Court Opinion

ID: 9644773
Source: CourtListenerOpinion
Date Created: 2023-08-22 21:04:41.836886+00
Date Added: 2024-06-11T18:11:18.175201
License: Public Domain

*462Frost, J.
This is an appeal by the respondents from an interlocutory decree entered in the superior court following ■a hearing on the complainants’ prayer for a preliminary injunction wherein the trial justice restrained the respondents until further order of the court from selling to Roger L. Stevens, of the city and state of New York, or his assignees certain shares of The Outlet Company stock pursuant to an agreement dated November 10, 1958.
The bill was originally brought by Joseph Samuels Sinclair, and later his mother Bertha Samuels Sinclair, now deceased, on her own motion was made a party complainant. The amended bill of complaint was brought against the Industrial National Bank of Providence, Walter F. Farrell and Daniel H. Morrissey, all trustees under an indenture of Joseph Samuels dated December 28, 1934, and against the Industrial National Bank, Walter F. Farrell, *463Daniel H. Morrissey and James Sinclair, trustees under clause Eleventh of the will of Joseph Samuels, and against the Industrial National Bank of Providence as escrow agent pursuant to a contract entered into on or about November 10, 1958 between said trustees and Roger L. Stevens. Hereafter the Industrial National Bank of Providence will be called the bank.
The amended bill avers .among other things that the complainant Joseph Samuels Sinclair is the contingent beneficiary of the said two trusts; that Joseph Samuels died on February 13, 1939; that Bertha S. Sinclair is the income beneficiary of both trusts; and that upon her death, provided complainant Joseph Samuels Sinclair is then living and is then forty years of age or more, the principal of both trusts is to 'be paid to him, free and clear of all trusts.
It is also- averred that the bank, Farrell and Morrissey have been trustees of both trusts since the death of Joseph Samuels; that the bulk of the principal of the trust under the indenture consists of approximately 31,225 shares of The Outlet Company stock, and the bulk of the principal of the trust under clause Eleventh of the will consists of 1,955 shares, more or less, of The Outlet Company stock; that The Outlet Company, a Rhode Island corporation located in Providence, is engaged in the retail merchandising business and owns and operates a radio and television station; that the bank, Farrell, and Morrissey are also trustees of three other trusts holding 22,050 shares, more or less, of the stock of The Outlet Company; and that the shares in all of said trusts, which total 55,230, constitute a majority of the stock of the company and represent a controlling interest in the company, there being, upon information and belief, 99,240 shares of the company outstanding.
It is further averred that the trustees entered into a contract with Stevens whereby he was given an option to purchase all the stock in all of the said trusts at a price of $120 per share; that the option was exercised; that Stevens *464will tender offers to other shareholders to purchase their stock for $120 per share; and that the contract with Stevens provides that the trustees shall have the right under certain conditions to -accept offers of other buyers who are willing to pay more .than $120 per share for such stock.
It is also averred that the stock is listed on the New York Stock Exchange; that on December 1, 1958 the closing price was $112; and that it is the intention of the trustees to invest the major portion of the proceeds of the sale of the stock of the Joseph .Samuels trusts in tax-exempt securities.
It is averred further upon information and 'belief that two major factors in the decision of the trustees to sell The Outlet Company stock were the desire of Farrell and Morrissey to withdraw from the management of a demanding commercial enterprise and the reluctance of the bank to continue to hold the stock without their continued participation in the active management of The Outlet Company, and that a further major factor was the desire to sell the stock held in certain other trusts referred to as the Quinn and Leon Samuels trusts, which stock could not so advantageously be sold as a separate unit.
The complainants allege that the sale by the trustees of The Outlet Company stock held by the two Joseph Samuels trusts is an act of negligence on the part of the trustees and they give the following as reasons- therefor:
“(a) that the principal of the said trusts will be substantially reduced by sale of the stock since the federal tax resulting therefrom will amount to $800,000, a sum which may not be recovered through appreciation since the trustees intend to- invest the proceeds in tax-exempt securities.
“(b) that the sale of The Outlet Company stock would diminish the principal by $800,000 thus reducing the potential share of complainant Joseph Samuels Sinclair and will not substantially assist the present income beneficiary.
*465“(c) that the sale of stock control in The Outlet Company should yield a price greater than $120 per share.
“(d) that the trustees, despite the provisions of said option agreement, refused to negotiate with or to receive offers from third persons during the period from November 10 to December 1, 1958, who were prepared to offer a higher price for the stock than that offered by Stevens and were also prepared to protect the managerial status of complainant Joseph Samuels Sinclair.
“(e) that the trustees in making said sale preferred the interest of the beneficiary of the Quinn trusts, the interest of the life tenant of the Samuels trusts and the interest of the outside shareholders of The Outlet Company, all at the expense of complainant Joseph Samuels Sinclair.
