Opinion
No. 34116
Decided June 29, 1955.
Executors and administrators — Sale of stocks belonging to estate — Time for selling — Market price — Sale on declining market — Loss resulting from mistake of judgment — Liability of executor — Failure to sell at peak of market — Neither actionable negligence nor nonfeasance, when.
1. In the absence of fraud or bad faith, an executor of an estate may not be called to account for not selling stocks belonging to the estate at the peak of the market occurring while such stocks are in his possession.
2. An executor of an estate, who is confronted with a declining market at the time he receives stocks belonging to the estate, and who, in good faith, does not sell such stocks until later when the market has further declined, may not be held accountable for either negligence or nonfeasance because of his mistake in judgment; any loss resulting from such conduct is damnum absque injuria.
3. Where in a will a decedent's executors are given "full right, power and authority to bargain, sell, convey, transfer, deed, compromise, settle, adjust, manage and deal with any and all of my property and obligations or claims against my estate, upon such terms and under such conditions as they shall deem wise for the proper settlement of my estate without the order of any court," any mistake in judgment, in the absence of fraud or bad faith, which results in the sale of estate securities in the possession of such executors at a price lower than the peak of the market during the time they hold such securities, does not constitute either actionable negligence or nonfeasance as to a beneficiary in the will.
APPEAL from the Court of Appeals for Cuyahoga County.
William T. Bentley died testate on May 24, 1946, and his will was duly probated on June 11, 1946.
Item XI of such will contains the following language:
"I make, nominate, and appoint Julian M. Andrus, attorney, of Shaker Heights, Ohio, my wife, Edith M. Bentley, Earle M. Garman and Louis H. Specht, Jr., as executors of this my last will and testament, giving to my said executors full right, power and authority to bargain, sell, convey, transfer, deed, compromise, settle, adjust, manage and deal with any and all of my property and obligations or claims against my estate, upon such terms and under such conditions as they shall deem wise for the proper settlement of my estate without the order of any court; and in the execution of the duties and powers herein conferred upon them my executors shall have the power to comply with all legal requirements as to the execution of all writings, deeds or other documents and formalities without the order of any court."
These executors, the testator's wife, his one-time lawyer, his brother-in-law, and his friend, proceeded with the execution of the testator's will and filed three partial accounts and a final account, all of which were duly approved after notice by publication.
Marguerite Bentley, appellee herein and hereinafter designated exceptor, is a sister of the decedent and a named beneficiary in the will, and, after having had vacated the orders of approval of the three partial and final accounts, filed exceptions to them as follows:
"Now comes Marguerite Bentley and represents that she is one of the beneficiaries named in the last will and testament of William T. Bentley, deceased, and excepts to the first, second and third partial accounts and final account of the executors of the last will and testament of the above decedent, which accounts were filed herein on May 9, 1947, May 17, 1948, June 16, 1949, and May 24, 1950, respectively, and for the grounds of her exceptions says:
"1. The executors have been guilty of nonfeasance and negligence in the performance of their duties with respect to the administration of the estate of the decedent.
"2. The executors retained in the estate securities of a speculative character and failed to obey the mandate of the law requiring them to reduce such securities to cash to enable payment of the debts and obligations of the estate and the costs and expenses of administration thereof.
"3. The executors have been guilty of nonfeasance and negligence in the performance of their duties with respect to the sale of securities coming into their possession as part of the assets of the estate of the decedent, in consequence of which a substantial loss was sustained by the exceptor and other beneficiaries of the said estate, particularly with respect to the sale of
"1,000 shares of the preferred stock of Baltimore Ohio Railroad Company for $17,500 in September, 1947, when at the time of receipt thereof they had a value of $39,500.
"2,500 shares of the common stock of Baltimore Ohio Railroad Company for $31,294.49, net, in September, 1947, when at the time of the receipt thereof they had a value of $65,937.50.
"2,000 shares of the common stock of Seaboard Airline Railroad for $30,700 in September, 1947, when at the time of the receipt thereof they had a value of $74,500.
"2,000 shares of the common stock of Industrial Brownhoist Company for $14,998.95 in October, 1947, when at the time of the receipt thereof they had a value of $21,000.
"1,000 shares of the common stock of Liquidometer Corporation for $2,874.50, net, in October, 1947, when at the time of receipt thereof they had a value of $7,750.
"$25,000 face value of the bonds of International Great Northern Adj. for $7,800 in June 1948, when at the time of the receipt thereof they had a value of $11,062.50.
"That all of the aforesaid securities came into the possession of the executors in June 1946, and that soon thereafter and continuously until finally sold the said securities declined in value.
