The Woodward School for Girls, Inc. v. City of Quincy

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SJC-11390

THE WOODWARD SCHOOL FOR GIRLS, INC. vs. CITY OF QUINCY,

trustee, 1 & another. 2

Norfolk. December 2, 2013. - July 23, 2014.

Present: Spina, Cordy, Botsford, Gants, Duffly, & Lenk, JJ.

Trust, Charitable trust, Investments, Trustee's accounts.

Damages, Breach of fiduciary duty, Interest. Interest.

Massachusetts Tort Claims Act. Governmental Immunity.

Immunity from Suit. Municipal Corporations, Trusts,

Governmental immunity. Waiver. Laches.

Civil action commenced in the Supreme Judicial Court for

the county of Suffolk on July 11, 2007.

After transfer to the Norfolk County Division of the

Probate and Family Court Department, the case was heard by

Robert W. Langlois, J.

The Supreme Judicial Court on its own initiative

transferred the case from the Appeals Court.

John S. Leonard (James S. Timmins, City Solicitor, with

him) for city of Quincy.

1

Of the Adams Temple and School Fund and the Charles

Francis Adams Fund.

2

Attorney General, as a nominal party.

2

Sarah G. Kim (Josephine M. Deang Chin & Alison K. Eggers

with her) for the plaintiff.

CORDY, J. This dispute arises from a trust established in

1822 by former President John Adams and supplemented by a

bequest of his grandson in 1886. The city 3 of Quincy (Quincy)

served as trustee of the Adams Temple and School Fund and the

Charles Francis Adams Fund (collectively, Funds) through two

boards. 4 The Woodward School for Girls, Inc. (Woodward), the

income beneficiary of the Funds since 1953, filed suit against

Quincy initially seeking an accounting and thereafter asserting

that Quincy committed a breach of its fiduciary duties to keep

adequate records, invest the trust's assets properly, exercise

reasonable prudence in the sales of real estate, and incur only

reasonable expenses related to the management of the Funds. We

transferred the case here on our own motion following Quincy's

appeal and Woodward's cross appeal from a Probate and Family

3

Quincy, originally a town, was incorporated as a city in

1888. See St. 1888, c. 347.

4

For the purposes of this opinion, the city of Quincy,

along with the board of supervisors and the board of managers

(together, joint boards) of the Funds at issue (the Adams Temple

and School Fund, or Adams Fund, and the Charles Francis Adams

Fund, collectively, Funds) are referred to collectively as

"Quincy," except where differentiation is helpful.

3

Court judge's ruling removing Quincy as trustee and ordering it

to pay a nearly $3 million judgment. 5

On appeal, Quincy asserts that the trial judge erred in

finding that Quincy committed a breach of its fiduciary duties

to the Funds by failing to invest in growth equities to protect

the principal when the Funds have only an income beneficiary to

provide for, and by not heeding specific investment advice it

received in 1973. In addition, Quincy challenges the award of

damages, alleging that it was based on an improperly introduced

and unsound portfolio theory hypothesizing unrealized gains;

that it failed to exclude reasonable costs and expenses Quincy

would have incurred had Quincy followed that portfolio theory;

and that it improperly included prejudgment interest dating back

to the dates of the various breaches. Finally, Quincy avers

that Woodward's claims should have been barred by the

Massachusetts Tort Claims Act, G. L. c. 258, § 4, and its

accompanying protection of sovereign immunity, and by the

equitable doctrine of laches.

For the reasons discussed below, we conclude that the

claims were not barred, and judgment against Quincy for

committing a breach of its fiduciary duties to the Funds was

proper, but the award of damages was erroneous in the

5

The parties have stipulated to the consolidation of the

appeals.

4

calculation of unrealized gains on the investment portfolio.

Specifically, we conclude that the judge erred in two respects:

first in finding that Quincy's failure to heed specific

investment advice it had solicited constituted a breach of its

duty to act as a prudent investor, and second in calculating as

damages the gains that might have been realized had Quincy

followed that advice. Nonetheless, because there was other

evidence of Quincy's mismanagement of the Funds, the judge did

not err in finding that Quincy had committed a breach of its

fiduciary duties with regard to them.

We further conclude that the judge did not err in including

prejudgment interest or in declining to speculate as to

potential costs or expenses Quincy may have incurred with proper

management. However, because the judge's calculation of damages

with regard to the unrealized gains on the investment portfolio

was based on his incorrect assumption that Quincy was required

to follow specific investment advice, that calculation was in

error. Accordingly, we affirm the judgment as to liability,

reverse with respect to the calculation of damages on the

unrealized gains, and remand for further proceedings consistent

with this opinion.

Background. In 1822, former President John Adams executed

two deeds of trust, conveying a portion of his real estate

holdings to a trust, thereafter named the Adams Temple and

5

School Fund (Adams Fund), and naming Quincy as the trustee. The

first deed executed by President Adams (Deed A) was supplemented

by a bequest of his grandson, Charles Francis Adams, in 1886, to

support the objectives of the Adams Fund (Charles Francis Adams

Fund, and, collectively with the Adams Fund, Funds). Deed A

contained the basic provisions of the trust and directed the

trustee to invest earnings from the real estate "in some solid

public fund, either of the Commonwealth, or of the United

States"; to build a church; and to apply "all future rents,

profits, and emoluments, arising from said land" to support a

school with particular requirements. The only principal

beneficiary identified in the deed was the oldest living male

descendant of President Adams, who was to receive the principal

only on "gross corruption or mismanagement," or knowing waste,

on the part of Quincy. Shortly after the deeds were executed,

the inhabitants of Quincy voted to accept the gifts therein, and

Quincy became the trustee.

Two acts of the General Court granted Quincy further

authority in executing its responsibilities as trustee of the

Funds. In 1827, the General Court appointed the treasurer of

Quincy as the treasurer of the Adams Fund, incorporated the

board of supervisors, and authorized the board of supervisors

and the selectmen of Quincy to execute the intentions of

President Adams and to receive and manage gifts from others for

6

the purposes articulated in the deeds. See St. 1827, c. 59

(1827 Act). Quincy thereafter established a board of managers

for the Adams Fund. 6 In 1898, the General Court authorized

Quincy as trustee of the Funds to sell and convey the Funds'

real property holdings and to "invest[] and re-invest[]" the

sale proceeds "from time to time . . . in real estate or in such

securities as trustees are authorized to hold in this

Commonwealth." See St. 1898, c. 102 (1898 Act).

In 1953, pursuant to an unpublished order of this court,

after three prior income beneficiaries, Woodward was designated

(and remains) the sole income beneficiary of the Funds. 7

6

The board of managers of the Adams Fund was comprised of

the mayor of Quincy, the president of the city council, the

treasurer and collector, and two members elected annually by the

city council. See § 2.144.020 of the General Ordinances of the

City of Quincy. It appears that whereas the board of

supervisors and the board of managers shared responsibility for

overseeing the Adams Fund, only the board of supervisors oversaw

the Charles Francis Adams Fund.

7

The Woodward School for Girls, Inc. (Woodward), was

established and operated by the Woodward Fund, a trust created

by the will of Dr. Ebenezer Woodward, a cousin of President John

Adams, in 1894. This fund was also managed by Quincy, but its

board of managers was separate from those of the Funds. In

1952, Quincy filed a petition asking that the Funds be used to

benefit Woodward, which was experiencing financial troubles.

This court granted the petition and ordered that "the net income

from the [Funds] . . . be paid to and expended by the City of

Quincy in its capacity as trustee of the Woodward Fund and

Property for the conduct, operation, maintenance, management,

and advancement of the Woodward School for Girls." The Woodward

Fund was subsequently liquidated. In his findings in the

present dispute, the judge noted that the cy pres decree "did

not . . . provide a requirement for any annual, quarterly, or

7

1. Investment advice and state of Funds. By the time

Woodward became the beneficiary of the Funds, the real estate

holdings of the Adams Fund had diminished significantly,

presumably due to sale. At the end of 1952, the assets of the

Adams Fund consisted of $4,474 in cash, $253,723.02 in

investment assets, and an assessed value of $102,325 in real

estate. The value of the Adams Fund's investment assets in 1973

totaled $321,932.43, an increase that may have been attributable

to the further sale of real estate. In April, 1973, the Adams

Fund investment assets were invested in a portfolio consisting

of ninety per cent fixed income and ten per cent equity

securities. That month, Quincy received investment advice it

had requested from the South Shore National Bank (bank) with

regard to managing the Funds' investment portfolio. The joint

boards of the Funds unanimously voted to adopt an agreement

establishing an advisory relationship with the bank and to

follow certain diversification investment advice it received

from the bank. However, Quincy never implemented the

diversification recommendations, and instead, by 1990, nearly

one hundred per cent of the Adams Fund's assets were invested in

fixed income instruments. In 2008, the value of the investment

even periodic, income payments from the [Funds] to the Woodward

School."

