Court Opinion

ID: 9688736
Source: CourtListenerOpinion
Date Created: 2023-08-24 18:02:04.00102+00
Date Added: 2024-06-11T18:18:41.631015
License: Public Domain

MADDOX, Justice,
(dissenting).
Everyone seems to agree that this is a unique case, but as I view it, there is just one legal question — what is the duty of a national bank in consolidation or merger proceedings, when the bank is co-trustee of a charitable trust, and a major asset of the trust is the stock of the bank ?
The majority opinion sets out the facts and I shall not restate them, but I do list a few of the basic points for a better understanding of my dissent. This charitable trust was established by the late Walter Henley who was a director, a president and later chairman of the board of Birmingham Trust National Bank, one of the co-trustees. This controversy arose when BTNB decided to merge into a holding company. The other co-trustee, John C. Henley, III, was opposed to the merger.
In this proceeding, the trial judge, after hearing extensive testimony, did not find that the bank had been disloyal to the trust, although he did point out that the bank and Henley should have received instructions in advance. The attorney general, representing the beneficiaries of the •charitable trust, does not question the trial court’s finding of no disloyalty on the part of BTNB.
My dissent is based on these basic points:
1. Under the facts of this case, I find no prejudicial error in the trial court’s determination that the bank was not disloyal;
2. The conduct of fiduciary business by BTNB, a national bank, was governed by federal law and regulation ;
3. Since there was no cross-appeal, I believe this Court exceeds its appellate jurisdiction when it finds that co-trustee Henley was also disloyal;
4. I question whether, on the record before us, this Court should direct the attorney general in the exercise of what, normally, is considered to be his executive discretion.
First, let me point out that I believe that the majority has acted in good faith, and that they sincerely believe, as indeed they find, that both Henley and BTNB were disloyal to this trust. I believe, however, that the majority has made an inflexible application of the conflict of interest rule, which I believe is not suitable in this case. Furthermore, the majority has specifically failed to apply the principle that the conduct of fiduciary business by national banks is governed, significantly, by federal laws and regulations.

The hank acted in good faith.