"4. The executors have been guilty of nonfeasance in office in the performance of their duties with respect to 1,800 shares of the common stock of Pathe Industries and 150 shares of the preferred stock of Pathe Industries. When said securities came into the possession of the executors in June 1946, they had a value of $22,950 and $12,825, respectively. When said securities were distributed in kind to the testamentary trustees under the will of the decedent in January 1950, they had a value of $3,600 and $3,000 respectively."
Upon hearing on the exceptions, the attorney for the exceptor made an opening statement in which, in his brief, he sums up as follows:
"1. The greatest part of the assets consisted of stocks and bonds of a highly speculative character.
"2. Shortly after the issuance of letters testamentary in May 1946, the executors and their counsel met and made a study of the character of the assets and the need of funds with which to discharge all of the debts, obligations and costs and decided that the securities should be liquidated immediately for two reasons: (a) preservation of the value of the estate and (b) realization of funds with which debts, charges, taxes, costs and expenses could be met.
"3. There was required for the payment of these debts, charges, taxes, costs and expenses $231,363.30, whereas the cash on hand and available for this purpose was slightly less than $35,000.
"4. Except for three sales of securities, one in August 1946, one in September 1946, and one in October 1946, upon which the total amount realized was approximately $61,000, no further liquidation of securities took place until September 1947, and from this date until June 1948 the balance of the securities, except 1,800 shares of Pathe Industries common and 150 shares of Pathe Industries preferred, were retained.
"5. The shares of Pathe Industries common and preferred were never sold but were retained until January 1950, when they were distributed in kind to the testamentary trustees.
"6. The value of the securities when received was $317,225.
"7. The amount realized for the estate through liquidation and distribution in kind was $173,467.94.
"8. By the retention of the securities the appellees were guilty of negligence and nonfeasance, by reason of which the estate suffered a loss of approximately $144,000."
After the opening statement of the attorney for the exceptor, the attorney for the executors made a motion to dismiss the exceptions to the first, second and third partial accounts and final account because the exceptions and the opening statement did not state a cause of action as a matter of law. The Probate Court granted this motion.
Upon appeal on questions of law to the Court of Appeals, that court reversed the judgment of the Probate Court, upon the ground that the opening statement of exceptor and her exceptions to the accounts of the executors presented issues of fact for determination by the Probate Court upon trial on the issues made.
The cause is before this court upon the allowance of a motion to certify the record.
Additional facts are stated in the opinion.
Mr. Sidney N. Weitz, for appellee.
Mr. Louis H. Wieber, Mr. W. Rolla Price and Mr. David A. Christopher, for appellants.
The decedent in his will, after making some provisions for his wife, devised the residue of his property to certain trustees, who were directed to pay $100 per month to decedent's mother so long as she lives, and the balance of the income and, in the discretion of the trustees, part of the corpus of the estate, if necessary, to various beneficiaries, including decedent's widow, sisters and sisters' children, as directed by the trust.
Decedent's widow elected to take under the statute of descent and distribution and was thereby entitled to one-half of the estate.
The various accounts referred to in the statement of facts show that a large portion of the estate consisted of stocks of railroad companies, some of which stocks were sold during 1946, and a large portion of which were sold in September 1947.
There is no charge in this dispute, or any evidence to justify one if it had been made, that the executors were guilty of any fraud, corruption or dishonesty in their administration of the estate. The facts show that from the time of decedent's demise until the sale of the stocks the market steadily declined, and that the executors refrained from selling the various stocks which had come into their possession with the hope, apparently along with that of vast masses of people, that they would again rise in price.
The question for us to determine is whether executors of an estate are liable for negligence or nonfeasance because of their failure to sell securities in an estate at the time of acquisition, where the market declines between the time of acquisition and the time of sale.
Exceptor takes the position that, although it may be true an executor is not liable for not selling securities in his possession at the peak of the market, nevertheless, if he determines that it is to the best interests of the estate and desirable for the liquidation of the debts thereof to sell securities immediately after their acquisition and then does not proceed to carry out that determination, he is liable for the loss due to the fall in the market from the time of the determination to the time of sale.
Ordinarily, where a fiduciary is entrusted with securities and has the power of sale, in the absence of fraud or bad faith he can not be charged with any loss if he fails to make a sale at the peak of the market. The absurdity of any contrary rule is at once apparent. if the market was lower at the time the securities were sold, and the fiduciary was to be charged with the loss for not selling them at an earlier date, it would logically follow that, if he had sold them at the earlier date and the market had advanced, he would be held liable for not having held the securities and thus realized the gain.
