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Cleveland Trust v. Eaton

Court of Common Pleas, Cuyahoga County
Jun 9, 1967
11 Ohio Misc. 151 (Ohio Com. Pleas 1967)

Opinion

No. 826381

Decided June 9, 1967.

Corporations — Trust company — Shares of its own stock held as fiduciary — Voting — Banking laws silent — Section 1701.47 (C), Revised Code — Applicability — Common law — Undivided loyalty — Desire for self-perpetuation in office — Ability of shareholders to review performance of management's handling of all trusts.

1. Since the statutes applicable only to banking and trust corporations contain no express authority for such a corporation to vote its own shares which it holds as a fiduciary, and Section 1103.42, Revised Code, provides that a banking corporation be governed, and its directors chosen, as provided in the General Corporaton Act, in so far as it is not inconsistent with the Banking Act, the prohibition in Section 1701.47(C), Revised Code, of a corporation's voting its own shares is controlling.

2. Although the power to vote is normally an incident to the power to hold stock, such power will not be implied from the right of a corporation to hold its own shares, as this would abrogate the purpose of Section 1701.47(C), Revised Code, to avoid an unequal distribution of power among the shareholders.

3. The voting by a trust company of approximately one-third of its own shares, which it holds in several trusts, by reason of the tendency to perpetuate its existing management in office, violates its common-law duty to avoid dealing with any trust estate in a manner which creates conflicts of interest and prevents performance of its duties thereto with undivided loyalty.

4. A trust company which has acquired or retained shares of its own stock as part of the investments of many trusts, without full disclosure to all the interested parties of the possibilities for conflicts of interests, should review all trusts in which such stock is held and ascertain that it has express authorization therefor, based upon an awareness by such parties of all material facts.

5. The practice of a trust company of voting shares issued by it and held in a fiduciary capacity violates common-law and statutory principles with regard to both the shareholders of the company and all the beneficiaries of the trusts administered by it.

6. No corporate fiduciary is permitted to hold shares issued by it unless so authorized by express language in the instrument establishing the trust.

7. No corporate fiduciary is permitted to vote any shares issued by it under the existing statutory law of Ohio.

8. Even with statutory authorization for a trust company to vote its own shares held in trust, it would be obligated to make full disclosure to its principals and secure court approval, where any doubt might exist.

9. The voting by the management of a trust company of its shares held as part of trust estates presents a conflict of interest between their desires for self-perpetuation in office and their duties of objective, undivided loyalty to the trusts under their control.

Messrs. Jones, Day, Cockley Reavis, Mr. Victor DeMarco, and Mr. George H. Rudolph, for plaintiffs.

Messrs. Marshman, Hornbeck, Hollington, Steadman McLaughlin, Mr. William F. Synder, and Mr. James J. Shiller, for defendant Eaton.

Messrs. Stokes, Stokes, Character Terry, Mr. Carl B. Stokes, and Mr. Alexander H. Martin, Jr., for defendants Watson and Calvert.


Plaintiffs herein pray that the court issue a declaratory judgment that plaintiff Cleveland Trust, as trustee of the Bartlett Trust, is entitled to vote stock of the Cleveland Trust Company, title to which is held by it or its nominee as such trustee, at any and all meetings of stockholders of Cleveland Trust and further that Cleveland Trust in its fiduciary capacity is entitled to vote Cleveland Trust stock, title to which is held by it or its nominee as trustee, executor, administrator, guardian, agent, custodian or in any other trust or fiduciary capacity, in compliance with the governing instrument, at any and all meetings of the stockholders of Cleveland Trust.

The Cleveland Trust Company, an Ohio corporation, is a bank and trust company organized and existing under and by virtue of the laws of the state of Ohio, having commenced its existence in 1894. Its issued and outstanding stock consists of 1,500,000 shares of common capital stock, of which on February 7, 1967, approximately 539,839 shares were held by it in a fiduciary capacity, as trustee, executor, administrator, guardian, agent or custodian. Of these shares 27,540 were held in the names of principals of agency or custodian accounts, while record title to a substantial part of the remaining shares is held in the name of nominee partnerships organized by the Cleveland Trust for that purpose, consisting of A. A. Welch Co., H. J. Haffner Co., and Custo, Inc. As trustee of the Bartlett Trust, the Cleveland Trust holds title through its nominee to 2,555 shares of such Cleveland Trust stock.

The defendant, Cyrus S. Eaton, and the intervening defendants, Edward C. Calvert and L. Gordon Watson, as individual shareholders, question the right of the Cleveland Trust Company through its elected management to vote Cleveland Trust stock held by it in various fiduciary capacities. The defendants advance a two-pronged attack on the practice of the Cleveland Trust in voting such shares, contending that it violates the statutory law of Ohio and constitutes a breach of fiduciary duties. On the other hand, the Cleveland Trust argues that the basic issue in its petition for the declaratory judgment is whether its practice of voting such shares held in a fiduciary capacity is prohibited by Section 1701.47(C), Revised Code.

