Before GOODRICH, McLAUGHLIN and HASTIE, Circuit Judges.
This case involves the question of the defendant's liability individually and as trustee under a trust settlement executed by him in May, 1939. The plaintiff charges the defendant with a breach of the trust. The district court denied relief and gave judgment for the defendant in an opinion which very carefully analysed the issues and reached conclusions thereon. The plaintiff appeals.
In 1938 the defendant acquired the entire capital stock of a company named United Engineers and Constructors, Inc. This was and is a service organization which provides engineering services in connection with the designing and erection of industrial plants, chiefly in the public utility field.At the time defendant acquired this stock the company was insolvent. The next year defendant created a trust with the stock as the trust res. The beneficial interests were represented by what the document called trust "units." The defendant issued slightly more than half of these to himself and divided the remainder among persons he considered to be key employees of the company, among whom was this plaintiff. No consideration was asked by nor paid to the defendant.
The plaintiff, who was the defendant's predecessor as President of United Engineers, remained in the company's employ until 1944. At that time he was seventy-five years of age. Four years later, relying upon the authority claimed to be given him by the trust deed, the defendant cancelled the plaintiff's trust "units" and offered him $30 per unit therefor. This price the plaintiff claims to be so grossly inadequate as to constitute a breach of trust by the trustee.
The case is in federal court by diversity only. Plaintiff is a resident of Massachusetts; the defendant a resident of New Jersey. Plaintiff suggests New Jersey law governs as this is "a matter of interpretation" of the trust deed. Restatement, Conflict of Laws § 296. Defendant says Pennsylvania law governs as this is a matter of administration of the trust. Restatement, Conflict of Laws § 297. The trust instrument was executed in Philadelphia and United Engineers has its home office in Philadelphia. We think the question is not the meaning of words as used but rather their legal effect, and that, consequently, Pennsylvania law governs. See Restatement, Conflict of Laws § 296, comment a. The parties agree, however, that they find no divergency between Pennsylvania and New Jersey law in this matter which affects the result here. We agree also.
This trust instrument was drawn to give the trustee a very wide latitude. In paragraph 10 thereof it is provided that in selling the interest of a beneficiary "the Trustee shall fix such price therefor as he shall determine to be fair." Then the document goes on to say "the Trustee's judgment in this regard shall not be subject to review by any court or otherwise." And the concluding paragraph of the trust instrument provides "Norshall the Trustee * * * be liable to any beneficiary * * * for any act whatever done in the administration of this trust except for wilful and intentional breach of trust."
It is suggested that these provisions plus a specific finding made by the district court should settle this case in favor of the defendant. The district court concluded its discussion of the matter by saying "the Court finds that the defendant as trustee exercised his discretion honestly and in good faith and within the limits accorded him by the Declaration of Trust." The reference to the trustee's honesty and good faith is reference to a fact and constitutes a finding. The latter part of the statement, we think, involves a conclusion of law which will be discussed hereafter. We have, then, these two exculpatory provisions plus a specific finding of good faith on the part of the trustee.*fn1
We do not think, however, that the case can be settled as peremptorily as this argument indicates. It is true that the trust settlement gives to the trustee an unlimited discretion in carrying out the trust which he set up. But we think we still have the question whether the trustee was acting, with regard to the sale of the plaintiff's units, within the authority given by the trust instrument. If he goes beyond that authority and devotes the trust to persons other than beneficiaries and to matters other than those which he, himself, has specified in his trust deed, he is not, even though acting in good faith, acting in accordance with that document. If he does that, he has passed beyond the area where he is protected in the exercise of the discretion which the instrument gives him in administration of the trust.
The solution of the question must turn upon the language of the trust deed. Whatever understanding the settlor may have had, he is limited by what he did in setting up this trust. Here is where the plaintiff's strongest argument comes.
In paragraph 4 it is provided that "The beneficiaries of this trust * * * shall be the holders named in certificates of interest * * *." In paragraph 6 of the same document it is provided that "Each beneficiary shall continue as such as long as such beneficiary continues in the active service of United Engineers & Constructors, Inc." It appears from the record, both in the answers to interrogatories submitted to the defendant and in correspondence between the parties, that Colonel Chance had a very definite view about his own purpose in setting up the trust. In one place he said: "My basic purpose in setting up the trust was to share with responsible members of the active staff of the corporation the earnings their efforts helped produce." This point of view is reiterated over and over again in the record.
In furtherance of this purpose, defendant admittedly priced plaintiff's units low enough to be purchased by the company's moderately-salaried employees. And we are willing to make the same assumption which the district court did, that the valuation placed on the units by the defendant was less than their "true" value.
The plaintiff says all this talk about purpose is very interesting but cannot affect his rights which stem from the trust deed, and this document by its terms makes him a beneficiary. He argues that it does not matter that he did not pay anything for his trust units. Since he is a beneficiary under the deed, the trustee, like any other trustee, must secure for him the best possible price for his interest. Because in carrying out the power to sell the trust units, the trustee looked to the interest of potential beneficiaries, rather than to that of a present beneficiary, and thereby undervalued plaintiff's holdings, the trustee has committed a breach of trust and is responsible therefor.
We, therefore, get down to the basic question in the case. Is there authority in the trust deed for the defendant to carry out what he has considered to be the basic purpose of the trust which he set up? We conclude that the answer is in the affirmative, and we reach that conclusion by noting ...