The trial judge determined that the bank acted in good faith. There is substantial evidence to support this finding, and I believe that this finding of no disloyalty is very important to a decision in this case.
Nobody can quarrel with the fundamental rule of law, stated in the majority opinion, that a trustee must act in good faith and give undivided loyalty to his trust. First National Bank of Birmingham v. Basham, 238 Ala. 500, 191 So. 873 (1939).
Unquestionably, if a trustee has engaged in self-dealing, as a matter of public policy, and because of the temptation of wrongdoing, the cestui que trust (the attorney general represented them in this case) may elect to affirm or disaffirm, unless countervailing equities have intervened. Whether the trust estate sustained a loss or profited is of no consequence. The Basham case also says that the primary' consideration is the good faith of the trustee. In Basham, the trial court had surcharged the trustee. This Court reversed *51and remanded the case, saying at one point :
“Banks, authorized by law to engage in a trust business, owe the same fidelity, and are subject to the same rules governing individual trustees, when applicable on principle.
“A distinction must be drawn between transactions wherein the interest of the bank and the trusts in its keeping are in common, as where the acts of the bank are in aid of such trusts, and transactions wherein their interests are antagonistic. Statutes conferring upon State or National Banks the power to engage in a trust business are designed to make available to investors the facilities and the experiences of Bankers in making investments, safeguarding the • trusts by setting up trust departments, directly engaged in the handling of trusts, and keeping complete records of trust transactions relating to each trust, subject to examination by the supervising agencies of government.”
A close reading of the Basham case indicates to me that this Court recognized in that case that even if a conflict of interest may seem to exist, the good faith of the trustee is the critical question.
The majority also cites Barker v. First National Bank of Birmingham, 20 F.Supp. 185 (D.C.Ala.1937), in support of their position that BTNB was disloyal. I believe the majority has failed to read what this Court said about the Barker case in Basham, as follows:
“Such dealings are challenged as violation of the rule of undivided loyalty to each trust. If the trustee has no personal interest to serve, there is nothing inherent in such transaction inconsistent with full loyalty to both; may do both a good service. We do not concur with the views expressed in Barker v. First Nat. Bank of Birmingham, D.C., 20 F.Supp. 185, 190, to the effect that loyalty to the selling trust in such case demands a sale at the highest obtainable price, and loyalty to the buyer demands a purchase at the lowest price. One of the criticisms of participations is that the market therefor is limited to the family of trusts. It would be a severe rule to charge a trustee with a breach of trust toward the seller where he has obtained the full amount he would have received if he had collected the loan at the time, or a breach of trust toward the buyer who gets a good loan on like terms he would have gotten on a new mortgage, and without the expense of negotiating and closing a new loan.
“We concur in the Restatement, supra, to the effect that when challenged as unfair, resulting in loss to the buyer, the burden is on the trustee to show the transaction was in good faith, and in the exercise of sound discretion and prudence in making this, as any other investment.” (Emphasis added.)
In Barker, the federal district court had criticized the bank on an inter-trust sale of a mortage participation, but did not surcharge the trustee which acted in good faith.
I believe that Alabama follows the rule, advocated by many legal writers, that when conflicts of interest cases involving corporate trustees arise, they should be approached in light of the remoteness of the conflict and the presence or absence of good faith, see, Prochnow, Conflict of Interest and the Corporate Trustee, 22 Bus. Law, 929 (1967); Comments, Corporate Trustee’s Conflict of Interest, 25 U.Chi.L. Rev. 382 (1958). The writer of the University of Chicago Comment thinks both Basham and Barker suggest “the use of good faith as a defense” in a conflicts of interest case. It has also been suggested that almost every trustee is subject to some degree of divided loyalty. Niles, The Divided Loyalty Rule, 91 Trusts and Estates, 734 (1952). Niles states the most common disloyalty is for a trustee to conduct him*52self so that he can be safe from any criticism.
The problem I have with the majority opinion is that I do not think the opinion recognizes the use of good faith as a defense in a conflict of interest case. Even if I did not think that this Court had recognized good faith as a defense in a conflict of interest case, I believe the settlor of this particular trust recognized that, on occasion, one or both of the trustees might have an “adverse interest.” The only [imitation he made was that each trustee should not exercise any power or discretion for the “personal advantage of the trustees.” The specific trust clause provides :
“In the management and control of the trust estate, the Trustees may (irrespective of the adverse interest of any Trustee) do and have done with respect to the trust estate and every part thereof all things which in the sole judgment and discretion of the Trustees may seem necessary, desirable or proper to promote, protect or conserve the interests thereof and of the beneficiaries thereof, in like manner as if the Trustees were entitled to said property beneficially, and every determination of the Trustees in the construction of powers or in any matter with respect to which the Trustees may be empowered to act or exercise discretion hereunder, whether made upon a question formally or actually raised or implied in any act or proceeding of the Trustees in relation to the premises, shall be binding upon all persons interested in the trust estate and shall not be. objected to or questioned on any grounds whatsoever. Powers and discretion, however, are vested in the Trustees as fiduciaries in the interest of the trust estate and its beneficiaries and not for the personal advantage of the Trustees.” (Emphasis added.)
As I read this clause, the trustees could act, “irrespective of the adverse interest” of either of them, but they must act in good faith for the best interest of the trust. Now, there was a difference of opinion between the co-trustees about whether the merger was in the best interest of the trust. If both trustees acted in good faith, thinking their independent judgments were in the best interest of the trust, why is that a breach of trust? Is it not possible that the bank’s business judgment concerning what was good for the bank would also be good for the trust, especially since a substantial asset in the trust was the bank stock ?
In Basham, this Court seems to approve of transactions where the interests of a trustee coincides with those of the trust, assuming, of course, the presence of good faith:
“Since the trustee has the clear right to deposit such funds in a good and solvent bank, there is no reason, nor legislative policy, to require deposit in a bank other than that selected by the settler to handle trust funds althought the trustee bank, like any other bank, would hold them as available assets for loans on its own account. See, also, Robinson v. Williams, Superintendent, 229 Ala. 692, 159 So. 239. National Banks are required to deposit securities for the protection of such funds. 12 U.S.C.A. § 248(k).
“As a business proposition, such deposits may enable the trustee to do a good service to the trust estates at less expense.
“All this is to demonstrate the policy of our laws in disapproving transactions by such trustees where the personal interest of the trustee is at variance with the interest of those whom he represents in trust relations; and to uphold transactions in the common interest of the trustee and trust estates in his keeping. Equity rules are to be applied in recognition of this policy, and deal with realities, not matters of form merely.” (Emphasis added.)
*53Since the trial court found the bank was not disloyal, I believe that this finding, under Alabama law and under the terms of the trust instrument, was a defense against the “conflict of interest” charge.