8

assets in the Adams Fund was reportedly still the same:

$321,932.43.

The assets of the Charles Francis Adams Fund, which are far

smaller than those of the Adams Fund, have diminished somewhat

over time. As of 1953, the Fund had a value of $23,428,

consisting of $1,453 in cash and $21,975 in securities

(primarily in corporate bonds). It has since declined to

$19,982 as of 2005, when it consisted of $2,530 in cash and

$17,452 in investments. 8

Despite the lack of growth in the Funds, between 1953 and

2008, the Funds generated over $700,000 in income; this income

was either paid to Woodward directly or used to pay the Funds'

expenses.

2. Request for accounting and present litigation. The

present dispute began in 2005, when Woodward had, for two

consecutive years, received a smaller distribution from the

Funds than it had anticipated. In light of these discrepancies,

the chair of the Woodward board of trustees requested an

accounting of the Funds from Quincy. As of nearly one and one-

half years later, the school had received some information from

8

As of 1962, the Charles Francis Adams Fund had a value of

$24,323. The Fund hovered in this range until 1977, when it

dropped to $19,542. As of 1984, the Fund contained $21,975.

9

Quincy but not a full accounting, which it again requested. 9 In

July, 2007, after still receiving no response, Woodward filed a

complaint and petition for an accounting with a single justice

of this court against Quincy as trustee of the Funds. Woodward

asserted that "as beneficiary of the Funds, [it] is entitled to

know, the real and financial assets currently in the Funds,

information about the Funds' management, and historically what

has happened to the Funds' assets and income." The single

justice transferred the case to the Norfolk County Division of

the Probate and Family Court Department.

A judge in that court appointed a special master to gather

relevant documents regarding the Funds' assets, prepare an

accounting for the Funds for the period of 1953 to 2008,

inclusive, and issue a report assessing the propriety of the

Funds' transactions. See G. L. c. 206, § 2; Rule 20 of the

Rules of the Probate and Family Court, Massachusetts Rules of

Court, at 1051 (Thomson Reuters 2014). Overall, the special

master concluded that Quincy had committed a breach of its

fiduciary duties in several respects, primarily because it had

"not maintained adequate books and records to substantiate its

9

Quincy had never previously provided an accounting of its

stewardship of the Funds to Woodward.

10

stewardship as Trustee," and it had sold the Funds' real

property at less than fair market value. 10,11

10

This accounting and report was supplemented by that of a

certified public accountant, who was retained to assist the

special master. Incorporating the accountant's findings, the

special master made numerous findings, the most relevant of

which are summarized here. First, he determined that the return

generated by the Funds' investments was "comparable to the

market return of similar investments." Second, he concluded

that $85,090 in income from the Adams Fund that was not

distributed to Woodward "was maintained in the Fund and

reinvested in market rate instruments," and that $18,864 in

income from the Charles Francis Adams Fund was wrongly withheld

from Woodward. Third, he concluded that real property sales

conducted between 1953 and 1972 were below fair market value,

and that the only remaining parcel of real property held by the

Funds was leased at less than fair market rent. Fourth, he

determined that Quincy's expenses were significant and required

justification. Finally, the special master concluded that

Quincy committed a breach of its duty of care to Woodward and

"may have violated its duty to prudently invest trust assets"

with regard to the land sales between 1955 and 1972; committed

a breach of "its duty of loyalty to Woodward when it engaged in

business dealings which caused trust property to be sold for

below fair market value"; committed a breach of its duty to

furnish information to beneficiaries "by not informing Woodward

of the 1972 petition concerning the lease" of real property

owned by the Funds, which was not a prudent investment, and by

not providing an actual accounting when Woodward requested one

until ordered to do so by the court; and committed a breach of

its duty to keep accurate records and provide reports. In a

supplemental report filed after receipt of additional

documentation, the special master concluded that Quincy "did not

adhere to the investment mandates" articulated in Deed A and

"varied the investment portfolio between equities and bonds"

when the deed seemed to limit investments to bonds only. The

special master also noted that the fifty-five year accounting

period at issue exceeded the recommended record retention period

and therefore questioned the timeliness of Woodward's challenge

to Quincy's actions as trustee.

11

The trial judge subsequently gave "presumptive weight" to

the special master's findings and conclusions. See

Mass. R. Civ. P. 53 (h) (1), as amended, 386 Mass. 1237 (1982).

11

Following the report of the special master, the dispute

proceeded to a thirteen-day bench trial. In February, 2011, an

amended judgment and amended findings entered, with 220 findings

of fact.

The judge concluded that Quincy failed to keep accurate

records of its financial stewardship of the Funds, to obtain

appraisals for real property and to sell parcels at fair market

value or greater, 12 to act on professional investment advice it

received, and to comport with its duty of loyalty to the Funds.

The judge characterized Quincy's management of the Adams Fund

specifically as "inattentive, imprudent and neglectful," but not

so neglectful as to "rise to the level of gross corruption or

gross mismanagement," such that the remainder beneficiary would

take the trust property.

With regard to Quincy's investment strategy for the Adams

Fund, the judge made several findings relevant to Quincy's

appeal. 13 First, he concluded that Quincy did not commit a

12

With regard to Quincy's real estate sales on behalf of

the Adams Fund, the judge concluded that Quincy failed to fulfil

its duty to sell realty for the best possible price, or at least

for fair market value, and instead prioritized its own municipal

needs.

13

With regard to the investment strategy for the Charles

Francis Adams Fund, the judge concluded that even though the

Fund's corpus had declined by nearly fifteen per cent between

1953 and 2005, it appeared that Quincy had made "a modest effort

to pay income of this relatively basic trust over to the

12

breach of its fiduciary duty to the Funds by employing

inappropriate investment strategies during the years of 1953 to

1973. 14 Second, with regard to the 1973 investment advice Quincy

received from the bank, the judge found that Quincy received and

unanimously voted to adopt a single portfolio diversification

plan, consisting of sixty per cent in equity securities, thirty-

five per cent in fixed income, and five per cent in savings (60-

35-5 plan). He concluded that Quincy failed to follow this

directive, and that it "ignored the terms of its own April 11,

1973, vote, and the competent, professional . . . advice

contained therein, to the considerable detriment of the [Adams

Fund]." Therefore, Quincy acted imprudently and in violation of

its fiduciary duties.

Third, the judge found that it was imprudent for Quincy to

permit the Adams Fund to consist almost entirely of fixed income

and cash assets by 1990. The judge rejected Quincy's assertion

that it maintained the Fund's assets in government securities in

order to comport with the explicit directive of the trust

instrument; rather, the judge concluded that the Fund had acted

in derogation of the 1892 legislation directing Quincy to invest

Woodward School." The judge therefore declined to speculate as

to any loss in income received by Woodward from this Fund.

14

Nonetheless, the judge expressed "serious reservations

and concerns" regarding the investment approach employed during

this period.

13

real estate sales proceeds "in real estate or in . . .

securities," by instead investing "the fungible portion of the

trust corpus in corporate bonds as well as in

equities/securities." 15

In light of these findings, the judge awarded Woodward a

total judgment of $2,994,868, including prejudgment interest of

$1,610,826 and approximately $1.1 million for "[u]nrealized

[g]ains in portfolio," and removed Quincy as trustee of the

Funds. 16

15

This finding departed from the special master's finding

on this issue.

16

The $2,994,868 total judgment was calculated as follows:

$255,566 in miscellaneous damages due to financial

mismanagement, including recoupment of funds not received by the

Adams Fund as a result of sales of real estate below fair market

value, unrealized income from the sale of a particular parcel,

the value of "missing" funds from the South Shore National Bank

(bank) account where the trust assets were held and from

unreported stock gains, and recoupment of an unexplained account

deficiency; $1,135,494 for the unrealized gain in the investment

portfolio; and a total of $1,610,826 in prejudgment interest on

these items ($475,426 on the miscellaneous damages combined, and

$1,135,400 on the unrealized gains); less a credit for

disallowed expenses of $7,018. Quincy's argument on appeal

focuses primarily on the unrealized gains and the prejudgment

interest portions of the award of damages. It appears to

concede that if the Massachusetts Tort Claims Act, G. L. c. 258,

§§ 1 et seq., does not bar the award, Quincy would remain

responsible for $119,271 of the $255,566 miscellaneous damages

(the amount attributable to unrealized income from the sale of a

particular parcel and the unexplained account deficiency), plus

certain prejudgment interest on that amount. Quincy asserts

that the remainder of the $255,566 (attributable to below-market

real estate sales and missing accounts and gains) is barred by

laches.

