Court Opinion

ID: 1004619
Source: CourtListenerOpinion
Date Created: 2013-07-04 18:43:59.357669+00
Date Added: 2024-06-11T15:37:08.171621
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS
                 FOR THE FOURTH CIRCUIT

TIFFANY S. STOPPER, as Beneficiary       
and Successor Co-Trustee of the
Irrevocable Trust Agreement of
John M. Stealey and Laura M.
Stealey dated December 25, 1995,
                  Plaintiff-Appellant,         No. 00-2204

                  v.
DAVID H. KESTEL,
               Defendant-Appellee.
                                         
            Appeal from the United States District Court
             for the District of Maryland, at Greenbelt.
                Frederic N. Smalkin, District Judge.
                           (CA-00-1664-S)

                       Argued: May 10, 2001

                       Decided: June 15, 2001

     Before LUTTIG, MOTZ, and TRAXLER, Circuit Judges.

Affirmed by unpublished per curiam opinion.

                             COUNSEL

ARGUED: Russell Jay Pope, POPE & HUGHES, Towson, Mary-
land, for Appellant. Roger Warren Titus, VENABLE, BAETJER &
HOWARD, L.L.P., Rockville, Maryland, for Appellee. ON BRIEF:
Michael S. Barranco, POPE & HUGHES, Towson, Maryland, for
2                         STOPPER v. KESTEL
Appellant. Kathleen E. Wherthey, VENABLE, BAETJER & HOW-
ARD, L.L.P., Rockville, Maryland, for Appellee.

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

                             OPINION

PER CURIAM:

   Tiffany S. Stopper ("Stopper"), beneficiary of an irrevocable trust
(the "Trust"), sued David H. Kestel ("Kestel") for breach of fiduciary
duty and gross negligence in his performance as trustee. For the rea-
sons set forth below, we affirm the district court’s grant of summary
judgment to Kestel.

                                  I.

   Stopper’s parents, John M. Stealey ("Stealey") and his then-wife
Laura Stealey, created separate irrevocable trusts for the benefit of
their three children in 1995. Each trust’s corpus consisted entirely of
stock in a new company founded by Stealey (the "Stealey stock").
Stealey made Kestel, his estate planning consultant, the trustee for
each of the trusts.1 Each Trust Agreement authorized Kestel to "retain
any and all property received [from the settlor] until such time as he
may deem it desirable to sell or otherwise dispose of the same." J.A.
16.

   Pursuant to an initial public offering ("IPO"), the Stealey stock
began trading on the NASDAQ at $8.00 per share on July 22, 1998,
and was at $14 per share on the second day of trading. As part of the
IPO, Kestel signed a lock-up agreement with the underwriter, in his
individual capacity as director, agreeing not to "sell, offer for sale,
    1
   Stealey invited Kestel to become a member of the Board of Directors
of his company in February 1997.
                            STOPPER v. KESTEL                              3
transfer, assign, pledge, hypothecate or otherwise dispose of, any
securities of the company owned by the undersigned, pursuant to Rule
144 promulgated under the Securities Act of 1933," for nine months.2
J.A. 155, 157-58. During the lock-up period, the Stealey stock price
plummeted.

   As the Stealey stock fluctuated between $0.625 and $2.50 per share
after the lock-up agreement ended, Stopper pressured Kestel to sell
the Stealey stock in her Trust. Kestel refused, stating that in his opin-
ion that stock was undervalued and would appreciate. Kestel told
Stopper that it was his duty to hold the stock until it rose to its true
value, which was at least $3.00 per share. J.A. 158.

   Faced with Stopper’s continued pressure to sell the Stealey stock,
Kestel resigned from his position as trustee for her Trust in October
1999. However, Kestel continued to serve as trustee for the trusts
established for the benefit of Stopper’s siblings. The Stealey stock in
Stopper’s Trust was sold by the successor trustee for $0.86 per share
in late October 1999, at Stopper’s request.3

   Stopper then filed suit against Kestel, alleging that he breached his
fiduciary duty in failing to diversify the portfolio and liquidate the
Stealey stock held in the Trust, J.A. 8, and that he was grossly negli-
gent in consciously and deliberately disregarding the risks of the "uni-
tary investment in" the Stealey stock. J.A. 9. Applying Pennsylvania
law, the district court granted Kestel’s motion for summary judgment,
and this appeal followed.

