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INTER VIVOS TRUST JEANNE P. MENDENHALL (03/14/79)

SUPREME COURT OF PENNSYLVANIA


decided: March 14, 1979.

IN RE INTER VIVOS TRUST OF JEANNE P. MENDENHALL, SETTLOR

No. 137 January Term 1977, Appeal from the Decree of the Court of Common Pleas of Chester County, Orphans' Court Division, at Estate No. 1975-924, Audit No. 151-1975.

COUNSEL

Mercer D. Tate, Philadelphia, for appellant.

W. Edward Greenwood, Gawthrop & Greenwood, West Chester, for appellee.

Eagen, C. J., and O'Brien, Roberts, Nix, Manderino and Larsen, JJ. Pomeroy, former J., did not participate in the consideration or decision of this case. Manderino, J., filed a dissenting opinion.

Author: Eagen

[ 484 Pa. Page 79]

OPINION OF THE COURT

This is an appeal from the final decree of the Court of Common Pleas, Chester County, Orphans' Court Division, dismissing exceptions of the settlor-beneficiary to the adjudication entered following audit of the amended account of Southeast National Bank of Pennsylvania, trustee, under a Deed of Trust executed by Jeanne P. Mendenhall, dated October 9, 1969.

The amended account covering the period from October 9, 1969 to October 31, 1975, was audited before the Orphans' Court on July 7, 1976. At that time, settlor objected to the account and requested surcharge of the trustee for the following reasons: (1) failure to invest large amounts of cash; (2) failure to sell on two separate occasions a holding of Philadelphia Electric preferred stock; (3) investment and retention of trust assets in Franklin New York Corporation; and, (4) improper concentration of trust assets in bank securities.

Pursuant to the parties' stipulation that the trust lost $550 income as a result of uninvested cash, the auditing judge awarded a surcharge in that amount. The remaining objections were denied, and, on July 29, 1976, the amended account was confirmed nisi, subject to a surcharge of $550. Exceptions filed to that adjudication were dismissed and the adjudication of July 29, 1976, was adopted as the court's final decree.

[ 484 Pa. Page 80]

Initially, we must decide whether the Orphans' Court applied the correct standard in evaluating the trustee's performance and in concluding there was no breach of duty in its management of the Mendenhall trust assets. Generally, a trustee who is authorized to retain investments need only exercise the skill and judgment which a prudent person, under similar circumstances, would exercise in connection with the management of his or her own estate. Mereto Estate, 373 Pa. 466, 96 A.2d 115 (1953). However, if the trustee possesses or procures its appointment by representing it has greater skill than that of a person of ordinary prudence, then it is required to exercise such greater skill. Killey Trust, 457 Pa. 474, 326 A.2d 372 (1974). Estate of Cahen, 483 Pa. 157, 168-169, 394 A.2d 958, 964 (1978). See also Restatement (Second) of Trusts § 174 (1959).

At audit, settlor maintained that Southeast National Bank (Southeast) was a corporate fiduciary possessing greater skill in the management of trust assets than a person of ordinary prudence and, furthermore, that Southeast, in procuring its appointment as trustee in this matter, represented itself as having such greater skill. Accordingly, settlor argued Southeast should be judged by the standard of a person with such special skill. The auditing judge rejected settlor's contention stating:

"In this case there is no showing that this trustee either had extraordinary skill in the administration of Trusts or that it procured its appointment as trustee in this Estate by representing that it had such skills. For that reason we need not further consider that portion of the rule."

The judge than proceeded to evaluate Southeast's administration of the trust according to the "prudent man" standard and concluded settlor had not satisfied her burden of proving an abuse of trustee's discretionary authority. Accordingly, the court denied settlor's claims for surcharge.

Our study of the record compels disagreement with the court's statement that "there is no showing that this trustee . . . had extraordinary skill [i. e. greater skill than the ordinary prudent man] in the administration of trusts

[ 484 Pa. Page 81]

. . .." Hence, we rule the court erred in applying the "prudent man" standard in this case and will remand the record for reconsideration in light of the skills actually possessed by the trustee which skills were greater than those of a prudent man.

The basic measure of a trustee's duty was established in early decisions of this Court which held a trustee was required to exercise only "common skill, common prudence and common caution," and would not be held liable for losses to the trust corpus so long as it acted "as others do with their own goods and in good faith and are not guilty of gross negligence." Neff's Appeal, 57 Pa. 91, 96 (1868). See also Eyster's Appeal, 16 Pa. 372 (1851).