The conduct of fiduciary business by a national bank is governed by federal law and regulations.

Under the facts of this case, what federal law was applicable? Let’s examine the facts and apply the law. The management of the bank had decided to consolidate. Since the bank held shares of its own stock as trustee, it could not vote the shares .in the consolidation proceeding, because Tit. 12, § 61, U.S.C., prohibited it from voting these trust shares. That section provides, in part:
“In all elections of directors, each shareholder shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and in deciding all other questions at meetings of shareholders, each shareholder shall be entitled to one vote on each share of stock held by him; * * * and (3) shares of its own stock held by a national bank and one or more persons as trustees may be voted by such other person or persons, as trustees, in the same manner as if he or they were the sole trustee. * * * Whenever shares of stock cannot be voted by reason of being held by the bank as sole trustee such shares shall be excluded in determining whether matters voted upon by the shareholders were adopted by the requisite percentage of shares.” (Emphasis added.)
As I read this statute, when the question of merger came up, this section prohibited the bank from voting the trust stock. However, the statute specifically permitted Henley, as co-trustee, to vote this stock. Henley, acting under this statute, actually voted every share of the trust stock against the merger, as he had a legal right to do acting as he was under the statute as the “sole trustee.” A reading of Tit. 12, § 61, convinces me that when a national bank holds shares of its own stock as sole trustee, it cannot vote the stock and these shares are excluded in determining whether matters voted upon by the shareholders were adopted by the requisite percentage of shares. I believe this portion of Tit. 12, § 61, U.S.C., was added by Congress to the National Banking Act in 1966 to prevent an inequity. If shares so held by a bank in trust could not be voted, and were not excluded, voting rights belonging to the beneficiaries of the trust would, in effect, be given to the remaining shareholders, cf. Cleveland Trust Co. v. Eaton, 21 Ohio St. 2d 129, 256 N.E.2d 198 (1970). When shares of its own stock are held by a national bank and one or more persons as trustees, then the other person or persons may vote the stock in the same manner as if he or they were the sole trustee.
Henley, acting as sole trustee, became a ■dissenting shareholder, pursuant to federal law. The critical question at this point was: what duty did the bank have with regard to the trust? The majority seems to say, in effect, that the bank should have supported Henley’s dissent even though it was against its business judgment. I disagree. Federal law prohibited the bank from voting the stock. Was the bank under a duty to support Henley’s dissent, even though it, acting in good faith, thought his dissent was not in the best interest of the trust ? I think not. If Henley had not dissented, the BTNB stock would have been exchanged for the “new” bank stock. Does the bank fail to give undivided loyalty to the trust by disagreeing with a business judgment exercised by a co-trustee, who is statutorily empowered to vote the shares as a “sole trustee?” I think not. I believe that federal law sufficiently *54protected this trust but even if I did not think that, I believe that this Court should consider this case in the light of the finding by the trial court of an absence of bad faith on the part of the bank.
In any event, when Henley decided to dissent, I believe that he became a “dissenting stockholder” under the provisions of federal law and from that point forward, national law provided, in detail, the procedure which had to be followed to determine the value of the shares. Tit. 12, § 215(b), U.S.C., provides, in part, that when a shareholder dissents from a plan of consolidation, he “shall be entitled to receive the value of the shares so held by him when such consolidation is approved by the Comptroller * * The valuation of the shares is governed by national law. Tit. 12, § 215(c) provides:

“Valuation of Shares

“(c) The value of the shares of any dissenting shareholder shall be ascertained, as of the effective date of the consolidation, by an appraisal made by a committee of three persons, composed of (1) one selected by the vote of the holders of the majority of the stock, the owners of which are entitled to payment in cash; (2) one selected by the directors of the consolidated banking association; and (3) one selected by the two so selected. The valuation agreed upon by any two of the three appraisers shall govern. If the value so fixed shall not be satisfactory to any dissenting shareholder who has requested payment, that shareholder may, within five days after being notified of the appraised value of his shares, appeal to the Comptroller, who shall cause a reappraisal to be made which shall be final and binding as to the value of the shares of the appellant.

Appraisal by Comptroller; expenses of consolidated association; sale and resale of shares; State appraisal and consolidation law.

“(d) If, within ninety days from the date of consummation of the consolidation, for any reason one or more of the appraisers is not selected as herein provided, or the appraisers fail to determine the value of such shares, the Comptroller shall upon written request of any interested party cause an appraisal to be made which shall be final and binding on all parties. The expenses of the Comptroller in making the reappraisal or the appraisal, as the case may be, shall be paid by the consolidated banking association. The value of the shares ascertained shall be promptly paid to the dissenting shareholders by the consolidated banking association. Within thirty days after payment has been made to all dissenting shareholders as provided for in this section the shares of stock of the consolidated banking association which would have been delivered to such dissenting shareholders had they not requested payment shall be sold by the consolidated banking association at an advertised public auction, unless some other method of sale is approved by the Comptroller, and the consolidated banking association shall have the right to purchase any of such shares at such public auction, if it is the highest bidder therefor, for the purpose of reselling such shares within thirty days thereafter to such person or persons and at such price not less than par as its board of directors by resolution may determine. If the shares are sold at public auction at a price greater than the amount paid to the dissenting shareholders the excess in such sale price shall be paid to such shareholders. The appraisal of such shares of stock in any State bank shall be determined in the manner prescribed by the law of the State in such *55cases, rather than as provided in this section, if such provision is made in the State law; and no such consolidation shall be in contravention of the law of the State under which such bank is incorporated. (Emphasis added.)
As I read the majority opinion, it does not say that the bank failed to follow the procedure outlined in the national banking laws and regulations. Procedurally,. the bank did nothing that was not allowed under national banking laws in consolidation proceedings involving dissenting shareholders. Even Professor Scott, who has been accused of developing the stringent conflict of interest rule [see, Notes and Comments: Trusts: The Rule of Undivided Loyalty — Corporate trustees holding their own shares, 33 Cornell L.Q. 616 (1948), agrees that this is true. He says:
“Corporate trustees are subject to many regulations which are inapplicable to individual trustees. Thus the trust departments of state banks and' trust companies are subject to the supervision of the banking authorities of the state. Frequently there is legislation regulating the duties of corporate trustees and the method of their conduct of trust business. The conduct of fiduciary business by national banks is governed by the Federal Reserve Act, § ll(k), and by Regulations issued in pursuance of the Act. Regulation F of the Board of Governors of the Federal Reserve system is now superseded by Regulation 9 of the Comptroller of the Currency.
“Although a state which permits trust companies or banks to act as fiduciaries cannot prevent national banks within the state from exercising fiduciary powers, a national bank acting as trustee is subject to the laws of the state, except insofar as these laws may conflict with federal laws or regulations or interfere with the purpose of Congress in permitting national banks to exercise fiduciary powers.”
Of course, federal law would not protect self-dealing, and for that matter, neither would Alabama law, where the personal interest of a trustee is at variance with the interest of those whom he represents in trust relations. As I read the federal law, it is designed to prevent conflicts of interest when a bank trustee holds shares of its own stock in trust. I believe that a trustee bank which follows federal regulations, in good faith, could not be guilty of a breach of trust. In other words, when a national bank acts pursuant to federal law in merger proceedings, without disloyalty to the trust, as the trial court found in this case, then I believe that this Court could not remove a national bank as trustee so long as it was acting in good faith in following federal laws and regulations, [cf. First National Bank v. Fellows, 244 U.S. 416, 37 S.Ct. 734, 61 L.Ed. 1233 (1917)]