                                     II.

   The standard for imposing liability on a trustee who is authorized
to retain investments has long been clearly established: While "au-
thority to retain investments [does] not justify holding without atten-
tion," a "trustee will not be held personally liable for an honest
   2
     See also 17 C.F.R. § 230.144(a)(2)(ii) (defining application of restric-
tion under section 144 of the Securities Act of 1933 to include any trust
of which a covered person serves as trustee).
   3
     In contrast, Kestel sold Stealey stock held under the siblings’ trusts
for more than $4.00 per share during the first quarter of 2000.
4                          STOPPER v. KESTEL
exercise of a discretionary power, in the absence of supine negligence
or willful default." In re: Mereto’s Estate, 96 A.2d 115, 116 (Pa.
1953) (citations omitted). Moreover, the Trust Agreement itself pro-
vides that Kestel, "while acting in good faith, shall not be liable or
held responsible for any loss or depreciation in the value of any trust
created hereunder, but shall be liable only for loss resulting from his
own willful default or gross negligence." J.A. 162 (emphasis added).
See also 20 Pa. Cons. Stat. Ann. § 7319(a) (providing that the liability
prescribed by the trustee in the trust instrument "shall control notwith-
standing this chapter"). To constitute gross negligence, "the behavior
of the defendant must be flagrant, grossly deviating from the ordinary
standard of care." Bloom v. DuBois Reg. Med. Ctr., 597 A.2d 671,
679 (Pa. Super. Ct. 1991).

   While Stopper argues that Kestel’s failure to diversify the trust
portfolio constitutes gross negligence, Appellant’s Br. at 17, we are
aware of no case holding that it per se constitutes negligence, let
alone gross negligence, for a trustee to retain stock in a new company,
even a new company engaged in a highly competitive industry. Nor
was Kestel required to diversify trust investments under Pennsylvania
law. See Estate of Knipp, 414 A.2d 1007, 1009 (Pa. 1980) (holding
that non-diversification is not presumptively imprudent).

   More importantly, Stopper neither provided nor proffered any evi-
dence that: (1) the Stealey stock was not undervalued at the time Kes-
tel refused to sell it; (2) Kestel acted in bad faith; or (3) Kestel acted
with indolence, "supine negligence or willful default," In re: Mereto’s
Estate, 96 A.2d at 116. Indeed, the uncontroverted record evidence is
that Kestel exercised his discretion and refused to sell the Stealey
stock, despite Stopper’s demands, because he believed the stock was
undervalued — a decision that was vindicated by subsequent events.
See supra at 3 n.3. Further, because the Stealey stock was the only
Trust asset, in order to diversify Kestel would have had to sell the
stock when he believed it was undervalued — in violation of his fidu-
ciary duties.

   After considering the parties’ briefs, the oral arguments of counsel,
and the joint appendix, we are persuaded that the district court
reached the correct result because Kestel’s actions "fell far short of
gross negligence," the standard of liability selected by the trust settlor,
                          STOPPER v. KESTEL                           5
                                                                  4
and we affirm the judgment of the district court on that ground. J.A.
247. We also agree with the district court that Kestel did not other-
wise breach his fiduciary duties and, having considered Stopper’s
other arguments, we affirm the grant of summary judgment to Kestel
on that claim on the reasoning of the district court.

                                                           AFFIRMED
  4
   Thus, we need not decide the extent to which the obligation to exer-
cise "due care and prudence in the performance of [Kestel’s] duties," 20
Pa. Cons. Stat. Ann. § 7302(a), was, or was not, modified by the Trust
Agreement’s retention clause.