Henley v. Birmingham Trust National Bank

322 So. 2d 688, 295 Ala. 38, 1975 Ala. LEXIS 1363

• Court: Supreme Court of Alabama
• Decided: November 6, 1975
• Docket: SC 780
• Status: Published

Opinions

JONES, Justice.

This is an appeal from a decree of the Circuit Court of Jefferson County entered on a petition filed by Birmingham Trust National Bank (appellee) which prayed for instructions and for ratification of previous acts by BTNB, as co-trustee of a charitable trust. John C. Henley, III (appellant), the other co-trustee, whose cross bill seeking removal of BTNB as co-trustee and other relief was denied, now appeals the order of instructions and ratification given BTNB.

The Trust involved is the Linn-Henley Charitable Trust which was established by the will of Walter E. Henley, the uncle of appellant Henley. Walter Henley was a member of the Board of Directors of BTNB for a period in excess of 50 years and President and Chairman of the Board of the Birmingham Realty Company. The trust corpus consisted almost entirely of stock, one-half of which was BTNB stock. The beneficiaries of the Trust, selected by the co-trustees, are limited to:

“. . . any corporation or organization organized and operated exclusively for religious, charitable, scientific, literary or educational purposes whose activities are exclusively within the geographical limits of Jefferson County, Alabama or which maintain branch operations within Jefferson County . . . [but any amounts distributed to the latter] must be expended . . . within Jefferson County ...”

In the fall of 1968, the management of BTNB decided that it would be advantageous to change its corporate structure from a National Banking Association to that of a “holding company.” When this merger was completed, the new structure would consist of a national bank known as the Alabama National Bank, and a Delaware business corporation known as the BTNB Corporation which would own all of the stock of the “new” national bank.

The plan of merger, as governed by the National Banking Act, 12 U.S.C. § 215a, was that the existing bank would be merged into the “new” bank. The “new” bank would not issue stock in the National Banking Association to the shareholders of the “old” bank, but instead would issue one share of stock of the “new” bank directly to the Delaware business corporation in exchange for stock of the existing bank. The Delaware corporation would then issue one share of stock of that corporation for each share of stock in Birmingham Trust National Bank turned in for conversion. When these various steps were completed, each former shareholder of Birmingham Trust National Bank would hold stock of the Delaware business corporation known as BTNB Corporation.

Although over 80% of the stockholders were in favor of this merger, Henley was opposed to it since he felt that from an investment viewpoint the stock of “old” BTNB was more desirable. Thereupon, under authority of 12 U.S.C. § 61(3), which states that in a situation where a national bank and one or more individuals are co-trustees of a trust containing stock of the national bank, the shares of the bank stock may be voted by the individual co-trustee as though he were sole trustee, Henley voted both his personal stock and the Trust’s 27,460 shares against the merger, and made extensive remarks in support of his position at the stockholders’ meeting. The merger was approved by the Comptroller and became effective on December 31, 1968.

On January 30, 1969, Henley informed BTNB that the Trust was dissenting from the merger. BTNB, to state it mildly, was quite incensed at this course of action pursued by Henley and unsuccessfully attempted to persuade him not to continue with his planned avenue of dissent.

The President of BTNB even arranged a meeting between Henley and one J. Craig Smith, a director of BTNB and Chairman of the Board of Avondale Mills, in the hope that Smith could persuade Henley not to dissent from the merger. It seems that Henley’s company, Birmingham Publishing Company, had for some years been responsible for printing the annual reports of Avondale Mills. In fact, one year earlier Birmingham Publishing Company performed over $30,000 worth of services for Avondale Mills. Conspicuously, however, after this meeting with Smith, wherein Henley refused to alter his stand, Birmingham Publishing’s business with Avondale Mills dwindled to $640 two years later.

The statutory procedure for dissent by a stockholder in the present situation is outlined in 12 U.S.C. § 215a(b), (c) and (d). In substance, that procedure is as follows: Those shareholders who are opposed to the merger, as was the Trust, shall be entitled to receive the value of the shares they hold after the merger is approved by giving the receiving association (the “new” bank) notice of such intent at any time before thirty days after the date of consummation of the merger, and by surrendering the stock certificates.

