Petition — First Alabama Bank of Montgomery, N.A. v. Martin

Office-Supreme Court, U.S.

82-1571 FILED

MAR 24 1983

No.

ALEXANDER L. STEVAS,

K

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

First ALABAMA BANK OF Montcomery, N.A.,

| Petitioner,

| VS.

CHARLOTTE KYLE MARTIN, KATHLEEN GERSON

GLoriA McKEOon, and ViRGINIA G. WELDON,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ALABAMA

M. ROLAND NACHMAN, JR.

P. O. Box 668

Montgomery, AL 36101

(205) 834-2222

Counsel of Record

Or COUNSEL: RoBert E. Steiner, III

P. O. Box 668

STEINER, CRUM & BAKER Montgomery, AL 36101

P. O. Box 668

Montgomery, AL 36101 HenrY E. SIMPSON

WILLIAM G. SOMERVILLE, JR.

LANGE, SIMPSON, ROBINSON 1700 Ist Alabama Bank Bldg.

& SOMERVILLE Birmingham, AL 35203

1700 Ist Alabama Bank Bldg.

Birmingham, AL 35203 Attorneys for Petitioner

St. Louis Law Printing Co., Inc., 411 No. Tenth Street 63101 314-231-4477

QUESTIONS PRESENTED FOR REVIEW'

The named beneficiaries of four trusts which held par-

ticipating units in two common trust funds were permitted to

bring a state class action against the common fund trustee—a

national banking association—on behalf of all beneficiaries of

some 1,250 trusts which had participating units in these com-

mon funds from 1971 through 1978, and to question the

prudence of certain common fund investments. Judgment was

entered against the trustee for $2,600,000 in money damages

consisting of the difference between the acquisition and sales

prices of questioned securities. Interest on this sum was com-

pounded. The state’s highest court did not require any notice of

this state class action proceeding to be given to any putative

class members, and none was given.

1. Does this decision of that court violate the Fourteenth

Amendment due process guaranties of the beneficiaries of these

1,250 participating trusts and of the trustee, in conflict with

holdings of this Court and of federal courts of appeal; and for

this reason, should the state class action proceeding be dismissed?

2. Does due process guarantee to the trustee of these 1,250

trusts the right to judicial accountings to ascertain the financial

impact, if any, of these common fund investiments on the in-

dividual trusts?

3. Is the judgment below impermissible state judicial in-

terference with a national bank?

' The parties to the proceedings in the Supreme Court of Alabama

were Petitioner, First Alabama Bank of Montgomery, N.A.

(hereinafter ‘‘Bank’’), a national banking association, and

Respondents, Martin, Gerson, McKeon and Weldon, who sued on

their own behalf and on behalf of all beneficiaries of trusts, under

which Petitioner (hereafter ‘‘Bank’’) was trustee, a portion of the cor-

pus of which was invested in two common trusts funds—a bond fund

and an equity fund—during the period 1971 through 1978.

iii

TABLE OF CONTENTS

Page

Questions Presented for Review. ........0 00000 cucu i

TT SCc Gd ae ae sesadee0sevevervecce sans i(fn. 1)

ESC eee ree iii

i bi cclebhdadtcstcaccereevae ses iv

ES ]

TE 2

Statutes and Constitutional Provisions ............... 2

UE UOEED veces cccccsicuncccccccncccces 3

mensons for Granting Writ .........ccccccccsccvcees 10

ae cake ee kucha weed seevesocasi’ A-]

Sr A-27

ee ad ola ees hae) 4 0sessccennectesise A-33

a re eee TE eer eee A-35

ee a eas wu kab aeaeveseeveesiacceanae A-43

ac cah 5 5-450 00s bes sescaresace ss A-55

ae ca cb ade sme deeteseeveeas A-59

CN ee cic n ses tersiteessacesvevesce A-67

iv

TABLE OF AUTHORITIES

Cases

Armstrong v. Manzo, 380 U.S. 545 (1965) .........55. 18

Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir.

sk 60556 5 kha RdETR OVENS ROT ERCeRAaw eI 12

Century 21 v. Alabama Real Estate Com., 401 So.2d 764

ROA WER eat Vos buss ea vbeeeeibaeyeesaseseris &

Chicago v. A.T. &S. F. R. CO., 357 U.S. 77 (1958) .... 8

Crowder v. Lash, 687 F.2d 996 (7th Cir. 1982)......... 12,14

Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2nd Cir.

DEG ah che eehden seer kon cekeeeeuerstsrenes 15

Eisen v. Carlisle & Jacquelin, 417 U.S. 156(1974)...... 3,8

10,11,12,13,16,17,19

Frank v. Teachers etc. Ass’n., 71 Ill.2d 583, 376 N.E.2d

2 FeO Hs SEES ARES he aera 16

Frankel v. City of Miami Beach, 340 So.2d 463 (Fla.

— a PAPO Dm ar er rey 16

Federal Reserve System v. Investment Company Institute,

SG EE i as cock dceeece tastbasiaehess 4

First Alabama Bank of Montgomery, N.A. v. Martin,

PR a ere icra ere 3

First Baptist Church v. Citronelle-Mobile Gathering,

nc... 409 $0.26 727 CAIN: IGE] a ccc cust ecvanns 3

Grigg v. Michigan Nat’! Bank, 72 Mich. App. 358, 249

ee Le I eee ae eee rrr ee 16

Hanson v. Denckla, 357 U.S. 235 (1958).............. s

In Re Hotel Telephone Charges, 500 F.2d 86 (9th Cir.

or ee eee Tree Or eT rere 15

Johnson v. General Motors Corp., 598 F.2d 432 (Sth Cir.