14

Discussion. We will not disturb the findings of the trial

judge or the special master unless they are clearly erroneous.

Mass. R. Civ. P. 52 (a), as amended, 423 Mass. 1402 (1996). See

Chase v. Pevear, 383 Mass. 350, 359-360 (1981); Matter of Jones,

379 Mass. 826, 839 (1980). "A finding [of fact] is clearly

erroneous . . . [if], although there is evidence to support it,

the reviewing court on the entire evidence is left with the

definite and firm conviction that a mistake has been committed"

(quotations and citations omitted). Demoulas v. Demoulas Super

Mkts., Inc., 424 Mass. 501, 509 (1997).

1. Breach of fiduciary duties. The primary issue in this

case is whether the judge erred in concluding that Quincy

committed a breach of its fiduciary duties by failing to invest

in growth securities and by failing to heed investment advice it

procured from an investment adviser. Because trustees' conduct

with regard to investment strategy and decision-making is

governed by the prudent investor standard, we begin by

articulating what that standard requires.

a. Prudent investor standard. A trustee's obligations

with regard to investing and managing a trust's assets are

dictated by our common law and by the Massachusetts Prudent

Investor Act, G. L. c. 203C, §§ 1 et seq. See Kimball v.

15

Whitney, 233 Mass. 321, 331 (1919); Harvard College v. Amory, 9

Pick. 446, 461 (1830). 17

A trustee has a duty to invest the trust's assets "solely

in the interest of the beneficiaries." G. L. c. 203C, § 6. In

performing this duty, a trustee must "exercise reasonable care,

skill, and caution" in "invest[ing] and manag[ing] trust assets

as a prudent investor would, considering the purposes, terms,

and other circumstances of the trust." Id. at § 3 (a). Among

those considerations are "the possible effect of inflation or

deflation"; "the expected total return from income and the

appreciation of capital"; "other resources of the

beneficiaries"; and "needs for liquidity, regularity of income,

and preservation or appreciation of capital." Id. at

§ 3 (c) (2), (5)-(7). See O'Brien v. Dwight, 363 Mass. 256,

17

Because the Massachusetts Prudent Investor Act, G. L.

c. 203C, §§ 1 et seq. (Act), applies only "to decisions or

actions of a trustee occurring on or after" the 1998 effective

date of the Act, we apply the standards of both the common law

and the Act and note distinctions where relevant. See St. 1998,

c. 398, § 3, inserting G. L. c. 203C. In many respects, the Act

mirrors the common-law doctrine that has existed since the mid-

1800s. See Harvard College v. Amory, 9 Pick. 446, 461 (1830).

See also Chase v. Pevear, 383 Mass. 350, 363 (1981). However,

the Act introduced two significant changes: permissive

delegation of duties, and the modern portfolio theory, which

recognizes inflation as a factor to be considered in portfolio

management decision-making and therefore shifts the assessment

of a trustee's actions to the over-all construction of the

portfolio. See Taylor, Massachusetts' Influence in Shaping the

Prudent Investor Rule for Trusts, 78 Mass. L. Rev. 51, 51-52 &

n.5 (1993). Compare Chase, supra at 364 (assessing each

investment individually, but with some consideration of "the

fund as a whole" [citation omitted]).

16

294-295 (1973). We assess investment decisions in the context

of the over-all investment strategy of the trust. 18 G. L.

c. 203C, § 3 (b). See Restatement (Third) of Trusts § 90

(2007).

A trustee exercising "reasonable care, skill and caution,"

G. L. c. 203C, § 3 (a), undoubtedly will approach investment

decisions with some conservatism. This, however, must be

balanced with a degree of risk in order to obtain income for the

trust and protect the principal against inflation. See

Restatement (Third) of Trusts, supra at § 90 comment e;

Restatement (Second) of Trusts § 227 comment e (1959).

Diversification of investments is therefore considered a central

component of prudent investment because it both moderates and

reduces risks. See G. L. c. 203C, § 4; Chase, 383 Mass. at 363.

Accordingly, trustees are discouraged from investing "a

disproportionately large part of the trust estate in a

particular security or type of security." Restatement (Second)

of Trusts, supra at § 228 comment a. Nonetheless, the standard

recognizes that in some circumstances, it may not be prudent to

diversify an investment portfolio, particularly where "the

objectives of both prudent risk management and impartiality can

be satisfied" without diversification. Restatement (Third) of

18

For actions occurring prior to 1998, we evaluate each

investment individually, but also consider investments in the

context of the trust as a whole. See Chase, 383 Mass. at 364.

17

Trusts, supra at § 90 comment g. See G. L. c. 203C, § 4;

Restatement (Second) of Trusts, supra.

b. Investment advice. We turn now to Quincy's first claim

of error. Quincy contends that the judge erred in concluding

that Quincy was required to follow specific investment advice it

requested and received in 1973. In addition, it asserts that

the judge misconstrued the investment advice at issue as

providing only one recommendation, when the advice actually

consisted of several alternatives, one of which Quincy claims to

have followed. We agree that the judge improperly considered

strict compliance with investment advice to be required of a

prudent investor. We do not, however, consider the judge's

interpretation of the advice provided to be clearly erroneous.

The investment advice in dispute was provided by the bank

in a letter dated March 29, 1973, and reviewed by the joint

boards of the Funds at a meeting on April 11. 19 The letter was

interpreted by the trial judge as providing a single

diversification recommendation of sixty per cent equity

securities, thirty-five per cent fixed income, and five per cent

savings (60-35-5 plan). 20 This represented a drastic change from

19

Quincy had requested this advice after receiving guidance

from its legal counsel that it was permissible to seek

professional advice regarding investments, but that Quincy would

retain responsibility for making investment decisions.

18

the Adams Fund's portfolio at the time of ninety per cent fixed

income and ten per cent equity securities. On receiving the

investment advice, the joint boards unanimously voted to enter

into an advisory relationship with the bank, 21 and to "mak[e]

investments and changes of investments in said Funds

substantially within the outline as presented" by the bank in

its letter. 22 However, Quincy did not make changes to its

20

The letter lends itself to several interpretations. It

ambiguously refers to three proposals, giving some credence to

Quincy's suggestion that the letter did not provide only one

directive. We agree with Quincy that one of the proposals

included in the letter was for "a modest upgrading of the

balance of the bond portfolio into higher rate bonds," which

Quincy purports to have followed. However, we are not persuaded

that the recommendations contained in the letter were meant to

be alternatives rather than complements to each other. Our own

review of the letter suggests that the primary emphasis with

regard to the Adams Fund was the adoption of a diversification

plan consisting of sixty per cent in equity securities, thirty-

five per cent in fixed income, and five per cent in savings (60-

35-5 plan). Accordingly, the judge's understanding of the

letter as providing this recommendation is plausible and not

clearly erroneous.

21

The agreement authorized the bank "to review periodically

and to advise or recommend to [Quincy] the retention, sale or

exchange of the securities and other property in the [Funds] and

to advise or recommend the purchase of stocks, bonds and other

securities." The agreement indicated that Quincy would

ultimately be responsible for making decisions regarding "the

acquisition or disposition of securities and other property."

22

The trial judge found that the boards adopted the

specific 60-35-5 diversification proposal discussed above.

However, the meeting minutes do not reflect such a precise vote.

Accordingly, we conclude that the boards did not adopt any

specific reading of the investment advice provided in the letter

but rather resolved to follow more generally the advice

provided.

19

portfolio consistent with the advice it received, and instead

increased the percentage of investments in fixed income assets

so that, by 1990, nearly one hundred per cent of the assets of

the Adams Fund were in fixed income investments. 23

Under both the common law and the Prudent Investor Act, a

trustee is permitted to consult with and receive advice from

accountants and financial advisers. See G. L. c. 203C,

§ 10 (a); Milbank v. J.C. Littlefield, Inc., 310 Mass. 55, 62

(1941) ("A trustee may avail himself of the services of

others"); Restatement (Third) of Trusts, supra at § 77 comment b

& § 80 comment b. Cf. Rothwell v. Rothwell, 283 Mass. 563, 571

(1933) (trust disbursements paying agents and attorneys who

assisted in trust management were appropriate); Hanscom v.

