Opinion ID: 1246501
Heading Depth: 1
Heading Rank: 10

Heading: Defendant's liability for breach of duties as trustee.

Text: Defendant contends that there was no evidence upon which to base an award of damages. The trial court held that defendant breached its duties as trustee beginning in 1941, instead of 1953, but rejected plaintiffs' contention that defendant's liability should be determined by the amount that the income and corpus of the trust would have increased had 50 per cent been invested in common stocks. It held instead that defendant's liability for such a breach was limited to any difference between the income produced by defendant's investment of the trust fund in its own bonds and accounts and the income that would have been produced had the trust fund been invested by a reasonable and prudent investor in other bonds, beginning in 1941. Because the trial court found that there would have been no difference it awarded no damages for breach of trust prior to September 3, 1970, the date on which plaintiffs first demanded an accounting. As previously stated, we agree that defendant had no duty to invest any portion of the trust fund in common stocks. We do not agree, however, that its liability was discharged because the income as produced by defendant's investment in its own bonds and accounts may have equalled the income that would have been produced by investment of the funds in other bonds. The reason that we cannot agree with such a disposition of the case is that it would overlook the responsibility of a trustee who uses trust funds for his own benefit to account for any and all resulting profits. 1 Restatement of Trusts 2d, supra, § 203. Plaintiffs have contended that as alternative relief they were entitled to either (1) an accounting for any and all such profits or (2) an assessment of interest at the legal rate of six per cent per annum on the amount of the funds held in trust during period of such a breach of duty by the trustee, whichever is greater. As previously stated, we have found that this period began on October 9, 1953, when defendant transferred the investment of the trust funds from coupon bonds into a matured passbook account. Although defendant has shown good reason why it should not be charged with damages computed upon the basis of an investment of any portion of the trust fund in common stocks, it has shown no good reason why either of the other alternatives should not be adopted other than to contend that plaintiffs are barred by laches and estoppel  a contention we have already rejected. In Duniway v. Barton, 193 Or. 69, 88-89, 237 P.2d 930, 938 (1951), although under somewhat different facts, this court had occasion to consider this problem and held as follows: The plaintiff,    is not for these reasons [uncertainty of proof of the amount of profits] to be deprived of a remedy. In such a case the beneficiary of the trust is entitled to recover interest, in many instances compounded, on the amount of the fund misapplied and used in the trustee's own business. We quote from the authorities: `   Where the trustee has used trust funds in his own business, the court will not usually give to the trust a definite share of the profits, but will charge the trustee with interest at a rate based to some extent upon the size of the profits earned in the business if the rate of return is larger than simple interest at the legal rate.' 1 Perry on Trusts and Trustees (7th ed.) 715, § 429. `If the trustee uses trust funds in his own business and it does not appear how much he has earned thereon, he is ordinarily chargeable with compound interest on the ground that he probably received a return from the trust fund so used at least equal to compound interest.' Restatement, Trusts, 568, Comment d. `Whether simple or compound interest shall be allowed, where interest is the basis, is a question of discretion and fact in each case. If simple interest will adequately compensate the cestui que trust, it will be added; if compound interest will more accurately make the beneficiary whole, then that standard of computation will be followed.' 4 Bogert, Trusts and Trustees, Part 1, 420, § 863. `   As Chancellor Walwroth said: Stating the account with periodical rests, and compounding interest, is only a convenient mode, adopted by the court to charge the trustee with the amount of profits supposed to have been made by him in the use of the money; where the actual amount of profits, which he has made, beyond simple interest, cannot be ascertained. Compound interest is, however, more often allowed in cases involving fraud, willful misconduct, or other gross delinquency, than in instances of honest mistake or bad judgment.' 