Opinion
No. 4055.
Decided July 9, 1951.
In a devise by the testator of his residuary estate to his widow the phrase "without accountability to anyone" is indicative that the estate devised was intended to be more than a life estate although not necessarily an absolute fee, A bequest of the use of property is a bequest of more than the income and may include the power to invade a portion of the principal in the enjoyment of the use. Certain evidence justified the finding that the defendant breached his fiduciary duty toward the plaintiff and was guilty of constructive fraud in failing to fully and frankly inform her of the effect of incorporating the business of her husband, thereby obtaining the business assets for himself in exchange for unsecured notes. Relief by rescission is granted only upon the plaintiff doing what equitably should be done under all the circumstances. Where one breaches a fiduciary duty the Court may in its discretion deny all compensation, allow a reduced compensation or allow full compensation. One who is charged as a constructive trustee on the basis of constructive fraud is not to be penalized in awarding compensation particularly where there is no final loss to the beneficiary and the breach of trust is not intentional.
BILL IN EQUITY, seeking to set aside certain transfers of property and agreements entered into between Caroline, hereinafter called the plaintiff and her son, the defendant, on the grounds of mistake, illegality and violation of fiduciary duty. The disputed transactions relate to a plumbing and heating business in Manchester owned by
John H. Stevens who died in 1936 devising said business to the plaintiff and their four children, consisting of the defendant and three children who join as plaintiffs in this proceeding. John H. Stevens, by his will executed in 1932, left the residue of his estate to the widow, the plaintiff "for her own use during life . . ., without accountability to anyone." The plaintiff was named executrix and the will provided that such property as remained after her death was to go to the children in equal shares but gave her the power to make a different distribution. In 1935, a codicil to the will substituted the defendant as executor, authorized him to continue the business and "to cause said business to be incorporated." By the codicil the defendant, in his discretion, was instructed, authorized and empowered as follows: "and thereupon to cause all the stock of said corporation to be issued to himself as executor to be held by him as assets of my estate subject to the terms and provisions of my said will. During the life of my wife, Caroline A. Stevens, my executor shall have full power to vote said stock and to manage and conduct the affairs of said corporation. After the death of my said wife said stock shall be divided among my four children with such voting rights as accompany stock under the laws of the State of New Hampshire. During the life of my said wife, none of my said children shall have any right to encumber or alienate any reversionary interest in said business or said stock except by transfer to some other one of said children. . . ." The defendant acted in the capacity of executor until 1938 when the plaintiff gave him a receipt for the assets of the estate which receipt was filed in the probate court. The executor's account was allowed in 1947.
Since the testator's death, the plaintiff has always treated the business as her own. From that time until 1941, the defendant and a son Judson were co-managers of the business. The plaintiff in 1936, purchased a plumbing and heating business in Laconia with certain assets of the estate. This business was conducted by Judson who was not successful and in 1941, due to the strained relations between defendant and Judson, the defendant became the sole manager of the businesses on a profit sharing basis.
In 1943, a formal partnership agreement was entered into by the plaintiff and the defendant by which they were to share equally in the net profits of the Manchester business and the assets of the partnership would remain the property of the plaintiff except for such of the defendant's share of the profits as was left in the business. At the same time the Laconia business was incorporated under the name of Northern Heating Plumbing Company, Inc. Of the seventy shares originally issued, thirty-five went each to the plaintiff and the defendant. Later ten shares were issued to the local manager of the business.
In 1948, the Manchester business was incorporated and all of the capital stock of the corporation was issued to the defendant the consideration of the payment of one thousand dollars. The assets of the Manchester business were transferred to the corporation by the plaintiff in consideration of unsecured serial notes aggregating approximately thirty-seven thousand dollars payable two thousand dollars annually.
The Master found that the transactions relating to the Northern Heating Plumbing Company were fair and reasonable but that the 1948 transactions relating to the Manchester business were not explained to the plaintiff by the defendant "as frankly and as fully as his duty to her required."