Malden & Melrose Gas Light Co., 234 Mass. 374, 381 (1920)

(same).

Indeed, consulting investment advisers may be part of

acting prudently and exercising care. See Restatement (Third)

of Trusts, supra at § 77 comment b. "After obtaining advice or

consultation, the trustee can properly take the information or

suggestions into account but then (unlike delegation) must

exercise independent, prudent, and impartial fiduciary judgment

23

Although Quincy avers that it followed some of the advice

in the letter by upgrading the Adams Fund's bond portfolio to

higher rate bonds, as noted above we are not persuaded that this

was more than a secondary component of the bank's broader

diversification recommendation.

20

on the matters involved." Id. at § 80 comment b. See Attorney

Gen. v. Olson, 346 Mass. 190, 197 (1963) (trustee may employ

bank as investment agent, as long as trustee gives independent

consideration to agent's recommendation). In contrast, were we

to require a trustee to follow investment advice it receives, we

would in effect mandate delegation of a trustee's fiduciary

duties. 24 We decline to require a trustee to abdicate this

fundamental function of a trustee to make investment decisions

merely because the trustee seeks advice on acting prudently.

See Boston v. Curley, 279 Mass. 549, 562 (1931). However

prudent the advice may be, a trustee is not required to follow

it. To the extent the judge considered the failure to follow

specific advice a per se breach of Quincy's fiduciary duty of

prudent investment, this was in error.

Whether a trustee requested and followed specific

investment advice is but one factor in the determination of

whether the trustee acted prudently. Receipt of sound

investment advice and dismissal or wilful ignorance of it, where

the advice was at the time prudent and consistent with the trust

24

The common law and the Prudent Investor Act take

different approaches to delegation of a trustee's

responsibilities. Compare G. L. c. 203C, § 10 (a) (permitting

trustee to "delegate investment and management functions if it

is prudent to do so"), with Milbank v. J.C. Littlefield, Inc.,

310 Mass. 55, 62 (1941) (trustee may not "delegate his authority

as trustee"), and Boston v. Curley, 276 Mass. 549, 562 (1931).

Merely receiving, considering, and adopting investment advice,

however, does not constitute delegation under either standard.

21

beneficiary's needs and goals, may be indicative of a lack of

prudent investing. But such action or inaction in and of itself

does not rise to the level of imprudent investing. The judge's

reliance on the 1973 investment advice as a default prudent

investment strategy resulted in inadequate consideration of the

range of investment strategies that would have been prudent for

the Adams Fund. 25

c. Concern for principal of income-only fund. Quincy also

challenges the trial judge's finding that it committed a breach

of its fiduciary duty by not investing in growth securities. It

asserts that as the trustee of a fund with only an income

beneficiary, it had a "duty to maximize income, even at the risk

of sacrificing growth," and therefore it was not obligated to

invest in growth equities that would protect the principal from

inflation. It claims that it acted prudently in structuring the

Adams Fund's investment portfolio as it did because the Fund

produced income for Woodward, and the investments comported with

the trust instrument's direction to invest the majority of the

Fund's assets in government-backed bonds.

The judge's findings regarding the Adams Fund's investment

portfolio demonstrate that the Fund has been primarily invested

25

We reserve our discussion of the impact of Quincy's

failure to follow the bank's investment advice for a more

holistic analysis of whether it acted prudently. See part 1.d,

infra.

22

in fixed income assets since Woodward became the income

beneficiary. As a result, the value of the Fund has remained

largely unchanged since 1973. Despite this lack of principal

growth, between 1973 and 2008, the Funds generated over $700,000

in income, benefiting from a 7.54 per cent rate of annual

return, which was either paid to Woodward directly or used to

pay the Funds' expenses. Nonetheless, the judge found that it

was imprudent for Quincy "to permit, by 1990, the [Adams Fund]

to consist of essentially 100% fixed income/cash assets," and

that this imprudence significantly harmed the Adams Fund.

Where, as here, the current beneficiary of a trust is an

income-only beneficiary, courts in at least three other

jurisdictions with similar prudent investor standards have

concluded that a trustee owes a duty to that beneficiary to

prioritize income over growth, and that investing in fixed

income assets over equities is not a breach of fiduciary duty

where such investments produce income for the beneficiary but

may fail to maintain the principal against inflation. See

Tovrea v. Nolan, 178 Ariz. 485, 490 (Ct. App. 1993); SunTrust

Bank v. Merritt, 272 Ga. App. 485, 488-489 (2005); In re Trust

Created by Martin, 266 Neb. 353, 359-360 (2003). See also Shirk

v. Walker, 298 Mass. 251, 257-258 (1937). This comports with

the obligation under G. L. c. 203C, § 6, to invest for the

benefit of the beneficiaries.

23

Although trustees in such cases are required to balance the

interests of successive beneficiaries, one of whom is to receive

the income during his or her lifetime and the other of whom is

to take the principal on the income beneficiary's death, these

courts have consistently concluded that a trustee does not

commit a breach of a fiduciary duty "by investing the trust in

such manner as to maximize the income payable to [the income

beneficiary] rather than expand the corpus of the trust."

SunTrust Bank, 272 Ga. App. at 489. See Tovrea, 178 Ariz. at

490 ("trustees' duty was [primarily] to invest in such a manner

as to produce an income for [income beneficiary] and,

secondarily, [to] preserve the principal").

In theory, the case for maximizing income over growth is

even stronger here, because the income beneficiary is an

institution and the remainder beneficiary takes only upon "gross

corruption or mismanagement . . . notorious negligence, or any

waste knowingly permitted," thereby justifying complete

attention to the interests of Woodward. See G. L. c. 203C, § 6.

However, the Adams Fund's status as a charitable trust and

Woodward's institutional status makes this case distinctly

different from those involving trusts with a lifetime

beneficiary.

A charitable trust such as this one is designed to support

an income beneficiary in perpetuity. See Jackson v. Phillips,

24

14 Allen 539, 550 (1867) (charitable trusts exempt from rule

against perpetuities). As a result, the trustee must

necessarily consider both the generation of income and the

growth and maintenance of the principal in order to provide

income funds to the beneficiary indefinitely. See Restatement

(Third) of Trusts, supra at § 90 comment e ("In balancing the

return objectives between flow of income and growth of

principal," trustee must consider trust's "purposes and

distribution requirements"). In effect, Woodward is equivalent

to both the lifetime income beneficiary and all subsequent

beneficiaries.

As such, acting prudently in managing a charitable trust

that benefits an institutional income beneficiary requires

considering the specific needs of the beneficiary in the short

and long term and balancing prioritization of income with

protection and preservation of the principal. At a minimum, a

trustee must consider how best to guard the principal against

inflation, if not how to grow the principal while simultaneously

generating income to support the beneficiary. Where the income

beneficiary will continue to exist in perpetuity, the mandate of

G. L. c. 203C, § 3 (a), to act with "caution" necessarily

entails considering "the possible effect of inflation or

deflation," id. at § 3 (c) (2), and the "preservation or

appreciation of capital," id. at § 3 (c) (7). A trustee must

25

accordingly "invest with a view both to safety" -- "seeking to

avoid or reduce loss of the trust estate's purchasing power as a

result of inflation" -- and "to securing a reasonable return."

Restatement (Third) of Trusts, supra at § 90 comment e.

In this case, a prudent investor would have realized at

some point, long before 2008, that a fund value that is

unchanged for decades after 1953 has not kept up with inflation,

and, given the potential perpetuity of the income beneficiary's

needs, would have taken or attempted to take steps to protect

the principal in order to preserve future income opportunities.