Court decides question not raised.

I believe the Court exceeds its appellate jurisdiction when it decides that Henley was also disloyal. The trial court entered no judgment on this issue. In the absence of a finding of bad faith by the trial court, I would not reach this issue. This Court’s finding of disloyalty by Henley raises serious questions. Could the Attorney General, or should he, in view of the suggestion given in the majority opinion that he should actively participate, file proceedings against Henley for surcharge ?
It appears to me that Henley, under the trust instrument, had the same powers and duties BTNB had. I would apply the same principles of law to Henley’s actions as I would to BTNB’s — that is, if that were before me. I believe that with regard to the purchase by the trust of the Birmingham Realty Company stock, the trial court has not found BTNB disloyal. The trial judge made no finding with regard to whether Henley was acting in good faith and in the best interest of the trust or for his own personal advantage in this matter. I fail to find in the record before us that Henley’s *56loyalty was made an issue at the trial level. Consequently, I fail to see how this Court can reach it. Furthermore, to find Henley guilty of a breach of trust without allowing him an opportunity to defend raises serious due process questions.

This Court cannot direct the exercise of an act of executive discretion.

The attorney general appeared in this proceeding, at the beginning of the trial with three attorneys, but took little active interest except to ask the court to protect the beneficiaries of the trust. I question whether this Court should suggest to the Attorney General how he must represent the beneficiaries of this trust. He is a constitutional officer and is vested with executive discretion.

Summary

The effect of the majority decision, I fear, means that every bank which is serving as a sole trustee or as a co-trustee of a trust containing shares of its own stock, would have to, at least temporarily, remove itself during the course of every consolidation proceeding. I cannot believe this is the law. In short, I think the matter of self-dealing and consolidation, are dealt with by federal law and by regulations promulgated by the comptroller of the currency. See, 12 C.F.R., § 9.12. I believe that when a trustee bank acts in good faith, and follows the procedures required by federal law, this Court should not find that the trustee bank breached its duty. In other words, it would seem to me that when an individual co-trustee decides to exercise rights granted to him by federal law “in a manner as if he or they were the sole trustee,” the co-trustee, acting as the sole trustee, must bear the commensurate responsibilities of a sole trustee. If the bank had been sole trustee, the bank shares would have been excluded in determining whether the other shareholders voted for or against merger by the required percentage.
The principles I would apply would seem to be especially true in this case, since we are dealing with a charitable trust. Section 383, Restatement of Trusts 2d, provides that if there are several trustees of a charitable trust, the powers conferred on them can properly be exercised by a majority of the trustees, unless it is otherwise provided by the terms of the trust. In other words, in this case, federal law permitted the co-trustee of this charitable trust to exercise the powers .which had been initially conferred upon the co-trustees. Henley decided to dissent from the merger. I cannot say whether his judgment was good or bad. I do believe, however, that under the trust instrument in this case, both trustees had the power and discretion to act, irrespective of their adverse interests, so long as they exercised their powers and discretions in the best interest of the trust. First National Bank of Birmingham v. Basham, supra.
When Henley dissented and the bank was put in a conflict of interest position, under federal law, Alabama law, and the terms of the trust instrument, the bank had to exercise good faith. The trial court found the bank was not disloyal, as a matter of fact.
In view of the above, I would affirm the judgment of the trial court which found that the bank was not disloyal to the trust.