The value of the shares of any dissenting shareholder shall be ascertained by an appraisal made by a committee of three persons, composed of (1) one selected by the vote of the holders of the stock who are dissenting; (2) one selected by the directors of the “new” bank; and (3) one selected by the two so selected.

If, within 90 days of the consummation of the merger, for any reason one or more of the appraisers are not selected, or they fail to determine the value of the shares, the Comptroller, upon written request of any interested party, shall determine the value of the shares which shall be final and binding on all parties. This amount shall be promptly paid to the dissenting shareholders by the “new” bank. Then those shares of the “new” bank which would have gone to the shareholders in exchange for their shares of “old” bank stock, had they not dissented, shall be sold at an advertised public auction. The “new” bank has the right to bid on the “new” stock, and if the price paid at this auction is greater than that paid to the dissenting shareholders, the difference shall be paid to the dissenting shareholders. If the “new” bank is the highest bidder at this auction, it shall resell these shares within 30 days thereafter to such person or persons as it shall desire.

Henley, in compliance with the statute, gave BTNB notice of his intent to dissent and surrendered the shares held by the Trust. Henley appointed one appraiser, though no notice was given to BTNB of such appointment, and BTNB did not appoint anyone to appraise the value of the stock. Neither Henley nor BTNB complied with the 90-day requirement of notifying the Comptroller should the appraisers not be appointed or be unable to agree as to the value of the stock. In fact, Henley never gave notice to the Comptroller and BTNB did not do so until September 23, almost eight months after the merger. •

The Comptroller finally did determine the value of the shares of $32.80 a share, for a total of $900,688. Neither co-trustee submitted any pertinent information to the Comptroller which might have aided him in reaching his decision as to the value of the shares.

As required by the statute, BTNB then offered for sale at auction the holding company stock, i. e., the equivalent of the stock of the old bank. The only bid was by BTNB Corporation — the holding company — for $26 per share. Since this bid did not exceed the $32.80 per share previously paid by the dissenting shareholders, no further payment was made by BTNB to the Trust.

In addition to the foregoing transaction, Henley also wished to persuade BTNB to allow the Trust to purchase stock in Birmingham Realty Company. The company, of which Walter Henley was a substantial stockholder, originally owned about 2700 acres where the City of Birmingham is located. It still owns in excess of 200 parcels of real estate in the area.

Henley’s argument in favor of purchasing more stock in Birmingham Realty was based on his contention that Walter Henley had in the past discussed with him his desire to bring control of the company to Birmingham from New York. In 1970, about 5% of the outstanding stock in Birmingham Realty came up for sale. If the stock could be acquired, the New York holdings in the company would be reduced below 20% and control would then be centered in Birmingham. Henley began negotiations and was told that the stock, with a book value of $900 per share, could be purchased for $650 per share. BTNB refused to agree to the purchase. It was stipulated that the last trade of Birmingham Realty stock before the trial was 5 shares at $1800 per share on May 14, 1973, and that less than 10 shares were offered by the Montgomery office of Sterne, Agee and Leach at a price of $2050 per share.

In April, 1970, Henley demanded further payment by BTNB to the Trust. (Prior to this, BTNB had mistakenly paid $32,952 as dividends on stock of the Delaware Corporation since the Trust no longer owned the stock, and had offered to pay the Trust $28,211 or approximately 61/2 % interest on the appraised value of the BTNB stock which it had had the use of for more than a year.) After an extended period of unfruitful negotiations between the two co-trustees, BTNB petitioned the circuit court for instructions and ratification of previous acts.

The issue presented, then, is whether either or both BTNB and Henley, as co-trustees of a charitable trust, are guilty of a breach of their fiduciary duty owed to the Trust as trustees. We find that both are guilty of such a breach.

