Petition — Clark v. American National Bank & Trust Co.

Supreme Court brief1976

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NOV 10 1975

IN THE | MICHAEL RODAK, ., CLERK

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Supreme Court of the United States

OCTOBER TERM, 1975

_ 75 6871

NORMA FRANCES RAOUL CLARK and

ANN ELIZABETH RAOUL,

Petitioners,

vs.

AMERICAN NATIONAL BANK AND TRUST

COMPANY OF CHATTANOOGA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF THE STATE

OF TENNESSEE

LEONARD R. TANNER, JR.

RicHarp P. JAHN

TANNER & JAHN

1223 Volunteer Building

Chattanooga, Tennessee 37402

615-756-8473

Counsel for Petitioners

November 8, 1975

E. L. Mendenhall, Inc., 926 Cherry Street, Kansas City, Mo. 64106, 816-421-3030

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Constitutional Provisions Involved ................ 5

r ie. eben ß ö. 5

How Federal Question Was Raised ............. 10

Reasons for Granting the Writ—

1. The Equal Protection Clause requires that Pe-

titioners be given the benefit of the discovery

doctrine announced in the Teeters case 11

2. Under the Due Process Clause a claim against

a trustee may not be barred by the Statute

of Limitations where the trustee had failed to

make full disclosure and the beneficiary-claim-

ants had no actual knowledge or reason to

know until immediately before suit wasfiled .... 16

D ] mA... ̃ m ek ws obi 19

Table of Authorities

CasEs

Beck v. Washington, 369 U.S. 541, 8 L. Ed. 2d 98,

e, d 11. 15

Binkerhoff-Farris Trust & Savings Co. v. Hill, 281

U.S. 673, 74 L. Ed. 1107, 50 S. Ct. 451 (1930) 11

Buchalter v. New York, 319 U.S. 427, 87 L. Ed.

e 16

Cowan v. Hamilton National Bank, 177 Tenn. 94,

rr ssc aceecnseekeness 10

Family Savings and Loan, Inc. v. Ciccarello, 207

D i a go atin eee beak ahenesy 15

Hutsell v. Citizens National Bank, 166 Tenn. 598,

,, m mo c é rere ree 15

Knox County v. Fourth and First National Bank,

181 Tenn. 569, 182 S. W. 2d 980 18

Layton v. Allen, 246 A. 2d 794 (Del. 1968) 13

McCroskey v. Bryant Air Conditioning Company,

.... Tenn. ...., 524 S. W. 2d 487 (1975) ...4, 11, 13

Mills v. Scott, 99 U.S. 25, 25 L. Ed. 294 (1878) .. 16

Milwaukee Electric Railway & Light Co. v. Wiscon-

sin Ex Rel. Milwaukee, 252 U.S. 100, 64 L. Ed.

rt ͤ 11

Roberts v. New York, 295 U.S. 264, 79 L. Ed.

Nn 15

Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, 79

L. Ed. 1045, 55 S. Ct. 525 (1935) .............. 11

Teeters v. Currey, .... Tenn. ...., 518 S.W. 2d

, ⅛ uA. ane — 4, 5, 10, 11, 14

Third National Bank v. Nashville Trust Co., 191

Tenn. 123, 232 8. W. 2d 7 (1960) ............... 9

Truax v. Corrigan, 257 U.S. 312, 66 L. Ed. 254, 42

RR 0 ee rey eee tee ete 11, 16

Wilson v. Iseminger, 185 U.S. 55, 46 L. Ed. 804,

,.. · ekeneee ess 16

CONSTITUTIONAL PROVISIONS AND STATUTES

Fourteenth Amendment, Constitution of the United

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r eons pace nets Cee b eee eee 3, 8

1. os ccc bce cescceceseenscccveseces 3

TExTs

37 Am. Jur. 2d Fraud and Deceit §332 .......... 15

76 Am. Jur. 2d Trusts 5335 and 833. 18

60 C.5.8. “Truste” o „„ „„ „ „ 6 15

INDEX TO APPENDIX

Chancellor’s Memorandum Opinion (March 25,1970) .. 21

Opinion of Court of Appeals (December 31, 1970) ...... 26

Opinion of Court of Appeals On Petition to Rehear

GE w- 35

Chancellor’s Memorandum Opinion (March 15,1973) .. 36

Final Decree (December 27, 1973) ................ 47

Opinion of Court of Appeals (August 30, 1974) ... 48

Court of Appeals Decree (August 30, 1974) ....... 70

Opinion of Court of Appeals On Petition to Re-

e ẽ᷑gÿ 71

Order of Court of Appeals Denying Petition to Re-

hear (November 6, 1970½lů j 73

Order of Supreme Court of Tennessee Denying Peti-

tion for Writ of Certiorari (July 7, 1975) ........ 74

Decree (July 7, 1975)

Memorandum Opinion On Petition to Rehear (Au-

D esit 76

Decree (September 29, 1975)

IN THE

Supreme Court of the United States

OCTOBER TERM, 1975

No.

NORMA FRANCES RAOUL CLARK and

ANN ELIZABETH RAOUL,

Petitioners,

vs.

AMERICAN NATIONAL BANK AND TRUST

COMPANY OF CHATTANOOGA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF THE STATE

OF TENNESSEE

The petitioners, Norma Frances Raoul Clark and

Ann Elizabeth Raoul pray that a writ of certiorari issue

to review the order and decree of the Supreme Court

of the State of Tennessee rendered in these proceedings

on July 7, 1975, and the memorandum opinion on peti-

tion to rehear and the decree thereon rendered in these

proceedings on August 11, 1975.

OPINIONS BELOW

None of the opinions of the Courts below are as

yet reported. They are as follows:*

(a) Opinion of the Chancery Court of Hamilton

County, Tennessee, filed March 25, 1970 sustaining

the defense of laches (pp. 21-26).

(b) Opinion of the Court of Appeals of Tennessee

filed December 31, 1970, reversing the Chancellor; find-

ing no laches and remanding the case for decision on

the merits (pp. 26-34).

filed March 16, 1971, overruling Respondent Bank's

petition to rehear, but reserving ruling on the Statute

of Limitations issue pending further decision by the

Chancellor (p. 35).

(d) Opinion of the Chancery Court of Hamilton

County, Tennessee, filed March 15, 1973, finding that

the Respondent Bank as Petitioners’ trustee violated

the prudent man rule and the undivided loyalty rule

when exchanging Cavalier Corporation stock in trust

in 1944 (pp. 36-47).

(e) Final decree of the Chancery Court of Hamil-

ton County, Tennessee, filed December 27, 1973, ren-

dering judgment in favor of Petitioners in the amount

of $3,941,799.74 (pp. 47-48).

(f) Opinion of the Court of Appeals of Tennessee

filed August 30, 1974, concurring with the Chancel-

*All page references are to the pages of the appendix infra

unless preceded by Tr.“ in which event reference is to the

trial transcript.

lor's finding of imprudence; disagreeing with the Chan-

cellor's finding of a breach of the loyalty rule; and

dismissing the case on the ground that the claim was

barred by T.C.A. 28-309, the Tennessee six year Statute

of Limitations (pp. 48-69).

(g) Order of the Supreme Court of Tennessee,

filed July 7, 1975 denying the petition for writ of cer-

tiorari and reciting only that this Court is of the opin-

ion that the Court of Appeals reached the correct

conclusion (p. 74); also the decree on said order filed

the same date (p. 75).

(h) Opinion of the Supreme Court of Tennessee

filed August 11, 1975, overruling the petition to rehear

and rejecting the Federal constitutional grounds asserted

in said petition (pp. 76-77); also the decree thereon filed

the same date (p. 78).

JURISDICTION

As shown above, both the memorandum opinion

on the petition to rehear, and the decree of the Su-

preme Court of Tennessee thereon, were filed Au-

gust 11, 1975 (pp. 76-78). This petition for certiorari

was filed less than 90 days from the date aforesaid.

The jurisdiction of this Court is invoked under 28

USC §1257(3).

QUESTIONS PRESENTED

In its 1970 opinion overruling the Chancellor on the

laches issue, the Court of Appeals of Tennessee ex-

pressly held (p. 32) that Petitioners had no “actual

or chargeable knowledge” of the facts giving rise to

their cause of action against the Respondent Bank, by

reason of its actions in 1944 as their trustee, until

shortly before they filed suit in 1964. The Defendant

Bank did not appeal from this finding and accordingly

it is now the law of this case.

The 1974 opinion of the Court of Appeals of Ten-

nessee (pp. 48-69) sustained the Statute of Limitations

defense (pp. 68-69) without reversing or altering said pre-

vious 1970 fact finding, now final. This 1974 decision,

however, was entered immediately prior to the land-

mark decision on December 9, 1974, of the Supreme

Court of Tennessee in Teeters v. Currey, .... Tenn.

, 518 S.W. 2d 512, adopting the so-called discov-

ery doctrine” for the State of Tennessee, and expressly

overruling all prior Tennessee precedent to the con-

trary. Under this doctrine, applied retroactively to

pending cases, the applicable statute of Limitations does

not begin to run until the wrong giving rise to the

claim is or should have been discovered by the claim-

ant. Teeters was a medical malpractice case.

In a subsequent ruling in McCroskey v. Bryant Air

Conditioning Company, decided by the Supreme Court

of Tennessee on April 7, 1975, .... Tenn. ...., 524

S.W. 2d 487, at 491, that Court held that the discov-

ery doctrine was not to be limited to medical malprac-

tice cases, but instead was one of universal applica-

tion in Tennessee in cases involving injuries to persons

or property arising out of tort, including negligence,

product liability and misrepresentation, and again over-

ruled all prior cases to the contrary.

The petitioners’ cause of action expressly charged

negligence in the exchange of stock in question as well

as breach of trust (pp. 26, 32, 48).

In its memorandum opinion on the petition to re-

hear in the subject case filed August 11, 1975, the

Tennessee Supreme Court stated:

We fully considered Teeters, supra, and concluded

that it had no relevance to the issues in this con-

troversy.

The questions thereby arising are:

1. Whether the refusal to apply the discovery

doctrine announced in Teeters to the subject case, there-

by eliminating the Statute of Limitations defense, vio-

lated fundamental rights of Petitioners under the Equal

Protection Clause of the Fourteenth Amendment.

2. Whether the Due Process Clause of the Four-

teenth Amendment is violated, if a trustee is permitted

to assert the Statute of Limitations as a defense to

a cause of action, where the trustee had failed to make

full disclosue to its beneficiaries of its 1944 action caus-

ing the loss here complained of, and the beneficiaries

did not know of same, and had no reason to know of

same, until 1963, when they learned what had occurred

shortly before suit was filed.

CONSTITUTIONAL PROVISIONS INVOLVED

Constitution of the United States, Amendment XIV,

§1:

“

nor shall any state deprive any person of

life, liberty, or property without due process of

law; nor deny to any person within its jurisdic-

tion the equal protection of the laws.

STATEMENT OF FACTS

Petitioners were beneficiaries of express trusts

designated No. 927 and No. 929, administered by the

Respondent Bank. In 1944 the Bank, as their trustee,

exchanged 323 shares of no par value common stock of

Cavalier Corporation which it held in said trusts, for

323 shares of newly authorized $100.00 par value com-

mon stock in said corporation (pp. 21, 28-29, 36-38, 49,

53-54).

The Chancellor found that the effect of making

the exchange was to deny a total immediate bene it

to the trusts of $341,775.99 if the exchange had not

been made, and that in making the exchange the Bank

gave up then and there 8198.05 per share of each

share’s pre- exchange book net worth, and a much higher

share of actual net worth (p. 40). No higher Court

has disagreed with these findings of the Chancellor.

The Chancellor (pp. 42-43) and the Tennessee Court

of Appeals (p. 58) concurred as to the Bank’s resulting

imprudence. Thus, it is the law of this case, by rea-

son of the concurrence of these two lower Courts on

this question of fact, that the Bank was imprudent and

is accordingly liable but for the Statute of Limita-

tions defense.

The exchange was the result of a plan conceived

by Gaston Raoul, for many years head of Cavalier,

its chief stockholder and a director, to further his per-

sonal estate planning and to shift equity to his son

and others with minimal gift and estate tax conse-

quences. Gaston Raoul personally sought to persuade

the other no par shareholders to exchange (pp. 38-40,

44-45, 53-54).

Gaston Raoul was also a director of the Bank,

whose president and fellow director was E. Y. Chapin.

Chapin was a close personal friend of Gaston Raoul;

was also a director of Cavalier; had previously been

Cavaliers Chairman of the Board, and held a small

amount (15 shares) of stock in Cavalier. Cavalier was

an important account for the Bank, which also acted

as Cavalier’s stock transfer agent (pp. 38, 54).

E. Y. Chapin headed the Bank’s trust investment

committee but personally handled the exchange of stock

in trust (Tr. 706-710, 714-715, 722; Exs. 71 and 72)

without consulting said committee (Tr. 871-875). Al-

though Cavalier’s 1944 reorganization plan provided a

two months’ period within which to exchange, Chapin’s

personal shares and those in the trusts were the first

to be exchanged at the very outset of the available

period (p. 40; Tr. 715; Ex. 23). It was then known

however, that due to the persuasion of Gaston Raoul.

who set the apparent example of exchanging his own

shares also, that most of the no par shareholders also

planned to exchange (pp. 39-40, 54; Exs. 42 and 119: Tr

175, 193). Gaston Raoul had discussed and conferred

with E. Y. Chapin about the proposed plan of ex-

change (p. 54).

During the trial petitioners accidentally discov-

ered in files brought to the trial by Bank Director

William Raoul, that his father, Gaston Raoul, had writ-

ten a memo after the exchange about its circumstances

(Tr. 650-660, 665-670). This memo (pp. 44, 60-61) stated

that E. Y. Chapin had “disapproved of the idea in

voto, as being a give-away by the then principal own-

ers to the no par stockholders who might elect not

to exchange. . He went along with the plan

however, like the loyal friend he always was.

