Opinion
Appeal Dismissed by Stipulation April 5, 1963.
Cottrell, Hofvendahl, Roessler & Whitney and R. L. Hofvendahl, San Jose, for appellant.
Tremaine & Shenk and John W. Shenk, Los Angeles, for respondent.
LILLIE, Justice.
Appeal from an order of the superior court settling eleventh account current, report of trustee and allowing trustee's fees and fees for its attorneys. The sole question for determination is the reasonableness of the fees allowed; they were in the amounts requested in the report, $7,470.00 to the trustee and $800.00 to its attorneys.
Appellant is the daughter and life beneficiary of the trust created by her deceased father. The trust instrument is silent on the subject of compensation payable for current services, except for a pertinent provision providing that the trustee 'shall receive a reasonable compensation for current services . . . and, on final termination of the trust, one percent (1%) of the reasonable value of the property distributed.' Section 1122 of the Probate Code accordingly becomes operative (Estate of Bodger, 130 Cal.App.2d 416, 423, 279 P.2d 61, 65); thereunder the trustee is entitled to his proper expenses (which includes attorneys' fees) 'and such compensation for services as the court may deem just and reasonable.' It is well settled that such allowance 'rests in the sound discretion of the Both sides rely on the McLaughlin case (to which the trial court was also cited) wherein several criteria are set forth for determining the reasonableness of a trustee's compensation. In addition to the income realized, other factors properly to be considered include (1) success or failure of the trustee's administration, (2) his fidelity or disloyalty, (3) unusual skill or experience of the trustee, (4) the amount of risk and responsibility assumed, (5) time consumed, (6) custom in the community, (7) character of the services rendered, whether routine or otherwise, (8) the trustee's estimate, if any, of the value of his services. (43 Cal.2d 462, 467-468, 274 P.2d 868.) Measured by these criteria, says appellant, 'it hardly seems fair, just or equitable that this Trustee should receive a fee of $7,470.00 on the basis of its record of administering this trust'--she suggests a fee of $5,000 as the maximum compensation to which the trustee can possibly be entitled. Her contention, however, must be governed by the familiar rule (applied in McLaughlin) that all reasonable inferences must be indulged in favor of sustaining the trier of fact, and the additional one (as stated in the same case) that the sole question for our determination is whether there is substantial evidence to support the finding below.
Appellant's mother, widow of the trustor, was also a beneficiary of the trust as well as a co-trustee with respondent bank. She died during the tenth accounting period.
Except for some cash the assets of the trust during the accounting period in question consisted of securities, most of them listed on recognized stock or bond exchanges. According to the trustee's vice-president in charge of the Bouffleur trust, the value of the trust at the end of the tenth accounting period (June 9, 1959) was $996,546.55; one year later this value was $1,025,662.32, an increase of $29,115.77, or approximately 3%. On the 1959 principal ($996,546.55) the trustee produced a gross income during the eleventh accounting period of $31,624, or 3.173%. The fee allowed ($7,470.00) represents 23.620% of such income, or (as appellant points out) approximately seventy-five (75%) percent of the maximum percentage (1% of the reasonable value of the property) the trustor specified should be paid to the trustee on final distribution.
Although appellant does not say so in so many words it is impliedly suggested that the not inconsiderable percentage of income allowed the trustee as a fee might have been more warranted if a greater measure of prudence had been exercised in the matter of investments. Specifically, if the entire principal of the trust had been converted into cash and deposited in separate building and loan savings accounts of $10,000 each, all secured under the provisions of the Federal Deposit Insurance Corporation, an income yield of $39,861.86 (based on the 4% rate), or $44,844.59 (based on the 4.5% rate) would have been achieved--an increase in income of at least $16,506.92. We are asked to take judicial notice of the fact that in this jurisdiction such interest rates are paid.
'Whether the trustees acted for the best interests of the trust [in the management of its assets] was a question of fact for the trial court.' (Estate of McLaughlin, supra, 43 Cal.2d 462, 466, 274 P.2d 868, 871.) The law does not require that a trustee exercise an infallible judgment in the investment of funds entrusted to his care. He must exercise the skill and judgment of a reasonably prudent business man in preserving the estate, but at the same time make the estate productive. Section 2261 of the Civil Code, embodying the so-called 'prudent man rule,' requires the trustee in the investing of trust funds to 'exercise the judgment and care * * * which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of their capital.' An essential part of the 'prudent man rule' is the requirement that investments be diversified. Mandel v. Cemetery Board,
Too, as held in the McLaughlin case, the income of a trust 'is only one of the many factors to be considered in determining the fees allowable to a trustee.' (Supra, 43 Cal.2d 462, 467, 274 P.2d 868, 872.) These other factors, enumerated earlier, are of no less importance in their bearing upon the exercise of the trial court's discretion in the allowance of the trustee's compensation. We now give them consideration in the light of the record presented, commencing with the 'success or failure of the trustee's administration.'