Initially, we would point out, irrespective of Henley’s contentions, that we are not here to decide the propriety vel non of BTNB’s decision to merge itself from a national banking association to that of a “holding company.” This is a decision solely within the discretion of the directors and shareholders of BTNB. As previously noted, the option of dissent was readily available to those who were in disagreement with that decision. Thus, Henley’s' argument in this respect is without merit.

It is a fundamental rule of law that a trustee must act in good faith and display complete loyalty to the interests of his beneficiaries. First National Bank of Birmingham v. Basham, 238 Ala. 500, 191 So. 873 (1939); Barker v. First National Bank of Birmingham, 20 F.Supp. 185 (D.C., Ala. 1937). It is this duty, in our opinion, that the co-trustees have breached.

The primary error in the decree of the lower court can clearly be seen when it stated:

“There has been no breach of fiduciary duties under the trust by Complainant. By this finding, this Court does not intend to state that there have not been instances, in its part in the execution of the trust, where Complainant has acted unwisely or precipitately. It must have been apparent to Complainant and its trust officers that, from time to time, during the life span of the trust to date, a division of opinion relating to the wisdom or propriety of the execution of the trust affairs was involved as between the co-trustees. When such a division of opinion became apparent, Complainant should have, by proper written petition or even by informal discussions with its co-trustee and this Court, sought, in advance of any direct action on the disputed action, a resolution thereof and a confirmation by a directive of this Court. But this opportunity and duty was also available to and incumbent upon the co-trustee. Hereafter, in the management and execution of the trust, the co-trustees are admonished to avail themselves of the services, advice, sanctions and directives of this Court whenever they cannot agree or whenever, even if they do agree, the matter under consideration is of unusual import or complexity.” [Emphasis supplied.]

The trial Judge was correct when he determined that BTNB should have sought a resolution of this problem in advance of any direct action on its part. Gilmer v. Gilmer, 245 Ala. 450, 17 So.2d 529 (1944). The crux of the controversy, however, as found by the Court, is not the relative right or fault of the co-trustees, but rather the separate and several duties of each to the Trust; and any breach on the part of one co-trustee would certainly not excuse those duties of good faith and loyalty owed by the other co-trustee. After all, charitable trusts are .especially favored in equity. Mastin v. First National Bank of Mobile, Inc., 278 Ala. 251, 177 So.2d 808 (1965). Thus, this suit is clearly not concerned with the rights and duties of one co-trustee as opposed to those of the other, but solely with those of the Trust. The principle of contributory or comparative fault or neglect as between co-trustees plays no role in measuring the proper discharge of this high duty imposed by law on each trustee.

We will first deal with the breach by both BTNB and Henley in their handling of the Trust’s interest in the dissent procedure. Under the outlined procedure of dissent, three appraisers were to be selected. Henley selected one but failed to notify BTNB of such selection and BTNB neglected to select an appraiser at all. Consequently, the third appraiser could not be selected. Additionally, this step not having been complied with, a Comptroller should have been notified within 90 days from the date of the merger. Henley did not give such notice at all, and BTNB did not give it until about eight months after the merger. BTNB attempts to excuse its failure to appoint an appraiser by Henley’s failure -to notify it of his selection, and that the'second procedure of allowing the Comptroller to make the appraisal was always available in lieu of selecting the three appraisers.

These were acts of contest and struggle between the co-trustees and can hardly be said to be acts of good faith and exercises of undivided loyalty on the part of either co-trustee. Every step possible to insure that the Trust assets were protected should have been taken; and it was incumbent upon each to comply with the fiduciary standards required of a trustee irrespective of the default of the other. The default of each is apparent and inexcusable.

Henley contends that BTNB should have at least temporarily removed itself as a co-trustee when it was notified of the Trust’s decision to dissent from the merger. A conflict of interest was apparent, says Henley, since BTNB was placed in a position whereby on the one hand it had the duty as a co-trustee to see that the Trust received the highest price possible for the stock and, on the other, as the purchaser of the stock, to see that the lowest possible price was paid.