Despite exhaustive discovery procedures this memo

was never revealed to Petitioners previously by Re-

spondent Bank.

In his second opinion in 1973 the Chancellor ex-

pressly found (p. 45):

Nowhere does the record indicate that the Trustee

Bank ever disclosed to anyone acting on behalf of

the plaintiffs the effects that the exchange of

stock hereinabove outlined would have on these

trusts.

Not only does the record fully support these findings

but no higher Court has disagreed.

Trusts 927 and 929 terminated in 1956 when

Petitioners’ father, Norman Raoul, died (pp. 53, 56-57).

Prior thereto in 1949 and 1950, Petitioners had agreed

with their Uncle Gaston Raoul, to the establishment of

Trust 1661 for their benefit with the Bank as trustee

(Ex. 4). It was agreed that certain assets would be

immediately placed in Trust 1661 for them by Gaston

Raoul in consideration of Petitioners’ agreeing that in-

stead of taking the assets of Trusts 927 and 929 free

from trust upon their then living father’s death, in ac-

cordance with the terms of those trusts, said assets

instead would upon such death be transferred to al-

ready existing Trust 1661 and there continue in trust

for Petitioners’ lifetimes (pp. 27-28, 52). A written

assignment to the Bank to accomplish this was signed

by Petitioners in 1950 (Ex. 152). The Bank continues

as trustee of Trust 1661 for Petitioners to this day,

the assets of which trust were increased in 1956 upon

their father’s death pursuant to the foregoing agree-

ment.

The Bank’s theory at the trial was that Trust

1661 was merely an extension and consolidation of

Trusts 927 and 929 (Tr. 57, 744-747, 809, 843-844;

Ex. 146). Nonetheless, the Tennessee Court of Appeals

concluded that Tennessee’s six year statute (T.C.A.

28-309) was set in motion when Trusts 927 and 929

technically ended in 1956 (pp. 56-57) and thus had run

by the time Petitioners first learned in 1963 what had

occurred in 1944 (Tr. 36-45, 233-235, 764, 776-778).

In so ruling, the Tennessee Court of Appeals relied

upon Third National Bank v. Nashville Trust Co.

(1950), 191 Tenn. 123, 232 S.W. 2d 7 (see pp. 55-56

infra). This decision in no way afforded comfort to

a trustee which failed to make a full disclosure, and

in any event is now subject to the new Tennessee

discovery doctrine requiring actual or constructive in-

covery of the wrong before the statute can begin to

run.

The Tennessee Court of Appeals, after noting the

Chancellor's viewpoint (pp. 59-62), somehow disagreed

and felt that the Raoul memo could be explained on

a basis consistent with the Bank’s duty of undivided

loyalty to Petitiners (pp. 62-64). No ome can ex-

plain why, if the Bank recognized through Chapin that

a give-away by principal owners was involved

when exchanging, there could be any difference with

smaller shareholders. Actually, the Bank as trustee,

with 323 shares, was a principal shareholder. Only

five out of the thirty shareholders who exchanged held

more shares, and none who did not exchange held

more shares (Exs. 20 and 23). Further, no one can

explain why, if the Bank, unlike most of the mis-

guided exchanging shareholders, was sophisticated

enough to know that a give-away was involved by the

principal shareholders, it was not a breach of trust to

fail to accept the recognized corresponding benefits

($341,775.99—p. 40) for Petitioners by refusing to

exchange.

A classic case is presented where the Bank had a

duty to fully disclose what it did know, and give the

beneficiaries an opportunity to protest, instead of pro-

ceeding unilaterally without Court approval.

To reach the result which it did, the Tennessee

Court of Appeals also ignored the rigid principles of

trust law fully set forth in the leading case of Cowan

v. Hamilton National Bank, 177 Tenn. 94, 146 S.W.2d

359 (1941), forbidding a trustee to act at all unless

it is wholly disinterested and without any possible ad-

verse personal interest which might be served thereby.

Under Cowan, when the Bank nonetheless acted with its

many conflicts of interest involved, a breach of trust oc-

curred per se, and the rule of no further inquiry ap-

plied regardless of what a Court might think otherwise

of the propriety of the action.

How Federal Question Was Raised

When the Supreme Court of Tennessee on July 7,

1975, denied Petitioners’ petition for a writ of certiorari

to the Court of Appeals of Tennessee (pp. 74-75), a peti-

tion to rehear was filed. This petition asserted a viola-

tion of Petitioners’ rights under the Due Process and

Equal Protection clauses of the Fourteenth Amendment,

by reason of the failure to apply the discovery doctrine

first announced in Teeters (p. 76). In its memo opin-

ion denying said petition to rehear, the Tennessee

Supreme Court did not specifically pass on the issue,

merely holding Teeters had no relevance” (p. 77). This

was the first and only occasion Petitioners had to raise

this federal issue previously in this protracted litigation.

Inherent in this issue is the second issue of

whether as a matter of due process of law the statute

can begin to run to protect a trustee who failed to dis-

close, until the beneficiaries discovered the wrong. Peti-

tioners have contended before all three lower courts

that it cannot, most recently as an assignment of error

by the Tennessee Court of Appeals in the Petition for

Certiorari to the Tennessee Supreme Court.

REASONS FOR GRANTING THE WRIT

1. The Equal Protection Clause requires that Pe-

tioners be given the benefit of the discovery doctrine

announced in the Teeters case.

The equal protection clause requires uniformity in

dealing with parties in similar circumstances. Stewart

Dry Goods Co. v. Lewis, 294 U.S. 550, 79 L. Ed. 1045,

55 S. Ct. 525 (1935). Distinctions can be made between

parties but the classification must be based on reason.

Truax v. Corrigan, 257 U.S. 312, 66 L. Ed. 254,

42 S. Ct. 124 (1921). The guarantee of equal protec-

tion applies to judicial action as well as legislative and

executive action. Binkerhoff-Farris Trust & Savings

Co. v. Hill, 281 U.S. 673, 74 L. Ed. 1107, 50 S. Ct.

451 (1930).

It is recognized, however, that the equal protec-

tion clause does not assure uniformity of judicial de-

cisions or immunity from judicial error. Beck v. Wash-

ington, 369 U.S. 541, 8 L. Ed. 2d 98, 82 S. Ct. 955

(1962). Thus, one who has lost a judicial decision but

can show a later decision between strangers irrecon-

cilable on a matter of law with the earlier decision

has had no federal right violated. Milwaukee Electric

Railway & Light Co. v. Wisconsin Ex Rel. Milwaukee,

252 U.S. 100, 64 L. Ed. 476, 4 S. Ct. 306 (1920). This

simply means that a State Court is free to change its

mind. In the subject case, however, the Tennessee

Supreme Court has not sought to overrule its recently

announced Teeters decision, further expounded upon in

McCroskey, but instead, without explanation, asserted

in the subject case (p. 77). that Teeters had no rele-

vance to the issues in this controversy.”

In Teeters the Tennessee Supreme Court stated

(518 S.W. 2d 512 at 514-516):

„When does the cause of action accrue?

“In Bodne v. Austin, 156 Tenn. 366, 2 S.W. 2d

104 (1927) the Court said:

‘. . . we have been referred to no authority hold-

ing that mere ignorance and failure to discover

the existence of the cause of action, or the con-

sequential damages resulting from the breach of

duty or wrongful act, can prevent the running of

the statute of limitations.’

“But this was in 1927 almost half a century ago.

a: SS ee

“The time has come for us to re-examine the past

holdings of our Appellate Courts in the light of

contemporary standards of justice and of the hold-

ings of the courts of last resort in other American

jurisdictions.”

R * *

We find it difficult to embrace a rule of law re-

quiring that a plaintiff file suit prior to knowledge

of his injury or, phrasing it another way, requir-

ing that he sue to vindicate a non-existent wrong,

at a time when injury is unknown and unknow-

able.

* * *

We recognize that statutes of limitations are stat-

utes of repose designed to promote stability in the

affairs of men and to avoid the uncertainties and

burdens inherent in defending stale claims.

“In recognition of this, traditionally our courts

have held that a right of action accrues immedi-

ately upon the infliction or occurrence of injury

and that mere ignorance or failure of plaintiff to

discover his cause of action or the subsequent re-

sulting damage does not toll the statute. Bodne

v. Austin, supra.“

That this is a harsh and an oppressive rule there

can be little doubt. To counter the casualties it

has produced the courts have fashioned the so- called

‘discovery doctrine’, under which the statute does

not begin to run until the negligent injury is, or

should have been discovered.

The Court quoted with approval at 518 S.W. 2d

516 from Layton v. Allen, 246 A. 2d 794 (Del. 1968)

as follows:

Where choice must be made between the defen-

dants’ problems of lost evidence, faded memories,

and missing witnesses on the one hand, and a dep-

rivation to the plaintiff of any and all remedy for

the wrong done her, on the other, the law must be

construed in favor of the blamelessly ignorant plain-

tiff and against the interests and convenience of

the wrong-doer.”’

In McCroskey the Tennessee Supreme Court stated

(524 S.W. 2d 487 at 491 and 493):

We hold that in tort actions, including but not

restricted to products liability actions (‘‘conceived

in an illicit intercourse of tort and contract“) pred-

icated on negligence, strict liability or misrepre-

sentation,® the cause of action accrues and the

* Prosser, The Fall of the Citadel, 50 Minn. L.

Rev. 791, 800 (1965).

* Misrepresentation is a tort. See Restatement

(Second) of Torts, Sec. 402B (1965).

statute of limitations commences to run when the

injury occurs or is discovered, or when in the ex-

ercise of reasonable care and diligence, it should

have been discovered. All cases contra are over-

ruled.

“Petitioner insists that the Court has ‘legislated’

in reaching its decision in defining or redefining

the accrual date of the cause of action. We cannot

assume that the Legislature would adopt a statute

which would deny redress to a citizen by requiring

that he sue prior to knowledge of his injury. We

therefore, adopted a discovery rule in order to vali-

date the statute and prevent a plain deprivation

of justice.

Petitioners’ cause of action was based upon both

negligence in making the exchange and breach of trust

(pp. 26, 32, 48). If nonetheless the unexplained rationale

of the refusal to apply Teeters to the present case is

that the cause of action was not to be classified as

sounding in tort, and that the discovery doctrine is

to be limited to injured tort claimants, despite the

blurred line between tort and contract in the included

product liability cases, then it is respectfully submitted

that a distinction or classification is being made, that

is wholly arbitrary and capricious, and without a ma-

terial difference between wronged citizen-claimants. A

plain violation of the Equal Protection Clause accord-

ingly results. The test for application of the discovery

doctrine is obviously when the injury or wrong was

first known or should have been known, and not the

nature of the cause of action selected thereafter to

achieve a remedy.

Further, as quoted above, misrepresentation is a

tort. Like wise, a failure of a trustee as here to ob-

serve the full disclosure duty is a fraudulent conceal-

ment constituting a tort equivalent to misrepresenta-

tion. Opinion of the Court of Appeals of Tennessee

(pp. 58-59); Hutsell v. Citizens National Bank, 166 Tenn.

598, 64 S.W. 2d 188 at 192; 90 C.J.S. “Trusts” §247

(2). To perpetrate a fraud is to commit a tort. 37

Am. Jur. 2d Fraud and Deceit 5332.

A recent decision of the Supreme Court of West

Virginia, Family Savings and Loan, Inc. v. Ciccarello,

207 S. E. 2d 157 (1974), applied the discovery doctrine

to a situation where an attorney had committed an

act of professional negligence. The Court held that the

statute of limitations began to run when the wrong-

doing was discovered or, by the exercise of reasonable

diligence, should have been discovered. There would

appear to be little distinction between such acts of

negligence, whether committed by an attorney or a

trustee.

Petitioners assert that there can be no rational

basis for granting some claimants in Tennessee the

benefits of the discovery doctrine while denying Peti-

tioners the equivalent benefit. The error is gross and

obvious, as well as arbitrary and capricious, justify-

ing intervention by this Court. Roberts v. New York,

295 U.S. 264, 79 L. Ed. 1429, 55 S. Ct. 689 (1935):

Beck v. Washington, supra. This Court has announced

that it will correct violations of equal protection rights

if the burden of showing essential unfairness can be

met by those who claim the injustice. Beck v. Wash-

ington, supra. Petitioners respectfully submit that they

have met that burden.

Under the Equal Protection Clause, the Tennessee

Supreme Court is not privileged to grant some citizens

the benefit of a rule of state law, and without revoking

the rule, to selectively deny the same benefit to others

in identical material circumstances. A Court may not

permit a desired result to control the applicability of a

rule of law; instead the rule must control the result.

2. Under the Due Process Clause a claim against

a trustee may not be barred by the Statute of Limita-

tions where the trustee had failed to make full dis-

closure and the beneficiary-claimants had no actual

knowledge or reason to know until immediately before

suit was filed.

The due process clause requires that the action of

the state through any of its agencies must be consistent

with fundamental principles of liberty and justice.

Buchalter v. New York, 319 U.S. 427, 87 L. Ed. 1492,

63 S. Ct. 1129 (1943). Basically, the due process clause

requires that even in a civil case every man shall have

the protection of his day in Court or at least have the

opportunity for his day in Court. Truax v. Corrigan,

supra. This Court has repeatedly held that a statute

of limitations that is unduly short under the circum-

stances, after the accrual of a cause of action, violates

this right. Wilson v. Iseminger, 185 U.S. 55, 46 L.

Ed. 804, 22 S. Ct. 573 (1902); Mills v. Scott, 99 U.S.

25, 25 L. Ed. 294 (1878).

So far as Petitioners have been able to discover,

the issue here presented, however, has not been pre-

viously considered by this Court.

