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Ledbetter v. First State Bank & Trust Co.

June 25, 1996


Appeal from the United States District Court for the Middle District of Georgia. (No. 93-124-1-ALB-AMER). Duross Fitzpatrick, Chief Judge.

Before Birch, Circuit Judge, Godbold, Senior Circuit Judge, and O'kelley,*fn* District Judge.

Author: Godbold

GODBOLD, Senior Circuit Judge:

Frederick D. Ledbetter is the beneficiary of a written, revocable trust, of which he is also the trustor, and First State Bank and Trust Company is the trustee. The bank, located in Georgia, is a wholly owned subsidiary of First State Corporation ("FSC"), a two-bank holding company. The bank, as trustee for plaintiff, owns less than 1/2% of 1% of the outstanding stock of FSC. Considering other trusts for a number of plaintiff's relatives, the bank owns nearly 40% of the holding company's outstanding stock, although it has the power to vote only 6% to 8%.

Plaintiff sued the bank, alleging that as trustee for him it had numerous conflicts of interest and that in several respects it violated duties owed to him as trust beneficiary by acting or failing to act in his interest.

The district court found that the bank had conflicting interests. Nevertheless it granted summary judgment to the bank. We reverse.

I. Plaintiff's claims

Plaintiff makes four major claims:

(1) That the bank as trustee failed to "encourage, prompt, and if necessary join with other shareholders" of FSC to require FSC to engage in discussions with a bank holding company interested in merging with or purchasing FSC. The management of the defendant bank and of FSC--principal officers and directors--is substantially common. FSC has maintained an anti-merger policy directed at keeping FSC and its two subsidiary banks independent. Representatives of First Alabama Bancshares, Inc., a bank holding company,*fn1 met with Morgan Murphy and Douglas Wren, who are the senior officers of FSC and the bank, and explored the possible advantages of a merger or sale between FSC and First Alabama. First Alabama was told that FSC was not interested. Subsequently First Alabama confirmed in a letter to Murphy its interest in a merger and what First Alabama saw as the benefits of a merger. No formal offer was made by First Alabama.

Plaintiff contended in the district court that the substantial minority of FSC stock held by the bank in various trusts for members of his family, including plaintiff, gave the bank as trustee power to influence the actions of FSC for the benefit of trust beneficiaries, and that negotiations with First Alabama would have led to benefits to plaintiff and other trust beneficiaries. According to plaintiff, the possibilities of sale or merger of FSC were not communicated to, or not fully communicated to, or were falsely communicated to, the bank and its trust committee. The trust committee was never consulted or informed of the First Alabama approach and never considered it. Additionally, though the bank's principal officers and directors knew of the First Alabama approach and FSC's rejection, they took no action to have the bank as trustee consider the matter on behalf of the beneficiaries whose trusts held FSC stock.

(2) Pursuant to authority of its management, which was essentially common with that of the bank, FSC made a public offering of its treasury stock, the effect of which, plaintiff contends, was to dilute the value of FSC's stock held in plaintiff's trust and to diminish the voting power of the bank as trustee of plaintiff's trust. Plaintiff asserts that FSC's offering of its treasury stock was motivated by a desire to dilute the interests of trust beneficiaries (and other holders of FSC stock) and thereby strengthen FSC's anti-merger strategy, and that the bank as trustee acted disloyally because it made no effort to stop the FSC offering.

(3) After plaintiff filed this suit the bank immediately transferred to plaintiff all FSC stock held by it in his trust but continued to hold other assets in his trust. Shortly thereafter it resigned as trustee. Plaintiff contends that these acts by the trustee were taken without regard to his interests as beneficiary and that the resignation was intended to deprive him of standing to pursue this suit.

(4) Payments made to the bank's principal officers by FSC violated Georgia law.

We hold that summary judgment was improperly granted on all four claims.

