Appeal from SUPERIOR COURT SPOKANE COUNTY. Superior Court No: 105686. Date filed in Superior Court: 2/26/93. Superior Court Judge signing: HAROLD CLARKE.
Dennis J. Sweeney, Ray E. Munson & Richard W. Miller, concur
SWEENEY, C.J. --Washington's prudent investor rule requires a trustee to "exercise the judgment and care under the circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs. . . ." RCW 11.100.020(1). This exercise of judgment requires, among other things, "consideration to the role that the proposed investment or investment course of action plays within the overall portfolio of assets." RCW 11.100.020(1). In this case of first impression, we are asked to decide whether the prudent investor rule limits the court's consideration to the overall performance of the trust, or whether, instead, the court may consider the performance of specific assets in the
trust. We hold the prudent investor rule focuses on the performance of the trustee, not the results of the trust. The trial court here then appropriately considered individual assets, and groups of assets, in finding that the trustee had improperly weighed trust assets in favor of himself, the income beneficiary. We affirm that portion of the court's judgment which required the trustee to reimburse the trust corpus for the loss caused by that investment strategy. We reverse other court rulings regarding personal representative, trustee and attorney fees.
De Anne Cooper died on March 6, 1978. In her will, she provided that her one-half of the community property would be held in trust during her husband Fermore B. Cooper's lifetime, and that Mr. Cooper and The Old National Bank of Washington (ONB) would serve as co-trustees of the testamentary trust. The trust required payment of income to Mr. Cooper and distribution of the corpus to her children after Mr. Cooper's death. The nonintervention will named Mr. Cooper personal representative. At the time of her death, Mrs. Cooper had two children, Joyce Johnston and Richard Cooper. Her one-half of the community property was worth about $800,000.
Mr. Cooper filed his wife's will and started a probate. But he took no further steps to conclude the probate until Joyce filed this action. He did not keep a separate estate account and continued to manage all of the former community property as his own.
In 1986, Mr. Cooper asked Joyce to approve the substitution of Richard for ONB as co-trustee of the trust. Joyce refused and asked about Mr. Cooper's management of the estate. At that point, Mr. Cooper funded the trust by depositing in ONB assets valued at approximately $2,000,000. Joyce then petitioned the court to remove Mr. Cooper as personal representative of the estate and trustee
of the trust, and for an accounting and a declaration that Mr. Cooper's second wife had no interest in the trust property. Her petition included a request for attorney fees and costs.
In March 1989, Mr. Cooper filed an inventory of estate assets. The asset mix set out in that inventory generates the primary dispute in this case. The inventory included (1) an unsecured note from Gifford-Hill, Inc., with a balance of $1,200,000 owing on the date of Mrs. Cooper's death; (2) partnership interests in Eight-O-One Investment Company and Hillside Investment Company, which owned interests in the Deaconess Medical Building; and (3) substantial holdings in income-producing assets including tax-exempt bonds. The inventory did not include shares in Comtrex, Inc. Mr. Cooper's son, Richard, was the chief executive officer of Comtrex. After Mrs. Cooper's death, Mr. Cooper bought shares in the company and also loaned it approximately $824,000, which Comtrex never repaid.
Before Mr. Cooper compiled the inventory, he had sold the community's share of stock in a closely held corporation, Western Frontiers. The corporation owned the North Shore, a hotel and restaurant in Coeur d'Alene. Its shares were valued for estate tax purposes in 1978 at 75 cents a share, for a total value of $21,750. Mr. Cooper sold both his and the estate's shares in 1983 to Duane Hagadone at a profit of about $1 million. The stock had appreciated largely because of a bidding war between Mr. Hagadone and Robert Templin. Both wanted control of the company. The purchase gave Mr. Hagadone a majority interest. Mr. Cooper reinvested the proceeds in stocks and bonds.
An accounting filed along with the inventory calculated the current value of Mrs. Cooper's estate at $1,279,433. Mr. Cooper's accountant compiled the accounting from estate tax returns and transaction sheets supplied by Mr. Cooper's stockbroker. The accounting summarized (1) purchases and sales of assets listed in the 1978 estate tax return, (2) capital gains, and (3) income.
On December 26, 1989, the superior court appointed John Cummins "as special master/referee to assist [it] in resolving various disputes that [had] arisen in connection with [the Cooper] estate." At the time, Mr. Cummins was a vice-president of Seattle-First National Bank and manager of its trust department. The court asked Mr. Cummins to contact the trust department of U.S. Bank (ONB's successor) to "review what has transpired in connection with the assets" deposited by Mr. Cooper in 1987 to fund the trust. The court also asked Mr. Cooper to forward to Mr. Cummins a copy of the estate accounting. After consulting with Mr. Cummins, the court found that "the accounting as accomplished to date in connection with the trust estate is not in accordance with generally recognized format and principles." It then instructed Mr. Cooper's accountant, James McDirmid, "to confer with Mr. Cummins as to what is contemplated to comply with those standards."
Mr. Cooper filed a revised inventory accounting in May 1990 based on Mr. McDirmid's calculations (McDirmid accounting). It set the 1987 fair market value of the inventoried assets at $1,835,821.50. The value of the assets Mr. Cooper had transferred to fund the trust in 1987 had a value of $1,959,113. Thus, the trust was overfunded by $123,291.50. The accounting also valued the partnership interests in Eight-O-One and Hillside, half of which the estate owned, at $192,000 and $86,000, respectively. These values reflected a 60 percent discount because Mr. Cooper's interest was a minority interest and therefore not easily marketable.
Mr. Cummins concluded the amended accounting revealed "no improprieties." The court refused Joyce's request to discover the basis for Mr. Cummins' opinions. It stated Mr. Cummins was appointed "solely for the purpose of deciding whether or not F. BERT COOPER should be removed as Personal Representative."
On December 12, 1990, the court directed the parties to proceed to a hearing on the final report and petition for
distribution. At the hearing, the principal issues were the accuracy of the McDirmid accounting and the propriety of Mr. Cooper's investment strategy. Mr. Cooper and Joyce presented expert opinion testimony in support of their respective positions.
On December 15, 1992, following the hearing, the court found Mr. Cooper had commingled income from estate assets and proceeds from the sale of estate assets with his own funds. It found the accounting prepared by Mr. Cooper's accountant adequately traced the estate's assets. The court further found, based on the McDirmid accounting, that Mr. Cooper "had more than sufficient funds in his own right as his separate property to make gifts and other distributions to and for the benefit of his children."
The court agreed with Mr. Cooper's valuation of the Eight-O-One and Hillside partnerships. And it held he had acted prudently in negotiating the sale of the Western Frontiers shares. It found that Mr. Cooper had, however, "maintained a policy of investment. . . which maximized the income of the estate. . . to the detriment of the growth of the corpus of the estate." It valued the loss to the remainder interest at $342,493 as of July 1987. It ordered Mr. Cooper to ...