The unappealed from and hence conclusive 1970

finding that there was no basis for laches as a defense,

by reason of Petitioners’ lack of knowledge or reason

to suspect (p. 32), in and of itself should be conclusive

that the Bank-trustee failed in its fundamental duty,

to make full disclosure in 1944 or thereafter to its bene-

ficiaries. The issue is thus a basic one of

(a) Whether trustees are to be encouraged to re-

main silent and violate their universally recognized duty

to disclose, with the hope that in due course the statute

will run against their unsuspecting beneficiaries, and

bar otherwise resulting claims; or

(b) Whether fiduciaries who have failed to make

full disclosure shall know with certainty that the statute

will not protect them unless they can show that the

beneficiaries otherwise knew or should have known.

The Court of Appeals of Tennessee held that fraud-

ulent concealment tolling the application of the statute

had not occurred, solely on the ground that the Bank

had sought and obtained Petitioners’ father’s consent to

the exchange. Based on this fact alone it concluded that

“the exchange in 1944 was in no manner hidden from

anyone and that There was no physical concealment

from anyone of the transaction itself (p. 59). The

Tennessee Supreme Court has concurred only in the

conclusion of the Court of Appeals that the statute

barred the claim, and nothing more (p. 74).

The Bank did not seek Court approval of the ex-

change. There was no contention that any disclosure

of any sort was made to Petitioners themselves at any

time. There was no proof as to what if anything the

Bank disclosed to Petitioners’ father, Norman Raoul,

prior to obtaining his brief written consent (Ex. 140).

Significantly, Chapin, who knew all, had Bank Trust

Officer Martin, who was admittedly uninformed, con-

tact Norman Raoul, a World War II Post Exchange

Manager, to obtain said consent (Tr. 714-715, 722-729,

737). Norman Raoul was not authorized to act for

Petitioners by any Court. His consent, whether in-

formed or uninformed, was meaningless. 76 Am.Jur.

2d Trusts 5335 and §336.

The burden was on the Bank to prove that it had

made a full disclosure. Knox County v. Fourth and

First National Bank, 181 Tenn. 569, 182 S. W. 2d 980

at 986. This disclosure obviously had to be to the

right parties. Consent obtained without it is no de-

fense. 76 Am. Jur. 2d Trusts“ 5336. The Raoul memo

(p. 44) demonstrates that the Bank fully understood

through Chapin the consequences of the exchange,

namely that a giveaway was involved, but there is

not one shred of evidence that this knowledge was com-

municated to the beneficiaries or anyone authorized to

act on their behalf (p. 45). This was a plain violation

of the duty to disclose, which the father’s consent can-

not possibly excuse.

It is accordingly submitted that a shocking miscar-

riage of justice will have occurred, contrary to basic

and universal principles of American jurisprudence, if

the Statute of Limitations is allowed to shield the Bank,

despite breach of its duty to fully disclose. This breach

of duty resulted in lack of knowledge on the part of Pe-

titioners until after the statute had run. A clear viola-

tion of basic rights of Petitioners under the Due Process

Clause is accordingly involved, in the Tennessee Su-

preme Court’s approving this departure from the ac-

cepted and usual course of judicial proceedings, by sus-

taining the statute of limitations defense.

CONCLUSION

For the foregoing reasons, it is respectfully sub-

mitted that the Tennessee Supreme Court has decided

a federal question of substance not heretofore deter-

mined by this Court, and in a way not in accord with

the applicable decisions of this Court. A writ of cer-

tiorari should accordingly issue to review the action of

the Supreme Court of the State of Tennessee, embodied

in its decrees upholding the statute of limitations as a

bar to Petitioners’ claims.

Respectfully submitted,

LEONARD R. TANNER, JR.

Ricuarp P. JAHN

TANNER & JAHN

1223 Volunteer Building

Chattanooga, Tennessee 37402

Attorneys for Petitioners

November 8, 1975

APPENDIX

| No. 38441

IN THE CHANCERY COURT, PART 1, OF

| HAMILTON COUNTY, TENNESSEE

NORMA FRANCES RAOUL CLARK, et al.,

Plaintiffs,

, vs.

AMERICAN NATIONAL BANK and TRUST

COMPANY OF CHATTANOOGA,

Defendant.

CHANCELLOR’S MEMORANDUM OPINION

(Filed March 25, 1970)

This suit was brought in 1964 by plaintiffs, Norma

Frances Raoul Clark and Anne Raoul, as the benefi-

ciaries of express trusts against American National

Bank and Trust Company of Chattanooga (‘Bank’’),

trustee of the trusts, and charges the Bank with negli-

gent breaches of trust (a) in exchanging, in 1944, 323

shares of no-par common stock of Cavalier Corporation,

Chattanooga, Tennessee (Cavalier), for an equal num-

ber of shares of that company’s $100.00 par value

“common” stock and (b) in failing to file suit against

0 Cavalier, its directors and others in 1963 to prevent

Cavalier from calling for redemption the said 323 shares

of par stock at $100.00 per share and accrued divi-

= dends. The complaint contains a third charge of breach

of trust—that the Bank was negligent in voting for a

1954 amendment to Cavalier’s charter, which, so the

plaintiffs allege, took away liquidation rights from the

par stockholders but at the trial it was stipulated that

the 1954 amendment changed no rights of the holders

of par stock (Tr. 864-05), hence this third charge must

now be considered as having been abandoned. What-

ever the liquidation rights of the par stock before the

1954 amendment, they were not changed by that

amendment.

Cavalier had a right to redeem the par stock at

$100.00 per share under provisions of its charter, the

provisions being also printed on the face of the par

value stock cer“ ificates.

(Here follows discussion of issue of whether or not

Cavalier's par common stock shared beyond its prefer-’

ence on liquidation, no longer material.)

The Court concludes that the $100 par value com-

mon stock was not entitled to share with the no-par

common stock in any surplus upon liquidation of the

Cavalier Corp. beyond the $100.00 par value plus ac-

cumulated dividends.

Accordingly,’ the Court holds that plaintiffs were

in no wise injured by having their $100.00 par stock

called for redemption prior to the sellout of Cavalier

to Seeburg. Therefore, the defendant Bank, as Trus-

tee for plaintiffs, did not fail in any duty toward

plaintiffs when it accepted the redemption of plaintiffs’

stock without protest in 1963.

The other prong of this suit is the claim of the

plaintiffs that the defendant Trustee committed a breach

of trust in 1944 when it exchanged the no-par common

stock which it then held in the assets of plaintiffs’

trust accounts for the new issue $100.00 par value

common stock of the Cavalier Corp. The insistence is

that the Bank was disqualified to act as Trustee in this

instance because two of its directors, Mr. E. Y. Chapin,

Sr., who also was the senior trust officer of the Bank,

and Mr. Gaston Raoul, who was chairman of the board

of Cavalier Corp., were also directors of the Cavalier

Corp. Plaintiffs contend that this situation of having

directors of the Bank who were also directors of the

Cavalier Corp. placed the Bank, as Trustee, in the

position of having a conflict of interest so that in

exchanging the stock in question the Bank was engag-

ing in “‘self-dealing’’ which would authorize the bene-

ficiaries of the trust to disaffirm the exchange. In the

alternative, the plaintiffs insist that the Bank failed

to exercise reasonable prudence and due caution in ex-

changing the no-par value stock for the new $100.00 par

value common stock since, in the opinion of the plain-

tiffs, the $100.00 par value stock was not as suitable

an asset of the trust as was the no-par value common

stock which was exchanged.

The defendant Bank, Trustee, asserts several de-

fenses to these claims on the merits and also pleads the

defense of laches. The plaintiffs’ reply to the defen-

dant’s claim of laches is that the plaintiffs were not

aware of their cause of action until Cavalier sold its as-

sets to Seeburg in 1963 and that they should not be

repelled for failing to bring an action when they had no

knowledge of its existence. But is this insistence of

plaintiffs’ valid?

“A cestui que trust cannot sit idly by and close

his eyes to what is going on around him. One who

would repel the imputation of laches on the score

of ignorance of his rights must be without fault in

remaining so long in ignorance of those rights. In-

dolent ignorance and indifference will no more avail

than will voluntary ignorance of one’s rights. As

a Pennsylvania court has said: ‘Laches is not ex-

cused by simply saying: ‘I did not know.’ If by

diligence a fact can be ascertained, the want of

knowledge so caused is no excuse for a stale claim.

The test is not what the plaintiff knows but what

he might have known by the use of the means of

information within his reach, which vigilance the

law requires of ;

„.. . The courts are suspicious of claims founded

on remote transactions where in the interval the

property has greatly increased in value, and the

plaintiff made no claim until this change has oc-

curred.’’ Bogert, Trusts & Trustees, Section 949,

Laches.

Laches in suing to set aside transfers of property

to corporate officers often depends upon whether

the stockholder who sues is chargeable with knowl-

edge of the transfer. As to this matter, it is gen-

erally held in this country that means of knowledge

plainly within the reach of stockholders by the ex-

ercise of the slightest diligence is, in legal effect,

the equivalent of knowledge. 3 Fletcher, Cyclo-

pedia of Corporations, Section 987.

“The view followed by most of the authorities on

the point is that, if the other elements of laches are

present in the case, the complainant may be charged

with laches if, but only if, he was either actually

or presumptively aware of his rights. Under such

view, knowledge of the conduct giving rise to the

complainant’s cause of action may be imputed to the

complainant by reason of an opportunity to acquire

knowledge or because of circumstances of which he

was cognizant, such as obvious and unconcealed ac-

tivities affecting the property in dispute. He will

be charged with knowledge where the evidence leads

to the conclusion that he could have informed him-

— . — ee re rn ae eer

—— —

self of the facts by the degree of ‘diligence’ which

the law exacts—described as ‘reasonable’ diligence—

or where circumstances of which he was cognizant

were such as to put a man of ‘ordinary’ prudence

on inquiry. Knowledge may be imputed to the com-

plainant by reason of the fact that the circumstances

of the transaction were publicly and generally known

at the place of his residence. 27 Am.Jur.2d,

Equity, Section 167.

The Court concludes in this case that the plaintiffs

knew or sbould, in exercise of reasonable diligence, have

known of all the facts constituting their alleged cause

of action for breach of trust by the defendant Bank in

exchanging their stock, at least since 1950 when the

younger one became 21 years of age. The exchange of

stock was made openly and the circumstance that Mr.

Chapin and Mr. Raoul were common directors of the

Bank and Cavalier Corp. was known or could easily

have been ascertained by the plaintiffs; and, in fact,

everything which the plaintiffs have asserted in this

action could have been as easily ascertained 14 years

ago as now. There is no evidence that the trustee bank

refused to give any information to the plaintiffs; indeed,

the plaintiffs sought none until 1963. The Court is of

the opinion that the tremendous increase in the value of

the no-par stock from the time of the exchange to the

time suit was brought is a factor which calis for the

application of laches and shows great prejudice to the

defendant as does the fact that the principal witnesses

and parties involved, such as Mr. Chapin and Mr.

Gaston Raoul, have long since died and are unavailable

as witnesses 27 Am.Jur.2d, Equity, Section 171; Bernard

v Walker, 186 Tenn. 617, 212 S.W.2d 600; Gibson’s

Suits in Chancery, 5th Edition, Section 81; 54 Am.Jur.,

Trusts, Section 579; Restatement of Law of Trusts, Sec-

tion 219; Cullen v Coal Creek Mining & Mfg. Co.,

(Tenn.Chanc.App.) 42 S.W. 693; Uffelman v Boillin, 19

Tenn.App. 1, 82 S.W.2d 545; Kissler & Co. v Ensley

Co., 141 Fed. 130.

The Court concludes that the defense of laches

should be sustained and accordingly the Court does not

reach the question whether or not the Bank as Trustee

actually committed a breach of trust.

Accordingly, the complaint will be dismissed.

March 25, 1970.

/s/ Ray L. Brock, Jr.

Chancellor— Part 1

IN THE COURT OF APPEALS OF TENNESSEE

WESTERN SECTION SITTING

AT KNOXVILLE

Hamilton Equity #193

NORMA FRANCES RAOUL CLARK, et al.,

Appellants,

vs.

THE AMERICAN NATIONAL BANK

& TRUST COMPANY,

Appellee.

OPINION

(Filed December 31, 1970)

Beneficiaries of express trusts brought suit in the

Chancery Court of Hamilton County, Tennessee, against

American National Bank and Trust Co. of Chattanooga,

Trustee of the trusts, charging negligence in the ex-

change of certain stocks, in failing to prevent the re-

— ee — — — ewe ene

demption of the exchanged stock by appropriate Court

action, and breach of trust. The Decree was in favor

of the trustee and the beneficiaries have appealed.

The stock in question is 423 shares of Cavalier Cor-

poration, designated as 8100 par-value common stock

The trust in question was composed of these 423

shares at the time call was made by the corporation.

The Trustee acquired the Cavalier stock in the manner

following:

(a) In 1932, Gaston C. Raoul, president of Cavalier

and uncle of the complainants, gave in trust 124 shares

(Cavalier then being known as Tennessee Furniture Com-

pany) of no-par value stock, for the benefit of complain-

ants and their father, Norman Raoul.

Subsequently, Gaston C. Raoul purchased from his

brother, Norman Raoul, the interest of his brother,

Norman Raoul, in their father’s (W. G. Raoul) estate,

and donated the entire interest including 160 shares of

Cavalier no-par value to this trust.

(b) Complainants’ grandmother, Mary M. Raoul,

by testamentary trust for the benefit of complainants

and their parents, gave 39 shares of Cavalier no-par

value.