At the outset, a brief comment on the duties of the court in handling a declaratory judgment action seems to be in order. In Sessions, Trustee, v. Skelton, 163 Ohio St. 409, 415, Judge Zimmerman succinctly stated:

"It has been observed that an action for a declaratory judgment is sui generis in the sense that it is neither one strictly in equity nor one strictly at law; it may possess attributes of both. Although declaratory judgment actions had their origin in controversies peculiar to equity, such an action may be utilized in a matter which is strictly legal. A declaratory judgment action creates no new or substantive rights, it is purely a procedural remedy, and in determining the issues presented such principles of law or of equity may be invoked as are appropriate. When such action partakes of equity it calls for the application of equitable principles and when it partakes of an action at law it utilizes any available legal principles necessary to dispose of the issues. See Borchard on Declaratory Judgments (2 Ed.) 237 et seq."

In 1 Anderson on Actions for Declaratory Judgments (2 Ed.) 576, Section 248, it is written:

"Equitable powers of courts are exercised in declaratory actions in harmony with the undoubted modern drift and tendency of the courts in dealing with matters presented to them through the instrumentality of a declaratory judgment action. It has been laid down that in connection with actions for a declaratory relief, the court has the broad and comprehensive powers of the courts of equity, in the light of the modern opinions of the courts in dealing with this procedural statute it is submitted that this holding is unassailable."

Stated in its simplest form the issue facing this court is: May the present management of the Cleveland Trust Company at the stockholders meeting for the election of directors vote directly or through its nominee the shares of Cleveland Trust stock held by it in a fiduciary capacity? In attempting to resolve this issue the court must perforce apply both legal and equitable principles in determining whether or not this general practice is proper.

As suggested by counsel, consideration of the specific provisions of over 600 instruments, with amendments thereto, governing fiduciary accounts in which Cleveland Trust holds Cleveland Trust stock is impracticable and unnecessary. The general situation is pictured in the 1967 Proxy Statement (Exhibit 1) issued by the company showing six fiduciary capacities:

"Of the 538,872 shares of its stock held by the bank in various fiduciary capacities on January 3, 1967:

"(a) 26,806 shares were registered in the names of principals of agency or custodian accounts and the bank as fiduciary has no power to vote such shares.

"(b) 47,671 shares were held in agency or custodian accounts where the direction of the principal is required before voting.

"(c) 3,949 shares were held in trusts where the direction of the donor, co-trustee or other designated person is required before voting.

"(d) 64,317 shares were held in trusts or estates where the approval of the donor, co-fiduciary or other designated person or persons is required before voting.

"(e) 152,501 shares were held in trusts, or agency, where the bank as fiduciary may determine the manner of voting only in the absence of instructions from one or more designated persons.

"(f) 243,628 shares (16.24% of the total shares outstanding) were held in trusts, estates or agencies where the bank as fiduciary has sole voting power. Of these shares, however, 50,595 thereof were held in trusts or agencies which may be terminated at any time by the donor or principal thereof, and an additional 76,800 shares were held in trusts under the terms of which the approval of one or more designated persons is required before sale of any trust asset may be made by the fiduciary."

The company then employed the following language to indicate its intention as to the voting of such shares:

"The bank as fiduciary intends to vote by proxy in form enclosed herewith such of the shares described in each of the foregoing classifications (b) through (f) held on the record date as to which either [1] the instrument under which held prescribes no prerequisite to exercise of the voting right by the fiduciary or [2] if any such prerequisite is prescribed it has been complied with. * * *"

As part of the evidence the court also received a representative instrument typical of all the others within each classification. The evidence showed further that at the annual meeting of the stockholders on March 30, 1967 (Exhibit 10), the management cast 533,868 votes for the election of directors, said votes representing the total shares voted by The Cleveland Trust Company as fiduciary. At similar elections the following votes were cast by the company for directors, as reflected by other exhibits (Defendants' Exhibits L and M):

Year Shares Outstanding Total Votes Cast Co. As Fiduciary

1966 1,500,000 1,377,436 520,004 1965 1,375,000 1,294,131 471,636 1964 550,000 492,779 189,049 1961 450,000 417,070 150,139 1951 150,000 131,577 31,024 1941 138,000 114,746 1,762

The defense argued that these figures (not all of which are reproduced here) indicate that the management of the company in a fiduciary capacity was voting 1.3% of the total shares in 1941, 21.9% by 1956, 32.9% in 1961, and last year 33.3%. It was further claimed that a projection of these figures at the same rate of growth would result in the Cleveland Trust management holding more than 50% of their own stock by the mid-1970's.

The plaintiffs insist that under Ohio law they have the power and the obligation to continue this practice to vote these shares in which they hold legal title but no beneficial interest; that the General Corporation Act of Ohio is not generally applicable to the classes of corporations designated as banks and trust companies, which are governed by the Banking Act (Chapters 1101 to 1115, Revised Code), and, that the practice is supported by, rather than contrary to, public policy.

The defendants insist that this practice of the company through its present management voting its own shares is expressly prohibited by Ohio law; that the obvious purpose of the company pursuing this course is self-perpetuation of management, and that the company is violating its fiduciary duty of undivided loyalty to its various trusts.