Two of the executors in the present case had large interests in the estate of decedent. The widow, one of the executors, was entitled to one-half of the estate under the laws of descent and distribution, and it is difficult to conceive that she was not acting in what she deemed to be the best interests of the estate.
In the case of In re Estate of Stafford, 46 Ohio Law Abs., 260, 69 N.E.2d 208, the court made some persuasive statements relative to a situation quite similar to the facts in the present case.
In that case, a motion to certify the record to this court was overruled (case No. 30860).
Although it is true that the overruling of a motion to certify is in no sense an affirmance of a judgment entered by a Court of Appeals, we quote excerpts from the Ohio Law Abstract report of the Stafford case, because of their persuasive reasoning:
"There is no positive specific mandate in the statutory provisions governing the discretion of executors in the administration of an estate, requiring such executors to sell stocks found by them in the estate of their decedent.
"* * *
"Limiting the present charge of the exceptors, therefore, to the period when any misconduct of the executors was effective to injure the estate: The exceptors charge that such misconduct of the executors consisted in (1) retaining the stocks in the estate in the presence of a falling market; (2) in failing to obey the mandate of the law requiring them to reduce such stocks to more stable securities, and pay the debts of the estate; (3) in retaining the stock of The Union Trust Company, when it was a coexecutor of the estate. * * *
"* * * Holders of the stock of the trust company were confronted with a dilemma to sell or keep their stock. * * * It is apparent that there were many persons who considered the economic failure only a temporary depression and that the wise course was to retain stocks and even buy more at the failing prices. * * *
"* * *
"Whether the stocks in the estate were rising or falling in value, the same dilemma was presented — whether it was for the best interest of the estate to sell. Error in judgment shown by later devlopments would have entailed bitter criticism of the action taken in either event. If the stocks had continued to rise after sale by the executors they would have been charged with the same bad faith of which they are now accused because they did not sell in face of the later falling market.
"It must be borne in mind, and this fact seems to be lightly considered by the exceptors, that essentially the individual coexecutors had each practically a one-third interest in the estate. Any action they took or failed to take therefore directly affected their own personal interest.
"* * *
"* * * They were placed much in the position of the captain of a ship who must make the decision to abandon ship or ride out the storm in his battered vessel. * * *
"The conclusion of the Probate Court that the mere failure to sell the stocks did not sustain either a charge of actual fraud or culpable negligence must be sustained."
Of course, if the executors in the present case had knowledge of any conditions concerning the stocks which were likely to cause them to depreciate in value, a different question would arise, but it is our opinion that merely holding them in a declining market for a little more than a year is not evidence of culpable negligence or nonfeasance, even though the holders had determined to sell them earlier and had abandoned that determination.
It will be remembered that under item XI of decedent's will the executors had "full right, power and authority to bargain, sell, convey, transfer, deed, compromise, settle, adjust, manage and deal with any and all of my properly and obligations or claims against my estate, upon such terms and under such conditions as they shall deem wise for the proper settlement of my estate without the order of any court."
How could one entrusting his property to a fiduciary give a wider or more unlimited discretion?
If a fiduciary is given the power to deal with any or all the property of another in a manner as such fiduciary deems wise, and such fiduciary deals with and disposes of such property in relation to the objectives for which he is entrusted with it, he can not be held to account in the absence of fraud, dishonesty or bad faith. See Caswell v. Lenihan, ante, 331.
It seems to us that under the circumstances of this case the assets of the estate, which assets the decedent himself had acquired, simply shrank as did the assets of many shareholders whose stock declined in the market during the period involved in the present controversy, and that the shrinkage simply resulted in damnum absque injuria.
Any other view of the case would make it almost impossible to secure competent persons to act as executors or administrators of estates or to secure bonds for the faithful performance of their duties.
One theory of exceptor is that holding the securities for more than a year constituted a reinvestment of the funds of the estate in securities, contrary to the power or authority of executors set forth in Section 10506-41, General Code (Section 2109.37, Revised Code), which reads in part as follows:
"Provided that no administrator or executor shall have authority to invest funds belonging to the estate except with the approval of the court or where the will or other instruments creating the trust permits."
In the present case, the moneys received from the sale of the assets of decedent's estate were not reinvested but were used to pay the indebtedness of the estate and were then transmitted, along with certain securities not sold, to the trust provided in decedent's will.
Under the circumstances, Section 10506-41, General Code, has no application.
The judgment of the Court of Appeals is reversed and that of the Probate Court affirmed.
Judgment reversed.
WEYGANDT, C.J., MATTHIAS, HART, ZIMMERMAN and BELL, JJ., concur.
TAFT, J., concurs in paragraph three of the syllabus and in the judgment.