C. Raoul felt that the trust should continue on for com-

plainants’ lifetime, rather than terminate on Norman’s

death or when complainant, Norma Raoul (Clark) be-

came 25 years of age, as the trust then provided. There-

fore, Gaston C. Raoul offered to deposit 50 shares of

$100 par-value common stock in the trust if Ann Raoul,

who was over 21, would so agree, and an additional 50

shares of $100 par-value common stock when Norma

Raoul (Clark) became 21 years of age and conditioned

upon her ratification in writing. Both Ann and Norma

agreed, with Norma confirming the new trust arrange-

ments subsequent to becoming of age.

Of the total 423 shares in the trust, 384 shares were

gifts from Gaston C. Raoul, and 39 were received under

the Will of Mary M. Raoul.

The general purpose of the trusts created was to

provide for the maintenance and education of Norma

and Ann Raoul and the maintenance of their father,

Norman Raoul, if needed. However, the dominant pur-

pose was to provide for Norma and Ann Raoul.

In 1944, the Trustee exchanged the 323 shares of

no-par value common stock of Cavalier it then held for

a like number of redeemable 8100 par- value common

stock of Cavalier. In 1963 the corporation called in

and redeemed at par all 8100 par- value common stock

then outstanding. The Trustee in 1963 held 423 such

shares, having acquired by donation from Gaston C.

Raoul subsequent to 1944 an additional 100 shares of

8100 par-value common stock when life of the trust

was extended for the lifetime of Norma and Ann Raoul.

The Trustee received, at the time of the call, $100.00

per share it held plus any accrued interest or dividend.

Approximately four months after the call of the shares,

Cavalier was sold to Seeburg Corporation and Cavalier

was liquidated with substantially in excess of $100.00

per share paid to those holding no-par common stock.

A thrust of this suit is directed towards the

voluntary exchange by the Trustee in 1944 of the 323

shares of no-par common it then held, for a like number

of redeemable 8100 par- value common stock“. The

complainants contend that the Trustee was negligent in

permitting the exchange, exercised bad faith, and

on — —

breached its trust. Because of this exchange, com-

plainants were denied the right to participate in the

surplus on liquidation of the corporation. Seemingly

almost incongruous to us, complainants also contend

that the 8100 par- value common stock had the right

to participate with other common shareholders on liqui-

dation. We say incongruous because if the 8100 par-

value shareholders had participation rights on liquida-

tion, the Trustee certainly committed no wrong in ex-

changing common stock with no preferred income and

no par value for stock with preferred income, par value,

and the right to participate on liquidation.

The complainants also have maintained that the

Trustee breached its trust in 1963 when it permitted

the redemption of the 8100 par- value common stock

without protest and without seeking relief from the

Courts to prevent such redemption; or, upon learning of

liquidation, failure to take appropriate steps to prevent

the distribution of funds to no-par value shareholders.

Of course, this position depends upon whether or

not the par value shareholders are entitled to share

with no-par value shareholders on liquidation.

The learned Chancellor concluded that the ‘$100

par-value common stock was not entitled to share with

the no-par common stock in any surplus upon liquida-

tion of the Cavalier Corporation beyond its $100 par

value plus accumulated dividends. Therefore, the

Chancellor held that since the par value stock was

redeemed at its maximum possible value and could not

share in any surplus, it became immaterial as to

whether or not the Trustee was negligent in 1963 in

permitting the stock it held to be redeemed.

As to the question of the propriety of the 1944

exchange of stock by the Trustee, the learned Chancellor

concluded that the complainants were guilty of laches in

waiting 14 years before bringing suit from the date the

youngest complainant beneficiary reached her majority,

and the complaint regarding the 1944 transaction was

barred. Therefore, the Chancellor never reached the

issue of whether or not the Bank, as Trustee, actually

committed a breach of trust in regard to the 1944

transaction. There is no finding of fact in that regard

in this record.

The Errors assigned are the foregoing conclusions

of the Chancellor.

We are of the opinion that the Chancellor was cor-

rect in his conclusion that the par value shareholders

were not entitled to share with no-par value share-

holders in the surplus upon liquidation beyond $100

par value plus accumulated dividends.

(Here follows discussion of issue of whether or not

Cavalier’s par common stock shared beyond its prefer-

ence on liquidation, no longer material.)

Therefore, the Chancellor was correct in holding

that par-value holders would not be entitled to share

with no-par holders in surplus after liquidation, there-

by pretermitting all questions of the Trustee’s negli-

gence or breach of trust subsequent to the 1944 ex-

change. The first Assignment of Error is therefore

overruled.

The question now remaining is whether or not the

Chancellor was correct in applying the doctrine of laches

to the 1944 transaction by the Trustee involving the

exchange of no-par for par-value stock. The record

indicates that complainant, Norma Raoul Clark, was

a minor at the time of the 1944 transaction, not attain-

ing her majority until August 15, 1950. Complainant,

—

— we ee

Ann Raoul, was born June 2, 1921, and therefore was

over 21 years of age in 1944. However, the income

from the trust existent in 1944 and periodic statements

pertinent thereto were received by Norman Raoul, the

father of the complainants. Both complainants testi-

fied they were unaware of the trust terms until 1950

when Gaston C. Raoul made the donation heretofore

mentioned of an additional 100 shares. Complainants

did not directly receive the income from the trust ex-

istent in 1944 until after the death of their father in

1956, at which time statements and income were re-

ceived by them. Also, the record reveals that com-

plainant, Ann Raoul, was committed to Eastern State

Hospital in 1960, but subsequently restored. There-

fore, at the time of the alleged wrongful transaction,

one of the beneficiaries was a minor and neither of the

beneficiaries knew of the existence or nature of the

trust, as all matters pertaining thereto were handled

by their father and all income and statements from

the Trustee were received by him. The Chancellor

was of the opinion that complainants were barred by

laches as everything which the plaintiffs have asserted

in this action could have been as easily ascertained

14 years ago [1956] as now. Evidently, the learned

Chancellor was of the opinion that, upon the death of

complainants’ father in 1956, and by this fact the crea-

tion of a more direct relationship between beneficiaries

and Trustee, the beneficiaries knew or should have

known, or could have learned by the exercise of rea-

sonable diligence of the circumstances surrounding the

1944 transaction. We must respectfully disagree with

the learned Chancellor on the question of the applicabil-

ity of the doctrine of laches. The beneficiaries, from

1956 to the redemption of the stock issued, regularly

received dividends and statements. On the statements

opposite the number of shares was the notation 8100

par common”. There was no change in the notation

from 1956 to redemption. The beneficiaries would have

no reason to know or suspect any change had been

made in the nature of the stock in 1944. Why should

or how could the beneficiaries inquire of the Trustee

concerning the 1944 transaction when they knew not of

its existence? The beneficiaries were not title holders

of the shares in question. Title was held by the

Trustee. We do not think it reasonable to require

beneficiaries of stock held by a Trustee, when bene

ficiaries become aware of the trust, to demand of de

corporation access to corporate minutes, etc., or be

barred by laches, when the beneficiaries would have no

idea when or if an alleged breach took place. Nor do

we think it incumbent upon the beneficiaries to demand

of the Trustee explanation of an event of which the

beneficiaries had no knowledge. We are unable to find

any circumstance subsequent to 1956 which would put

a person of ordinary prudence on inquiry concerning

the complained of stock exchange in 1944. In order

for the doctrine of laches to apply, there must not

only be a long delay, but the sleeping on of one’s

rights. To sleep on’’ one’s rights entails an acquies-

. cence in the fact complained of. To acquiesce in a

fact, there must be actual or chargeable knowledge

of a fact. The real test as to chargeable knowledge

is what he might have known, by the use of the

means of information within his reach, with the vigi-

lance the law requires of him”. Bogert, Trusts &

Trustees, 2nd Edition, page 455. We hold that there

was no such knowledge present in this case and ap-

pellants’ second Assignment of Error is sustained.

We hold that, whether or not there was negligence

or breach of trust on the part of the trustee in 1944

is a question of fact that should have been determined

by the Chancellor. This remaining issue of fact is

determinative of the case and the matter is before us

without a finding of fact by the Chancellor on that

determinative factual issue. Ordinarily, we would pro-

ceed to make such a decree as we think should have

been made under the proof whenever there is an incom-

plete finding of fact by the Chancellor. However, the

finding of fact by the Chancellor which we lack in this

case, addresses itself to the very heart of the matter.

When such is the case and justice requires, we have

the authority to remand the cause for further findings

of fact. T.C.A. 27-329; Carver v. Crocker, 43 Tenn.

App. 636, 311 S.W. 2d 316; Hicks v. Hicks, 168 Tenn.

539, 79 S.W. 2d 802; Polston v. Scandlyn, 21 Tenn.

App. 252, 108 S.W. 2d 1105.

While it is true that we have before us a full

and complete transcript containing all the testimony

and proof regarding the issue pretermitted by the Chan-

cellor, this remaining issue involves an alleged breach

of trust which necessarily also involves the credit-

ability of witnesses. We are of the opinion that justice

could be better served if a proper finding of fact and

decision by the Chancellor, who has had the opportunity

to observe the manner and demeanor of the witnesses,

was afforded us. Therefore, the cause is remanded to

the Chancery Court for a decision and further find-

ing of fact on the remaining issue, which we hold is

not barred by laches. The effect of this remand shall

not dispose of this cause or displace it from the docket

of this Court, but it shall be retained, suspended, until

the order of remand be complied with. A finding of

fact and decision shall be made by the Chancellor, certi-

fied and transmitted to this Court. See as authority

for this procedure: Mynatt v. Hubbs, 6 Heisk. 320,

322; Nolan v. Black, 3 Shannon Cas. 578; Mrs. Nannie

Lawrence Williams v. First National Bank of Dickson,

Middle Section, Court of Appeals, June 18, 1932, un-

reported, yet cited with approval by the Supreme Court

in Hicks v. Hicks, supra.

An order will be entered remanding this cause to

the Chancery Court of Hamilton County so that the

Chancellor may prepare and file his written finding of

fact and decision on the alleged breach of trust by the

Trustee in the 1944 exchange of Cavalier stock, and the

same may be certifed by the Clerk and Master to this

Court as a part of the record in this cause. After the

receipt by this Court of the Chancellor’s decision and

finding of fact, the parties shall be allowed 20 days

from such receipt to file additional Briefs. A copy of

this Opinion will accompany the Procedendo on the

remand.

Nearn, J.

Carney, P. J.

Matherne, J.

IN THE COURT OF APPEALS OF TENNESSEE

WESTERN SECTION SITTING

AT KNOXVILLE

HAMILTON EQUITY #193

NORMA FRANCES RAOUL CLARK, et al,

Appeilants,

vs.

THE AMERICAN NATIONAL BANK &

TRUST COMPANY,

Appellee.

(Filed March 16, 1971)

ON PETITION TO REHEAR

A very courteous and comprehensive Petition for

Reheering and For Finding of Other or Additional Facts

has been filed with the Court. However, the Petition

must be denied as it raises no new matter for our con-

sideration.

The Petition also seeks to have us apply the Statute

of Limitations to the complainants’ cause of action, while

admitting that, because of the Chancellor's view of the

matter, that issue has not been previously raised in this

Court. In this case, the applicability or inapplicability

of any Statute of Limitations cannot be determined until

a decision is reached regarding the remaining issue and

conclusions yet to be made by the Chancellor.

The Petition is respectfully denied.

Nearn, J.

Carney, P. J.

Matherne, J.

| |

No. 38441

IN THE CHANCERY COURT, PART 1, OF

HAMILTON COUNTY, TENNESSEE

NORMA FRANCES RAOUL CLARK, et al,

Plaintiffs,

THE AMERICAN NATIONAL BANK

& TRUST COMPANY,

Defendant.

CHANCELLOR’S MEMORANDUM OPINION

(Filed March 15, 1973)

This is an action by the beneficiaries of express

trusts against the Trustee Bank to recover for alleged

breach of trust in exchanging, in 1944, trust assets con-

sisting of 323 shares of common stock of the Cavalier

Corporation of Chattanooga, Tennessee, for an equal

number of a new issue of stock in the same company

called the 8100.00 par value common” stock. The

plaintiffs have alleged that the Trustee violated its duty

of undivided loyalty in making said exchange of stock

and failed to exercise reasonable care and skill of a paid

trustee ij: making said exchange. The remedy sought

by the plaintiffs is to recover from the Bank the value,

at the time suit was brought in 1964, of the common

stock they would have owned but for said exchange.

Following the original trial, this Court did not deter-

mine whether or not the Trustee had committed a breach

of trust but decided the case in favor of the Trustee

Bank on the ground of laches. However, on appeal,

the Court of Appeals reversed the holding of this Court

that the defense of laches had been made out and re-

manded the cause to this Court with the direction that

this Court ascertain whether or not the defendant Bank

in fact had violated its trust as alleged. The defendant

Bank again has asserted the defense of laches and like-

wise has pleaded the six-year statute of limitations in

bar of the plaintiffs’ action. But the Court is duty

bound to follow the decision of the Court of Appeals on

the question of laches and is further convinced that the

Court of Appeals would deny application of the statute

of limitations for the same reasons it denied application

of the rule of laches. See: Bogert, Law of Trusts, Sec.

170 (Hornbook Series). Accordingly, these two defenses

of the defendant Trustee must be denied. It is perhaps

the duty of the Court to state, however, that, were it

free to do so, it would sustain the plea of the statute

of limitations as insisted by the defendant Bank.

The Court comes to the issue whether or not the

Trustee Bank committed a breach of trust. In deter-

mining this question, the actions of the Trustee are to

be judged by the facts as they were known to it in 1944

at the time said stock was exchanged and not by any

hindsight consisting of the events occurring thereafter.