Section 1107.07, Revised Code, confers broad power upon an Ohio trust company to execute any duties and powers granted to it in regard to the holding, management, and disposition of any property and to act as trustee in the same manner as in the case of any trustee. It provides:

"A trust company may act as agent, and may accept and execute any trusts, duties, and powers which may be granted to it, in regard to the holding, management, and disposition of any property, real or personal, which may be committed to, transferred to, or vested in the trust estate, and in regard to the rents and profits thereof or the sale thereof. A trust company may act as trustee under any instrument creating a trust for the care and management of property, under the same circumstances, in the same manner, and subject to the same control by the court, as in the case of any other trustee."

Ohio Revised Code Section 1701.47(C) broadly prohibits voting by a corporation in any manner. It provides:

"(C) No corporation shall directly or indirectly vote any shares issued by it. Shares which under this division of this section are not entitled to be voted shall not be considered as outstanding for the purpose of computing the voting power of the corporation or of shares of any class."

In support of its position that the General Corporation Act does not apply to or bar the company from voting stock issued by it and held in a fiduciary capacity, plaintiffs cite Section 1701.98(B), Revised Code, of the Act itself, which reads:

"(B) Special provisions in the Revised Code for the organization, conduct, or government of designated classes of corporations shall govern to the exclusion of Sections 1701.01 to 1701.98, inclusive, of the Revised Code, on the same subject, except where it clearly appears that a special provision is cumulative, in which case it and the provisions of said sections on the same subject shall apply."

On the other hand, the Banking Act doesn't totally supersede the General Corporation Act because in Section 1103.42, Revised Code, is found the following:

"A banking corporation shall be created, organized, governed, and conducted, and its directors shall be chosen, in all respects in the same manner as is provided by Sections 1701.01 to 1702.58, inclusive, of the Revised Code, for corporations generally, in so far as such manner is not inconsistent with Chapters 1101., 1103., 1105., 1107., 1109., 1111., 1113., and 1115 of the Revised Code."

The right and procedure for a corporation to vote securities standing in its name is set up in Section 1701.98(A), Revised Code, which applies to all corporations generally:

"(A) Except as provided in Sections 1701.01 to 1701.98, inclusive, of the Revised Code, the provisions of said sections shall apply only to domestic corporations, and except as otherwise provided in this section, the provisions of said sections shall apply to all domestic corporations, whether formed under said sections or under previous laws of this state."

Two other sections of the Revised Code would appear to have some pertinency to the situation under discussion. Section 1103.20 reads:

"Except as otherwise provided in the articles of incorporation, each stockholder of an incorporated bank, in elections of directors and in deciding questions at meetings of stockholders, shall be entitled to one vote for each share of stock held by him. Any stockholder may vote by proxy authorized in writing. * * *"

Under Miscellaneous Provisions, Section 1115.11 provides:

"Any bank or trust company incorporated under the laws of this state and any national bank located in this state may, when acting in any fiduciary capacity, whether as sole fiduciary or as a cofiduciary, register and hold, in the name of such bank, trust company, or national bank, or a nominee thereof, any stocks, bonds, or other securities held in such fiduciary capacity * * *."

Counsel for plaintiffs contend that Section 1701.47(C), Revised Code, should not be interpreted as preventing a trust company from voting its share held in a fiduciary capacity for a number of reasons. The section, they argue, does not apply to a special class of corporation such as banks and trust companies. The prohibition was meant to bar a business corporation from voting shares issued by it and then acquired by it and held in its treasury for its own benefit, or so-called "treasury shares." Both federal and state authorities supervising banks and trust companies have proceeded on the assumption that this statute does not prevent a trust company from voting its own stock held in a fiduciary capacity. To said authorities, they claim, the practical interpretation is accorded great weight and is regarded as presumptively the correct interpretation of the law.

While there are some Ohio cases, particularly, In re Trusteeship of Stone, 138 Ohio St. 293, and State, ex rel. Kearns, Pros. Atty., v. Rindsfoos, 161 Ohio St. 60, dealing with this general problem, no court in this state has been called to rule upon the direct question of whether the prohibition of Section 1701.47(C), Revised Code, against an Ohio corporation voting stock issued by its applies to a bank and trust corporation. Similarly, no court has faced the problem of whether or not a bank and trust company, charged with the responsibilities of carrying out its rights and obligations as a trustee and holding and voting its own stock, can be classed as a stockholder, within the terms of Section 1103.20, Revised Code, when it actually represents management and a particular trust at one and the same time.

Without listing all the citations, the following language generally spells out the duty and power of the court when called upon to interpret statutes:

50 Ohio Jurisprudence 2d 132 to 135, Statutes, Section 164 et seq.

"Although it is true under proper circumstances that some aid may be derived from legislative and executive construction of statutes, it is ultimately the court's province and duty to construe laws enacted by the Legislature, in order to continue the orderly processes of government. In the interpretation of statutes it is the duty of courts to clarify uncertainties and harmonize results with justice.

