Stanton v. Wells Fargo Bank & Union Trust Co.

A testamentary trust expressly limited the trustees in investing and reinvesting the trust property to the purchase of certain types of bonds. This action was brought to secure a modification of this provision so as to permit the trustees to invest and reinvest in those securities permitted by section 2261 of the Civil Code.

The action was initiated by three of the four life beneficiaries of a trust created by the will of Sanford Sachs, who died in 1931. The estate was distributed in July of 1936. Under the terms of the decree of final distribution, the residue of the estate was distributed to the Wells Fargo Bank and Union Trust Company, and to Hilda Newbauer, a niece of

The trust provides that upon Hilda Newbauer’s death her share of the estate will vest in her testamentary appointees, and, failing appointment, in her issue. The other three income beneficiaries are also given the power of appointment, and, failing appointment, the share of such income beneficiary vests in his or her issue, and, failing issue, in the survivor or survivors of the three. J. Newbauer, one of the petitioners, died prior to trial without exercising his power of appointment and without issue. His share of the estate was thus vested in his two sisters, Lillian Stanton and Helene Preis. Hilda Newbauer has been declared incompetent and Helene Preis has been appointed cotrustee with the bank. By the same order substituting her as trustee Helene Preis was eliminated from this proceeding as a petitioner. Thus, by the time of trial Lillian Stanton was the sole petitioner in this proceeding.

A guardian ad litem was appointed to represent Hilda Newbauer, and that guardian appeared in the proceedings and requested that the prayer of the petition be granted. Helene Preis and her children, as well as those of Lillian Stanton, also appeared and also requested that the petition be granted. Thus, all persons in being, that is, all life beneficiaries and their children and one of the two trustees, appeared in the proceeding requesting that the petition be granted. The Wells Fargo Bank, one of the two trustees, objected to the granting of the petition. The only persons not represented in the proceeding are the possible unborn issue of Lillian Stanton and Helene Preis. Both of these life beneficiaries were over 40 years of age when this proceeding was instituted in December of 1951.

The trial court entered its judgment in favor of the petitioner ordering that the trust provisions relating to investments in bonds be amended to permit reinvestment as provided in section 2261 of the Civil Code. Wells Fargo has appealed. In Stanton v. Preis, 138 Cal.App.2d 104 [ 291 P.2d 118 ], this court denied a motion to dismiss this appeal, holding that one of two cotrustees may appeal from such a

The trust involved was executed in December of 1930. The decree of distribution was entered in April of 1936. In accordance with the terms of the will the decree provided that the trustees “shall have full power and authority ... to invest and reinvest any of the trust property ... as to the trustee shall deem fit and proper, ’ ’ subject to the limitation “that investments by the trustees shall be made only in bonds of the United States Government, in bonds of the States of the United States, and municipalities thereof, and in such other bonds (the bonds of foreign governments or foreign municipalities excluded) as shall be rated at least ‘AA’ by Moody Investor’s Service, or in the event such service shall no longer be in existence, by such first class service as such trustees shall deem best.”

The petition herein alleges that there has been a change in economic conditions not anticipated by the settlor since the trust was executed, and that, should the restrictive investment provision be followed, such changed circumstances may substantially impair the purpose of the trust. It is alleged that it was the intent of the settlor to assure the beneficiaries a continued income from the corpus in as large an amount as is consistent with reasonable investment safety; that such restrictive provision was inserted because the trust was executed in the middle of a financial depression when investments in stocks and real estate were in general disrepute; that the settlor was not innately opposed to investments in stocks; that since the death of the settlor the investment situation has been subjected to a “radical change”; that now there is confidence in investments in stocks because of the gradual rise in their market values and in their dividend rate; that such investments are now recognized as suitable and desirable for trusts; that the California Legislature has recognized this by the adoption of the “Prudent Man Rule” of investments embodied in section 2261 of the Civil Code; that the petitioner believes that some of the securities and real estate in the trust should now be sold so as to avoid loss, but, if this is done, the proceeds from such sales would have to be invested in the specified types of bonds; that under present conditions such investment in bonds would not be desirable because of their low yield and because they would not constitute a hedge against inflation; that as a result, if the restrictive investment provisions remain, the income of the life

At the trial, in May of 1955, petitioner introduced Exhibit 4 to show the nature of the investments at the date of death of the settlor, the date of distribution, and on December 31, 1954. The exhibit also gives some idea of the general change in the economy between those dates. It can be summarized as follows:

Date of Date of

Death Distribution December 31,

Composition 5-7-31 7-16-36 1954

Bonds ............ 4.2% .3% 17.4%

Preferred Stocks .. 6.8% 3.8% 2.0%

Common Stocks .... 49.9% 47.2% 50.0%

Real Estate....... 35.0% 48.2% 29.9%

Others............ 4.1% .5% .7%

100.0% 100.0% 100.0%

Total Dollar

Values ... .$3,460,516.04 $2,323,718.50 $2,860,687.21

Dow Jones Averages

Bonds ............ 95.57 103.37 101.00

Industrials........ 148.88 163.64 404.39

* Consumer Price

Index .......... 65.4 59.4 114.3

* Wholesale Price

Index .......... 47.6 52.3 109.5

*Basis: 1947-1949 = 100

Other exhibits show that two pieces of San Francisco realty increased in appraised value $60,000 between 1931 and 1954, and that an Oakland property decreased in value $225,000 between the same dates.