4 Bogert, op. cit., 423, § 863. See also Marston v. Myers et ux., 217 Or. 498, 514, 342 P.2d 1111 (1959); Marshall v. Frazier, 159 Or. 491, 535, 539, 80 P.2d 42, 81 P.2d 132 (1938); and Collins v. Collins, 168 Or. 666, 674, 126 P.2d 512 (1942). Cf. Brown v. Stephenson, 171 Or. 239, 247, 137 P.2d 289 (1943), and Fitchard v. Hirschberg's Estate et al., 128 Or. 317, 329, 272 P. 906, 274 P. 505 (1929). See also Note, 17 Or.L.Rev. 47, 61 (1937). As stated in Duniway v. Barton, supra , the allowance of interest in such a suit in equity, including the manner in which such interest is computed (i.e., whether at simple or compound interest), is a matter largely within the discretion of the court and depends upon the facts and circumstances of each case. See also 1 Perry on Trusts and Trustees (7th ed 1929) 794-804, §§ 468-471. Interest may also be allowed in such a suit under a prayer for general equitable relief, regardless of whether or not interest was specifically prayed for in the complaint. See Cross of Malta Bldg. Corp. v. Straub, 257 Or. 376, 384, 476 P.2d 921, 479 P.2d 505 (1971). In many cases in which a trustee has mingled trust funds with his own or has used such funds in his own business, courts have held that the trustee should be charged with not less than interest at the legal rate and that if the trustee has made more than legal interest he may also be charged with all of the profit received from the use of the trust funds. See cases collected in Annots., 37 A.L.R. 447, 459 (1925); 55 A.L.R. 950, 952 (1928); 112 A.L.R. 833, 838 (1938); and 156 A.L.R. 936, 944 (1945). Indeed, this appears to be the rule as adopted by this court in Duniway (193 Or. at 69, 237 P.2d 930), in which it cited with approval the statement of that rule in 1 Perry on Trusts and Trustees, supra, 715, § 429. In this case this alternative measure of damages, as sought by plaintiffs in the trial court, was six per cent interest on the full sum of the corpus, less the amounts which were actually paid by defendant, compounded annually from 1941. Because, however, we have held that defendant's liability for breach of trust did not commence until October 9, 1953, the award of interest at the legal rate of six per cent per annum on the sum of $50,000 must be computed to begin as of that date. As proposed by plaintiffs, the amounts actually paid by defendant shall be deducted. Cf. Duniway v. Barton, supra at 90, 237 P.2d 930, and Collins v. Collins, supra, 168 Or. at 674, 126 P.2d 512. The question remains whether the balance shall be compounded annually, as requested by plaintiffs. In other words, for the year 1954, during which defendant apparently paid interest at two and one-half per cent to Anna Stephan, should the difference between two and one-half per cent and the legal rate of six per cent, i.e., interest at the rate of three and one-half per cent, be compounded as of the end of that year? As stated in Duniway v. Barton, supra, 193 Or. at 89, 237 P.2d at 938, quoting from 4 Bogert, Trusts and Trustees (2d ed. 1962) 423, § 863:    Compound interest is    more often allowed in cases involving fraud, willful misconduct, or gross delinquency. However, according to 1 Restatement of Trusts 2d § 207, Comment d (1959): If the trustee uses trust funds in his own business and it does not appear how much he has earned thereon, he is ordinarily chargeable with compound interest on the ground that he probably received a return from the trust fund so used at least equal to compound interest. To the same effect, see 1 Perry on Trusts and Trustees, supra, 801-803, § 471. See also State v. Schachat, 120 Conn. 337, 180 A. 502 (1935); St. Paul Trust Co. v. Kittson, 62 Minn. 408, 65 N.W. 74 (1895); and In re Comstock's Will, 219 Minn. 325, 17 N.W.2d 656 (1945). But see In re Reed's Estate, 37 Wyo. 107, 259 P. 815 (1927). Although the cases are in great conflict on this question, we believe that under the circumstances of this case interest should be compounded annually at a rate representing the difference between the legal rate of six per cent and the rate actually paid by defendant to Anna Stephan, beginning as of October 9, 1953, and continuing until the trust funds are paid over by defendant to the successor trustee as appointed by the decree and judgment of the trial court. [8] Finally, we come to the question whether, in addition to such an award of interest, plaintiffs are entitled to an accounting for the purpose of determining whether, as a result of the use of the trust funds for its own benefit, defendant made profits in excess of interest at the rate of six per cent. As previously stated, the principal reason for the rule under which a trustee who commingles trust funds with his own funds and uses such funds in his own business may be charged with interest at not less than the legal rate is that in such a case it is often difficult, if not impossible, to accurately determine by an accounting the actual amount of profit made by the trustee from the use of the trust funds. Thus, in suits for an accounting, this court, depending upon the circumstances, has made awards of interest as final determinations of such cases and has remanded them for computation of such amounts and entry of final judgments or decrees in such amounts, rather than to remand such cases for further proceedings under which the trustees would be required to render accountings for profits. See Templeton v. Bockler, 73 Or. 494, 509-510, 144 P. 405 (1914); and Duniway v. Barton, supra, 193 Or. at 90, 237 P.2d 930. Such further proceedings may be proper under other circumstances, as in cases in which it has been shown that there is some reason to believe that the trustee has made profits in excess of the legal rate of interest. Upon consideration of the circumstances of this case, however, including the difficulty and expense involved in an attempt to arrive at an accurate accounting of the profits earned from the use of these funds, we believe that a final judgment and decree should be entered upon the remanding of this case, to include an award of interest, to be computed as previously stated, but without provision for a further accounting. In all other respects the judgment and decree of the trial court is affirmed. Modified and remanded.