“(f) that the trustees prior to signing the said contract with Stevens never informed complainant Joseph Samuels Sinclair of the proposed sale and never offered him an opportunity to buy the stock or to form a syndicate to do so.
“(g) that the trustees failed in their said contract with Stevens to provide the customary provision for the employment security of Joseph Samuels Sinclair in the general managership of the radio' and television station.
“(h) that the trustees failed to use adequate care and reasonable diligence in ascertaining the value of The Outlet Company stock held by the so-called Samuels trusts.”
The complainants further allege that the sale by the trustees of the stock held by the Joseph Samuels trusts would be an act contrary to the intention of the settlor or testator in that the principal of the trusts would be reduced by the sum of $800,000, since the settlor or testator in the trust instructions requires that the principal be preserved as shown by the instructions therein.
The complainants further allege that to permit the sale by the trustees of the Joseph Samuels stock in The Outlet Company would wrongfully deprive complainant Joseph *466Samuels Sinclair of his inheritance of the major 'block of stock of the family business since he could quite probably inherit said stock within three and one-half years; that it was the intention of Joseph Samuels as repeatedly evidenced in the trust instructions that the health, welfare and well-being of his grandson, a complainant herein, be attended to.
The complainants pray that pending the final hearing upon the bill, the trustees be restrained and enjoined from selling or delivering the Joseph Samuels stock held by the trusts to Stevens or his assignees.
It appears from the evidence that Joseph and Leon Samuels were brothers and were the founders of The Outlet Company; and that Mildred E. Samuels is the widow of Leon Samuels who' died September 24, 1929, and the mother of Clare S. Quinn. In addition to the two trusts created by Joseph Samuels there are three other trusts referred to in the bill whose trustees are parties to the contract of sale, performance of which is enjoined; that the bank and Clare S. Quinn are trustees under the will of Leon Samuels and hold 16,100 shares of The Outlet Company stock; that the bank and Farrell, since the decease of Morrissey, are the surviving trustees under an indenture of Clare S. Quinn, dated January 17, 1949, and hold 700 shares of said stock; and that they are also the surviving trustees under an indenture of Clare S. Quinn, dated April 3, 1952, and hold 5,250 shares of said stock. It appears that the five trusts hold a total of 55,230 shares out of a total of 99,420 shares of The Outlet Company stock, which is a controlling interest in the company; that Clare S. Quinn is the beneficiary of the two trusts created by her, while her mother Mildred E. Samuels is the income beneficiary under the Leon Samuels trust and her daughter Clare S. Quinn is the remainderman.
Much testimony was taken and thereafter the trial justice filed a rescript. It is unnecessary for the purposes of this opinion to discuss all of his findings and we shall confine *467ourselves to a consideration of those which he made as a basis for the injunction which he later decreed.
The trial justice found that complainants had proved at least prima facie that the bank by its acts had placed its private interests in conflict with its interests as one of the trustees of the Joseph Samuels trusts; that this conflict was not a mere matter of form but involved a very substantial interest, and that the decision of the corporate trustee to sell the shares in the Joseph Samuels trusts was probably affected thereby. The trial justice also found that the immediate effect of a sale of The Outlet Company stock as contemplated would be a detriment to complainant Joseph Samuels Sinclair.
In reference to complainants’ charge of negligence in that the trustees failed to negotiate with or to receive offers from third persons in the period from November 10 to December 1, 1958, the trial justice held that the trustees had failed to discharge their duties in that they could probably have obtained a higher offer for the stock in that period than they had already received.
On July 24, 1929 Leon and Joseph Samuels entered into an agreement concerning the 32,500 shares of The Outlet Company stock, which amount each held. Each agreed that during the life of the agreement neither should sell any of the stock without the consent of the other. This agreement was referred to in the indenture of Joseph Samuels executed in 1934 and was confirmed in an agreement of November 30, 1938 signed by Mildred E. Samuels, Clare S. Quinn, and Joseph Samuels individually and as trustee.
The evidence shows that after Clare S. Quinn inherited under her father’s will some 16,400 shares of The Outlet Company stock she desired to sell some of this stock to pay her living expenses. A considerable amount of stock was sold and releases from the restrictive agreement were obtained therefor. When several thousand shares had been sold it became evident that if such sales continued control *468would be lost, and on April 3, 1952 Clare S. Quinn executed an indenture in which she pledged 5,250 shares of The Outlet Company stock. This stock was pledged to the bank as security for her loan which is now approximately $750,000 and steadily growing. As security the bank holds 5,250 shares of stock pledged to- it and a life insurance policy for $750,000 on the life of Clare S. Quinn the cash value of which is approximately $158,358. The bank also- has an assignment from Clare S. Quinn of her residuary interest under her father’s will in the remaining shares of The Outlet Company stock still held by the trust thereunder.