Five witnesses testified at the trial. Four of these were officers of the appellant bank, and the fifth, called by respondent, was an associate professor of business administration and research at the University of California. The bankers testified that the usual practice in trust administration is to buy and sell securities as conditions warrant; that if the trustee has the power only to invest in bonds, assuming a general inflationary trend, the risk to the corpus of the trust is increased, because of the reduced purchasing power of the fixed bond principal; that, when possible, it is the

Appellant concedes, of course, that since 1931 economic conditions have changed, but argues that such change alone does not warrant a court in authorizing the trustees to deviate from the terms of the trust. It is argued that to warrant deviation some emergency endangering the main trust purpose must exist, and it is contended that there is no evidence of such an emergency. Appellant considers it significant that since the inception of the trust the estate has been substantially invested in common stocks and realty, with bonds, as late as December 31, 1954, comprising only 17.4 per cent of the estate. Appellant argues that respondent seeks the deviation solely because the bond investment provision is inflexible, and believes that flexibility would be preferable, and contends such fact alone did not warrant the court in authorizing the deviation. Appellant points out (p. 19 of its opening brief) :

“. . . this lack of flexibility was inherent at the time of the creation of the trust. While flexibility may be desirable and while trustors might be better advised to provide for it, its lack does not create the emergency situation which is necessary to move the court to order deviation. . . .

“In short, there has been no showing of an emergency or exigency which menaces the trust estate and the beneficiaries, no showing of extreme hardship, of virtual necessity, of serious or any impairment of principal, or of inability to carry out the purpose of the trust which, . . . must appear in order to authorize a deviation.”

The main contention of respondent in answer to these arguments is that if the trustees are compelled to adhere to the terms of the trust the settlor’s intent and his main trust purpose would be frustrated. It is argued that all of the interested beneficiaries, including the living remaindermen, have consented to the deviation, and all will benefit by the proposed modification. Respondent refers specifically to the evi

The problem of when a court may permit a deviation from the provisions of a trust has been discussed by many commentators and text writers. (See 23 Cal.L.Rev. 86 ; 34 Cal.L. Rev. 453 ; 28 Cal.L.Rev. 785 ; 21 So.Cal.L.Rev. 433; 170 A.L.R. 1219 ; 168 A.L.R. 1018 ; 4 Pomeroy’s Equity Jurisprudence, §§ 1062, 1062b, 1073a; 2 Scott on Trusts, § 167, p. 836; 3 Bogert on Trusts and Trustees, §§ 561, 562; Rest., Trusts, § 167.)

The power to permit deviation from the terms of private trusts is analogous to the cy-pres doctrine applicable to charitable trusts. (Estate of Loring, 29 Cal.2d 423 [ 175 P.2d 524 ].) A few generalizations can be made. Normally, of course, the trust instrument constitutes the measure of the trustee’s powers. (Bryson v. Bryson, 62 Cal.App. 170 [ 216 P. 391 ].) Except in unusual or emergency situations the courts will limit the trustees to the powers conferred. But the courts will not permit the main purpose of a trust to fail by compelling slavish adherence to the administrative limitations of the trust instrument. Where the main purpose of the trust is threatened the courts will and should grant permission to deviate from restrictive administrative provisions. But the court should not permit a deviation simply because the beneficiaries request it where the main purpose of the trust is not threatened and no emergency exists or is threatened. It must be remembered that it is the theory of this rule that, by the exercise of this power, the court is not defeating the trust, but in fact is furthering it. The equity court is simply doing what the testator, presumably, would have done had he anticipated the changed conditions. In other words, the specific intent of the testator is disregarded in order to enforce his general intent.