Two trusts are actually involved. It was the pur-

pose of each to support and educate the plaintiffs, one

of whom was 15 years of age and the other 23 years of

age in 1944. One consisted of 284 shares of common

stock in the Cavalier Corporation, and in it the Trustee

was granted broad powers to sell or exchange any se-

curity . . . in any manner which may seem wise. The

other trust consisted of 39 shares of the common stock

of the Cavalier Corporation, and in this trust instrument

the Trustee was not granted any power of sale or re-

investment. One question is whether the law of Georgia

or that of Tennessee governs the administration of the

trust consisting of the 39 shares, and on this issue it

is the finding of the Court that the law of Tennessee.

controls and, therefore, that the so-called “prudent man

rule is the proper one to apply to the actions of the

Trustee in exchanging these 39 shares for the $100.00

par value stock. It should be noted here that these two

particular trusts were later merged into a new trust and

100 additional shares of $100.00 par value stock were

added to the corpus in 1949. This additional 100 shares

of $100.00 par value stock is in no wise involved in this

litigation, but the fact that the two original trusts ter-

minated and were supplanted by the new trust is sig-

nificant because the Bank insists that the statute of

limitations began to run when the two original trusts

terminated on October 15, 1956, the date of the death

of the father of the plaintiffs.

The date of the exchange of the common stock for

the $100.00 par value stock was October 31, 1944 and

at that time two of the directors of the Trustee Bank,

Mr. E. Y. Chapin and Mr. Gaston C. Raoul, were at

the same time directors of the Cavalier Corporation, had

been serving in such dual capacities for several years,

and each owned stock in the Cavalier Corporation. Mr.

Chapin had been Chairman of Cavalier’s board of di-

rectors in 1941. Cavalier’s account was one of the more

important accounts of the Bank at that time and the

Bank also acted as Cavalier’s transfer agent.

The exchange in question grew out of a plan of

recapitalization of Cavalier conceived over a period of

many months by Mr. Gaston C. Raoul who had devoted

most of his life to the development of Cavalier. One

of his primary motives appears to have been to transmit

his large holdings in Cavalier to his son and to Mr.

Lane, his business associate of many years, and to do

so in a manner calculated to hold Federal death taxes

—

or gift taxes to the very minimum. The Cavalier Cor -

poration constituted Mr. Raoul's consummate interest.

Before the exchange, Cavalier had outstanding 8,872

shares of common stock and of this total Mr. Gaston

Raoul and his family of brothers, sisters, neices and

nephews owned 6,973 shares. After considering various

plans, he finally decided upon the one here in litigation

and did everything within his power to see that it was

carried out. He wrote many letters advising and even

urging his relatives to exchange their common stock for

the new $100.00 par value stock.

The new $100.00 par stock was, in effect, a pre-

ferred stock. It was preferred in dividends up to $2.50

per year, if earned and declared, but it was limited to

a total of $7.50 per year in dividends. It was subject

to redemption on 90 days’ notice at $100.00 per share

plus accrued dividends and, in the event of liquidation,

it was preferred over the common to the extent of

$100.00 per share, but was not entitled to share in liqui-

dation beyond that amount. It had no right to vote

unless the $7.50 dividend was not paid or the company

failed to maintain current assets of 150% or more of

the amount of par stock outstanding. Of course, the

common stock was the equity stock ef the company

with unlimited right to dividends and to assets upon

liquidation after the preference just mentioned, and it

had the sole voting control, with the two exceptions

above mentioned.

Holders of the common stock were given the option

of exchanging their stock for the new $100.00 par stock

between October 31, 1944 and December 31, 1944. Mr.

Gaston C. Raoul had iittle difficulty in leading nearly

all the other holders of common stock likewise to ex-

change for the new $100.00 par stock; after all, he had

built the company and, presumably, knew best. 7,389

shares of the common stock were exchanged for the

$100.00 par value stock, leaving the equity ownership

of the company in the 1,383 shares of common stock

remaining unexchanged. The Trustee Bank exchanged

the stock it held in the plaintiffs’ trusts on the very

first day of the exchange period.

The Court will now consider the book value, earn-

ing capacity, dividends, liquidation and voting rights

of these two stocks. Immediately prior to the exchange,

8,772 shares of common stock were outstanding and the

book value of each share was approximately $298.05.

By simple arithmetic, it is apparent that immediately

upon exchanging a share of said common stock for a

share of the new $100.00 par stock the person exchang-

ing has given away $198.05 of the net worth of the com-

pany to those who continued to hold the common stock.

This makes a total of $1,463,391.45 of the net worth of

the company which by reason of the exchange was trans-

ferred from those stockholders who exchanged to the

holders of the common stock who did not exchange.

Thus, if the defendant Trustee had not exchanged the

common stock in these trusts for the $100.00 par stock

it would have gained $1,050.13 in book value or net

worth per share of the common stock in the plaintiffs’

trusts, or a total benefit to the plaintiffs of $341,775.99.

This fact, coupled with the fact that the common stock

was not limited in the amount of dividends which could

be paid to its holders and the fact that there was no

limitation of the amount the common stock would share

upon liquidation of the company, after payment of the

$100,000 par, convinces the Court that the Trustee vio-

lated the prudent man rule in making the exchange of

common stock for the $100.00 par value stock. Section

176 of the Restatement of Trusts states, The trustee

is under a duty to the beneficiary to use reasonable

care and skill to preserve the trust property. (Emphasis

added.) The right of unlimited sharing in liquidation

was an important factor in the mind of Mr. Raoul in

planning the recapitalization as shown by a memorandum

written by him dated June 30, 1944 in which he said:

‘Theoretically this common stock (no par) is never worth

to its holder more than cost plus appreciation, but sup-

pose some day a good opportunity arises and the com-

pany is sold out lock, stock and barrel. There might

be very few common shares outstanding at that time,

but surely they would receive everything after satisfac-

tion of the preferred and A ($100.00 par) shares. They

might thereby make a killing (less taxes) but the A

($100.00 par) should not care as it would first have to

be paid off in full. The old gentleman could not have

known how right he was in view of the sale in 1963 of

Cavalier to Seeburg, lock, stock and barrel, for

$9,413,188.00, plus 120,000 shares of Seeburg no par

common stock of the value of 23 3/8 per share, or a

total consideration of $12,098,188.00.

Aside from the net worth, or book value, of the

respective stocks, it should be noted that beginning in

1940 Cavalier earned $5.03 per share of common stock,

in 1941, $22.94 per share, in 1942, $9.23 per share, in

1943, $9.63 per share and in 1944, $12.67 per share.

Mr. Gaston Raoul reported to the Board of Directors

on October 21, 1943, J am glad to report that earnings

for the current year are entirely satisfactory. . .”

Further, although dividends had not been paid for

several years prior to 1944, dividends were paid on the

common stock in 1944 prior to the proposed exchange

as follows: April 19, 1944—$1.00 per share; July 18,

1944—$.50 per share; October 18, 1944—$.50 per share.

The defendant Trustee Bank, through its directors Mr.

Gaston Raoul and Mr. E. Y. Chapin, knew that for

the year 1944 profits after taxes would amount to be-

tween $175,000.00 and $200,000.00. Since the earning

power of stock is one of the prime characteristics there-

of, it should be noted that for the year 1944 the earn-

ings per share of common stock before the recapitaliza-

tion was $14.67, but after the recapitalization and as-

suming that the Trustee had not exchanged the 323

shares in the plaintiffs’ trusts and that maximum divi-

dends of $7.50 a share had been paid on the $100.00

par value stock, the earnings per common share would

have jumped from said $14.67 per share to $52.97 per

share, or an increase of $38.30 per share.

Weighing all of these factors, the Hon. Forrest

Hodge O’Neal, Dean of the Duke University Law School

and a specialist in closely held corporations, testified

that no reasonably prudent businessman would have

exchanged the Cavalier common stock for the $100.00

par stock at the end of 1944, and that the new $100.00

par value shares were of substantially less value than

the equity stock which the defendant Trustee exchanged

for them. Likewise, Mr. William G. Stiegelmier, a

specialist in the valuation of stocks in closely held cor-

porations, testified that although the purpose of the

trusts was to educate the plaintiffs, it was most im-

prudent for the Trustee in 1944 to exchange the 323

shares of common stock held in the trust for the new

$100.00 par stock. Mr. William E. Heer, a professional

investment counsel with 35 years’ experience, testified

that as of December 31, 1944, immediately after the

exchange, the common had a value of $745.00 per share

while the new 3100.00 par had a value of only $80.00

per share. In conclusion on this phase of the case, the

Court is of the opinion that the Trustee breached its

— — . —

duty as stated in Section 174 of the Restatement of

Trusts, to wit:

“The trustee is under a duty to the beneficiary

in administering the trust to exercise such care and

skill as a man of ordinary prudence would exercise

in dealing with his own property; and if the trustee

has greater skill than that of a man of ordinary

prudence, he is under a duty to exercise such skill

as he has. See also: Knox County v. Fourth &

First Nat. Bank, 181 Tenn. 569, 182 S.W.2d

980, 984.

The Court now deals with the contention of the

plaintiffs that the Trustee violated its duty of loyalty.

See: Bogert, Law of Trusts, Sec. 95, (Hornbook Series);

54 Am Jur. 247, Trusts, Sec. 312. That duty is stated

in Section 170 of the Restatement of Trusts as follows:

i) The trustee is under a duty to the bene-

ficiary to administer the trust solely in the interest

of the beneficiary. (Emphasis added.)

(2) The trustee in dealing with the benefi-

ciary on the trustee’s own account is under a duty

to the beneficiary to deal fairly with him and to

communicate to him all material facts in connection

with the transaction which the trustee knows or

should know.

Further, under Comment p' to said Section 170, is the

following, to wit:

“Action in the interest of a third person. The

trustee is under a duty to the beneficiary in ad-

ministering the trust not to be guided by the in-

terest of any third person. Thus, it is improper

for the trustee to sell trust property to a third

person for the purpose of benefiting the third per-

son rather than the trust estate.” (Emphasis

Added.) See also: Cowan v. Hamilton Nat.

Bank, 177 Tenn. 94, 146 SW2d 359, 367.

It is obvious that in this case Mr. Gaston Raoul,

while acting as a director of the Trustee Bank and thus

onerated with the duties of undivided loyalty owned by

a Trustee to his beneficiaries (Plaintiffs) was at the

same time acting in his own personal interest in carry-

ing out his personally devised scheme of recapitaliza-

tion, the ultimate aim of which was to place equity

ownership of the Cavalier Corporation in his son and

close associate, Mr. Lane, while paying little or no

Federal taxes.

Eleven years later on August 2, 1954, Mr. Raoul,

in a personal memorandum, stated:

“Incidentally, Mr. Chapin disapproved of the

idea in toto as being a giveaway of the then prin-

cipal owners to the no par stockholders who might

elect not to exchange. I disagreed with him, and

after 11 years still do. He went along with the .

plan, however, like the loyal friend he always was.

W. C. R.“ (Emphasis added.)

This memorandum of Mr. Raoul was with respect to

the 1944 stock exchange. Said memorandum is very

revealing in two respects. First, it tells us that “Mr.

Chapin disapproved of the idea in toto as being a give-

away”, and, secondly, that Mr. Chapin, who handled

these trusts for defendant Bank, failed to exercise in

behalf of the trust beneficiaries his said judgment of

disapproval but went along with the plan however,

like the loyal friend he always was. These actions

by Mr. Raoul and Mr. Chapin appear to be precisely

what Section 170 of the Restatement of Trusts states

is a violation by the Trustee of its duty of loyalty.

It appears that Mr. Raoul viewed the plan almost

solely from a standpoint of achieving his own personal

estate objectives rather than from the standpoint of

Trustee for the plaintiffs. It is understandable how

Mr. Raoul could disagree with Mr. Chapin as indicated

by said memorandum because to Mr. Raoul the plan

was accomplishing his estate plan objectives. He did

not wish his estate to enlarge as the company grew.

From the standpoint of death taxes, the plan had the

effect of shifting high value assets (no par common

stock, book value of $298.05) out of his estate so that

he might hold low value assets ($100.00 par common

stock) and thereby defeat death taxes. If he had made

an inter vivos gift he would have incurred Federal gift

taxes and the objectives of his bounty would not have

received as much as they would have received under

his plan. But Mr. Chapin must have viewed the whole

scheme from a different aspect; his only personal in-

terest was friendship for Mr. Raoul. The new stock

was subject to redemption for $100.00 per share, repre-

senting a “give away of $198.05, of book value and

the earnings and dividends that went with it. Mr.

Gaston Raoul did not regard this as a give away for

him because he was giving to his son and business

associate, Mr. Lane, and his family was retaining what

he deemed sufficient voting control to protect their re-

maining investment. Finally, the Trust assets were

always vulnerable to redemption for the sum of

$32,300.00.

Nowhere does the record indicate that the Trustee

Bank ever disclosed to anyone acting on behalf of the

plaintiffs the effects that the exchange of stock here-

inabove outlined would have on these trusts. See:

Knox County v. Fourth & First Nat. Bank, supra,

at P. 986. It seems of great importance to the Court

that the Trustee Bank was chargeable with notice not

only of what Mr. Chapin knew, but also of what Mr.

Gaston Raoul knew about the recapitalization plan,

the prospects for Cavalier and the advantages and dis-

advantages of the two stock issues, and he knew just

about all there was to know.

Section 205 of the Restatement of Trusts provides:

“If the trustee commits a breach of trust, he

is chargeable with

(a) any loss or depreciation in value of the

trust estate resulting from the breach of

trust; or

(b) any profit made by him through the breach

of trust; or

trust estate if there had been no breach of

trust.

Section 206 of the Restatement of Trusts provides:

The rule stated in Sec. 205 is applicable where

the trustee in breach of trust sells trust property

to himself individually, or sells his individual prop-

erty to himself as trustee, or otherwise violates his

duty of loyalty. (Emphasis added.) See also:

Bogert, Law of Trusts, Sec. 157, (Hornbook Series).

