National Academy of Sciences v. Cambridge Trust Co.
346 N.E.2d 879 (1976)
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Rule of Law:
A trustee's representation of fact in a fiduciary account, made as of the trustee's own knowledge but without making reasonable efforts to verify its truth, constitutes constructive fraud sufficient to reopen previously allowed accounts and hold the trustee liable for resulting improper distributions.
Facts:
- In 1932, Leonard T. Troland's will established a trust administered by Cambridge Trust Company (bank) to provide income to his widow, Florence R. Troland.
- The will stipulated that the payments to Florence were to cease upon her death or remarriage.
- Upon the termination of Florence's interest, the trust principal was to be transferred to The National Academy of Sciences (academy) to create a research foundation.
- On February 13, 1945, Florence R. Troland married Edward D. Flynn but did not inform the bank of her remarriage.
- For 22 years, from 1945 until her death in 1967, Florence continued to receive trust income payments totaling $106,013.41.
- To conceal her identity, she directed the bank to send checks to her brother-in-law, Kenneth D. Custance, and she endorsed them with her former name, 'Florence R. Troland.'
- Throughout this 22-year period, the bank made no effort to ascertain whether Florence had remarried.
- The bank only discovered the remarriage after Florence's death in 1967.
Procedural Posture:
- The bank brought a separate suit in equity in the Superior Court against Kenneth Custance and others, recovering $41,416.64 of the mis-paid funds.
- The National Academy of Sciences (academy) filed a petition in the Probate Court for Middlesex County against the Cambridge Trust Company (bank).
- The petition sought to revoke seven decrees that had previously allowed the bank's twelfth through thirty-third accounts.
- The Probate Court judge revoked the decrees, ordered the bank to restore $114,314.18 plus substantial interest to the trust, and awarded attorney's fees to the academy.
- The bank, as appellant, appealed the Probate Court's decision to the Massachusetts Appeals Court.
- The Appeals Court, with the academy as appellee, affirmed the Probate Court's decree but modified it to disallow the bank from charging the trust for legal fees it incurred in the Superior Court recovery action.
- The case was granted further appellate review by the Supreme Judicial Court of Massachusetts.
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Issue:
Does a trustee's representation in its accounting that a beneficiary remains entitled to income, made without any effort to verify a fact critical to that entitlement, such as marital status, constitute 'fraud' under G. L. c. 206, § 24, allowing previously approved accounts to be revoked and the trustee surcharged for erroneous payments?
Opinions:
Majority - Reardon, J.
Yes. A trustee's representation in an account, made as of its own knowledge but without reasonable efforts to ascertain the truth, constitutes constructive fraud sufficient to reopen previously allowed accounts. The court held that the bank's statements in its annual accounts that payments were being made to 'Florence R. Troland' were representations that she remained the beneficiary, which implied she was unmarried. These were representations of a fact susceptible of precise knowledge, yet the bank made them without any knowledge, having exerted 'no effort at all' to verify her marital status. Because the academy relied on these misrepresentations to its detriment, the bank's actions constituted constructive fraud under G. L. c. 206, § 24. Therefore, the accounts were properly reopened, and the bank is liable to restore the erroneously distributed funds with interest. The bank is also not entitled to charge the trust for legal fees incurred to recover some of the funds, as the litigation was necessitated by its own fault.
Dissenting - Wilkins, J.
No. A trustee's negligence resulting in an implied misrepresentation of fact does not constitute 'fraud' under G. L. c. 206, § 24. The dissent argues that the majority's interpretation of 'fraud' is overly broad and undermines the statute's purpose of ensuring the finality of judicially allowed accounts. The dissent contends that the statute's 'fraud' exception should apply only to actual fraud involving an intent to deceive, not to 'constructive fraud' arising from mere negligence or inattention. By equating the bank's 'pathetic inattention to duty' with fraud, the majority's holding renders countless past and future accounts perpetually vulnerable to challenge based on similar unverified, implied representations of fact, thereby thwarting the legislative goal of finality.
Analysis:
This decision significantly clarifies a trustee's duty of inquiry and expands the definition of 'fraud' for the purpose of reopening settled fiduciary accounts in Massachusetts. It establishes that a trustee's passive failure to verify critical facts can rise to the level of actionable 'constructive fraud' if the trustee makes positive representations in its accounts based on those unverified facts. The ruling imposes an affirmative duty on trustees to take reasonable steps to confirm beneficiary eligibility, shifting the standard from a mere ministerial function to one of active diligence. This precedent makes it more difficult for trustees to defend against liability for erroneous payments by claiming ignorance, particularly when the true facts were reasonably ascertainable.
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