The Master found "the value of the Stevens corporation as a going concern was dependent on the energy and efficiency of the defendant." The Master's report was accepted and all findings of fact approved except the finding that justice could be done without an accounting for profits. The Court (Grimes, J.) decreed that the petition be dismissed as it related to the Northern Heating Plumbing Company, Inc. As to the Manchester business (John H. Stevens Company, Inc.) rescission of the transactions involving that corporation was ordered. The decree provided that the defendant should transfer all of his stock in the corporation to the plaintiff upon payment by her of one thousand dollars and a further sum which was equal to fifty per cent of the net profits of the business since its incorporation in accordance with the partnership agreement and the accounting procedures used during its existence. The decree further provided that this amount paid to the defendant was to be offset by any sums he received from the business including his salary since its incorporation. Since the litigation began the business has continued to be managed efficiently by the defendant and its net worth has continued to increase each year. All exceptions of the parties to the decree were reserved and transferred by the Court (Grimes, J.). Further facts appear in the opinion.
McLane, Davis, Carleton Graf (Mr. Carleton orally), for the plaintiffs.
Devine Millimet (Mr. Millimet orally), for the defendant.
The transactions relating to the plumbing and heating business at Laconia culminating in the incorporation of the Northern Heating Plumbing Company, Inc., with the plaintiff and the defendant owning an equal number of shares created in effect a partnership in corporate form. Since the original purchase of the business was made by the plaintiff "at the suggestion of her son Judson and contrary to the advice of the defendant," the latter cannot be charged with exercising undue influence upon the plaintiff in respect to it. Subsequent transactions relating to the Laconia business have been found to be fair, reasonable and understood by the plaintiff. These findings are supported by the evidence. The decree of the court dismissing the plaintiff's petition in respect to the Laconia business must therefore be affirmed unless, as the plaintiffs argue, Caroline could not legally transfer a one-half interest to the defendant in that business. The answer to this argument involves a construction of the John H. Stevens will and codicil.
"The language of the will [and codicil] in its disposal of the testator's residuary estate is not readily construed." Holmes v. Mackie, 86 N.H. 287, 289. The phrase "without accountability" has no precise meaning. (Geisse v. Franklin, 56 Conn. 83), although it is a clear indication that the plaintiff was given something more than a mere life estate even though it may have been less than an absolute fee. However, undue emphasis should not be placed on this phrase since the codicil to the will necessarily affects it if it does not control it. By the codicil the power of the plaintiff to make a different distribution to the children is taken away. The defendant is substituted both as executor and in control of the business where as formerly under the will, the plaintiff had wide powers of discretion with respect to the business. While it is difficult to make a consistent construction of all provisions of the will and codicil certain primary objectives can be deduced from them. The first objective is provision for the wife during her lifetime. The second objective is that the children should have an equal reversionary interest either in the Manchester business or the stock which it represents. The third objective was that the business should remain in the family during the life of the plaintiff. Wilkins v. Miltimore, 95 N.H. 17, 18.
When the plaintiff purchased the Laconia business using part the assets of the estate, the business was still within the control of the family and this was a use which the testator might well have had in mind at the time the will was drawn. Since the plaintiff had the power to use a portion of the assets for such purchase, it follows that she likewise had authority to enter into a fair partnership agreement with the defendant in return for past and future services of management. The fact that the controlling interest of the Laconia business is equally owned by the plaintiff and the defendant does not violate the objective of the will which gives the children equal reversionary interest in the Manchester business. Since the plaintiff's use of the estate was legal her subsequent division of the fruits of this use in the form of the Laconia business is likewise legal. A bequest of the use of property is a bequest of more than the income (Ruel v. Hardy, 90 N.H. 240, 242) which may include the power to invade a portion of the principal in the enjoyment of the use. Belford v. Olson, 94 N.H. 278.