"The courts may not read meaning into a law, but on the contrary must bring meaning out of it. They have no legislative authority and should avoid judicial legislation. * * *

"The courts, in the construction of a statute, must be guided by it as it exists, in other words, as the Legislature enacted it. A court can do nothing more than follow the mandate of the Legislature as evidenced by the statute itself. Courts cannot write what they consider better acts. * * *

"It is the duty of the court to ascertain what the statute means and execute it accordingly. * * *

"The provisions of the statute cannot be extended by implication beyond the clear import of the language used, or its operation so enlarged as to embrace subjects not specifically enumerated. * * *"

The Court of Appeals for this district in a case involving statutory construction, State, ex rel. Shaker Heights Public Library, v. Main, Clerk, 83 Ohio App. 415, at page 420, said:

"It is not within the province of the judicial branch of the government to question the wisdom of legislative enactments or even to question their logic. The primary purpose in the interpretation or construction of statutes is to give effect to the intention of the Legislature, as gathered from the provisions enacted, by the application of well settled rules of interpretation, the ultimate function being to ascertain the legislative will.

"As stated in 37 Ohio Jurisprudence 514, Section 278 [now 50 Ohio Jurisprudence 2d 149, Section 174], `the right of the courts to interpret a duly enacted statute is based upon some apparent uncertainty of meaning, some apparent ambiguity of terms, or some apparent conflict of provisions. Where the language of a statute is plain and unambiguous and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation. To interpret what is already plain is not interpretation, but legislation, which is not the function of the courts, but of the General Assembly.'"

Unquestionably the language of Section 1701.47(C), Revised Code, "No corporation shall directly or indirectly vote any shares issued by it," is clear and unambiguous and would apply to the Cleveland Trust Company unless said section is inconsistent with some special provisions of the Revised Code applicable only to banking and trust corporations. It is true that the Banking Act can be classed a special provision which defines the powers of banking and trust corporations, but in Section 1103.42, Revised Code, it provides for the choosing of directors, "in all respects in the same manner as is provided by Sections 1701.01 to 1702.58, inclusive, Revised Code, for corporations generally," in so far as such manner is not inconsistent with the Banking Act. Since no authority to vote its own stock can be found in the special provisions, the general prohibition with respect to a corporation's action in voting its own shares indirectly held in a fiduciary capacity does apply to a banking and trust corporation.

Relying heavily on State, ex rel. v. Rindsfoos, supra, counsel for plaintiffs claim it holds that:

"* * * this special Banking Law provision excluded application of the general provisions of the Ohio General Corporation Act defining the voting right of a shareholder and giving him the right to vote cumulatively, even though the provisions of the Ohio Banking Act respecting such stockholder's rights to vote were silent as to his right to vote cumulatively."

Counsel seem to claim the same reasoning requires that since the provisions of the Banking Act are silent as to the right of the Cleveland Trust to vote its own shares held by it in a fiduciary capacity, the complete silence or omission in the special provisions defeats the explicit language of the general provisions.

The court in the Rindsfoos case, supra, at page 65, says:

"In this case we are asked to give effect to a provision of the General Corporation Act as a supplement to a subject specifically covered in the Banking Act, which is the reverse of a situation that the cumulative provision of Section 8623-132, General Code (Section 1701.20, Revised Code), was intended to cover.

(Actually the language of this General Code section is to be found in Section 1701.98(B) of the Revised Code. The Comparative Section Table is in error.)

"If no specific provision is made with respect to any matter concerning the incorporation, organization, conduct or government of corporations, operating under special statutes, the provisions of the General Corporation Act apply.

"However, if the right of shareholders to vote in the election of directors of a corporation is fully covered by the provisions of a special act, such provisions operate to the exclusion of the provisions in the General Corporation Act governing the voting right of shareholders generally.

"The Banking Act contains specific provisions, complete in themselves, governing the voting right of shareholders and the casting of votes in the election of directors. There is no provision in the Banking Act authorizing cumulative voting in the election of directors. The right of cumulative voting does not exist unless it is expressly authorized by statute."

Likewise the right of the management of a banking and trust corporation to vote its own shares held in fidiciary capacity does not exist unless it is expressly authorized by statute. Silence does not imply consent, particularly, where you are dealing with a legal entity existing only in contemplation of law and created for the convenience and benefit of all the shareholders.

Plaintiffs contend that the only purpose of Section 1701.47 (C), Revised Code, was to prohibit voting by a business corporation of shares issued by it and then acquired by it and held in its treasury or otherwise for its own benefit. Quoting from plaintiffs' trial brief:

"On the other hand, a fiduciary, such as a trust company, representing a beneficial interest in stock, because the person who acquired the stock and created the trust desired it do so. It stands in the shoes of the beneficial owner, and has just as much right to vote as he did; because he paid for the stock, just like all the other stockholders, and is entitled to be represented by his designee. The stiuation is not different, in principle, from voting by proxy, which is universally recognized as legal, e.g., Section 1701.48, Revised Code."

The General Assembly has not seen fit to limit the language of the statute by adding the qualifying adjective "treasury" before the word "shares" in Section 1701.47(C), Revised Code, even though the whole statute has been amended since its original adoption in 1927. Significantly, the most recent amendment to Section 1701.47(A), Revised Code, apparently made at the suggestion of banking and trust corporations, added "and any such officer or cashier or trust officer of a banking and trust corporation" to the list of corporate officers with authority to vote shares, appoint proxies, and execute consents, waivers and releases on behalf of such corporation. The balance of the statute was undisturbed and no exceptions were noted under paragraph (C).