If Quincy recognized that the Adams Fund was vulnerable to

inflation, likely attributable to its lack of diversification,

it had a duty to determine which of its assets could be invested

in a manner that would guard against this vulnerability. At a

minimum, Quincy could have invested the proceeds from the sale

of real estate in investments that would potentially protect the

principal. See St. 1898, c. 102. Instead, Quincy chose to keep

the Adams Fund's investment assets exclusively in bonds, which

produced a higher rate of return than a more diversified

portfolio but resulted in stagnation of the trust principal. 26

26

Quincy asserts that the terms of the trust instrument,

Deed A, required it to invest most of the principal, with the

exception of real property sales proceeds, in State and Federal

bonds. Under the Prudent Investor Act, a trustee may be

relieved from the obligations set forth in the Act where the

trust instrument requires the trustee to act otherwise and "the

26

Where, in most instances, an increase in principal will lead to

an increase in income, this decision not to diversify was

imprudent in light of the Adams Fund's need to support Woodward

in perpetuity and not merely during a human lifetime. Even

without the benefit of hindsight, see G. L. c. 203C, § 9, it is

clear that Quincy did not take any steps to protect the Adams

Fund's principal against inflation. We therefore conclude that

Quincy's failure to protect the principal against inflation

alone was sufficient to constitute a breach of its fiduciary

duty.

trustee acted in reasonable reliance on the provisions of the

trust." G. L. c. 203C, § 2 (b). See Restatement (Second) of

Trusts § 228 comment f (1959) ("By the terms of the trust the

requirement of diversification may be dispensed with").

However, we are not persuaded that Quincy's complete reliance on

this particularly restrictive trust provision was reasonable.

Quincy failed to keep adequate records reflecting which assets

could be invested only in bonds and which assets could be more

broadly invested and used to diversify the portfolio and secure

the principal against inflation. Instead, Quincy invested

nearly all of its assets in bonds, which undoubtedly exceeded

the allocation that was required by the trust.

Further, if the express terms of the trust proved too

restrictive to achieve the trust's goals, Quincy could have

appealed to the court to revise the trust's terms to better

serve its original purpose. See Trustees of Dartmouth College

v. Quincy, 357 Mass. 521, 531 (1970) ("courts of equity" have

general power "in the administration of charitable trusts to

permit deviations short of cy pres applications"); Briggs v.

Merchants Nat'l Bank of Boston, 323 Mass. 261, 274-275 (1948)

(applying cy pres doctrine because "[equity] will presume that

the donor would attach so much more importance to the object of

the gift than to the mechanism by which he intended to

accomplish it that he would prefer to alter the mechanism to the

extent necessary to save the object").

27

d. Quincy's over-all performance. As the above

discussions illustrate, Quincy engaged in several shortcomings

in its management of the Adams Fund's investment portfolio that

indicate that it failed to perform as a prudent investor would

under the circumstances. See G. L. c. 203C, § 3 (a). Although

Quincy sought and received ongoing investment advice from the

bank in 1973 and thereafter, 27 it does not appear that it ever

heeded the most significant, and seemingly prudent, advice the

bank provided, construed in even the most general terms: to

diversify the Adams Fund's portfolio in such a way that would

decrease slightly the annual rate of return but would realize

some appreciation for the principal. This factor, while not

dispositive, is illustrative of Quincy's general lack of

consideration of diversification, long considered a prudent

investment strategy, see G. L. c. 203C, § 4; Chase, 383 Mass. at

363, and its disregard for both the 1898 legislative directive

and the long-term needs of the income beneficiary.

We are not persuaded that Quincy was prohibited from

following this advice or from otherwise diversifying the Adams

Fund's portfolio by the restrictions in the trust instrument.

See note 26, supra. Rather, as Quincy's legal counsel observed

27

The board meeting minutes reflect that an investment

representative from the bank attended the board meetings and

provided reports to Quincy in the decades following the 1973

advice.

28

and as the 1898 Act required, Quincy was in fact directed to

invest the real estate sale proceeds "in real estate or in such

securities as trustees are authorized to hold in this

Commonwealth." St. 1898, c. 102, § 2. The limitation

articulated in Deed A of investing in government-issued bonds

did not apply to these proceeds. Thus, contrary to Quincy's

assertion that it was following the restrictions on the

investment of the Adams Fund, its nearly complete investment in

bonds suggests that Quincy actually contravened the applicable

investment restrictions.

Finally, and most significantly, Quincy failed to invest

with the long-term needs and best interests of the income

beneficiary in mind, creating a portfolio that consistently

provided income but that left the principal vulnerable to

inflation and, as a result, depreciation. See Harvard College,

9 Pick. at 458. Accordingly, based on these considerations, the

judge's ruling that Quincy committed a breach of its fiduciary

duty of prudent investment was not clearly erroneous.

2. Award of damages. We turn next to Quincy's allegations

of error in the theory and calculation of the award of damages.

a. Theory of damages. Quincy contends that the judge

improperly devised a new liability theory, that of Quincy's

failure to achieve any capital appreciation for the Adams Fund,

that had not previously been an issue in the case. Quincy avers

29

that by "injecting" this issue into the case, enabling Woodward

to assert the issue by permitting its expert witness to testify

based on the theory, and making a finding based on this

testimony, the judge engaged in an inappropriate fact-finding

method and denied Quincy an adequate opportunity to prepare to

defend against the theory. We agree with Woodward that the

issue of lack of capital appreciation was present from the

beginning of the litigation, and further note that even if it

were not, a judge has the authority to raise an issue in the

case as long as adequate notice is afforded to the parties.

We begin with a brief description of what transpired. On

the second day of trial, in the presence of counsel, the judge

indicated his disbelief that the Adams Fund's principal would

not have grown significantly over the course of nearly sixty

years. 28 He then proceeded to ask counsel a number of rhetorical

but relevant questions about why the value of the Adams Fund had

not appreciated, speculating that perhaps various stock

28

Specifically, the judge stated, "It is inconceivable to

me that the value of the portfolio has not doubled, tripled,

quadrupled over [sixty] years." He observed that there had been

no growth in the Adams Fund's portfolio but that "[t]he

investments seemed reasonable" and "didn't seem inappropriate."

In encouraging the parties to seek a settlement, the judge noted

that he had "no idea what the end result of this case [was]

going to be" and that it was "unusual that a trust fund, whereby

there would be no invasion of the principal, doesn't grow over

[sixty] years of an incredible period of time of growth in the

country. . . . It is inconceivable that there would not be an

increase."

30

investments had been made that did, at least temporarily, lead

to some appreciation, the value of which was then lost through

unsuccessful investments, but that such transactions were simply

not reflected in the Fund's records. Quincy asserts that these

statements "injected" the issue of capital appreciation into the

case.

Thereafter, Woodward identified Scott Winslow as an expert

witness who would testify that the Adams Fund's investment

portfolio, being primarily invested in bonds, was such that it

resulted in significant underperformance. Quincy moved to

exclude Winslow's testimony, asserting that it "would introduce

a new issue in the middle of trial." In opposition, Woodward

contended that Winslow's testimony would "respond to the Court's

questions regarding why it was that despite a period of

extraordinary growth in the economy, the principal of [the

Funds] did not increase in value." Woodward further asserted

that capital appreciation had been an issue from the beginning.

The judge denied the motion but ultimately limited Winslow's

testimony on this issue to whether the investments were

consistent with the advice Quincy had received from the bank,

and prohibited Winslow from testifying about a theoretical

proposal that Quincy could have followed.

Winslow testified that, had Quincy employed the 60-35-5

diversification plan recommended by the bank in 1973, the Adams

31

Fund would have grown in value significantly. Because Quincy

did not do so, the Fund's value remained unchanged from 1973 to

2008. The judge credited this testimony and used it to

calculate the damages owed to Woodward.

Although the specific calculations employed by Winslow and

adopted by the judge were inappropriate for the award of

damages, as we discuss infra, there was no error in the process

by which this liability theory was introduced. The question of

capital appreciation was indeed mentioned in Woodward's

complaint, in the order appointing a special master, and in

Woodward's pretrial memorandum. Given this early introduction

of the issue, we are not persuaded that Quincy was denied a

meaningful opportunity to prepare to defend against this

assertion. Contrast Harrington-McGill v. Old Mother Hubbard Dog

Food Co., 22 Mass. App. Ct. 966, 968 (1986).

Even if the issue were not raised in the complaint and

other documents, the judge may introduce a recovery theory or

unpleaded issue at trial if there is "implied consent" of the

parties, reflected by evidence "that the parties knew the

evidence bearing on the unpleaded issue was in fact aimed at

that issue and not some other issue the case involved." Jensen

v. Daniels, 57 Mass. App. Ct. 811, 816 (2003). See

Mass. R. Civ. P. 15 (b), 365 Mass. 761 (1974); Harrington-

McGill, 22 Mass. App. Ct. at 968. As the above discussion

32

regarding Quincy's breach of fiduciary duty evinces, the

question whether a trust's principal has experienced any capital

appreciation is part of the inquiry into whether a trustee has

engaged in prudent investments. Accordingly, Quincy cannot

claim that, where a breach of fiduciary duty was alleged for

improper investment strategies, it was unaware that principal

appreciation might be an issue or even unaware of the facts that

might be used in support of an argument that there was no

appreciation.