In addition to the 'minimal' income produced during the particular accounting period, appellant contends that the growth performance of principal has been no more spectacular, accordingly she argues that 'it is a practical impossibility for the Trustee to urge the success of its administration as a factor justifying the fee approved.' In this connection, evidence was produced that 65 leading stocks (Dow Jones index) had increased in market value approximately 257% from 1949 to 1960; during the same period an index of 64 leading mutual funds increased an average of 213%. In contrast, the increase in principal of the instant trust has been only 141% since 1949 when the assets of the decedent's estate were distributed to the co-trustees. The above evidence was received despite objection by respondent's counsel, midway through its production, that the issues related solely to the period embraced by the eleventh account and the trial court's conclusion that testimony should be restricted to that period. We must assume, despite the weight which otherwise should be accorded the above evidence, that the trial court (following submission of the matter) adhered to its view of the law expressed during the hearing. Such view, of course, was correct. Prior to the present objections, the economic merit of the trustee's investments had been adjudicated on ten occasions; such orders accordingly are res judicata of the instant matter. (McLaughlin v. Security-First Nat'l Bank, 20 Cal.App.2d 602, 605-606, 67 P.2d 726.) It has been said that, 'Accountings are an invitation to all interested parties to object to the manner in which a trust is being administered, and the failure to object amounts to passive acquiescence.' (Estate of Bothwell, 65 Cal.App.2d 598, 609, 151 P.2d 298, 304.) Appellant's failure to file objections prior to the present accounting was presumably (and understandably) due to her mother's position as co-trustee; she is nonetheless bound by her conduct in the premises. We have considered the arguments, pro and con, relating to the trustee's unusual skill and experience, its fidelity or disloyalty, and the amount of risk and responsibility assumed. Although not suggesting that the trustee, with all its facilities, was not capable of exercising the skill requisite to the performance of its duties, appellant argues that such unusual skill was not in fact exercised. Considerable testimony negativing this claim was given by the trustee's officer in charge of the trust's administration. Much is made of the fact that he did not keep a time sheet. (The time element will be further discussed infra.) It cannot be said, however, that the evidence presented by respondent as to this particular factor in the case does not lend support to the ultimate determination made. The same is true of the trustee's fidelity to its responsibilities--appellant concedes that there has been no specific breach of any fiduciary duty. As for the risk and responsibility assumed, the accounting itself shows such assumption by the trustee during the period of accounting. In this latter regard, the mere fact that the trust portfolio comprises conservative securities does not lessen the responsibility involved.
What gives us concern, however, is the claim that despite the vigilance exercised in the administration of the trust, the character of the services rendered were so routine and the time therein involved of such brief duration that the compensation allowed 'exceeds the bounds of reason.' (Silver v. Shemanski, 89 Cal.App.2d 520, 529, 201 P.2d 418, 425.) Thus, it appears that save for certain services later to be mentioned, the only transactions handled by the trustee were some twenty-two in number; they consisted of eight sales, thirteen purchases and one exchange--all of securities. These transactions, admittedly, were handled by brokerage firms. As to this phase of the appeal, the McLaughlin case is not of much assistance to respondents; it approvingly quotes from Estate of Prescott, 179 Cal. 192, 175 P. 895, where the Supreme Court said that the question of reasonable compensation depends largely upon the facts of each case. In Prescott, however, it appears that 'the trust fund was invested in sound bonds, and, except for the sale of a few of these and the substitution of others, the trustee had little to do beyond collecting and remitting the income.' (p. 193, 175 P. 895.) Too, although the trust aggregated $200,000, the fee awarded was only $200, and its reasonableness was sustained with the observation that the trustee's responsibility of safeguarding the fund might be properly left for consideration upon final winding up (which view was presumed to be that of the trial court). Prescott, of course, was decided in 1918, and there are now more ramifications to the administration of a trust than then--tax problems among others. These are detailed in respondent's brief and need not be repeated here.