After a careful examination of all the sections of the Banking Act cited by the plaintiffs including Sections 1107.07 and 1115.11, Revised Code, the court finds that none of them offsets, nullifies or supersedes the language of Section 1701.47, Revised Code.

It should be noted that the general counsel of the company testified that the Cleveland Trust Company relies on the authority given it in Section 1701.47(A), Revised Code, in the execution of proxies on any securities it holds.

Section 1103.42, Revised Code, states that a banking corporation's directors "shall be chosen as provided by Sections 1701.01 to 1702.58, Revised Code * * * for corporations generally."

Parenthetically, too, under Section 1115.11, Revised Code, the General Assembly includes national banks which are not authorized to vote shares of their own stock unless actually directed by the donor beneficiary under the specific terms of the trust. Section 1115.11, Revised Code, making no reference to voting provides that any bank or trust company, when acting in a fiduciary capacity may register and hold in the name of such bank, trust company, or national bank, or a nominee thereof, any stocks, bonds, or other securities. Section 1107.07, Revised Code, confers broad powers upon a trust company to execute any duties and powers granted to it under the instrument creating the trust in regard to holding, management and disposition of property in the trust estate. Neither section, however, is inconsistent with Section 1701.47(C), Revised Code. Neither section specifically grants authority to a banking and trust corporation to vote its own shares directly or indirectly. Authority to hold, manage, and dispose its own stock does not imply a power to vote. In Allen v. De Lagerberger, 10 Ohio Dec. Rep. 341, 20 W. L. B. 368, the court pointedly said:

"It is a well-established principle that stock held by the corporation cannot be voted. * * * The corporation * * * may also hold it and receive the dividends on it which go to the equal benefit of all stockholders * * *. The power to vote is a power incident to ownership of stock, but to allow the directors acting for the corporation to vote the stock would not be distributing the power equally among the stockholders * * * and it would be entrusting to persons in power the means of keeping themselves in power."

To this point, the General Assembly has excluded no corporation in Ohio from the broad prohibition of Section 1701.47 (C), Revised Code, which is expressive of the common law. By a continuation of the practice of voting more than one-third of the total shares issued, the management can occupy the status of a voting stockholder with regard to the Cleveland Trust shares, can frustrate the reason for incorporation, can ignore the most fundamental legal concepts pertaining to corporations, and thereby vest control in the directors of the corporation indefinitely instead of where it legally and equitably belongs in the stockholders themselves.

The contention that in casting these shares for the election of the slate of nominees for the board of directors already selected by itself, that management has no beneficial interest in the stock and is merely exercising its responsibilities as the trustee of various trusts might be termed colloquially as so much "double-talk." While not beneficiaries in the strict sense in which the word is used in connection with trusts, the management, in the solicitation of proxies and in the self-serving interpretation of certain trust instruments, accumulates sufficient shares to practically insure its re-election. By writing the common law into the statutes of the state of Ohio, specifically Section 1701.47(C), Revised Code, the Legislature in its wisdom has sought to prohibit this practice of directors perpetuating themselves in office, regardless of their motives, by providing that no corporation shall directly or indirectly vote any shares issued by it. Even though the General Assembly over the years has enacted special provisions for designated classes of corporations, it has firmly adhered to this sound principle and nowhere provided for any variance from the principle by any corporation recognized in Ohio. Considering Sections 1701.98 and 1103.42, Revised Code, and all the well-written arguments of counsel, the court, finding no conflict between the provisions of the general and special acts, concludes that the plaintiffs herein, the Cleveland Trust Company, are not entitled to vote Cleveland Trust stock held by the bank in a fiduciary capacity at any and all meetings of the Cleveland Trust Company.

Fully realizing the effect of this conclusion denies the right to be counted in the selection of the management to more than a third of the shares of the Cleveland Trust, the court suggests that the responsibility for the creation of this dilemma ultimately lies with the company itself.

The fact that federal and state banking authorities have not questioned this practice over the years does not deter this court from declaring it illegal and contrary to basic principles underlying both corporate and trust law. The argument that the shares held in a fiduciary capacity are still less than fifty percent of the shares issued and therefore have not affected the corporate election results is not very persuasive, particularly in the face of the steady trend in the growth of these shares over the past twenty-six years. Counsel for the plaintiffs also claim that Ohio attorneys drawing wills for their clients and naming banks and trust companies as trustees have proceeded on the assumption that if stock of such trust companies were included in the assets left by the testator it could be voted by the trustee in accordance with the usual power of a trustee. Bearing in mind the fact that the extent of such shares held and voted by the company was not known until the figures were orally announced three years ago at the shareholders meeting and published for the first time last year as a result of a new federal requirement, one can only speculate as to how many attorneys and settlors would follow the same course knowing the full extent of such holdings by the company.

The law of Ohio makes no exception for corporate fiduciaries nor does it limit the prohibition against corporations voting their own shares to the so-called treasury shares.