Further, in raising the theory, the judge afforded numerous

opportunities for Quincy to respond. Quincy was permitted to

depose Winslow prior to cross-examination and to retain an

expert and prepare a response to Winslow's testimony, which it

did. In addition, the judge limited Winslow's testimony on this

issue. Thus, Quincy suffered no prejudice in the way the

liability theory was introduced, see Cormier v. Grant, 14 Mass.

App. Ct. 965, 965 (1982), and there was no issue of "fundamental

fairness" in the inclusion of the theory at trial. See Jensen,

57 Mass. App. Ct. at 816.

b. Calculation of damages. Quincy also alleges that the

judge erred in calculating the award of damages award in three

respects: first, by basing the award for unrealized gains on

what the value of the Adams Fund would have been had Quincy

followed the specific investment advice the judge found that

33

Quincy received in 1973; second, in deciding not to subtract

from the unrealized gains the costs and expenses Quincy

theoretically would have incurred had it followed the

diversification plan; and third, in awarding prejudgment

interest dating back to the date of each breach. 29 We agree that

the formula used to calculate unrealized gains was

inappropriate, but reject Quincy's other claims.

i. Basis for unrealized gains. Quincy first asserts that

the judge's finding that Quincy should have adopted a specific

portfolio diversification plan recommended by the bank in 1973,

and the judge's employment of this plan by way of Winslow's

testimony to calculate the unrealized gains, was clearly

erroneous. We agree.

In awarding damages, the judge concluded that the Adams

Fund was "entitled to a return on monies it would have

29

Quincy also asserts that the judge's findings were

inadequate to support the award. While we agree with Quincy

that the judge is required to make subsidiary findings of fact

in support of an award, see Mass. R. Civ. P. 52 (a), as amended,

423 Mass. 1402 (1996), we are not persuaded that the judge did

not adequately do so here. See Willis v. Selectmen of Easton,

405 Mass. 159, 161-162 (1989) (judge need only "articulate the

essential grounds for a decision" and demonstrate that he or she

"has dealt fully and properly with all the issues"). Further,

to the extent Quincy challenges the judge's crediting of the

testimony of Scott Winslow generally, and his discrediting of

the testimony of Quincy's expert witness, we note that the judge

is entitled to credit any properly admitted expert testimony he

or she deems credible, and that the judge here explicitly found

that Winslow's opinion was credible. See Delano Growers' Coop.

Winery v. Supreme Wine Co., 393 Mass. 666, 682 (1985).

34

reasonably realized but for the imprudent actions of the

Trustee." Because the judge determined that it was imprudent

for Quincy to ignore the bank's investment advice, and

interpreted this advice as providing a 60-35-5 diversification

plan, the judge calculated the return the Adams Fund would have

realized based on this recommended portfolio and the five per

cent rate of return the bank anticipated that such a portfolio

would receive. Using this information, Winslow had testified

that, had Quincy employed this diversification plan, given the

growth in the equity market between 1973 and 2008, the Adams

Fund would have grown from its 1973 value of $321,932.43 to a

value of $1,457,426 in 2008. 30 The judge therefore determined

that the Fund suffered a loss in value of $1,135,494, or an

average annual loss of income of $31,542, from Quincy's failure

to act prudently and to employ the bank's portfolio

recommendation. Accordingly, he included this amount, plus

prejudgment interest, in the total award.

To the extent the damages here were based on the judge's

finding that Quincy ignored the specific investment advice it

received in 1973, the finding and calculation were in error. 31

30

Quincy takes issue with the bond indexes employed by

Winslow in calculating these numbers. Because we conclude that

the formula used to calculate the unrealized gains was

inappropriate, we decline to assess whether the indexes Winslow

used were appropriate here.

35

As discussed above, a trustee is not required to follow

investment advice strictly but rather must invest prudently.

See G. L. c. 203C, §§ 1 et seq. Therefore, an award of damages

cannot be based solely on what the trust's investment portfolio

performance would have been had the trustee complied with

certain, specific advice. Such reliance on a potential

investment portfolio necessarily and improperly employs the

benefit of hindsight. See id. at § 9. Unfortunately, this is

precisely the formula the trial judge employed here.

The award must be based on more than just the unheeded

investment advice a trustee received, and should instead

consider the totality of the circumstances as they would have

informed prudent investment decisions over the relevant time

period. See Quinton v. Galvin, 64 Mass. App. Ct. 792, 800

(2005) (judge must reach "approximate estimate of the

plaintiffs' damages" in considering variety of factors). Cf.

Bernier v. Bernier, 449 Mass. 774, 785 (2007) (valuation of

business for purposes of divorce proceeding must not be

31

We disagree with Woodward's assertion that it was proper

for the judge to rely on Winslow's testimony in calculating the

award where Quincy did not present any contrary methodology or

challenge Winslow's calculations. Were the methodology employed

by the judge sound, and simply not the approach most favorable

to Quincy, we would uphold the judge's calculation. However, we

cannot permit a judge's ruling to stand where it is clearly

erroneous, as we conclude it is here. See Mass. R. Civ. P.

52 (a), as amended, 423 Mass. 1402 (1996). See also Young Men's

Christian Ass'n of Quincy v. Sandwich Water Dist., 16 Mass. App.

Ct. 666, 672-673 (1983).

36

"materially at odds with the totality of the circumstances").

Factors to consider in this case include the state of the

relevant bond and equities markets when various investment

decisions were made, not just at one point in time decades ago;

the terms and limitations of the trust instrument; the specific

needs of the income beneficiary in the short and long term; and

any risk calculations that may have influenced the trustee's

decisions, including subsequent advice from the bank, the Funds'

financial advisor. Cf. Black v. Parker Mfg. Co., 329 Mass. 105,

112, 116-117 (1952) (assessment of value of unique services

involves consideration of variety of tangible and intangible

factors). As another factor, the judge may "take into account

his general knowledge of economic conditions during the period

of [the trustee's] transgressions." Quinton, supra. These

factors can appropriately guide the judge's determination of

"what asset mix a prudent fiduciary would have maintained" for

the Adams Fund during the lengthy time frame at issue. See

Meyer v. Berkshire Life Ins. Co., 250 F. Supp. 2d 544, 573 (D.

Md. 2003).

Because the judge here considered merely one possible

investment approach and did not account for these other factors,

we reverse the award for unrealized gains in the portfolio and

remand for further proceedings on this measure. On remand, an

assessment of what a prudent investor would have done requires

37

expert testimony on the minimum level of growth equities that

would have been prudent for an income-only fund, with

consideration of the potential shifts over the lengthy period at

issue. A prudent investor may well have followed the 60-35-5

plan, or could have chosen a portfolio with a lower allocation

to growth equities. At a minimum, the record must be thoroughly

developed and findings made regarding the range of prudent

strategies, so that the award, particularly with regard to

unrealized gains, is calculated with a fuller understanding of

the minimum growth equities allocation in mind. 32

ii. Accounting for costs and expenses. Quincy also

asserts that the judge erred in failing to subtract from the

damages related to the return on investment the costs and

expenses the Adams Fund would have incurred in realizing those

investment gains. See G. L. c. 203C, § 8 (trustee may incur

"costs that are appropriate and reasonable in relation to the

assets, the purpose of the trust, and the skills of the

trustee"). 33

32

Recalculating the unrealized gains on the portfolio also

requires careful consideration of the extent of likely stock

appreciation and the appropriate rate of return corresponding

with the portfolio or portfolios on which the award is based.

33

Although the judge did not exclude any costs or expenses

from the calculation of the unrealized return on investments, he

did exclude from the total award expenses that he found to be

allowable, including reasonable compensation for Quincy's

services, despite the fact that Quincy never submitted a bill

38

The plaintiff bears the burden "to introduce evidence

proving its damages to a reasonable certainty." See Brewster

Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass.