The compensation allowed unquestionably was large--larger than we would have awarded the trustee had that been our province in the first instance and considerably larger, according to evidence in that regard, than that charged by named corporate trustees in the San Francisco area. But the weight of this latter testimony was for the trial court which had before it the testimony of the trustee's vice-president that the fee requested was reasonable. Appellant is asking us to say that there is present here a 'plan and palpable abuse of discretion' (Estate of Duffill, 188 Cal. 536, 553-554, 206 P. 42, 49); except for one or two of the factors mentioned in McLaughlin tending to support such a claim, the result must be controlled in the last analysis by the governing rules stated in that decision.
The only other question relates to the reasonableness of the fees awarded the trustee's attorneys. Such fees are a trustee's 'proper expense' (Prob.Code, § 1122) on the settlement of each account. (Tread-well v. Nickel, 194 Cal. 243, 265, 228 P. 25.) One of the trustee's attorneys testified to his standing in the community, his knowledge of the trust, and the nature and extent of the services performed. He further testified The order is affirmed.
WOOD, P.J., concurs.
FOURT, Justice.
I dissent.
The will and trust instrument in this case is an uncomplicated document prepared for and signed by the trustor on January 12, 1943. A codicil was executed on April 16, 1943, which in nowise changes the agreement insofar as this particular case is concerned. The will provided for certain comparatively small bequests to a number of persons and the balance of the estate was ultimately distributed in trust to the present trustee following a term of cotrusteeship. In the main the trust agreement provides for certain payments to the trustor's grandchildren and some other relatives for a limited period of time; the net income from the trust estate (after the payment of the annuities above mentioned) is to be distributed to the trustor's wife and daughter (after his wife's death her share of the income is to go to his daughter, the objector herein); upon the death of the daughter the income is to go to her children; the trust agreement provides that it shall terminate when certain events have occurred, and that the trust estate shall thereupon be distributed to the issue of the trustor's daughter.
The trustee is authorized, if certain contingencies arise, to use the 'share of the trust fund apportioned' to the wife and daughter if the income is not sufficient to pay the expenses which may be necessary for the care and support of such beneficiaries. The powers of the trustee are recited in the trust agreement and are typical of those used in bank trust forms, for example, that the trustee has the power to invest in securities and otherwise, whether or not such securities are authorized for the investment of trust funds, and in fact to do practically anything an outright owner of the trust estate might do with the same. The trust further provides:
'(10) The corporate Trustee shall receive a reasonable compensation for its current services as Trustee and, on final termination of the trust, one per cent (1%) of the reasonable value of the property distributed. For any unusual or special services, it shall receive a reasonable compensation.
'(11) * * *
'(12) The Trustee shall pay out of principal or income as they may elect, or partially out of each in such shares as they may determine, taxes, assessments, charges, attorneys' fees, the Trustee's compensation and other expenses incurred in the administration or protection of this trust. The discretion of the Trustees to pay these items from income or principal, or partially from each, may be exercised not only in the interest of the trust estate but for the benefit of any beneficiary.'
The will named the bank and the testator's wife as the executors thereof, with no bonds required, and named the bank and the trustor's wife as 'Trustees to execute the trusts in' the will created.
The wife died during the 10th annual accounting period. Upon that death the daughter, as heretofore indicated, became the sole beneficiary under the trust with certain minor exceptions. The bank became the sole trustee.
The trustee has seen fit to charge its entire fee in each accounting to income. In The following figures give some idea of what has been occurring in the administration of the particular trust:
Estate of ALBERT I. BOUFFLEUR, Deceased
Account Trustee's Percentage Market Value Attorney Ending June Income Fee of Income Principal Fees ----------------------------------------------------------------------------- 1950 $16,111.48 $2,482.61 15.409 $332,861.00 $250.00 ($412,805.17 actual starting value) 1951 18,505.89 3,080.00 16.643 421,910.00 250.00 1952 22,905.76 3,775.00 16.480 503,178.00 300.00 1953 23,058.17 4,000.00 17.373 541,742.61 300.00 1954 24,249.95 4,020.00 16.577 536,055.06 300.00 1955 26,542.24 4,500.00 16.954 600,369.56 350.00 1956 28,829.78 6,000.00 20.811 808,423.00 350.00 1957 31,148.17 6,475.00 20.787 863,751.73 350.00 1958 32,352.72 6,175.00 19.086 823,506.03 400.00 1959 34,298.79 6,235.00 18.178 831,822.88 800.00 1960 31,624.94 7,470.00 23.620 996,546.55 800.00Simple arithmetical calculations indicate that the trustee fee presently requested in this case amounts to 23.62 per cent of the gross income for the period in question.
On the principal indicated the trustee produced gross income of $31,624.94 or, in other words, a gross return of 3.173 per cent. If the trustee and counsel fees totaling $8,270.00 as requested are deducted from the gross income there is a net return of 2.34 per cent.