It is the opinion of the Court that the rule stated

in Section 205 (c) and in Section 206 of the Restatement

of Trusts is the proper rule to be applied in this case.

According to the computations in the plaintiffs’ brief,

the application of said rule of damages, after allowing

credit for the $32,300.00 already paid plaintiffs, results

in a net recovery to the plaintiffs of the sum of $2,540,256.11,

plus any surplus in dividends paid on the common

stock since 1944 over and above that paid on the

$100.00 par stock. As suggested in the briefs, the

case will be referred to the Master for appropriate find-

ings as to the precise sum due in accordance with this

decision. Solicitor for plaintiffs shall submit an ap-

propriate decree.

March 15, 1973.

/s/ Ray L. Brock, Jr.

Chancellor Part 1

No. 38,441

IN THE CHANCERY COURT OF HAMILTON

COUNTY, TENNESSEE

NORMA FRANCES RAOUL CLARK, ET AL

Plaintiffs

vs.

AMERICAN NATIONAL BANK & TRUST CO.

Defendant

FINAL DECREE

This cause came on to be heard on the Report of

the Master, as ordered in the Decree of this Court

entered on June 22, 1973, and the Master, having

filed his Report, showing a computation of interest

to December 20, 1973, said report is hereby incorpo-

rated herein by reference.

It is accordingly

ORDERED, ADJUDGED and DECREED that the

Plaintiffs have and recover from the Defendant the total

sum of $3,941,799.74 plus the costs of this cause for

which execution may issue if necessary.

A lien is hereby declared upon said recovery cover-

ing the attorneys’ fees of Tanner and Jahn, Attor-

neys for the Plaintiffs, in such amount as is evidenced

by their agreement with the Plaintiffs at such time as

adjudication of this cause becomes final.

The Chancellor's opinion and the Report of the

Master shall constitute a finding of fact and decision

by this Court and the Clerk and Master is ordered to

certify and transmit same to the Court of Appeals as

a part of the record in this cause.

Enter this 27 day of December, 1973.

Js, Ray L. Brock, Jr.

Chancellor

IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

Hamilton Equity

Norma Frances Raoul Clark, et al,

Original Appellants,

vs.

American National Bank and Trust Company

of Chattanooga,

Original Appellee.

OPINION

(Filed August 30, 1974)

This is a trust case involving an alleged breach

of trust and it is the second time that the matter

has come before this Court. Previously, this Court re-

manded for additional findings by the Chancellor.

In the original complaint, filed in 1964, the bene-

ficiaries of express trusts charged the defendant Trustee,

American National Bank and Trust Company of Chatta-

nooga, Tennessee, with negligence in the exchange of

certain stocks held in trust; in failing to prevent the

redemption of the exchanged stock by appropriate court

action; and breach of trust.

The main thrust of the complaint was that the

Trustee had committed a breach of trust in 1944 when

certain shares of trust stock were exchanged for a dif-

ferent type of stock in the same corporation. Prior to

the complaine? of 1944 transfer of stock the Trustee

held shares of Cavalier Corporation no- par common

stock. These shares were voting shares with no divi-

dend preference and would share equally on dissolu-

tion of the Corporation. In 1944 the ‘‘no-par” common

stock was voluntarily exchanged by the Trustee for a

like number of what was termed 8100.00 par value

common stock’’. The par value stock enjoyed dividend

preference and was subject to redemption by the Cor-

poration.

In 1963 Cavalier called in and redeemed the $100.00

par value stock at $100.00 per share. Approximately

four months thereafter Cavalier was sold to Seeburg

Corporation for approximately 12 million dollars and

Cavalier was liquidated. The holders of common stock

in Cavalier participated in the division of the sale

proceeds upon dissolution while the former holders of

$100.00 par value stock did not. This fact precipi-

tated this suit.

In addition to charging a breach of trust in the

1944 transaction, complainants contended at the first

trial that the 8100.00 par value common stock” had

the right to participate with other common shareholders

on liquidation.

At the first trial the Trustee contended that the

breach of trust claim was barred by the doctrine of

laches and even if it were not, there had been no

breach. Further, the $100.00 par value stock was not

entitled to share upon liquidation with the no-par com-

mon stock.

The Chancellor held: (a) the “$100.00 par value

common stock was not true common stock but was

preferred as to dividends and its par value; (b) upon

liquidation it did not share with the common stock in

the overage after payment of its par value; and (c) the

plaintiffs were barred by the doctrine of laches on the

breach of trust issue and, consequently, made no fact

finding on that point.

On appeal, we affirmed the Chancellor’s holding

regarding the nature of the 8100.00 par value common

stock, but reversed the Chancellor’s holding regarding

the application of the doctrine of laches and remanded

for a finding of fact on the pretermitted issue.'

On remand, the Trustee, having lost the issue re-

garding laches, raised the issue of the statute of limita-

tions as set out in T.C.A. § 28-309, and again insisted

that the facts did not constitute a breach even if the

claim was not barred by the statute of limitations.

The Chancellor has filed his finding of fact and

conclusions and held that T.C.A. § 28-309 was not a

bar to the suit and that the Trustee had committed a

breach of trust in 1944 in exchanging the no-par

value stock for the 8100.00 par value stock. Judg-

ment in the amount of $3,941,799.74 was rendered

against the Trustee.

1. In an effort to have this Opinion conform to some degree

of reasonableness in length, we will not reiterate here our reasons

for our previous holding, as a copy of our previous Opinion may be

obtained from the Clerk of this Court by those who have an in-

terest in that portion of these proceedings.

Now the Trustee appeals and insists that the Chan-

cellor erred in not sustaining the plea of the statute of

limitations as well as in holding there had been a breach

of trust. In addition, it is also insisted that the Chan-

cellor erred in the manner of assessment of damages

and interest.

For an understanding of this matter it is necessary

to give some history of the trusts involved.

Gaston C. Raoul, uncle of Anne Raoul and Norma

Raoul, planted the seed of the trusts in 1932. In that

year, Gaston Raoul, the President of Tennessee Furni-

ture Company and its prime movant, gave in trust to

the defendant Trustee 124 shares of the company’s no-

par value common stock.' The trust was for the

benefit of his nieces, Anne and Norma Raoul, the com-

plainants, and their father, Norman Raoul, who was

Gaston’s brother.

Subsequently; Gaston purchased from Norman

his brother’s interest in their father’s (W. G. Raoul)

estate. Gaston then gave in trust as additional corpus

this interest, which included 160 shares of Cavalier

no-par value common stock.

Complainants’ grandmother, Mary M. Raoul, by

testamentary disposition increased the trust corpus by 39

shares of Cavalier no-par value common stock.

Thus, it may be seen that at this point there

were 323 shares of Cavalier no-par value stock held in

trust. The trust provided that it was to terminate up-

on the youngest of the nieces reaching twenty-five years

1. Tennessee Furniture later came to be known as Cavalier

Corporation and in all references in this Opinion all stock will

be referred to as that of Cavalier.

of age and the death of their father Norman Raoul, but

in no event prior to Norman’s death. Beneficiary Anne

Raoul was born June 2, 1921, and Norma was born

August 15, 1929. Norman Raoul died October 15, 1956.

In late 1949, prior to Norman Raoul’s death,

Gaston Raoul, the settlor became of the opinion that it

would be better if the corpus was held in trust for the

lifetime of his nieces instead of being distributed to

them upon the death of their father, Norman Raoul.

Therefore, Gaston proposed to deposit 50 shares of

$100.00 par value shares of Cavalier stock' in a trust

if Anne Raoul, who was over 21 years of age, would

agree to place her expected share of the first trust,

when that trust terminated, in trust with the 50 shares

offered by Gaston. He also proposed to deposit an

additional 50 shares of the same stock in that trust

if Norma would likewise agree and would ratify the

agreement upon reaching 21 years of age. Both Anne

and Norma agreed; with Norma confirming the new

trust arrangements subsequent to attaining majority.

Of course, Norma Raoul, a beneficiary of the first

trust, was not and could not be a party to the agree-

ment as the first trust, according to its terms, was

to terminate upon his death and the corpus distributed

to his daughters. Gaston Raoul had in this manner

placed 100 shares of $100.00 par value Cavalier stock

in trust; which trust existed contemporaneously with the

first trust until the first fell in upon the death of

Norman in 1956. The named trustee of the second

1. In the 1944 transaction, both the trustee and Gaston

Raoul had voluntarily exchanged their no-par value stock for

$100.00 par value stock, so at the time of the new agree-

ment the 100 shares offered by Gaston and the 323 held by the

Trustee were all $100.00 par value shares.

—— —— — —

trust was the same as the first, that is, the defen-

dant, the American National Bank and Trust Company

of Chattanooga.

Hence, at one point in time there existed two sep-

arate trusts with the same named Trustee. One, the

first in time, consisting of 323 shares, which is the

subject of this suit, and the second consisting of 100

shares with which this litigation is not concerned.

While the Trustees of the trust were the same,

neither the corpora, settlors, beneficiaries, or terms

were the same. In the first trust, we may consider

Gaston C. Raoul as the settlor with Anne, Norma and

Norman Raoul as named beneficiaries with termination

conditioned upon the death of Norman. In the second

trust Gaston, Anne and Norma Raoul are the named

settlors with Anne and Norma as the named benefi-

ciaries with termination upon the death of Anne and

Norma. The general purpose of the first trust was

to provide for the maintenance and education of Norma

and Anne Raoul and the maintenance of their father,

Norman, if needed. However, the dominant purpose

of that trust was to provide for Norma and Anne.

The sole purpose of the second trust was to provide

for Norma and Anne. The second trust contained a

spendthrift clause while the first did not. Also, there

existed contemporaneously for a time two distinct cor-

pora; the first consisting of 323 shares and the second

consisting of 100 shares.

Upon the death of Norman Raoul on October 15,

1956, the defendant Trustee transferred the 323 shares

from the first trust to the corpus of the second.

Now, a brief summary of the events of 1944. Cav-

alier Corporation represented the life’s work of Gaston

C. Raoul. He was justly proud of his business and

in 1944 began to contemplate about its future when

death would remove him as captain of the ship. Over

the years Cavalier had done its banking with the de-

fendant bank. Mr. E. Y. Chapin, a director of the

bank and a trust officer, became a personal friend of

Gaston Raoul. Chapin also owned a few shares of

Cavalier stock. In the year 1944 both Chapin and

Raoul were members of the board of directors of both

the defendant bank and Cavalier. Gaston conceived

the idea of the $100.00 par value stock. His fear was

that after his death the Corporation would be ab-

sentee owned, that is, those who were actively engaged

in the day to day operation of the Corporation would

not be common shareholders and as a consequence the

business would suffer for lack of real concern by those

who were operating it. Also, as will be later shown,

the exchange of common stock for par value stock

would have definite tax benefits for Gaston Raoul.

Therefore, he proposed that the Corporation offer to

exchange $100.00 par value stock with dividend pref- .

erence on a share-for-share basis for common stock.

The ultimate hoped for result would be that those who

did not actively contribute to the running of the busi-

ness would exchange their common stock for the pre-

ferred stock, which would have the effect of making

the common ownership stock available by purchase or

bonus incentive to those who actually ran the business.

Gaston Raoul discussed and conferred with E. Y.

Chapin about this plan. The offer was made to the

stockholders in 1944 and nearly all of the absentee

owners, including the defendant Trustee and Gaston

Raoul, exchanged the no-par value common stock for

the $100.00 par value preferred.

It is not in dispute that T.C.A. § 28-309 is appli-

cable to trusts. See Third Nat. Bk. v. Nashville Trust

Co. (1950) 191 Tenn. 123, 232 S.W. 2d 7. The statute

provides in effect that this action shall be commenced

within six (6) years after the cause of action accrued.”

It has been generally stated that a statute of lim-

itations does not apply to express trusts. However,

the misconception that the foregoing generality has cre-

ated was interred by our Supreme Court in the case of

Third Nat. Bk. v. Nashville Trust Co., supra, when the

Court stated:

“The rule that no statute of limitations applies

to express trusts, has been widely and loosely

stated. The equitable theory upon which the rule

was based was that since in equity, the possession

of the trustee was the possession of the cestui

que trust and so could not be adverse, that no legal

statute of limitations could commence to run until

the possession was adverse. That the rule is lim-

ited to the time that the trustee is in possession

of trust funds, and to the continuing relation of the

parties as trustee and cestui que trust, is abun-

dantly clear from the early cases cited in Judge

Catron's opinion in Armstrong's Heirs v. Campbell,

11 Tenn. 201, 24 Am. Dec. 556. Our research

was limited by the availability of these old cases

to Beekford v. Wade, 17 Ves. 96, and Melvy v.

Cawley, 4 Price 107. In the course of his opinion,

Judge Catron said, 11 Tenn. at page 227: Al-

though a trustee cannot, in general, set up his pos-

session in opposition to his cestui que trust, or

plead the statute of limitations against him, so

long as the relation of trustee and cestui que trust

subsists between them, yet if that relation is once

dissolved, or if the trustee to the cestui que trust

notice that he intends to hold in opposition to him,

the statute of limitations will run“

In the course of that opinion the Court quoted with

approval the rule as set out in Corpus Juris as follows:

In order to set the statute in motion in favor

of the trustee the trust must terminate, as by its

own limitation or by settlement of the parties, or

there must be a repudiation of the trust by the

trustee and an assertion of an adverse claim by

him, and the fact made known to the cestui que

trust. This proposition is well established by all

the numerous cases in which the question has

arisen, there is no conflict of authority whatever

upon the subject. 37 C. J., Limitations of Ac-

tions, Section 267, pp. 903-904-905; 54 C. J. S.,

Limitations of Actions, Section 178. (191 Tenn.