II. Breach of the duty of undivided loyalty

The foremost duty which a fiduciary owes to its beneficiary is undivided loyalty. Clark v. Clark, 167 Ga. 1, 144 S.E. 787 (1928); Fulton Nat'l Bank v. Tate, 363 F.2d 562 (5th Cir. 1966). Accord, Comptroller's Handbook for National Trust Examiners, July 1984, p. 1.*fn2 If trustee places itself in a position where its interests might conflict with the interests of the beneficiary, the law presumes that the trustee acted disloyally; inquiry into such matters as whether the transaction was fair is foreclosed and the burden shifts to the trustee to show it received no benefit. It is not necessary for the beneficiary to show that the fiduciary acted in bad faith, gained advantage, fair or unfair, or that the beneficiary was harmed. Fulton Nat'l Bank, 363 F.2d at 571-72. The defendant bank's policy manual acknowledges that the bank owes a duty of undivided loyalty to the beneficiaries of the trusts that it manages. In Clark v. Clark the Supreme Court of Georgia discussed the duty of undivided loyalty.

As long as the confidential relation lasts, the trustee owes an undivided duty to the beneficiary under the trust, and cannot place himself in a position which would subject himself to conflicting duties, or expose him to the temptation of acting contrary to the best interests of the cestui que trustent. 3 Pomeroy's Equity Jurisprudence, § 1077. Beneficiaries of a trust are entitled to have it administered by trustees entirely at the service of the trust and above suspicion. Crummey v. Murray, 130 Misc. 378, 224 N.Y.S. 49 [(1927)]. The purpose of this rule is to require a trustee to maintain a position where his every act is above suspicion, and the trust estate, and it alone, can receive, not only his best services, but his unbiased and uninfluenced judgment. Whenever he acts otherwise, or when he has placed himself in a position that his personal interest has or may come in conflict with his duties as trustee, or the interests of the beneficiaries whom he represents, a court of equity never hesitates to remove him. In such circumstances the court does not stop to inquire whether the transactions complained of were fair or unfair; the inquiry stops when such relation is disclosed.

Clark, 144 S.E. at 789.

The defendant bank was in a position of obvious and pervasive conflicts of interest. It is a wholly owned subsidiary of FSC. As trustee it owns nearly 40% of FSC stock. The district court recognized that a conflict of interest arose from the bank's holding in trust stock of its parent. The bank's trust department manual recognizes this conflict. A trustee's ownership of its own stock, unless consented to or waived, is inconsistent with the rule of undivided loyalty. The rule of undivided loyalty in this situation is based upon the possibility that circumstances may arise in which the trustee and its officers and directors are in a position when determining whether to sell or retain the stock they cannot appraise the problem with the same detachment with which they approach the sale of other securities. IIA Austin W. Scott & William F. Fratcher, The Law of Trusts § 170.15, p. 369; Comptroller's Handbook, p. 3. As the district court noted, the rule is no different when the stock owned is that of an affiliated corporation. The trustee may be tempted to favor itself or the affiliate. See Albright v. Jefferson County Nat'l Bank, 292 N.Y. 31, 53 N.E.2d 753, 151 A.L.R. 897 (N.Y. 1944). The question is not whether the trustee and the affiliated corporation are separate legal entities but whether the trustee has placed itself in a position where its interests, or the interests of its affiliate, may conflict with its duties to its beneficiaries. The wholly owned subsidiary-parent relation with common management is the paradigm of affiliation.

Connection between the bank and FSC reached far beyond ownership of stock. Management of the two corporations is overlapping and interlocking. The summary judgment evidence discloses that the bank and the holding company are tightly bound together by a web of overlapping duties, responsibilities, and relationships, by cross-assignment of principal officers and directors of the bank and of FSC, and of members of the trust committee of the bank, and by compensation of principal officers. At times relevant to this case Morgan Murphy was chairman of the board, president, and chief executive officer of FSC and chairman of the board and chief executive officer of the bank. Douglas Wren was president and chief operating officer of the bank and executive vice president and chief operating officer of FSC. Both served on FSC's executive committee which also served as the compensation committee.*fn3 Both served on the bank's trust committee. The head of the bank's trust department served on the trust committee and was a director of the bank and of FSC. The other members of the trust committee were FSC directors. Two members of the trust committee served on FSC's executive committee. Bank officers, including Murphy and Wren, were compensated directly by FSC, not by the bank, and the bank in turn paid FSC a management fee.

Thus, the bank's conflicts of interest that exist because of these relationships run far more broadly and more pervasively--and affect the issues in this case to a much greater extent--than ...

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