It is a matter of common knowledge, indeed it would be next to impossible (with radio and television advertising as it is) not to know that the building and loan savings account rate in this area is anywhere from 4 per cent to 4 3/4 per cent and this, in many instances, is compounded quarterly and such accounts are (up to $10,000.00 each) insured by the Federal Deposit Insurance Corporation. The trustee itself, in its banking business, pays 3 1/2 per cent on savings accounts, compounded quarterly, which brings the return up to approximately 3.7 per cent as a minimum and it pays 4 per cent on savings accounts which are deposited for a term of one year or more. Or, in other words, had the principal of this trust been reduced to cash and deposited in separate building and loan accounts of not exceeding $10,000.00 each, an income yield of $44,844.59 (using the 4.5 per cent straight rate) would have been achieved. If the money had been deposited in a bank savings account of 4 per cent the income yield would have been $39,861.86. The net income yield to the beneficiary by the accounting presented here is $23,354.94 as heretofore set forth.
The growth performance of the trust estate is on about the same mediocre level as the income performance. The Dow-Jones index of leading varied stocks increased in market value about 257 per cent from 1949 to June 1960. An index of 64 leading mutual funds increased an average of 213 per cent in market value during the same period of time. During that identical period of time the trust principal under the trustee's administration increased 141 per cent. In other words, the trustee in this case produced an income far less than it paid out on its own customer savings accounts and less than that paid in savings accounts in The trust estate in this case is made up of bonds (11 per cent), common stocks (88 per cent) and preferred stocks (1 per cent). There is no going business to be attended to nor any other unusual circumstance which requires the attention of the trustee. There was no emergency; there was no illness which required the exercise of any discretion by the trustee. There was no litigation by or on behalf of the trustee.
Purchases or acquisitions by the trustee during the accounting period consisted of a Gary, Indiana, Sanitary District 4 per cent bond, a Scranton, Pennsylvania, 3 7/8 Improvement Bond, three California School District bonds (at about 4 per cent), U.S. A. Treasury 4 per cent notes, and certain shares of stock from stock splits or stock dividends. There were eight sales of securities made during the accounting period and one exchange. Or, in other words, there was a total of 22 transactions. Admittedly the transactions in each instance were of the simplest kind, with no complications in any respect. Based upon a fee of $7,470.00 each transaction is charged at about $339.00. The bare statement of the amounts involved is to indicate how unconscionable the fee in reality is.
It is the law, as I understand it, that the burden is upon the trustee to establish the truth of its account, as well as the reasonableness of any item which may be challenged. (Purdy v. Johnson, 174 Cal. 521, 163 P. 893; Estate of Rose, 63 Cal. 349; Estate of Moore, 88 Cal. 1, 25 P. 915.) The trial judge of course must consider the amount and difficulty of the services rendered by the trustee, the risks it assumed and the responsibilities which are imposed upon it, and the skill and success in administering the trust. The court also should consider what compensation would ordinarily be paid to others for performing substantially the same service, the failure of the trustee to meet with even the minimum of financial returns, that there was nothing unusual which occurred during the accounting period which called into being the exercise of any particular skill or experience, the time consumed in carrying out the trust, the character of the work performed, and the quality of the business judgment which was exercised.
At the hearing in the trial court the trustee called as its witness C. W. Smith, the trust officer under whom the trust in question is administered. He was asked to describe the activities of the trustee with reference to the trust in question. His answer was one of glittering generalities; he made reference to the many and various committees they had in the bank, told how various analysts worked and reviewed and how surveys were conducted and all about the many other departments of the bank, none of which had to do with this particular trust, nor with any particular item in the trust estate. The witness was unable to give any estimate whatsoever as to any time which he or anyone else had expended in the administration of any phase of the trust here involved. He could not say whether he or anyone else had devoted a substantial or a minimal amount of time in the accounts involved.
He was asked by way of interrogatory: 'State the practice of the Bank in appraising and handling its total portfolio of stocks and securities in testamentary trusts.'
His answer was: 'It is the practice of the bank, in appraising and handling its total portfolio of stocks and securities in testamentary trusts, to administer each trust in the best interests of the beneficiaries of each trust and with safety and profit to the trustee. There is no practice, as such, in appraising and handling its total profolio [sic] of stocks and securities.' (Emphasis added.) The trial judge obviously had in mind a formula as a basis for computing the compensation, for he asked the witness after the statement was made by the witness to the effect that the requested fee was reasonable, 'Is this based upon 3/4 of one percent of the corpus?' The witness answered that there was no provision in the decree establishing the trust for a rate of fee. There then followed these statements:
'THE COURT: In other words, the fee requested here of $7,470 is within that three quarters of one percent rule? (Emphasis added.)