130-31) (Emphasis supplied)

By its terms, the first trust terminated on October

15, 1956, upon the death of Norman Raoul. The second

trust was already in existence on that date. The

second trust cannot be simply an extension of the first

trust as argued by counsel for the beneficiaries.

The only common denominator between the two trusts

is the name of the Trustee, American National Bank

and Trust Company of Chattanooga. There is no proof

in this record that the Trustee attempted in any manner

to induce the beneficiaries of the first to create the

second for any reason, much less for the reason of

“covering up any past mistakes. The second trust

was based on the agreement between the nieces and

their uncle, that the nieces would place in a trust what

was theirs personally when they were entitled to it, if

their uncle would also place in that trust 100 shares.

— — ee. ee —

On October 15, 1956, the corpus of the first trust be-

came the personal property of the nieces to do with it

as they saw fit. They saw fit to place that corpus in

another trust already created. Therefore, the statute o.

limitations in this case would begin to run on the first

trust on the date of its termination, October 15,

1956, for the Trustee no longer had any duties under

that trust and, in effect, turned over the corpus to

the beneficiaries, who had by prior agreement agreed to

place it in another trust; unless it can be said that

fraud is involved.

In Bates v. Preble, 151 U.S. 149, 14 S.Ct. 277,

cited in Hall v. DeSaussure (1956 W.S.) 41 Tenn. App.

572, 297 S.W. 2d 81, it was said. if the fraud

be secret in its nature, and such that its existence

cannot be readily ascertained, or if there be fiduciary

relations between the parties, there need be no evidence

of a fraudulent concealment other than that implied

from the transaction itself.

We must therefore determine if the 1944 exchange

itself was a fraudulent transaction. Evidently the Chan-

cellor was not of the opinion that the transaction of

1944 was a fraudulent transfer for he did not so find.

The Chancellor held, after an exhaustive finding of fact,

that the Trustee in the 1944 transaction failed in its

duties as set out in Section 174 of the Restatement

of Trusts, to wit:

The trustee is under a duty to the bene-

ficiary in administering the trust to exercise such

care and skill as a man of ordinary prudence

would exercise in dealing with his own property;

and if the trustee has greater skill than that of a

man of ordinary prudence, he is under a duty to

exercise such skill as he has.

In other words, the Chancellor found that the

Trustee violated the prudent man rule.

Expert testimony was adduced on both sides

of this controversy concerning the prudent advisabil-

ity of exchanging or not exchanging the stock. The

experts properly viewed the exchange in the light of

circumstances existent in 1944. The Trustee’s expert

witnesses testified in that light and not judging by

hindsight were of the opinion the exchange was prudent.

On the other hand, expert witnesses for the beneficiaries

viewed the exchange in the same light and through

the same sight and were of the opinion the ex-

change was not prudent. The Chancellor accepted

the testimony of the latter and we cannot say the evi-

dence preponderates against the finding that the ex-

change was imprudent. However, an imprudent mis-

take, even a bad one, does not make out a case of

fraud and we hold the proof does not warrant such con-

clusion.

Nevertheless, it is argued that whether a mistake

be fraud or not, if the cause of action is concealed

from the beneficiaries, the concealment thereof is fraud

and a fraudulent concealment will toll the statute.

“It is not the fraud, but its concealment by the party

perpetrating it, unmixed with fault or negligence on the

part of him who complains, which works this result.”

Woodfolk v. Marley (1897) 98 Tenn. 467, 40 S.W.

479, at page 471.

Absent a fiduciary relationship that concealment

must be evidenced by some overt act, but where a

fiduciary relationship exists and there is the duty to

speak, mere silence may constitute a fraudulent con-

cealment. Pomeroy, Equity Jurisprudence, 5th Edition,

§ 902 page 550; Simmons v. Evans (1947) 185 Tenn.

— — a — —

282, 206 S. W. 2d 295; Sewing Machine Company v.

Jackson (1885) 83 Tenn. 418.

Immediately prior to the 1944 transfer of stock,

the Trustee, through a trust officer (not Mr. Chapin)

discussed the matter of the exchange of stock with

Norman Raoul, beneficiary of the first trust and father

of the co-beneficiaries, Anne and Norma. Norman

gave the Trustee permission for the transfer and stated:

“It is entirely satisfactory with me to exchange any

Cavalier old stock for the new Cavalier stock that

you are holding in trust for my children.” The ex-

change in 1944 was in no manner hidden from any-

one. After the exchange, the records of the Trustee

indicated that the stock was $100.00 par value stock

where before it had been listed simply as shares. In

short, there was no physical concealment from anyone

of the transaction itself.

It is the position of the beneficiaries that Mr.

Chapin was of the opinion that the exchange was not

in the best interest of the beneficiaries and he was un-

der a duty to reveal to the beneficiaries any un-

certainty in his mind regarding the soundness of the

stock exchange. This brings us to the Chancellor's

finding that the Trustee breached its duty of loyalty.

On that point we copy from the Chancellor's opin-

ion:

“The Court now deals with the contention of

the plaintiffs that the Trustee violated its duty

of loyalty. See: Bogert, Law of Trusts, Sec.

95, (Hornbook Series); 54 Am.Jur. 247, Trusts,

Sec. 312. That duty is stated in Section 170 of

the Restatement of Trusts as follows:

‘(1) The trustee is under a duty to the

beneficiary to administer the trust solely in the

interest of the beneficiary. (Emphasis added.)

(2) The trustee in dealing with the bene-

ficiary on the trustee’s own account is under a

duty to the beneficiary to deal fairly with him

and to communicate to him all material facts

in connection with the transaction which the

trustee knows or should know.

Further, under Comment p' to said Section 170,

is the following, to wit:

‘Action in the interest of a third person.

The trustee is under a duty to the beneficiary

in administering the trust not to be guided by

the interest of any third person. Thus, it is

improper for the trustee to sell trust property

to a third person for the purpose of benefiting

the third person rather than the trust estate.’

(Emphasis Added.) See also: Cowan v. Hamil-

ton Nat. Bank, 177 Tenn. 94, 146 SW2d 359,

367.

“It is obvious that in this case Mr. Gaston

Raoul, while acting as a director of the Trustee

Bank and thus onerated with the duties of undi-

vided loyalty owed by a Trustee to his benefi-

ciaries (Plaintiffs) was at the same time acting

in his own personal interest in carrying out his

personally devised scheme of recapitalization, the

ultimate aim of which was to place equity owner-

ship of the Cavalier Corporation in his son and

close associate, Mr. Lane, while paying little or

no Federal taxes.

Eleven years later on August 2, 1954, Mr.

Raoul, in a personal memorandum, stated:

‘Incidentally, Mr. Chapin disapproved of

the idea in toto as being a giveaway of the

— —ͤ—

exchange. I dis-

years still do.

He went along with the plan, however, like the

loyal friend he always was. W. C. R.“ (Empha-

sis added.)

This memorandum of Mr. Raoul was with re-

spect to the 1944 stock exchange. Said memo-

randum is very revealing in two respects. First,

it tells us that ‘Mr. Chapin disapproved of the

idea in toto as being a giveaway’, and, secondly,

that Mr. Chapin, who handled these trusts for de-

fendant Bank, failed to exercise in behalf of the

trust beneficiaries his said judgment of disapproval

but ‘went along with the plan however, like the

loyal friend he always was. These actions by Mr.

Raoul and Mr. Chapin appear to be precisely what

Section 170 of the Restatement of Trusts states

is a violation by the Trustee of its duty of loyalty.

“It appears that Mr. Raoul viewed the plan

almost solely from a standpoint of achieving his

own personal estate objectives rather than from the

standpoint of Trustee for the plaintiffs. It is un-

derstandable how Mr. Raoul could disagree with

Mr. Chapin as indicated by said memorandum be-

cause to Mr. Raoul the plan was accomplishing

his estate plan objectives. He did not wish his

estate to enlarge as the company grew. From the

standpoint of death taxes, the plan had the effect

of shifting high value assets (no par common

stock, book value of $298.05) out of his estate so

that he might hold low value assets ($100.00

par common stock) and thereby defeat death taxes.

If he had made an inter vivos gift he would have

incurred Federal gift taxes and the objectives of his

bounty would not have received as much as they

would have received under his plan. But Mr.

Chapin iust have viewed the whole scheme from

a differeat aspect; his only personal interest was

friendship for Mr. Raoul. The new stock was

subject to redemption for $100.00 per share, repre-

senting a give away of $198.05, of book value

and the earnings and dividends that went with it.

Mr. Gaston Raoul did not regard this as a give

away for him because he was giving to his son

and business associate, Mr. Lane, and his family

was retaining what he deemed sufficient voting

control to protect their remaining investment. Fi-

nally, the Trust assets were always vulnerable to

redemption for the sum of $32,300.00.

Nowhere does the record indicate that the

Trustee Bank ever disclosed to anyone acting on

behalf of the plaintiffs the effects that the ex-

change of stock hereinabove outlines would have

on these trusts. See: Knox County v. Fourth

& First Nat. Bank, supra, at P. 986. It seems

of great importance to the Court that the Trustee

Bank was chargeable with notice not only of what

Mr. Chapin knew, but also of what Mr. Gaston

Raoul knew about the recapitalization plan, the

prospects for Cavalier and the advantages and dis-

advantages of the two stock issues, and he knew

just about all there was to know.

It should be noted that in Gaston Raoul’s memo-

randum, upon which the Chancellor placed so much

weight, it was stated that Chapin “disapproved of the

idea in toto, as being a giveaway by the then principal

owners to the no par stockholders who might elect not

to exchange. The memorandum was a note written by

Gaston to himself evidently in 1956 when he was in a

reminiscing mood and was in reference to a letter of

1944 that had been transmitted to the directors of Cava-

lier expiaining the nature of the then proposed new is-

sue of $100.00 par value stock. The letter had nothing

to do with trust stock but was the embodiment of the

idea for the new' stock. It appears to us that Gas-

ton Raoul was saying that Chapin disapproved the idea

of the new $100.00 par value stock because it was a

giveaway of ownership by the then principal owners

but that Chapin eventually went along with the plan.

If this be a proper interpretation of the minds of Gas-

ton Raoul and Chapin, both now being dead and un-

able to tell us differently, what does that opinion of

disapproval of the stock issue and the “giveaway”

feature of equity ownership have to do with the man-

ner which Chapin was obligated to view the securities

from an investment standpoint? Issues of non equity

ownership stock, with preferred dividends could legiti-

mately be considered by a trustee as a better trust in-

vestment than equity ownership stock, dependent upon

circumstances. In other words, Chapin may have felt

that Gaston and the other large equity owners may

have been cutting their own throats as to real owner-

ship in the Corporation; but as Trustee entrusted only

with relatively few shares of stock with no real owner-

ship say-so, also have felt that the interests of his bene-

ficiaries would be better served with preferred income.

Chapin could disagree with the wisdom of Gaston’s

plan in so far as Gaston was concerned, and still be

of the opinion that the new stock issue was best for

his beneficiaries. It is interesting to note that Chapin

also exchanged the few shares of common stock that he

and his wife owned for the $100.00 par value stock

about the same time the trust stock was exchanged.

Chapin handled his personal stock in the same manner

as he did that of the trust. If he intended to help

Gaston at the expense of the trust by the exchange he

also intended to injure himself.

There is no proof in this record, other than the

various interpretations placed by counsel on the Gaston

memorandum, that would indicate that Chapin ever

acted as Trustee without the best of motives. His

judgment and that of the other members of the trust

committee of the defendant bank may have been wrong,

as evidently it was; and they may not have given the

then present and future prospects of Cavalier their

proper due, as evidently they did not; but we are un-

able to find proof upon which we could base the conclu-

sion that Chapin had knowledge of his mistake and

failed to reveal such to the beneficiaries.

Therefore, in so far as the actions of Chapin are

concerned, we disagree with the Chancellor and do not

find that Chapin breached his duty of loyalty to the

trust.

We now turn to that portion of the Chancellor’s

holding wherein he held that since Gaston was a di-

rector of the Trustee bank he was also a Trustee of the

trust and any knowledge he had concerning the advisa-

bility of the exchange was imputed to the bank as

Trustee.

Gaston Raoul was not a trust officer of the bank.

He was a director and, as far as this record is con-

cerned, he did not act in an advisory capacity or

otherwise in the management of the trust department.

Nothing that he knew about his own Corporation was

ever acquired by virtue of his capacity as director of the

6 rene 1 oe

bank. There is no proof that Gaston Raoul ever as-

sumed to act in any manner in the capacity of a

Trustee.

The general rule as stated in Fletcher’s Cyclopedia,

Corporations, Permanent Edition, Vol. 3, §808 p. 72, is

as follows:

“Information not acquired in the course of his em-

ployment, or by or in performance of some duty

as agent or director owing to the corporation, is

not imputed to the corporation, because the di-

rector is under no obligation to communicate such

knowledge to the corporation, and the corporation

is not presumed to have been informed by the

director of what he ascertained in that transac-

tion. Accordingly, the knowledge of a member

of the board of directors of a banking corporation

cannot in law be attributed to the bank, where

it does not appear that at the time he was in any

way engaged in the bank’s business, or acting in

its behalf.

We are of the opinion that the general rule, as

above stated, is the rule of this State.

The Chancellor seemed to consider the tax advan-

tages to Gaston’s estate as the personal motive which

induced Gaston in some manner to sway the mind of

Chapin so that the shares held in trust would be ex-

changed. This theory will not bear scrutiny. Whether

or not the shares in trust were exchanged would have

no bearing on Gaston’s estate or the tax liability there-

on. Gaston had already parted with the ownership of

those shares, when, during his lifetime he placed them

in trust. They never could become part of his estate

and there would be no tax advantage to him one way

or the other.

Therefore, we hold that the Chancellor was in error

when he held that Gaston Raoul as Trustee had

breached his duty of loyalty.

