No. 203 Philadelphia 1982, APPEAL FROM THE DECREE OF DECEMBER 18, 1981 IN THE COURT OF COMMON PLEAS OF PHILADELPHIA COUNTY, ORPHANS NO. 2395 of 1965.
Walter E. Nelson, Jr., Philadelphia, for Village Improvement, appellant.
Lawrence Barth, Deputy Attorney General, Philadelphia, for Commonwealth, appellant.
Davil L. Grove, Philadelphia, for Weaver, Campbell and Spellessy, participating parties.
Norman H. Brown, Philadelphia, for Provident Nat'l. Bank, participating party.
Cavanaugh, Brosky and Cirillo, JJ.
[ 323 Pa. Super. Page 274]
The charitable beneficiary under a testamentary trust seeks to surcharge the corporate trustee and the individual trustee's estate for the amount of losses incurred on certain trust investments. The questions raised require an interpretation of provisions of the will of Frances R. McCredy, deceased.
Frances R. McCredy died on December 26, 1964. She left a will dated June 24, 1954, with codicils dated June 5, 1961 and November 25, 1964. Item Five of the will, as amended by the first codicil, left her entire residuary estate for the creation of a perpetual charitable trust, subject to certain life interests not relevant to this case. The will provided that trust income was to be paid in semi-annual installments forever to the Village Improvement Association, a tax-exempt women's club, for the operation and maintenance of the Doylestown Emergency Hospital.
Item Six of Mrs. McCredy's will reads:
In the management and control of my Trust Estate, I order and direct as follows:
(a) So long as he shall live and shall desire to be so employed, I order and direct that Arthur E. Spellissy shall have complete and absolute control and oversight of the management of said Trust, and during that time that the Corporate Trustee hereinafter named shall follow his directions blindly and implicitly, doing only the clerical work involved, keeping the records, etc. and having the physical care and custody and possession of the papers, documents, securities and muniments and evidences of title of the property and assets of said Trust. Under no circumstances shall he or his Executor or Administrator
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be liable to any person at any time or in any proceeding whatever for anything whatever which he may do or direct to be done in reference to said Trust, nor likewise shall said corporate Trustee be liable, provided only that it obey his directions so long as he shall act as Investment Counsel for said Trust. For his services as Investment Counsel I direct that he shall be paid his regular current compensation for such oversight and advice, in addition to whatever sum may be paid him for his services as co-executor and co-trustee.
(b) In the management and control of the property and assets of said Trust, I order and direct that the Executors and Trustees and their successors as fiduciaries shall have such rights, powers and privileges as follow herein: My Executors and Trustees may retain any investment, asset or property which I shall have at my death so long as deemed wise and advantageous. They may also, in any manner they deem wise, sell and dispose of any trust asset or property . . . at any time if deemed wise and advantageous . . . . They may invest trust funds in any type or kind of property or investment whatever, real or personal, including shares of common or preferred corporate stocks, and corporate bonds, and in "common trust funds", though same be managed by the corporate trustee . . . . They shall not be confined to income-producing property, nor such as is a legal investment for trust funds . . . . And they and their successor may exercise all or any one of the foregoing powers without any liability whatever to any beneficiary or any other person for any loss or depreciation in value of any trust asset, always provided that said corporate Trustee shall do therewith as directed by said Spellissy, so long as he shall act as Investment Counsel for said Trust.
In Item Eight of the will, Mrs. McCredy appointed "my friend and Investment Counsel ARTHUR E. SPELLISSY" and the Provident Trust Company of Philadelphia, to exercise the foregoing powers as both co-executors of her estate and co-trustees of the trust. Item Eight also provided that
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should Spellissy cease to act as executor or trustee, he could continue to act as investment counsel to the trust so long as he desired.
After termination of the life interests previously mentioned, Spellissy and Provident Trust Company (now Provident National Bank) filed their final account as executors. By an adjudication dated June 30, 1969, the Philadelphia Court of Common Pleas, Orphans' Court Division, awarded the remaining estate to Spellissy and Provident as trustees. They continued as co-trustees of the trust, with Spellissy making all investment decisions for the trust and with Provident restricting itself to clerical duties, until Spellissy died on May 31, 1974. Because of Spellissy's death, Provident as surviving trustee filed an account covering the period from the inception of the trust to May 27, 1976. The executors of Spellissy's estate joined in the account insofar as it relates to Spellissy's period of stewardship.
