities upon which they rely indicate that such liability has rarely been imposed. [15] The executor normally is not held to account for failure to anticipate fluctuations in the price of a publicly traded stock arising from general market conditions, as distinct from conditions peculiar to the company in which the stock is held. ( Estate of Kent (1936) 6 Cal.2d 154, 164-165 [57 P.2d 901]; cf. Day v. First Trust & Sav. Bank (1941) 47 Cal. App.2d 470, 479 [118 P.2d 51].) There was evidence that the decline in the value of the Reserve stock reflected a decline in the market price of oil stocks generally (see fn. 7, ante ) and that the executor used reasonable care to become informed about any special circumstances that might affect the value of the stock. Thus, the evidence showed that during the initial two weeks of probate administration and periodically thereafter until distribution the executor ascertained through the research facilities of its investment department, staffed by security analysts and other experts, that there was no deterioration in the financial condition or management of Reserve which would indicate the existence or prospect of a substantial loss of intrinsic value. This evidence supported the trial court's finding that Reserve Oil & Gas Company was not in a deteriorating condition at any time during the probate of this estate and the [executor] so determined in the course of considering whether to retain any shares of the common stock of said corporation in the estate. (8) In addition to the executor's duty to preserve the estate assets, a second area of its responsibility necessarily affecting the contestants' interests in the trust was its selection of which assets to sell to raise the cash needed by the estate and which to retain for distribution into the trust. Contestants attack the executor's sales of short term government bonds authorized by the probate court in June 1969 along with the sale of part of the Reserve holdings. They argue that the executor was negligent in not obtaining the needed cash entirely from a larger disposition of Reserve instead of partly from Reserve and partly from the bonds. [16] To have retained the bonds for distribution to the trust would have been nearly equivalent to retaining cash for this purpose as the maturity dates of the bonds made it probable that some and perhaps all would be converted to cash before administration of the estate was completed. [17] As previously stated, there was evidence that the executor in deciding not to obtain cash from selling additional shares of Reserve took into account the suitability of that stock for inclusion in the trust, based on the trust's terms, the circumstances and resources of the beneficiaries, the income produced by trust assets other than Reserve, the propriety of capital growth as one of the trust objectives, and a judgment that Reserve stock had long-term potential for increase in value. This evidence supports the trial court's finding set forth in footnote 12, ante, that the executor exercised due care in deciding to retain the stock for distribution to the trust. A third area of the executor's responsibilities having at least a potential effect on the contestants' interests as trust beneficiaries was the timing of the distribution of particular assets from the probate estate into the trust. Upon such distribution the management of the Reserve stock was freed from the restrictions imposed by the executor's multifarious duties and limited powers and became subject to the broad powers conferred upon the trustee by the terms of the trust. [18] It is the established policy of this state, implemented by sections 1000 and 1001 of the Probate Code, to encourage the distribution of property to legatees as soon as can be done without jeopardizing the rights of others interested in the estate. [Citations.] ( Estate of Toler (1957) 49 Cal.2d 460, 467 [49 Cal.2d 460, 319 P.2d 337]; accord, Estate of Hogemann (1965) 63 Cal.2d 131, 136 [45 Cal. Rptr. 149, 403 P.2d 405].) Although contestants as trust beneficiaries had standing to petition for preliminary distribution to the trustee ( Estate of Mackay (1895) 107 Cal. 303, 307 [40 P. 558]; Estate of McGirl (1932) 125 Cal. App. 310, 313 [13 P.2d 746]), the executor's duty to avoid unreasonable delay in distribution was not dependent on the initiative of a beneficiary. ( Estate of Taylor (1967) 66 Cal.2d 855, 858-859 [59 Cal. Rptr. 437, 428 P.2d 301].) The record shows that the executor in fact obtained authorization for preliminary distribution of the Mother Lode Bank stock from the estate to the trust in April 1969 (see fn. 8, ante ) and indicates no obstacle to preliminary distribution of the Reserve stock if its earlier subjection to trust management had been deemed advantageous. [19] However, there was no evidence that earlier distribution of the Reserve stock would have resulted in its being sold by the trustee at any price higher than its market value at the time it was in fact distributed.