Initially in applying for this declaratory judgment the Cleveland Trust Company requested a ruling that Section 1701.47(C), Revised Code, has no applicability to it and that the company is entitled to vote its own stock held in a fiduciary capacity, in compliance with the provisions of the governing instrument. The defendants countered by claiming that the company's practice of voting its own shares held in a fiduciary capacity violates common law and statutory principles and constitutes an open breach of the fiduciary's duty to administer its trust portfolio with undivided loyalty and without conflict of interest.

It is fundamental in all trust law that the trustee is under the strict obligation and the absolute duty to the beneficiary to administer the trust solely in the interest of the beneficiary. From time immemorial it has been recognized that the trustee is required to exercise the highest degree of good faith and to refrain from gaining any personal advantage or from assuming any responsibility inconsistent with his duty owed the trust.

In In re Trusteeship of Stone, supra, the court, in referring to a fiduciary, said:

"Since a trustee is a fiduciary of the highest order and is charged with the utmost fidelity to his trust, he must refrain from creating situations where his own interests are brought into conflict with those of the trust, and from doing those things which would tend to interfere with the exercise of a wholly disinterested and independent judgment. In accepting a trust, the trustee is presumed to know the obligations and limitations connected with his high office, and if he transgresses must abide the consequences."

In In re Estate of Binder, 137 Ohio St. 26, at page 35, in commenting on the oral argument during which it was stated that "one trust company in Cleveland is trustee for more than 5,000 separate trusts," Judge Hart wrote:

"Under such circumstances, undivided loyalty to each trust is obviously almost an insuperable task, since there must exist a temptation and the urge of special circumstances to favor one trust over another * * *. Nothing but extreme diligence and fair dealing will, under the law, exonerate a trustee placed in such circumstances. Trust companies perform a great service in the business world and the law must not make rules of conduct governing them so onerous that they may not function, but it must demand that high sense of honor and measure of integrity which loyalty requires in carrying out the great responsibilities which trust companies voluntarily assume in representing others in a trust capacity."

The text writers have written extensively on the question of undivided loyalty. It is stated in 4 Bogert "Trusts Trustees" (2d Ed. 1960) 475:

"It is generally, if not always humanly impossible for the same person to act fairly in two capacities and on behalf of two interests in the same transaction: consciously or unconsciously he will favor one side as against the other, where there is or may be a conflict of interest. If one of the interests involved is that of the trustee personally, selfishness is apt to lead him to give himself an advantage. If permitted to represent antagonistic interests the trustee is placed under temptation and is apt, in many cases, to yield to the natural prompting to give himself the benefit of all doubts."

In Armstrong v. Huston's Heirs, 8 Ohio 552, the Supreme Court found that though there appeared to be no reason to distrust the integrity of the fiduciary or the fairness of the transaction:

"The temptation to abuse power for selfish purposes is so great that nothing less than incapacity is effectual, and thus a disqualification is wrought by the mere necessity of the case."

Of particular significance here are the words of Professor Austin W. Scott in an exhaustive article on "The Trustee's Duty of Loyalty" in 49 Harvard Law Review 521:

"It is sometimes contended that a trust company should be permitted to purchase securities from its securities or banking department, because it is in a position to judge most wisely as to the value of such securities. If it always acted with an unbiased judgment, this might conceivably be so but the difficulty is that it is not in a position to exercise an unbiased judgment. In a sense the difficulties are greater than those which arise in the case of an individual trustee. An honorable individual trustee can hardly help seeing the direct conflict between his own interests and his duty to the beneficiaries. On the other hand, the officers of a trust company owe allegiance to the shareholders as well as to the beneficiaries, and the temptation to favor the shareholders may well be more insidious than the temptation of an individual trustee to favor himself. It seems clear in both cases self-dealing is too dangerous to be permitted."

Under cross-examination, the president and chairman of the board of the Cleveland Trust Company with the pride and candor befitting a top corporation executive stated that he felt the best interest of the shareholders of the Cleveland Trust Company are best served by a continuity of the present management. This same management in exercising its fiduciary judgment is then required to select the board of directors and officers from the nominees designated by this same management. Such an arrangement recalls to mind the old fairy tale line, "mirror, mirror, on the wall, who is the fairest of them all." Under such circumstances the company is just not in a position to exercise an unbiased judgment. No question of good or bad faith is involved, even though the highest degree of good faith is a well-established rule. The plaintiffs, the Cleveland Trust Company, in its fiduciary capacity is prohibited from gaining any advantage or accepting any responsibility inconsistent with its duty to each trust.

When serving on the Court of Appeals of New York, the famous Justice Cardozo said in Meinhard v. Salmon, 249 New York 458:

"* * * A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the `disintegrating erosion' of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that troddened by the crowd. It will not consciously be lowered by any judgment of this court."