In the instant case all persons interested in the trust

On the other hand, the considered conclusions of the settlor regarding what should constitute appropriate investments cannot be lightly disregarded. He had managed to preserve a large fortune during a terrible depression. He had seen stock investments wiped out overnight. He knew that in the past there had been recurring periods of inflation and deflation. He, the man who had accumulated this fortune, whose property it was, wanted to protect his niece and her children from such vicissitudes, and to provide them with an adequate income. He decided that this could best be done by limiting the trustee’s reinvestment powers to the purchase of certain types of bonds. While the equity court has the power in an emergency to disregard these directions, the express and considered wishes and desires of the settlor should not be cavalierly disregarded. In the instant case the judgment of the settlor, to date, has not proved devastatingly erroneous. The trustees received assets in 1936 of the value of $2,323,718.50. By December 31, 1954, these assets were worth $2,860,687.21. The distributable annual income was $88,890.60 in 1938, and by 1954 this had increased to $109,942.84. There is no evidence that any beneficiary is in want or that the distributable income is not sufficient to supply the reasonable needs of all beneficiaries. No emergency exists. The existing inflationary cycle has continued for some years. The government has adopted many economic measures to try to control and stop this inflationary trend. Some economists predict an era of deflation and others warn us of a depression. These matters are mentioned to indicate that, while the settlor may not have been omniscient, neither are the beneficiaries nor the courts, omniscient. No one can forecast, with any certainty, future events. Certainly, it is true that misguided restrictions imposed by a settlor should not be permitted to defeat his fundamental trust purpose, but it is equally true that the court should not try to guess what economic conditions may be in a few years by permitting deviations when no real emergency exists or is threatened.

It was stated as well settled that “a court of equity has the power to change the method of administering a trust estate, when it is shown that such a change is necessary to prevent loss or destruction of the trust property. ...” (P. 358.)

At page 360 the court made the following comments: “It seems only reasonable to assume that had the trustors, at the time the trust was created, any knowledge that oil and gas could be produced from the trust property, they would have had the declaration of trust provide for a lease thereof for that purpose. In giving to the trustee this right to lease the trust property for the production of oil and gas, the court is only doing what the trustors would have done had they had the same facts before them then that were before this court at the trial of this action.”

At page 361 the applicable rules were summarized as follows: “It is perfectly clear from the above authorities that the rule against courts modifying the terms of a contract, and that they should construe it precisely as the parties had made it, does not apply to declarations of trust, where the primary purpose of the trust would not be accomplished by a strict

In Leonardmi v. Wells Fargo Bank, 131 Cal.App.2d 9 [ 280 P.2d 81 , 49 A.L.R.2d 1085 ], this court affirmed a trial court’s refusal to modify the terms of a spendthrift trust by permitting an invasion of the corpus so as to increase the payments to the life beneficiary and to provide for current payments to the remaindermen. In discussing the power of the court in passing on a request for permission to deviate, this court stated (p. 12) : “It is well settled that, in the exercise of this power of permitting what the court believes that the settlor would have permitted had he anticipated the emergency that has arisen, the court may permit a deviation from the express terms of the trust. . . . But this power to modify a trust is a limited one. It is to be exercised sparingly and only in the clearest of cases.”

Another interesting California case is Security-First Nat. Bank v. Easter, 136 Cal.App. 691 [ 29 P.2d 422 ], There a trust consisted, in part, of a group of houses called Catalina Court. The decedent-settlor’s wife was given the use for life of one of the houses rent free together with the sum of $300 per month out of the net income from the corpus. The balance of income was to go to the heirs at law of the deceased, who were also the remaindermen. The trustee was prohibited from selling or in any other manner disposing of Catalina Court. Because of the depression the value and income from the real property was so reduced that the trustee was unable to make the payments in full to the beneficiaries. The trustee brought an action to secure permission to sell the property. This was resisted by the remaindermen. The trial court made findings that the purposes of the trust would be frustrated without such sale and directed a sale for the best price obtainable. This was reversed, emphasis being placed on the absence of any showing that a reasonable price or any sum whatever could be obtained for the real property, and on the fact that there was no evidence to support a finding that, if a sale were permitted and the proceeds reinvested, there would be sufficient income to carry out the purposes of the trust. While the factual situation is different from the one

In Moxley v. Title Ins. & Trust Co., 27 Cal.2d 457 [ 165 P.2d 15 , 163 A.L.R. 838 ], the majority of the Supreme Court were satisfied that a complaint requesting permission to deviate was demurrable because the plaintiff “does not allege facts showing anything in the nature of an emergency or any peculiar circumstances which were not reasonably within the contemplation of the testatrix” when she created the trust. (P. 468.) (See also Estate of Van Deusen, 30 Cal.2d 285 [ 182 P.2d 565 ]; Whittingham v. California Trust Co., 214 Cal. 128 [ 4 P.2d 142 ] ; Estate of Keet, 15 Cal.2d 328 [ 100 P.2d 1045 ].)

Cases from other states are, perhaps, more closely in point. Appellant refers us to six out-of-state cases where modification on the basis of claimed economic changes were denied. Three of these are from New Jersey. In First Nat. Bank of Jersey City v. Stevens, 9 N.J.Super. 324 [ 74 A.2d 368 ], the trust instrument was silent as to the nature of investments permitted the trustees. The plaintiff sought court permission to invest in securities other than those a fiduciary was authorized by statute to buy without a court order. The court held that the desire to invest in common stock to increase income and to hedge against inflation was not a sufficient showing of necessity or of emergency to warrant the deviation.