Restatement of Trusts § 174 (1935) stated a trustee's duty in terms of the "common prudence" standard but set forth an exception which required a trustee having superior skill to exercise such skill.*fn1 This Court adopted Section 174 of the Restatement in Stirling's Estate, 342 Pa. 497, 504, 21 A.2d 72, 76 (1941). See also Killey Trust, supra; Lohm Estate, 440 Pa. 268, 269 A.2d 451 (1970); Mastria Estate, 413 Pa. 278, 196 A.2d 653 (1964); Glauser Estate, 350 Pa. 192, 38 A.2d 64 (1944).

In the instant case, the Trust Administrator for Southeast's Trust Division testified regarding its investment review procedures during the term of the Mendenhall trust as follows: An investment officer was assigned to each trust account. The bank's investment officers formed an investment committee which reviewed the bank's holdings and made recommendations to the Trust Administration Committee which made final decisions regarding the acquisition and retention of investments. The bank's investment officers conducted periodic reviews of all trust accounts based on detailed analyses of the holdings in each account. In

[ 484 Pa. Page 82]

    addition, the bank employed outside firms as investment analysts, including Merrill-Lynch, Mitchell-Hutchins, Provident National Bank, Drexel-Burnham and Studley-Sherbert. Thus, the record does demonstrate Southeast possessed greater resources and skills than those of the ordinary individual trustee.*fn2 If, on remand, the court determines Southeast failed to use the resources and skills it possessed in administering the Mendenhall trust, a surcharge is justified for any depreciation in the value of principal resulting from the breach of duty.*fn3

One further issue requires discussion. Settlor also asserts Southeast's liability for breach of trust under a second exception to the rule of "ordinary prudence" as added by the Restatement (Second) of Trusts § 174 (1957) which states:

"the trustee who procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence . . . is under a duty to exercise such skill." [Emphasis added.]*fn4

In Killey Trust, supra, this Court adopted the foregoing "representation rule," stating that

[ 484 Pa. Page 83]

". . . one who procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence will be held to have such skill as he has represented." [Emphasis added.] 457 Pa. at 477, 326 A.2d at 375.*fn5

In Killey Trust, supra, we exacted a higher standard of responsibility from the bank-trustee after concluding it had advertised itself as being an expert in the handling of estate and trust accounts.

In the instant case, no public representation of superior skills appears in the record. Settlor maintains that the bank officer, who assisted her in creating the trust, orally represented the bank was qualified to handle a trust of this type and that she relied on that representation. Even if we accepted an oral representation as the equivalent of public advertising for the purpose of determining the appropriate standard for a trustee's conduct, the record does not establish a representation of superior skills was made. The only pertinent testimony was given by settlor on direct examination:

"Q. And did Mr. Hume indicate to you that the bank was qualified to handle this type of a trust for you?

" A. Yes. We just thought that they were."

This, without more, is insufficient to prove Southeast procured its appointment as trustee by representing it had greater skill than the ordinary person.

[ 484 Pa. Page 84]

Decree vacated and the record is remanded for further proceedings consistent with this opinion. Costs on trustee.

MANDERINO, Justice, dissenting.

I must dissent. The majority's departure from the "ordinary prudent person" standard is completely unwarranted.

The auditing judge correctly decided that the evidence did not show that the trustee, Southeast National Bank, had extraordinary skill in administering estates or that it made such a representation to the settlor in being appointed as trustee. Absent such a representation that the trustee has extraordinary skill, the appropriate standard to be applied is whether the trustee exercised the skill and judgment which a prudent person under similar circumstances would exercise in connection with the management of his or her own estate. Mereto Estate, 373 Pa. 466, 96 A.2d 115 (1953). This standard is commonly known as the "ordinary prudent person" standard.

[ 484 Pa. Page 954]

Although the majority agrees that the trustee did not represent to the settlor that it possessed extraordinary skills, the majority stretches this analysis to reach a desired result. The majority is remanding this appeal because the record shows that the trustee possesses "greater resources and skills than those of a ordinary individual trustee." Page 954. A finding of liability must be imposed if on remand, the trustee has failed to use "greater resources and skills." Id.

The majority's standard incorporates a new and different element in determining whether the trustee possesses "greater resources." This Court has never applied such an onerous burden upon corporate or individual trustees. See Killey Trust, (Concurring opinion of Roberts, J.) 457 Pa. 474, 326 A.2d 372 (1974).

[ 484 Pa. Page 85]

Therefore, as the trustee in this appeal made no representation that it possessed extraordinary skills, liability should not be imposed.


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