All of what we have said before being true, coun-

sel for beneficiaries argues that the reasons we gave

in our first opinion for overruling the Chancellor on the

question of laches are good and sufficient reasons for

not applying the statute of limitations.

It should be noted that the Chancellor was of the

opinion that the statute of limitations was a good plea

in bar, but he was convinced that the Court of Appeals

would deny the application of the statute for the same

reasons it denied application of the rule of laches in the

first appeal and commented as follows:

“It is perhaps the duty of the Court to state, how-

ever, that, were it free to do so, it would sustain

the plea of the statute of limitations as insisted by

the defendant Bank.”’

In the first appeal of this case, the beneficiaries

of the trust had lost in the lower court on the basis

of the Chancellor sustaining the plea of laches. The

appeal was directed to the Chancellor's error in apply-

ing the doctrine of laches. Of course, the appellant-

beneficiaries did not raise the additional defense of the

statute of limitations. Nor did the Trustee on that

appeal raise the defense of the statute of limitations.

The first appeal was determined on the question of

laches with no mention of the statute of limitations.

The issue of the statute of limitations has been first

raised in this Court on this appeal. On remand, the

Chancellor was perfectly free to rule upon that issue

as he saw fit and it is our opinion that he should

have followed his inclinations and sustained the plea.

Laches is a defense peculiar to Courts of equity

and the doctrine is usually applied where no statute of

limitations governs the case. However, on occasions

the doctrine is applied to bar a stale claim prior to the

running of the statute of limitations; but it should be

applied in such cases when there is gross laches in the

prosecution of the claim. See Bogert on Trust, Section

169 (Hornbook series); State Ex Rel v. Abernathy

(1929) 159 Tenn. 175, 17 S.W. 2d 17; Carpenter v.

Wright (1929) 158 Tenn. 289, 13 S.W.2d 51.

Laches is actually based on equitable estoppel and

is dependent upon the facts and the equities of each

individual situation. State Ex Rel v. Abernathy, supra,

and Hamilton Nat. Bank v. Woods (1948 E.S.) 34

Tenn. App. 360, 238 S.W. 2d 109. Contrarywise,

there is little, if any, equity involved in a statute of

limitations. Statutes of limitations are arbitrary time

periods fixed by the Legislature to put at rest possible

litigation after the lapse of that period fixed by the

Legislature for the benefit of society in general in or-

der to promote certainty and repose.

Long delay alone in the prosecution of a claim is

insufficient for the application of the doctrine of laches.

The present circumstances of the parties must be con-

sidered. There must be actual aquiescence or that im-

plied from the circumstances of the case, in the conduct

of the defendant. Whether or not such exists is depen-

dent upon the facts. And whether the facts are suffi-

cient is dependent upon the Court applying those facts.

One Court may reach a different conclusion than another.

Initially, we could find no factual condition in the

record, as we reviewed it, that would put the complain-

ant-beneficiaries on reasonable inquiry or notice of the

complained of exchange which, therefore, tolled the

running”’ of the doctrine of laches.

However, the question of the reasonableness of the

opportunity to discover is not a matter for judicial con-

clusions when dealing with statutes of limitations as

they are statutes of repose. See and compare West v.

Moore (1952) 193 Tenn. 431, 246 S.W. 2d 74; Lee v.

Harris (1949) 188 Tenn. 373, 219 S.W. 2d 892. A plea

of laches and a plea of the statute of limitations are

not the same thing. As in this case, laches may not

bar the claim; but the statute of limitations will.

See and compare In Re Estate of Darwin (1973) 503

S.W. 2d 511.

Able counsel for the beneficiaries also argues that

even if all the foregoing is true, which by no stretch

of the imagination is conceded, the defendant bank as

Trustee was obligated to sue itself when it received the

corpus of the first trust on the death of Norman Raoul.

This position is based on the theory that when the

bank accepted the corpus from the old trust, it was

obligated to check the manner in which it had previ-

ously handled the first trust, and if irregularities were

discovered to sue the prior Trustee which happened to

be itself. Since the second trust was an express trust

and not terminated, the statute of limitations has not

yet begun to run against the Trustee as Trustee of the

second trust. We are cited to cases which involve

the duties of successor trustees. However, the bank

as Trustee under the second trust was not and is not

a successor trustee. Any cause of action for the mis-

management of the first trust belonged to the bene-

ficiaries thereof upon its termination and never became

the right or duty of the Trustee under the second trust,

which trust was not and is not the same as the first

trust.

For the reasons stated, we are of the opinion that

the claim of the beneficiaries is barred by the statute

of limitations and the Chancellor erred in not so hold-

ing. We do not reach the other Assignments of Error.

The result is that the suit will be dismissed.

The Court is of the opinion that in this case the

costs below and costs of appeal are to be adjudged

against the defendant bank.

So order.

Judge William P. Puryear, by designation of the

Supreme Court of Tennessee, took part in the hearing

of this appeal in the absence of Presiding Judge C. S.

Carney, Jr.

/s/ Nearn, J.

Nearn, J.

/s/ Matherne, J.

Matherne, J. (Concurs)

/s/ W. P. Puryear

Puryear, Sp. J. (Concurs)

COURT OF APPEALS

DECREE

Filed August 30, 1974

John A. Parker, Clerk

Hamilton Equity (#38441)

NORMA FRANCES RAOUL CLARK, et al,

AMERICAN NATIONAL BANK & TRUST

COMPANY OF CHATTANOOGA.

REVERSED & DISMISSED

This cause coming on to be heard upon a transcript

of the record from the Chancery Court of Hamilton

County, assignments of error, reply brief and argument

of counsel, upon consideration whereof the Court is of

opinion that in the decree of the Chancellor there is error.

It is therefore ordered and decreed by the Court

that the decree of the Chancellor be reversed, and that

this suit be dismissed.

Costs in the Chancery Court and in the Court of

Appeals are adjudged against the defendant, American

National Bank & Trust Company of Chattanooga, for

which execution may issue if necessary.

IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

Hamilton Equity

Norma Frances Raoul Clark, et al,

Original Appellants,

vs.

American National Bank and Trust

Company of Chattanooga,

Original Appellee.

ON PETITION TO REHEAR

(Filed November 6, 1974)

A petition to rehear, response thereto and a re-

sponse to the response have all been filed in this matter.

The petition to rehear filed by counsel for complain-

ant-appellants raises seven alleged grievances. Six of

those seven were heretofore thoroughly argued and

briefed by counsel and were considered by this Court

in its Opinion rendered August 30, 1974. Therefore,

they will not again be considered. See Lyman v. Ameri-

can Nat. Bank and Trust Co. (1960 E.S.) 48 Tenn. App.

328, 346 S.W. 2d 289.

However, the petition does raise the issue of the

alleged improper reliance of counsel for the Bank and

this Court on the statute of limitations as set out in

T.C.A. § 28-309. The gist of the complaint is that by

their pleadings, the Bank relied specifically on T.C.A.

§ 28-310 with no mention therein of the limitation as

set out in T.C.A. § 28-309.

The record reveals that the pleadings of the Bank

do not specifically mention T.C.A. § 28-309. The record

does further show that nowhere has the Bank's right to

rely on T.C.A. § 28-309 ever been questioned until the

petition to rehear was filed. The record further reveals

that T.C.A. § 28-309 was the issue below and was con-

sidered by the Chancellor as he specifically mentions

the six year statute of limitations in his Opinion which

is part of the record. The argument below and the issue

and argument on appeal was the interpretation and ap-

plicability of the limitations as set out in T.C.A. § 28-

309. The Bank’s inability to rely on the statute for fail-

ure to specifically plead same is an issue that has

never before in this cause been raised until this time.

The limitation as set out in T.C.A. § 28-309 has been

at all times heretofore considered by the parties, the

Chancellor, and this Court without objection by com-

plainant-appellants. The objection comes too late.

It is a well established rule that a litigant will not

be permitted to act on one theory in the Trial Court

and switch to another on appeal. Thomas v. Noe (1956

E.S.) 42 Tenn. App. 234, 301 S.W. 2d 391. The rule

is applied with double force when the switch takes place

on a petition to rehear.

The petition is denied with costs adjudged against

complainant-appellants.

Nearn, J.

Matherne, J. (Concurs)

Puryear, Sp. J. (Concurs)

IN THE TENNESSEE COURT OF APPEALS

AT KNOXVILLE

(Filed Nov. 6, 1974)

(John A. Parker, Clerk Court of Appeals)

Hamilton County Chancery Cause No. 38441

NORMA FRANCES RAOUL CLARK, et al,

Original Appellants,

vs.

AMERICAN NATIONAL BANK & TRUST

COMPANY OF CHATTANOOGA,

Original Appellee.

PETITION TO REHEAR DENIED

This cause coming on to be heard upon a petition to

rehear, response thereto and a response to the response,

upon consideration whereof the Court is of the opinion

that the petition is not well taken and must be denied:

Therefore, it is adjudged and decreed that the peti-

tion to rehear be and hereby is denied at petitioners

costs.

Said costs incidental to the petition to rehear and

adjudged against the petitioners Norma Frances Raoul

Clark, et al, and surety Warren K. Clark, for which let

execution issue.

Nearn, J.

Matherne, J.

Puryear, J.

IN THE SUPREME COURT OF TENNESSEE

AT KNOXVILLE

HAMILTON EQUITY

NORMA FRANCES RAOUL CLARK and |

ANNE ELIZABETH RAOUL,

Plaintiff-Petitioners,

vs.

AMERICAN NATIONAL BANK and TRUST

COMPANY OF CHATTANOOGA,

Defendant-Respondents. j

ORDER DENYING PETITION FOR WRIT

OF CERTIORARI

(Filed July 7, 1975)

After a consideration of the petition, briefs of coun-

sel and the entire record, this Court is of the opinion

that the Court of Appeals reached the correct conclu-

Sion.

The petition for writ of certiorari is accordingly

denied.

Per Curiam

SUPREME COURT OF TENNESSEE,

AT KNOXVILLE

SEPTEMBER TERM 1974

DECREE

(Filed July 7, 1975)

(John A. Parker, Clerk)

Hamilton Equity

(No. 38441)

NORMA FRANCES RAOUL CLARK and

ANNE ELIZABETH RAOUL,

vs.

AMERICAN NATIONAL BANK and TRUST

COMPANY OF CHATTANOOGA.

WRIT DENIED

This cause coming on to be heard upon a tran-

script of the record from the Chancery Court of Hamil-

ton County, opinion and Decree of the Court of Ap-

peals, petition for certiorari, assignments of error and

briefs of counsel, upon consideration whereof the Court

is of opinion that the petition for writ of certiorari is

not well taken, and said petition for certiorari is denied.

The petitioners, Norma Frances Raoul Clark and

Anne Elizabeth Raoul, and surety, Warren K. Clark,

will pay the costs incident to filing petition for cer-

tiorari, for which let execution issue.

Per Curiam

IN THE SUPREME COURT OF TENNESSEE

AT KNOXVILLE

HAMILTON EQUITY

NORMA FRANCES RAOUL CLARK and

ANNE ELIZABETH RAOUL,

Plaintiff-Petitioners,

vs.

AMERICAN NATIONAL BANK and TRUST

COMPANY OF CHATTANOOGA,

Defendant-Respondents.

MEMORANDUM OPINION ON PETITION

TO REHEAR

(Filed August 11, 1975)

Petitioners have filed a petition to rehear.

We are asked to reconsider and recede from our

prior decision to deny the writ of certiorari on two

grounds which may be summarized as follows:

a. Petitioners were deprived of their constitutional

right to have their petition considered by the full Court.

b. The failure to apply the rule of Teeters v. Cur-

rey, 518 S.W.2d 512 (Tenn.1975) constitutes a denial

of their rights under Article 1, Sections 8 and 17 of

the Constitution of Tennessee and the Fourteenth

Amendment to the Constitution of the United States.

Article 6, Section 2 of the Constitution of Tennessee

provides that ‘‘(t)he concurrence of three of the judges

shall in every case be necessary to a decision.

Section 16-301 T.C.A. contains substantially the

same provision.

In the case of Radford Trust Company v. Lumber

Company, 92 Tenn. 126, 21 S. W. 329 (1893), this

Court, after reciting the constitutional requirements.

held:

The same number which may render a judgment

constitute a quorum of the Court.

It is settled law that the concurrence of three

judges of this Court produces a valid judgment. Pierce

v. Tharp, 224 Tenn. 328, 461 S.W.2d 950 (1970).

In this case three judges of this Court, following

substantial consideration, unanimously determined that

the writ would be denied.

We fully considered Teeters, supra, and concluded

that it had no relevance to the issues in this contro-

versy.

The petition to rehear is respectfully denied.

/s/ Henry

Henry, J.

Concurrences:

Fones, C. J.

Harbison, J.

Cooper, J. and

Brock, J. did not participate

SUPREME COURT OF TENNESSEE,

AT KNOXVILLE

SEPTEMBER TERM, 1974

(Filed August 11, 1975)

(John A. Parker, Clerk)

Hamilton Equity

(No. 38441)

NORMA FRANCES RAOUL CLARK and

ANNE ELIZABETH RAOUL,

vs.

AMERICAN NATIONAL BANK AND TRUST

COMPANY OF CHATTANOOGA.

DECREE

(Filed September 29, 1975)

PETITION TO REHEAR DENIED

This cause came on to be further heard on the

Petition to Rehear, upon consideration whereof the

Court is of the opinion the Petition to Rehear is not

well taken and should be denied.

It is, therefore, ordered and decreed by the Court

that the Petition to Rehear is denied.

Costs on the Petition to Rehear will be paid by

petitioners, Norma Frances Raoul Clark and Anne Eliza-

beth Raoul, and surety, Warren K. Clark, for which

let execution issue.

Joseph W. Henry, J.

William H. D. Fones, C.J.

William J. Harbison, J.

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