In the fifteen years since the testators death, the defendant has fiduciary duty toward the plaintiff which he has never denied. Prior to 1948, the duty was not violated. Thereafter the violation is limited to the Stevens corporation according to the decree of the Superior Court. There is no finding of false representations, intentional deceit or actual fraud but a failure to fully and frankly inform the plaintiff of the effect of the incorporations of the Manchester business in 1948. The plaintiff was over seventy years of age and had a "limited knowledge of corporate finance and structure" and it is not always an easy feat for a fiduciary to adequately perform his duties in such cases. Furthermore the transactions that led up to the incorporation were handled by a law firm that had acted for the estate for a long period of time and did not act as the agent of either the plaintiff or the defendant individually.
In effect the defendant is charged with constructive fraud (Cotton v. Stevens, 79 N.H. 224) which is a rather ambiguous device for preventing the unjust enrichment of one person at the expense of another even though no intentional wrongdoing may be involved. As a result of the incorporation of the Manchester business the defendant became the owner individually of all the stock and the plaintiff was an unsecured creditor of the corporation. Although the position of the defendant was a difficult one, there is evidence to support the findings below that the plaintiff would never have entered into the transaction if she had understood it. Construing the findings most favorably to the prevailing parties, they cannot be set aside on appeal in this case.
Since the findings are supported by the evidence it follows that a decree allowing rescission is proper. Page Belting Co. v. Prince, 77 N.H. 309. This brings us to the question whether the terms of the decree do justice and equity to the parties in the litigation. Cotton v. Stevens, 82 N.H. 105. In granting rescission the decree recognized that the plaintiff was entitled to such relief only "upon doing what equitably she ought to do under all the circumstances." It was determined that equity required the defendant "be left in no worse position than he would have occupied if he had continued to operate the business under the partnership agreement of July 8, 1943."
When one breaches a fiduciary duty the court may in its discretion deny all compensation, allow a reduced compensation or allow full compensation. 4 Bogert, Trusts Trustees, s. 979. "In the exercise of the court's discretion the following factors are considered: (1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault; (3) whether the breach of trust related to the management of the whole trust or related only to a part of the trust property; (4) whether or not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the trustee's services were of value to the trust." Restatement, Trusts, s. 243, comment c. It will be noted that the defendant stands in a favorable position under most of these factors.
One who is charged as a constructive trustee on the basis of constructive fraud is not to be penalized in awarding compensation particularly where there is no final loss to the beneficiary and the breach of trust was not intentional. 2 Scott, Trusts, s. 243. These principles have been applied to an executor as well as a trustee (McInnes v. Goldthwaite 94 N.H. 331, 338) and they are applicable to the defendant in this case. The defendant has more than doubled the net worth of the business since the time he assumed sole management of it. The granting of rescission will therefore result in no loss to the plaintiff but the terms of the rescission should be such that the defendant's efficient management may be compensated for in an equitable manner. The present decree does not fully accomplish this.
The court has found and the evidence clearly indicates that the only party to this litigation that is responsible for the value of the Stevens corporation as a going concern is the defendant. The increased net profits of the business particularly since its incorporation are the culmination of the more productive years of the defendant's life. To base his compensation on the partnership agreement of 1943 is not adequate or equitable as a condition to the order of rescission of the Stevens corporation made by the court when no damage will result to the plaintiff. See Record v. Trust Company, 89 N.H. 1. The decree should not only protect the interests of the plaintiff, and the equal reversionary interests of her children but also do equity to the defendant. All of these objectives of the will and codicil can be approximated by amending the decree to provide that, for the fiscal years ending in March of 1949, 1950 and 1951, the defendant shall be entitled to the net profits of Stevens corporation less such sums as he received from the business, including his salary, during those years and also less the sums paid or allocated to the plaintiff during said years. This may not be a perfect solution of a matter which defies certain determination after three years of litigation. However it is preferable to the negative and sure method of doing injustice by sustaining an inadequate award on the theory we cannot tell exactly how much to award.
Decree affirmed as modified.
All concurred.