'THE WITNESS: Yes, it is.
'THE COURT: I see.'
There is no rule with which I am familiar and there is no law to the effect that a corporate trustee may in every instance ask for and receive what is tantamount to 3/4 of 1 per cent of the corpus of a trust as an annual fee. In this case 3/4 of 1 per cent of the corpus equals $7,474.08. It takes more credulity than I have to believe that the figure for the fee arrived at in this case was not in fact based upon the unreal (3/4 of 1%) percentage rule. To be true the trustee subtracted $4.08 from the $7,474.08 figures and rounded the requested fee to an even amount ($7,470.00), however, that action does not in anywise convince me that the trustee did not in fact use a rule of thumb in calculating the amount which would be used in its request for a fee. Furthermore, in reducing the figures by $4.08 it was enabled to say that the requested fee 'is within that three-quarters of one per cent rule.'
Upon cross-examination it was elicited that at no time had the trustee ever charged trustee's fees, even in part to principal; this in spite of the Principal and Income Law of the state. It was also brought out that the will contained no provisions which in effect directed the trustee to accumulate principal.
The witness was asked about how many other trusts he had worked upon during the accounting period and the amount of time he had devoted to such. The witness stated that the number of other trusts was in the hundreds but he could not say how many hundreds and that the number might even be in the thousands. He could make no estimate of what, if any, time had been expended upon the trust involved in this particular case.
The other witness in behalf of the trustee was its attorney. He testified that he spent or charged 15 hours to the trust accounting and that his rate was $45.00 per hour upon such matters and therefore $800.00 was a reasonable fee. Fifteen times forty-five equals $675.00--however there is little if any objection by the beneficiary to the fee for the attorney.
In this case it is apparent to me that the trustee is so managing the trust estate as to increase its own fees and build up principal to the end that when the trust is terminated its percentage will be even larger than originally contemplated.
The evidence produced at the hearing in nowise supports the fee requested by the trustee. This is not the situation where there is a conflict in the testimony and the trial judge determined the credibility of the witnesses. To say the least, the trustee's main witness was divertingly indefinite and dealt entirely in broad generalities.
In Perry on Trusts and Trustees (7th ed.), page 1557, it is stated that '[t]he elements which determine proper compensation are the amount of risk and responsibility and the time and labor required of the trustee and actually spent in the performance of his duties. The guiding principle is to give the trustee a reasonable recompense only, not a profit.' (Emphasis added.)
The trustee in this case is receiving almost 24 per cent of what the beneficiary receives. In my reading of the will there is no indication given by the testator that he intended that the bank would be the object of his bounty in any such percentage or amount.
The award of fees ought to be made by the exercise of a legal discretion and not a mystical ceremony based upon whether In this case behind the elaborate facade of generalities which were presented to the trial judge there is a record of less than minimal returns which in my opinion merits no sum remotely approaching 24 per cent of the total income.
I fully realize that an 'abuse of discretion' is a flexible term and can mean many things, dependent upon the circumstances. As I understand the term (as used in this case) there is no implication of a wilful abuse or intentional wrong, there is no connotation of bad motive or wrong purpose, there is no thought that the conduct was deserving of any censure, there is no reflection upon the judge, and there is no ulterior motive of the judge indicated. At the same time I think the order which the trial judge made demonstrates that the discretion which was exercised exceeds the bounds of reason and the majority of this court note that 'the compensation allowed unquestionably was large--larger than we would have awarded the trustee had that been our province in the first instance and considerably larger, according to evidence in that regard, than that charged by named corporate trustees (Wells Fargo American Trust $3400 and Crocker Anglo $5125) in the San Francisco area.'
The fee allowed here is not justified by and is clearly against reason and the evidence. The court's ruling went far afield from the outside limits of a reasonable fee and was based, if based on any grounds at all, upon an untenable premise. The ruling, without doubt, brings into being a miscarriage of justice and clearly the beneficiary here has suffered a serious injustice and undoubtedly, unless the course is changed, will continue to suffer an injustice at the hands of the trustee. The public interest and the administration of justice in this state likewise suffer from such action.
If the trustee in this case were to receive 10 per cent of the income the fee would be $3162.50, which in my opinion would be fully adequate and generous. The present allowance is outrageous and exorbitant and will surely result in legislative action to curb all corporate trustees in such matters.
I would reverse the order.