In Reiner v. Fidelity Union Trust Co., 127 N.J.Eq. 377 [ 13 A.2d 291 ], a trust created in 1922 required reinvestment only in such securities as were permitted by the statute as legal investments for trust funds. The plaintiff sought authoriza

“. . . In this case the whole situation was put upon the basis of economics, not the necessity of the beneficiaries. The only witnesses were the trust officer of the trust company and an investment broker.”

In Bliss v. Bliss, 126 N.J.Eq. 308 [ 8 A.2d 705 ], the trust instrument also limited investment to legáis and permission was sought to invest in nonlegals on the ground of lowered income and loss of corpus caused by inflation. At page 706 [8 A.2d] the court stated: “It is not the province of this court to allow trustees to speculate in stocks which might result in a loss to the remaindermen. ... It does not seem to me that the objects and purposes of the trust will be defeated by a continuance of the scheme set forth in testator’s will.”

Of course, if these three cases were to now arise in California, they would necessarily be decided differently because of the authority conferred on trustees by section 2261 of the Civil Code. But the theory of these New Jersey cases is relevant to our discussion.

In Rogers v. English, 130 Conn. 332 [ 33 A.2d 540 , 147 A.L.R. 812 ], deviation was denied in spite of changed economic conditions, the court emphasizing that the trust was prospering in spite of the inflexible investment provisions. The Minnesota court in In re Jones’ Will, 221 Minn. 524 [ 22 N.W.2d 633 ], refused a deviation aimed at increasing income, while the Maine court in Porter v. Porter, 138 Me. 1 [ 20 A.2d 465 ], refused deviation in a similar case where all interested parties requested it. The Maine court emphasized that there was no evidence of an emergency or that the beneficiaries were adversely affected.

Mention should also be made of a recent (1956) decision of the Missouri court—Thomson v. Union Nat. Bank in Kansas City,-Mo.-[ 291 S.W.2d 178 ]. There a trust had been created in 1913. For many years the trust earned income of between $4,800-$3,600 annually. That income had diminished to less than $1,400 annually. The trust instrument limited reinvestment to bonds. The life beneficiary and remaindermen sought permission to deviate by investing in

The eases cited by respondent involved real emergencies. Thus, in Lambertville Nat. Bank v. Bumster, 141 N.J.Eq. 396 [ 57 A.2d 525 ], a New Jersey case, the settlor, who died in 1945, prohibited the trustees from selling any of the securities in- the trust estate. Seventy-seven per cent of these securities were highly speculative. The market value of the estate by 1948 had already declined 19 per cent. The chancellor held that, had the settlor envisaged the changed circumstances, he would have permitted the deviation. All the parties interested requested the deviation, including the trustee.

In Citizens’ Nat. Bank v. Morgan, 94 N.H. 284 [ 51 A.2d 841 ], the income of the trust had been halved since the creation of the trust. The court granted relief from the restrictive investment provisions of the trust.

These cases involved real, not imagined emergencies. It is not the function of courts to remake the provisions of trust instruments. Generally, it is the duty of courts to enforce the provisions of the trust instrument. A court should not presume to remake a trust instrument even though the court believes that it could to a better job. The court’s power to permit a deviation exists so that the settlor’s main trust purpose will not fail, and to take care of grave emergencies. That is not this case. The trial court should not have permitted the deviation.

Respondent also argues that section 2261, subdivision (5), of the Civil Code supports the action of the trial court. That subdivision reads as follows: “The provisions of this section shall apply to all trusts now existing or hereafter created. Where, in trusts now existing or hereafter created, the term ‘investments permissible by law for investment of trust funds,’ or ‘authorized by law for investment of trust funds,’ ‘legal investments,’ or ‘authorized investments,’ or

Respondent argues that the provision of the trust restricting the trustees to reinvesting in bonds is no different than if the testator had limited the trustees to such investments as were then permitted by law for the investment of trust funds. In that event, of course, the rules established by section 2261 would apply.

The obvious answer to this contention is that the settlor did not state that the trustees were to be limited by what the law provided were legal investments for trustees. He specified certain types of securities regardless of what the statute then provided and without reference to the statute. The quoted provision of the statute is only applicable where the testator limits investments to statutory approved investments. It has no application where the settlor himself specifies particular investments that are prohibited.

The judgment appealed from is reversed.

Bray, J., and Wood (Fred B.), J., concurred.

A petition for a rehearing was denied June 7, 1957, and respondents’ petition for a hearing by the Supreme Court was denied July 8, 1957. McComb, J., was of the opinion that the petition should be granted.