The value of the trust principal had declined dramatically during the account period,*fn1 and the Village Improvement Association (hereinafter "VIA"), together with the Attorney General as parens patriae for charities, filed objections to the account. The objectants sought to surcharge the trustees on the basis of their investments in the securities of three corporations: Photon, Inc., Phoenix Steel Corporation, and Chrysler Corporation. The objectants alleged that the trustees breached two duties in making and retaining these investments: the duty of prudent fiduciary investment, and the duty of undivided loyalty to the trust. Judge Theodore S. Gutowicz of the Philadelphia Orphans' Court heard eight days of testimony and the parties' oral arguments. On August 10, 1981, Judge Gutowicz dismissed the objections to the account in a comprehensive opinion and adjudication. The judge ruled that Mrs. McCredy had established Arthur Spellissy's personal investment philosophy, rather than the rule of prudent investment, as the standard by which trust
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investments were to be measured. The judge also ruled that the trustees had not breached their duty of undivided loyalty, and that with respect to Photon securities Mrs. McCredy had waived the rule of undivided loyalty by bequeathing Photon securities to the trust with full knowledge that Spellissy was personally involved in the company. The VIA and the Attorney General filed exceptions to the adjudication, and the orphans' court sitting en banc dismissed the exceptions in a final decree dated December 18, 1981. The exceptants appeal, pursuing the same arguments they made in the orphans' court.*fn2
We will affirm the Orphans' Court of Philadelphia.
Mrs. McCredy's relationship to Arthur Spellissy dated back to May 1935. Mrs. McCredy, herself the widow of an investment adviser, in that month engaged Spellissy as her investment adviser and provided him with $240,780 to invest for her. Later she gave him $17,000 to invest. From that time on, every increase in Mrs. McCredy's invested capital came from securities as to which Spellissy rendered investment advice. By 1954, the year she executed her will, the market value of her securities had reached $1,009,003; by 1961, the year she executed her first codicil, her securities were worth $1,726,218; when she died at the age of ninety-six, her securities had a market value of over $2,750,000.
Mrs. McCredy took an active interest in her investments. She visited the offices of Spellissy's investment advisory firm more frequently than any other client, and discussed each investment with Spellissy before it was made. She received annual reports detailing her investments, plus all correspondence sent to shareholders by companies in which she had investments. In November of 1960, with age curtailing her mobility, Mrs. McCredy opened a custodian account at Provident National Bank for the keeping of her securities. She continued to receive annual investment
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reports directly from Spellissy, but shareholder correspondence thereafter went to Provident.
Spellissy was wed to his work as an investment adviser. He had founded his own firm in 1931; the firm, Spellissy & Associates, was registered as an investment adviser under federal and state law, and was incorporated in 1966. The firm was not registered under law as a broker-dealer of securities. Spellissy and his firm enjoyed an excellent reputation in the Philadelphia financial community. Spellissy had a unique investment philosophy. He believed that appreciation of principal was the best way to protect the value of a portfolio's securities; consequently he would sacrifice current income for future principal appreciation. Spellissy recommended to his clients that they carry certain "special situation" securities in their portfolios. According to Spellissy's investment philosophy, a "special situation" would have some feature making it a distinctively attractive hold; usually it was a modest-sized company undergoing some development that gave it special promise for the future. "Special situations" usually presented opportunities not followed or appreciated by the general investing public; they would not be considered standard investments, and a trust company like Provident usually would not see fit to invest in them for its accounts.
Of the three investments challenged by the VIA, at least two -- Photon and Phoenix Steel -- were decidedly "special situations" within Spellissy's investment philosophy.
Photon, Inc., developed, manufactured, and sold high-speed phototypesetting equipment. High-speed phototypesetting represented the first basic innovation in typesetting since the introduction of hot lead typecasting in 1886. Spellissy considered Photon to be in the forefront of a new technology, and personally invested in Photon stock as early as 1951. Spellissy was very enthusiastic about Photon's future, and remained so until his death. He served on its board of directors from May of 1959 until February of 1974. He served as its treasurer, without salary, from August
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to August 1973. When he died on May 31, 1974, he held 503,400 shares of Photon common stock, approximately ten percent of the outstanding total. He was then the largest individual shareholder in the company.
Spellissy also recommended Photon securities to his clients and associates; specifically, Mrs. McCredy first purchased stock in Photon in July 1953, and she owned Photon securities continuously from that time until her death in December 1964. As part of her estate, she passed $15,000 Photon five percent convertible debentures due December 1, 1971, and 3,250 shares of Photon common stock. The total cost to Mrs. McCredy of these Photon securities had been $49,506; their fair market value at her death was $78,500.
In June of 1965, her executors exercised previously acquired rights to purchase 750 shares of Photon common stock for $9,000. On September 13, 1968, the executors received 12,000 additional shares of Photon common stock in a four-for-one stock split. By the time the executors filed their final account in March of 1969, ...