BTNB contends that there was no incumbent duty upon it to resign and that there was no conflict of interest since Henley’s decision that the Trust would dissent from the merger forced them into the situation where they became both a seller and a purchaser; also, the dilemma was resolved by the statutory dissent procedure available. With this we cannot agree. Henley did not force BTNB into this situation by merely exercising a legal right in favor of the Trust; but it was the duty of BTNB to recognize the obvious conflict of interest which resulted and resolve it by at least temporarily resigning as trustee.

A breach of the co-trustees’ duties can be seen in the alternative step of having the Comptroller fix the value of the stock. Neither co-trustee submitted any pertinent information to the Comptroller which might have enabled him to make a more favorable determination of the value of the Trust’s BTNB stock. Henley requested annual reports and “internal audits” of BTNB for the five years preceding the merger. The reports were delivered but the “audits” were not. BTNB stated that the audits did not contain any information which would be pertinent to the Comptroller’s appraisal of the stock. Henley excuses his failure to submit any information to the Comptroller on BTNB’s failure to supply the audit information. BTNB attempts to excuse its failure to submit information to the Comptroller for two reasons:

First, due to Henley’s decision to dissent, he became, for all practical purposes, the sole trustee and thus the duty to submit the information fell on his shoulders and off those of BTNB. (This contention of itself reveals the inherent conflict of interest.)

Secondly, since the Comptroller already possessed extensive information about BTNB as a result of the national bank examination performed two or three times a year, there was no need on their part to submit any additional information. (This virtually admits a default in the discharge of its obligation.)

Again, we cannot agree that the acts or omissions of either co-trustee excused the subsequent breach of duty by the other c'o-trustee. BTNB and Henley should have each taken the initiative to submit as much information as possible to the Comptroller to enable him to make an accurate appraisal of the stock’s value.

Notwithstanding the foregoing. BTNB contends that the Comptroller’s appraisal, as stated in 12 U.S.C. § 215a(d), “shall be final and binding on all parties”; and that even if such appraisal was not final and binding, it could only be reviewed by a direct proceeding in which the Comptroller was a party. That is to say, BTNB’s contention is that federal law has preempted this entire area of law and that a state court, therefore, is precluded from reviewing the Comptroller’s appraisal. Here, again, this contention proceeds on the false premise that the controversy is limited to BTNB and Henley. Moreover, the flaw in this contention is that we are not reviewing the finding of the Comptroller. We are reviewing the acts of the co-trustees, as such acts relate to their fiduciary duties to the Trust, which supervisory jurisdiction has not been preempted by the federal statutes and rests exclusively with the state court.

BTNB contends that, assuming the Comptroller’s appraisal was affected by the actions or inactions of either co-trustee, the Comptroller’s decision is not subject to review under authority of Heikkila v. Barber, 345 U.S. 229, 73 S.Ct. 603, 97 L.Ed. 972 (1953), and Crane v. Hahlo, 258 U.S. 142, 42 S.Ct. 214, 66 L.Ed. 514 (1922). Neither case supports such contention.

In Heikkila, an alien was deported by order of the Attorney General under authority of § 19(a)¹ of the Immigration Act of 1917, which states that such order “shall be final.” Judicial review was proscribed by the very terms of the Act and the complaining parties sought just such a review. The Court recognized habeas corpus, in which issues not administratively adjudicated under the Act could be raised, as the only available remedy.

Crane was concerned with the amount of damages awarded in an eminent domain proceeding by the Board of Revision of Assessments in which the statute authorizing such proceeding provided that the award was final and conclusive. Both of these cases deal with efforts to review the merits of previously adjudicated issues expressly contrary to the proscription contained in the Act authorizing the proceedings; and the principle which dictated the result in each case is distinguishable from the case at bar in that the issue before us —the fidelity vel non of a co-trustee — has not been, nor could it have been, adjudicated.

That the preemption doctrine has a field of operation can be seen from the case of Rogers v. First National Bank of St. George, 297 F.Supp. 641 (D.C., S.C., 1969), which held that national bank merger procedures are controlled by federal and not state law. The Federal Act does not address itself, however, to fiduciary duties,² and this is recognized by the final section of the Act which prohibits discrimination in the removal of a merging bank, as a trustee, by a state court on the sole ground that it has availed itself of the merger procedure authorized by the federal banking laws. The federal law cannot preempt that which it does not include nor purport to deal with. The state law is, and necessarily must remain, fully intact with respect to its supervisory jurisdiction of trust estates.