Regardless of its motives no banking and trust corporation by use of its position of trust is permitted to accumulate or corral proxies or interpret trust instruments it holds in a manner calculated to insure a perpetuation of its current management. In fact, the General Assembly imposes a stricter standard on corporate fiduciaries than personal fiduciaries. Section 2109.44, Revised Code, provides:

"Fiduciaries shall not buy from or sell to themselves nor shall they in their individual capacities have any dealings with the estate, except as expressly authorized by the instrument creating the trust and then only with the approval of the probate court in each instance; but no corporate fiduciary shall be permitted to deal with the estate, any power in the instrument creating the trust to the contrary notwithstanding. * * *"

The practice of the company in voting one-third of its shares violates its common-law duty of undivided loyalty and the parallel statutory prohibition. Again quoting Judge Hart in In re Binder, supra:

"The law is jealous to see that a trustee shall not engage in double-dealing to his own advantage and profit. The reason is not difficult to discover when it is remembered that a trusteeship is primarily and of necessity a position of trust and confidence, and that it offers an opportunity, if not a temptation, to disloyalty and self-aggrandizement."

Self-perpetuation in office by a trustee with control of a substantial amount of corporate stock with voting rights and with the opportunity to influence the re-election of directors is a form of dealing with the trust estate which violates the public policy embodied in the common law requiring undivided loyalty and prohibiting conflicts of interest. The larger the number of such trust shares the greater the opportunity to influence the election of directors. Since it is possible to utilize this advantage for self-aggrandizement a conflict of interest arises, regardless of the motives of the trustee.

There is considerable merit to the argument that the company's fiduciary violation which results from voting its own shares is not limited to those trusts holding shares of the Cleveland Trust stock. The violation may well extend to all trusts held by the company. By selecting a corporate trustee, each settlor seeks a special advantage not available in an individual trustee. Under a corporate trustee, the quality of the management of the trust estate can be reviewed and studied through the annual election of the directors by the shareholders. When it is possible for the controlling directors to start with a substantial block of trust shares to be cast for themselves, they violate their loyalty to every trust, for every trust has been deprived of the opportunity for a shareholders appraisal of the performance of management and for all practical purposes of the opportunity for any real contest for the election of management.

Further, the court feels compelled to refer briefly to the manner in which the company under the belief that it had the statutory right to vote the trust shares acquired some of the proxies and interpreted the governing instruments in other instances.

Under classification (d) of the proxy statement in which it is conceded that approval of the donor, co-fiduciary or other designated person is required before voting. The solicitation letter (Exhibit 6-A), in effect, seems to say:

"If you approve of our recommendation, return this document and we will vote for the management and for the propositions that management espouses. If you don't approve it, such shares will not be voted."

Witnesses for the company admitted that these votes were all cast and that every vote that was ever cast was in favor of the Cleveland Trust and the propositions espoused by the current management.

As to classification (e) containing over 152,000 shares, the Cleveland Trust never sent any letters until 1967, after this litigation began, because the company felt that in the absence of direction the Cleveland Trust could vote as it saw fit. The 243,638 shares under classification (f) were simply cast without any notice to any beneficiaries because the company determined for itself that the Cleveland Trust had full discretion as to these trust shares. The officials testifying for the company readily acknowledged that in the history of all the shares held in a fiduciary capacity, there never had been a single vote cast against the Cleveland Trust.

In the six representative instruments (Exhibits 3-A, 4-B, 5-B, 6-B, 7-B and 8-A) selected by counsel for the company there is but a single mention of Cleveland Trust stock, and that is in the retention clause. Nowhere is there any reference to the voting of Cleveland Trust stock by name. The law is clear that self-dealing or breach of good faith on the part of a trustee cannot be excused on the ground that the instrument creating the trust and making him trustee has given him broad authority and unlimited discretion in the administration of the trust. The trustee, whether individual or corporate, cannot take advantage of the liberal provisions of the trust instrument to relieve him or itself from the legal responsibility of a fiduciary under law.

In filing this lawsuit the Cleveland Trust selected as a co-plaintiff, the Bartlett Trust, the settlor of which was the daughter of a former president of Cleveland Trust and the wife of a current vice-president of the Cleveland Trust Company in the trust department. The original instrument was amended in 1946 mentioning Cleveland Trust stock for the first time in the holding provision. In a 1958 amendment the first mention of the stock appeared in the voting provision. These amendments are interesting in the light of In re Stone, supra, decided in 1941, which clearly establishes the principle that a corporate trustee may not acquire its own shares of stock as an investment for a trust in its charge, or retain its own shares in the trust, unless express authorization is contained in the instrument creating the trust or in a provision of law.

In In re Trusteeship of Stone, supra, at page 304, Judge Zimmerman discusses this question as follows:

"No statute is directly applicable, so we turn to the will of Ella A. Stone creating the trust and read the following in Item XLIX:

"`Said trustee shall have absolute control of said trust estate, and shall handle, manage, lease, bargain, sell, transfer, convey, mortgage, encumber, allot, invest and reinvest the same or any part thereof upon such terms, under such conditions and in such securities as it in its discretion shall deem best, all statutory limitations and restrictions as to the investment of trust funds now in force and that may hereafter be enacted by the state of Ohio being hereby expressly waived by me * * *.'