App. Ct. 582, 609 (2007). The theory or explanation for the

damages requested need not be the soundest one; it need only

"provide[] a sufficiently (if minimally) rational basis" for the

award. Id. at 611. Cf. Bernier, 449 Mass. at 785. Woodward

met this burden by presenting Winslow's testimony. There is no

obligation on the part of the judge to decrease potential

damages sua sponte because of costs or expenses not admitted in

evidence. In the absence of contrary testimony from Quincy

regarding what its costs were or would have been had it

implemented the investment strategy on which the award was

based, the judge did not err in crediting the reasonable opinion

proffered by Woodward's expert as to what costs and expenses a

trustee using a hypothetical portfolio would have incurred. Cf.

Bernier, supra.

iii. Award of prejudgment interest. Finally, Quincy

challenges the judge's award of interest on each measure of

damages from the last date on which the damage was sustained,

for this compensation. In fact, the judge found that Quincy

would be due a credit against other funds owed to the Adams Fund

of $7,018, given $157,025 in allowed expenses offset by $150,007

in disallowed expenses. This credit was factored into the total

award.

39

consistent with the judge's findings on these issues. 34 Quincy

avers that the judge erred in including this prejudgment

interest because, in tort actions, such interest can be awarded

only from the date of the filing of the complaint, and not from

the date of the breach itself, pursuant to G. L. c. 231, § 6B. 35

We conclude that G. L. c. 231, § 6B, does not apply here, and

affirm the awards of prejudgment interest. 36

General Laws c. 231, § 6B, provides for the addition of

interest to the amount of damages awarded in an action involving

damage to property and other such tort actions, at a rate of

twelve per cent per year from the date of commencement of the

action. The statute is intended "to compensate a damaged party

34

For example, the judge found that 1962 was the year of

the Adams Fund's last sale of real estate below fair market

value, and thus he included interest from the end of 1962 on the

monies not received as a result of these below-market real

estate sales. In addition, the judge found that the sale of a

property referred to as "Vigoda" should have occurred in 1972

but did not occur at all, and therefore he awarded interest from

January 1, 1972. The judge employed two different rates of

return in calculating the prejudgment interest: five per cent

for the unrealized gain in the investment portfolio, and 7.54

per cent for all other measures.

35

Quincy also avers that prejudgment interest is barred in

claims against municipalities under the Massachusetts Tort

Claims Act. See G. L. c. 258, § 2. Because, as discussed

infra, we conclude that Quincy waived its sovereign immunity on

these claims and therefore that the Tort Claims Act does not

govern here, we decline to address this claim.

36

However, the rate of return the judge employed for the

unrealized gain in the investment portfolio may require

reconsideration on remand, consistent with our discussion above

regarding the flaws in this particular analysis.

40

for the loss of use or the unlawful detention of money." McEvoy

Travel Bur., Inc. v. Norton Co., 408 Mass. 704, 717 (1990),

quoting Conway v. Electro Switch Corp., 402 Mass. 385, 390

(1988). The primary goal of this statutory interest award is

not to make the aggrieved party whole, but rather "to compensate

for the delay in the plaintiff's obtaining his money." See

Bernier v. Boston Edison Co., 380 Mass. 372, 388 (1980). To

achieve this goal, § 6B affords a standard return that the

aggrieved party "would have had but for the other party's

wrongdoing," regardless of what the theory of liability or

underlying damages calculation is. See McEvoy, supra.

In contrast, "[w]hen a breach of trust occurs, the

beneficiary of the trust is 'entitled to be put in the position

he would have been in if no breach of fiduciary duty had been

committed.'" Berish v. Bornstein, 437 Mass. 252, 270 (2002),

quoting Fine v. Cohen, 35 Mass. App. Ct. 610, 616 (1993).

Making the beneficiary whole, particularly where the breach

stems from imprudent investment decisions having an impact on

the growth of the trust's assets, may require awarding interest

beginning from the time of the breach, such that the trust's

assets resemble what they would have but for the breach. In

such circumstances, the award of prejudgment interest is part

and parcel of the award of damages itself, and is not

compensation for the delay of litigation in the same sense as

41

interest awarded under G. L. c. 231, § 6B. Accordingly, it was

not erroneous for the judge here to find that the Adams Fund was

entitled to a return on monies that it would have reasonably

realized but for Quincy's imprudent actions, and to award

prejudgment interest stemming from the last date of breach in

order to make the Adams Fund whole. 37

3. Claimed bars to recovery. We discuss briefly Quincy's

remaining assertion that Woodward's claims should have been

barred on the grounds of sovereign immunity; the Massachusetts

Tort Claims Act, G. L. c. 258, §§ 1 et seq.; and laches. We

conclude that Woodward's claims were not so barred, and recovery

against Quincy was proper.

a. Sovereign immunity and applicability of Tort Claims

Act. Quincy first argues that because Woodward ultimately

brought a breach of fiduciary duty claim, which sounds in tort,

Woodward was obligated to follow the requirements of the Tort

Claims Act or else Quincy, as a municipality, would be

effectively protected against the claim by sovereign immunity.

Further, Quincy avers that Woodward failed to satisfy the Tort

37

There may be circumstances in which it is proper to apply

G. L. c. 231, § 6B, to tort actions arising from the breach of a

fiduciary duty of a trustee. See, e.g., Lattuca v. Robsham, 442

Mass. 205, 210 (2004). Where, however, the judge determines

that an award of prejudgment interest is necessary to make the

beneficiary whole, the additional award of interest under § 6B

would be excessive and improper, as such an award is not

punitive in nature. See McEvoy Travel Bur., Inc. v. Norton Co.,

408 Mass. 704, 717 (1990).

42

Claims Act's presentment requirement specifically, and therefore

its claim should have been barred. See G. L. c. 258, § 4.

Woodward, in contrast, asserts that its claim sounds in contract

rather than tort, because Quincy's obligations to manage the

Funds arose through a contractual relationship with President

Adams, and therefore the Tort Claims Act does not place any

conditions on its claim. Alternatively, if its claim does sound

in tort rather than contract, Woodward contends that Quincy's

sovereign immunity is impliedly waived, due to Quincy's

acceptance of the role of trustee and subsequent acts by the

Legislature affirming this role, such that Woodward's claim

properly survived.

In determining whether a claim arises in tort or contract,

we look to "the essential nature of the plaintiff's claim."

Hendrickson v. Sears, 365 Mass. 83, 85 (1974). When Quincy

accepted the responsibility to manage President Adams's property

in trust, Quincy and President Adams entered into a contract,

see Dunphy v. Commonwealth, 368 Mass. 376, 383 (1975), of which

Woodward is an intended third-party beneficiary and therefore is

entitled to enforce the contract's terms. See Miller v. Mooney,

431 Mass. 57, 61-62 (2000); Anderson v. Fox Hill Village

Homeowners Corp., 424 Mass. 365, 366-367 (1997), and cases

cited. However, although Woodward initiated this action seeking

an accounting, a purely contractual claim, the case evolved into

43

an action for breach of fiduciary duty, a claim that sounds in

tort, see Doe v. Harbor Schs., Inc., 446 Mass. 245, 254 (2006);

Lattuca v. Robsham, 442 Mass. 205, 210, 213 (2004), and arises

by operation of law rather than by contractual obligation. See,

e.g., G. L. c. 203C, §§ 1 et seq. See also LeBlanc v. Logan

Hilton Joint Venture, 463 Mass. 316, 328 (2012) ("Where a

contractual relationship creates a duty of care to third

parties, the duty rests in tort, not contract"). Accordingly,

the present case is a tort action. To the extent Woodward asks

us to frame its claim as a contractual one, we decline to do so.

See Anthony's Pier Four, Inc. v. Crandall Dry Dock Eng'rs, Inc.,

396 Mass. 818, 823 (1986).

As Woodward's claim sounds in tort, Quincy asserts that the

Tort Claims Act imposes numerous conditions that Woodward failed

to fulfil. 38 See G. L. c. 258, §§ 1 et seq.; Morrissey v. New

England Deaconess Ass'n -- Abundant Life Communities, Inc., 458

Mass. 580, 587 (2010). The purpose of the conditions imposed by

the Tort Claims Act is to limit tort claims against

municipalities in order to maintain effective government. See

id.; Vasys v. Metropolitan Dist. Comm'n, 387 Mass. 51, 57

38

Among these is the requirement that the plaintiff present

its claim to the executive officer of the municipality within

two years of when the cause of action arises. See G. L. c. 258,

§ 4; Richardson v. Dailey, 424 Mass. 258, 261-262 (1997). The

parties do not dispute that Woodward did not comply with this

presentment requirement. In addition, the Tort Claims Act

places a $100,000 limit on damages. G. L. c. 258, § 2.