We now turn to Henley’s contention that BTNB’s refusal to consent to the purchase of Birmingham Realty Company stock for the Trust was premised on consideration for its private interest and not those of the Trust. Credence is given to this contention by the testimony of a BTNB trust officer when he stated:

“I think there were probably two principal disadvantages concerning the substantial ownership of the Trust would have had in Birmingham Realty Company, one would have been that the stock could have been pivotal in perhaps controversial decisions of the corporation, and we do not think that would have been something we would have liked at the time. A number of people who are principals, or who were principals of Birmingham Realty Company at the time or directly interested in the company, were good friends and customers of the Bank, and it could also have been conceivable that a situation would have developed . . . wherein the interest of the Trust would have been adverse to the interest of those individuals, which would have placed the Bank in a situation of where regardless of what we did we might have been criticized for it.

“We do not think that owning that much stock of the company would have been desirable, principally for those reasons.”

As stated in Barker v. First National Bank of Birmingham, supra, when referring to the duties of a trustee, “all personal or selfish interests and all consideration of the interests of third parties must be excluded. His must be an undivided loyalty.”³

Clearly, if the foregoing statement is the true reason for BTNB’s refusal to purchase the stock, then it has committed a definite breach of its fiduciary duty.

BTNB asserts that its reasons for refusing to purchase the Birmingham Realty stock are as follows:

1) The purchase would concentrate too much of the Trust’s assets in a closely held corporation.

2) The stock provided low income which might prove troublesome under the Tax Reform Act of 1969.

3) Since it was a closely held company, the stock would be difficult to sell.

4) The value of the stock would be difficult to determine.

5) Owning this much stock would make the Trust influential in company affairs, perhaps pivotal in conflicts among the controlling shareholders, and would create a situation wherein conflict between the co-trustees might be encouraged.

6) There was no proof in the will that Walter E. Henley desired for the Trust to make such a purchase.

7) The purchase would have no relation to the avowed charitable purpose of the Trust, and

8) If the Trust were allowed to purchase the stock, then Henley and his cousin, Carl Wittichen, already a substantial stockholder of Birmingham Realty Company, would then effectively control 18% of Birmingham Realty Company.

When taken together, and fully analyzed, these reasons are but supportive of the conclusions stated in the trust officer’s testimony and demonstrate the legal conclusiveness of the conflict of interest on behalf of BTNB with respect to this transaction.

Next, BTNB contends that, assuming some breach of duty on their part, no evidence was adduced showing that any damage to the Trust resulted therefrom. Indeed, the anomaly encountered in obtaining any “after the fact” remedy on behalf of the Trust is readily apparent. The bank stock, the value of which is the principal asset involved, is gone. So is the Birmingham Realty stock. But the difficulty of ascertaining the loss, if any, suffered by the Trust can never be a legal ground for ratification of such flagrant abuse of fiduciary duties by the co-trustee. If difficulty of solution were the basis for denying a remedy, hardly any field of operation would exist for the equity arm of the Court.

We recognize that our remand of this cause with instructions for resubmission of the issue of damages to the Trust, if any, places on the trial court a responsibility which would not have arisen had there been a good faith utilization of the procedure set out in the Federal Act with regard to, placing a value on the bank stock. But, here again, federal law contemplates faithful discharge of fiduciary duties, and does not speak to fiduciary accountability. Therefore, the guilty trustee cannot be heard to complain that its misconduct invites, with its attendant risks, a state court review and determination of liability for damages, if any, to the Trust. As we have previously observed, state courts exercising supervisory jurisdiction over trusts provide the only available forum for such review and determination.

This case is remanded to the trial Court with the following instructions:

1. Appoint a Temporary Trustee of the Trust Estate in lieu of the named co-trustees for the sole and limited purpose of the retrial of this cause.