While complainants concede that $120 per share for The Outlet Company stock is a fair price, they insist that the trustees failed in their duty to- negotiate with others and particularly with William H. Sylk concerning whom there was evidence that he was prepared to offer $122.50 a share. The agreement of November 10, 1958 provided that the trustees could receive abona fide offer in the period between November 10 and December 1, 1958.
For several years the bank had been loaning money to Clare -S. Quinn, one of the beneficiaries of three of the five trusts, which in itself produced, in the beginning at least, no conflict of interests. However,- when she pledged 5,250 shares of The Outlet Company stock to the bank the latter under certain circumstances -could sell this stock to satisfy its loan to- some extent. Such a sale- would endanger the control of The Outlet Company stock which was most important to the trustees. When the bank became pledgee of the stock it assumed a position with the beneficiaries of the Joseph Samuels trusts in which its interest as a bank was potentially antagonistic to its interest as a trustee. As the loan grew the gap between the interest of the bank as a lender of money and as a trustee of the Joseph Samuels trusts grew wider.
Was the decision of the corporate trustee to sell the stock in its own interest as a bank or was it in the- interest of the *469■beneficiaries of the Samuels trust? We cannot say that the trial justice was clearly wrong in drawing the inference of potential antagonism from the relation of bank and trustee as just outlined; hence he did not err in granting an injunction.
Speaking generally, it cannot be questioned that a trustee is held to a high degree of loyalty to the beneficiaries of his trust. This court stated in Dodge v. Stone, 76 R. I. 318, at page 323: “Broadly speaking it is clearly established that a trustee must give undivided loyalty to the trust confided to his care and to- its beneficiaries. It is the policy of the law to -see that in -administering the trust he shall not be tempted in any way by conduct or circumstances to act otherwise than with -complete loyalty to the trust and its interest. He must at all times exercise a high standard of honor and avoid all situations and transactions that tend to -call his good faith into question and to create in himself rights .possibly conflicting with those of the beneficiaries.”
In Horton v. Maine, 22 R. I. 126, it appeared that the defendant was the guardian of the plaintiff; that prior to the guardianship the plaintiff mortgaged to the defendant certain goods. After appointment as guardian the defendant foreclosed the mortgage and purchased the property at the sale. Referring to the chance that if such a sale were permitted the mortgagee might conduct it in his own interest, the court said at page 127: “Such a liability the law will not tolerate, and therefore it does not permit the same person to occupy two- antagonistic relations from which a possible conflict of duty may arise, and will not stop to -consider whether -or not a sale in such circumstances in a particular instance is fair or otherwise.” See also Industrial Trust Co. v. Dean, 67 R. I. 504.
In 2 Scott, Trusts (2d ed.), §187.5, the author states at page 1394: “The fact that the trustee has an interest conflicting with that of the beneficiary is a circumstance which the court may properly consider in determining whether *470the trustee is acting from an improper motive in the exercise of a discretionary power.”
We are of the opinion that complainants have made a prima facie case in that they have shown such a conflict .between the interests, particularly of the corporate trustee and those of the beneficiaries, as to make it essential to restrain the sale until there has been opportunity for as full a hearing as the parties desire within the limits of court procedure.
In our opinion the position of the bank with respect to the loan and the action of the trustees with respect to the Sylk offer make this action of the court compelling. Normally the parties would have such a full hearing, but a hearing as outlined would have little value if in the meantime the stock were sold. By such a sale irreparable damage would be done.
In Miller v. Tanenbaum, 61 R. I. 92, we said at page 95: “The question before us, on the respondent’s appeal from the decree granting a preliminary injunction, is merely whether it is reasonably clear that the justice in granting the preliminary injunction exercised his discretion in an illegal manner. The granting of such an injunction does not amount to a formal or final determination of the rights of the parties; its office is merely to hold matters approximately in statu quo, until the cause may be properly and finally heard and determined upon its merits; and to prevent, in the meantime, the doing of any act whereby the rights in question may be irreparably injured or endangered. Its issuance rests largely in the sound discretion of the court.”
In his rescript the trial justice said: “While the cause was heard at considerable length, no answer was filed and the parties did not agree that the cause could be finally determined as if it were being heard on the merits. It may be that little additional evidence will be produced at the final hearing, yet this Court feels bound by the rules estab*471lished by our Supreme Court with respect to the kind of case which must be made out in order to obtain a preliminary injunction.” We are of the opinion that he did not exercise his discretion in an illegal manner. Studley Land Co. v. Myers, 81 R. I. 426. See also Blackstone Hall Co. v. Rhode Island Hospital Trust Co., 39 R. I. 69.
The respondents’ appeal is denied and dismissed, the decree appealed from is affirmed, and the cause is remanded to the superior court for further proceedings.