44

(1982). See also Whitney v. Worcester, 373 Mass. 208, 217

(1977). Hence, G. L. c. 258, § 10, explicitly excludes certain

types of claims that the Legislature clearly decided must give

way to sovereign immunity.

Because the Tort Claims Act is in effect a mechanism for

both limiting and preserving sovereign immunity from certain

tort claims, 39 see Morrissey, 458 Mass. at 587, and cases cited,

its restrictions do not apply where a municipality has waived

sovereign immunity, and thereby implicitly waived the

protections afforded by the Tort Claims Act. Sovereign immunity

may be waived expressly by statute or implicitly, where

"governmental liability is necessary to effectuate the

legislative purpose." Todino v. Wellfleet, 448 Mass. 234, 238

(2007). See Woodbridge v. Worcester State Hosp., 384 Mass. 38,

42 (1981), and cases cited. We conclude that Quincy's sovereign

immunity is impliedly waived here.

First, when Quincy agreed to serve as trustee, it assumed

the fiduciary duties of that role, including the consequences

for not fulfilling these duties. The policy purposes of

39

Indeed, the Tort Claims Act replaced any prior common-law

sovereign immunity doctrine with regard to tort claims and was

designed to provide "a comprehensive and uniform regime of tort

liability for public employers." Morrissey v. New England

Deaconess Ass'n -- Abundant Life Communities, Inc., 458 Mass.

580, 588 (2010), quoting Lafayette Place Assocs. v. Boston

Redev. Auth., 427 Mass. 509, 534 (1998), cert. denied, 525 U.S.

1177 (1999).

45

sovereign immunity are not served where, as here, a municipality

takes on a responsibility beyond its inherent or core government

functions and therefore serves in a capacity that could just as

easily be accomplished by a nongovernmental entity. See

Morrissey, 458 Mass. at 587. See also Minton Constr. Corp. v.

Commonwealth, 397 Mass. 879, 880 (1986) (where municipality has

assumed certain obligations through contract, it has waived

sovereign immunity against actions brought to enforce such

obligations). In essence, by choosing to accept the obligations

of trusteeship, Quincy waived any sovereign immunity from claims

arising from its duties as a trustee.

A trustee, regardless of whether it is a municipality, a

corporation, or a private individual, is accountable to courts

for its conduct in fulfilling, or committing a breach of, the

fiduciary duties it owes. 40 See Fox of Boylston St. Ltd.

Partnership v. Mayor of Boston, 418 Mass. 816, 818 (1994).

Unlike the statute at issue in Woodbridge, 384 Mass. at 42, 44-

45, where we determined that sovereign immunity was not waived,

the Prudent Investor Act creates "a formal system of actionable

guaranties," id. at 42, and expects the same level of conduct

from any trustee. See G. L. c. 203C, §§ 1 et seq. "[A] natural

and ordinary reading" of the Prudent Investor Act indicates that

40

Indeed, Quincy has sought court direction regarding the

administration of the Funds previously, and therefore has

subjected itself to court supervision on these matters.

46

where a municipality accepts the obligations of serving as a

trustee, it will be held to the same standards and subject to

the same penalties as any other trustee. See DeRoche v.

Massachusetts Comm'n Against Discrimination, 447 Mass. 1, 14

(2006).

Several legislative acts specific to the Funds further

signal that Quincy is liable for any breach of the trustee

responsibilities it has assumed. The 1827 Act appointed the

treasurer of Quincy as treasurer of the Adams Fund and

authorized a board of supervisors and the selectmen of Quincy to

execute President Adams's intentions. See St. 1827, c. 59. It

further required the treasurer to "render an account of his

doings, and exhibit a fair and regular statement of the property

in his hands." St. 1827, c. 59, § 9. The 1898 Act authorized

Quincy, as trustee, to sell and convey the Adams Fund's real

property holdings, and in effect confirmed Quincy's legal

responsibility to administer the Fund and invest its assets.

See St. 1898, c. 102. In neither of these acts did the

Legislature indicate that Quincy would be held to standards

different from those applicable to other trustees.

To effectuate the purposes of these acts, we must consider

sovereign immunity to be impliedly waived. The Legislature

could not have intended to enable a municipality to serve as a

trustee, by way of the Prudent Investor Act and the 1827 and

47

1898 Acts, and simultaneously relieve it of the fiduciary duties

inherent in the role of a trustee. Reading Quincy's obligations

otherwise would frustrate the general intent of the Prudent

Investor Act that trustees further the interests of trust

beneficiaries, by eliminating any recourse for mismanagement,

and would be illogical in light of the specific acts of the

Legislature empowering Quincy to take on such fiduciary

responsibilities on behalf of the Funds. Accordingly, the Tort

Claims Act cannot be read to limit tort liability where a

municipality has agreed to serve as a trustee. 41

b. Laches. Quincy also argues that the equitable doctrine

of laches bars Woodward's claim. We agree with Woodward, the

trial judge, and the special master that the claim is not barred

on this ground.

Quincy avers that Woodward unduly delayed in bringing this

action, and that this delay prejudiced Quincy because several of

its key witnesses had died since the alleged breaches occurred.

Quincy's primary contention on appeal is that the judge

improperly required actual knowledge by Woodward of Quincy's

41

Because we conclude that Quincy waived the provisions of

the Tort Claims Act, including its exceptions, we decline to

address Quincy's claim that the Probate and Family Court lacked

subject matter jurisdiction for the claim under G. L. c. 258,

§ 3.

For the same reason, we need not decide whether Quincy's

assertion that it is immune from suit on this claim under G. L.

c. 258, § 10 (b), is a valid one.

48

mismanagement of the Funds in order to satisfy the laches

standard; instead, Quincy asserts that an opportunity to

ascertain such facts is all that is required for a laches

defense.

At trial, Quincy identified two occasions on which it

asserted that Woodward had constructive knowledge of Quincy's

failings as a trustee. First, Quincy suggested that Woodward

knew of Quincy's inadequacies as early as the 1960s, when the

headmistress of Woodward communicated to Quincy's primary

record-keeper that she was disappointed that Quincy had sold at

least one parcel owned by the Funds for less than fair market

value. Second, Quincy alleged that as a result of litigation in

the late 1980s between Woodward and Quincy regarding Quincy's

mismanagement of the Woodward Fund, a separate trust, Woodward

knew or should have known that Quincy was engaging in similar

mismanagement of the Funds at issue here. Quincy contends on

appeal that this constructive notice should have been adequate

to satisfy the laches standard.

Both the special master and the trial judge rejected

Quincy's laches claim because it had not established that

Woodward had actual knowledge of Quincy's breach prior to its

seeking of an accounting in 2005. 42 There is no flaw in the

42

The trial judge specifically rejected Quincy's assertion

that Woodward should have known of Quincy's mismanagement as a

49

legal analysis employed by the trial judge. To establish a

laches defense, the asserting party must establish both actual

knowledge, see Lattuca, 442 Mass. at 213-214; Demoulas, 424

Mass. at 518-519; and prejudice. See Stuck v. Schumm, 290 Mass.

159, 166 (1935); Stewart v. Finkelstone, 206 Mass. 28, 36

(1910). "Constructive knowledge is insufficient," Lattuca,

supra at 213, as is "[m]ere suspicion or mere knowledge that the

fiduciary has acted improperly." Doe, 446 Mass. at 255. This

requirement of actual knowledge "protects the beneficiary's

legitimate expectation that the fiduciary will act with the

utmost probity in all matters concerning the relationship." Id.

Contrary to Quincy's implication, a plaintiff is not required to

conduct "an independent investigation" to determine if a breach

of fiduciary duty has occurred. Demoulas, supra at 520.

We agree with the special master's characterization that

although "[c]ommon sense would dictate that if Woodward knew

[Quincy] was mismanaging the Woodward Fund . . . , [then Quincy

was] engaging in the same practices with regards to the Adams

Fund [,] . . . common sense and constructive notice are not the

standards here." As the special master and trial judge properly

concluded, the laches standard simply was not satisfied.

result of the Woodward Fund litigation and emphasized that the

Funds were not parties to that litigation and therefore were not

officially on notice of it.

50

Conclusion. The further amended judgment of the Probate

and Family Court, and the amended judgment incorporated therein,

is affirmed as to liability. We affirm the judge's award of

damages in part, but remand the case to the Probate and Family

Court for recalculation of the damages related to the unrealized

investment gains, including prejudgment interest thereon, and

for further proceedings consistent with this opinion.

So ordered.