2. Upon resubmission of this cause, make the following specific findings of fact and conclusions:

(a) Determine what data should, and except for the conflict of interests of the co-trustee — BTNB—would, have been made available to the Comptroller; and, from such data, fix the value of the “old” bank stock as of the time such ascertainment is contemplated by the Federal Act. If the value as fixed is more than the value fixed by the Comptroller, award to the Trust as damages the sum equal to the difference against BTNB.

(b) In which latter event (if the fixed value per share exceeds $32.80), determine the true bid value of the “new” bank stock had BTNB, absent its conflict of interests, actively sought potential bidders as of the time of the public auction as provided by the Federal Act. If the bid value so fixed is higher than the ascertained value of the stock as fixed under (a) above, award to the Trust as additional damages the sum equal to such difference against BTNB.

(c) If the ascertained value of the “old” bank stock is less than $32.80 per share, but the per share auction value as fixed under (b) above exceeds $32.80, award to the Trust as damages the sum equal to the aggregate of the difference between such per share auction value and $32.80 against BTNB.

It is suggested that the price obtained by BTNB upon resale of the “new” stock within the 30-day period following the auction, as prescribed by § 215a(d), is relevant data (subject, of course, to any admissible evidence of price variance) for consideration in making such determination.

(d) Determine whether the ascertainable true value of Birmingham Realty stock and the asking price therefor of the “N. Y. block,” along with the other material factors, rendered BTNB’s conflict of interests responsible for an abuse of discretion in refusing to agree to such purchase. If so, award to the Trust as damages such sum as the Court may deem reasonable and adequate to make the Trust whole in light of all competent evidence adduced on this issue.

(e) Determine whether BTNB’s evidenced conflict of interests is so inherent in the nature of its relationship to the Trust and to the Co-trustee Henley as to render BTNB disqualified to further serve as co-trustee to the instant Trust Estate; or, whether the resolution of the instant controversy will so dissolve the conflict of interests as to render BTNB fully competent and qualified to serve as co-trustee; and to implement by order of the Court such determination as the interest of the Trust Estate may require.

3. Determination and award of expenses and fees chargeable against the Trust Estate shall be limited to those reasonably and necessarily incurred by the Temporary Trustee and his attorney.

In conclusion, we observe that the Attorney General of the State of Alabama was made a party to this litigation as authorized by State v. Bibb, 234 Ala. 46, 173 So. 74 (1937). The record shows that the Attorney General filed an answer request ing in effect that the Court protect the interests of the beneficiaries to the charitable Trust. Except for one apologetic reference made by the trial Judge to his failure to recognize the representative from the Attorney General’s office for the purpose of examining a witness, the record is moot as to any participation by the Attorney General in the trial of this cause. The wisdom of Bibb, authorizing representation of the beneficiaries of a charitable trust by the Attorney General, is abundantly exemplified by the posture of the record in this case. We have noted this fact merely to comment that we deem appropriate the active participation by the office of the Attorney General on behalf of the beneficiaries of the Trust Estate upon retrial of this cause.

Reversed and remanded with instructions.

MERRILL, ALMON, and EMBRY, JJ., concur. SHORES, J., concurs in the result. HEFLIN, C. J., and MADDOZ, J., dissent. BLOODWORTH and FAULKNER, JJ., not sitting.

1 . 39 Stat. 889, as amended, 54 Stat. 1238, 8 U.S.C., § 155(a).

2 . The reference here to “fiduciary duties” is to be understood in the context of the law of trusts; the reference is not to those duties owed by a bank to its dissenting stockholders absent the trustee relationship. Indeed, as to ordinary stockholders who dissent from the merger, the Federal Act contemplates that a bank is cast in an adversary role — a role abhorred by the law of trusts.

3 . Justice Cardozo, speaking for the majority in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928), said: “Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties., A trustee is held to something stricter than the morals of the market place. Not honestly alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Wendt v. Fischer, 243 N.Y. 439, 444, 154 N.E. 303. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.” See also United States v. Missisippi Valley Generating Co., 364 U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961).