"This item certainly confers broad powers of investment and broad discretionary powers in the management of the trust estate, but there is no specific authority conferred to retain the bank stock. Is the quoted item then sufficiently comprehensive to justify the retention of the stock by the trustee, which otherwise, in our view, would be wrongful?"

The Bartlett Trust is one trust being managed by the Cleveland Trust which has been tailored by amendments in an attempt to conform to the requirements laid down by the Stone case.

The opinion in the said case is concluded as follows at page 304:

"Our studied conclusion, applicable to the instant case, is that a corporate trustee cannot acquire its own shares of stock as an investment, or retain its own shares in a trust, without express authorization by the terms of the instrument bringing the trust into existence, or by provision of law. Without such authorization, there is disregard for the duty of absolute faithfulness to the trust, because of the conflict which may and does on occasion arise between the personal interests of the trustee on the one hand and the interests of the trust and its beneficiaries on the other.

"Pertinent to the discussion is the language used in the tenth paragraph of the syllabus in the Binder case:

"`* * * breach of good faith on the part of a trustee * * * cannot be excused on the ground that the instrument creating the trust and making him trustee gave him broad authority and unlimited discretion in the administering of the trust.'"

In his testimony the chairman of the board, a forty-year veteran with the company, said the bank did not invest in its own stock because such investment would be illegal. If the divided loyalty problem rears its ugly head in the investment situation, its presence is just as evident where the same fiduciary holds the stocks and attempts to serve two masters. As suggested, what degree of objectivity can be expected from corporate managers in decisions on the sale of the trust company's stock from a trust portfolio when the opportunity to control the trust company's management could be lessened by such a sale. The difficulty of evaluating such subjective and hidden motivations forms the basis for the rule prohibiting conflicts of interest.

In the light of the established law the Cleveland Trust should review all the trusts it is administering and fully advise any and all concerned of the full implications of the Stone case. The company should not attempt to argue that the beneficiaries of the various trusts have acquiesced in the breach of trust by accepting its services and the benefits in the form of dividends, because the Supreme Court dealt with that point at page 305:

"* * * The proposition is elementary that to bind a beneficiary in a breach of trust, by acquiescence, it must be made to appear not only that he was aware of all the material facts, but that he was also advised of his legal rights and failed thereafter to register objection. We do not discover anything tangible in the record to support the claim of estoppel."

The record here does not disclose any evidence indicating that any information beyond that required by the recent federal rule has been furnished or that any attempt has been made by the management to explain the effect of the Stone case, its own statutory responsibility, and its common-law duty where it serves in two capacities with possible conflicts.

In the heat of his final argument one defense counsel urged that "it has created this monster; and this court should order the Cleveland Trust Company to disgorge itself of this monster by gradually putting back (the stock) into the market and getting rid of the conflict." This court has no intention of issuing any such edict, because this court is in no position to pass upon the more than 600 trusts in which the company holds its own shares in a fiduciary capacity. It is impossible here to determine which meet or do not meet the test of "express authorization." Further without the parties concerned and the instruments involved no conclusive ruling can be reached on the question of full disclosure and the question of acquiescence and approval of the company's actions.

Applying both legal and equitable standards to all the evidence, the court, by way of summary, reiterates that the Cleveland Trust Company's practice of voting shares issued by it and held in a fiduciary capacity violates common law and statutory principles with regard to both the shareholders of the company and all the beneficiaries of the trusts administered by Cleveland Trust. No authority is granted under the banking act to vote its trust shares and the prohibition in Section 1701.47(C), Revised Code, applies without exception to all Ohio corporations. This court is not willing "through conjectural and dubious construction" of the statutes "to extend to banking and trust corporations exercising trust prerogatives such a broad and far-reaching power when the General Assembly has not seen fit to do so through plain and unequivocal language." No corporate fiduciary is permitted to hold shares issued by it unless so authorized by express language in the instrument establishing the trust and no corporate fiduciary is permitted to vote any shares issued by it under the existing statutory law of Ohio.

Words used by Judge Zimmerman in Ulmer v. Fulton, 129 Ohio St. 323.

Further in construing the power of holding its shares and the power of voting, in the event the Ohio Legislature should ever amend the forty-year old statute, the bank and trust corporation cannot rely on its own self-serving interpretation but must make full disclosure to the principals involved and likewise secure approval from the Probate Court, where any doubt may exist. Clearly the current practice of voting its trust shares by the Cleveland Trust management presents a conflict of interest between their desires for self-perpetuation in office and their duties of objective undivided loyalty to the trusts under their control.

An entry shall be prepared accordingly by counsel for defendants and approved as to form by counsel for the plaintiffs. Costs herein are charged to the plaintiffs.


Summaries of

Cleveland Trust v. Eaton

Court of Common Pleas, Cuyahoga County
Jun 9, 1967
11 Ohio Misc. 151 (Ohio Com. Pleas 1967)
Case details for

Cleveland Trust v. Eaton

Case Details

Full title:THE CLEVELAND TRUST CO. ET AL. v. EATON ET AL

Court:Court of Common Pleas, Cuyahoga County

Date published: Jun 9, 1967

Citations

11 Ohio Misc. 151 (Ohio Com. Pleas 1967)
229 N.E.2d 850

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