a, PRESET ECePEREPer LTTE Creer ieee 11,13,14

Katzinger v. Chicago Metallic Corp., 329 U.S. 394 (1947) 13

Lane v. Wilson, 307 U.S. 268 (1939) .......cccssceees 10

MacGregor v. Westinghouse Co., 329 U.S. 402 (1947) .. 13

Mercantile Nat’l Bank v. Langdeau, 371 U.S. 555 (1963) 18

Mullane v. Central Hanover Bank, 339 U.S. 306 (1950) . 3,8

10,11,12,13,16,17,19

National Lake Development, Inc. v. Lake Tippecanoe

Owners Ass’n., 417 So.2d 655 (Fla. 1982) ........ 16

Parrett: ¥. Tevier, 451: U.S. S27 (ISS). occ ccccccvcens 18

Penson v. Terminal Transport Corp., 634 F.2d 989 (Sth

SC AU SeeE Ee NERES RAE REO RRR WAR eee 12,14

Pittsburg v. Alco Parking Co., 417 U.S. 369 (1974) .... 10

Schaffner v. Chemical Bank, 339 F. Supp. 329 (S.D.N.Y.

PAA SAS Air PIR wey oes a eee 7

Simer v. Rios, 661 F.2d 655 (7th Cir. 1981)............ 14

William E. Arnold Co. v. Carpenters District Counsel,

es aos ka tele bbe mate auae sme 10

Williams v. State of Louisiana, 350 So.2d 131 (La. 1977) 16

Windham v. American Brands, Inc., 565 F.2d 59 (4th

Nes Wa cide eh ka hin auat wa cakes eeu 15

vi

Constitutional Provisions

Amendment XIV, United States Constitution ......... 2,5,17

Statutes and Rules

Pe PEMTNEE babe ce cde ter nvedacccsccveverese 2

ii pac ehudkeevecsngnsscsnnases 3

Dee PUN COE UTS ovccrcccsecccccccccenes 4

Rule 23, Federal Rules of Civil Procedure ............ 3,17

Rule 23, Alabama Rules of Civil Procedure .2,3,6,8,13,14,15,17

Uniform Class Actions Act, § 7(b) and (d) .........065 16

Miscellaneous

Newberg on Class Actions, § 1210(b), Supp. .......... 17

Ill Scott on Trusts, 3 Ed., § 260, pp. 2217-18. ......... 17

Restatement 2d of Trusts, § 260 ...........0..0.000005. 17

No.

IN THE

Supreme Court of the United States

OcTOBER TERM, 1982

First ALABAMA BANK Or MontGomery, N.A.,

Petitioner,

VS.

CHARLOTTE KyLe MARTIN, KATHLEEN GERSON

GLoriA McKEOon, and VirGIniA G. WELDON,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE SUPREME COURT OF ALABAMA

Petitioner prays that a writ of certiorari issue to review the

opinion and judgment of the Supreme Court of Alabama

entered in these proceedings on August 20, 1982 and January

14, 1983.

OPINION BELOW

The opinion of the Supreme Court of Alabama of August 20,

1982, is unreported and appears as Appendix A; the order of

that Court of January 14, 1983, which modified and extended

its original opinion, overruled Petitioner’s application for

rehearing and granted Respondents’ application for rehearing is

unreported and appears as Appendix B; its order staying judg-

ment pending proceedings on Certiorari here appears as Appen-

dix C; its opinion dismissing an earlier petition for interlocutory

=

review is reported at 381 So.2d 32 and appears as Appendix D;

the judgment of the trial court of August 19, 1981, appears as

Appendix E; its order of June 24, 1981 regarding the prudence

of certain investments appears as Appendix F; and its order on

class action determination of July 26, 1979 appears as Appendix

G.

JURISDICTION

The judgment of the Supreme Court of Alabama was entered

on August 20, 1982; its judgment of January 14, 1983, exten-

ding and modifying its opinion of August 20, 1982 and denying

Petitioner’s and granting Respondents’ application for rehear-

ing was entered on January 14, 1983. This Petition for Cer-

tiorari was filed within 90 days after that date. This Court’s

jurisdiction is invoked under 28 U.S.C. § 1257(3).

STATUTORY AND CONSTITUTIONAL PROVISIONS

United States Constitution, Amendment Feurteen:

**No state shall make or enforce any law which shall

abridge the privileges or immunities of citizens of the

United States; nor shall any state deprive any person of

life, liberty, or property, without due process of law; nor

deny to any person within its jurisdiction to equal protec-

tion of the laws.”’

Rule 23, Alabama Rules of Civil Procedure appears in Ap-

pendix H.

a ae

STATEMENT OF THE CASE

Respondents brought this action as a class action’ in the Cir-

cuit Court of Montgomery County, Alabama on behalf of the

more than 1250 beneficiaries of trusts, under which Petitioner, a

national banking association (hereinafter ‘‘Bank’’) was trustee,

a portion of the corpus of which had been invested in two so-

called common trust funds of which Bank was also trustee—a

bond fund and an equity fund; and asserted losses alleged to

have arisen out of certain alleged imprudent investments in the

two common funds, The common trust fund device is authorized

* Alabama's class action Rule 23, and subparts, are identical to

those of Rule 23 of the Federal Rules of Civil Procedure. First Baptist

Church v. Citronelle-Mobile Gathering, Inc., 409 So.2d 727 (Ala.

1981). Respondents first sought class action certification under all

subdivisions of rule 23, but amended to proceed only under Rule

23(b)(1)(A) and (B) and 23 (b)(2), Alabama Rules of Civil Procedure.

The trial court, over Bank’s objection, so certified the class action on

July 26, 1979, but certified, as well, an interlocutory appeal to the

Supreme Court of Alabama, the court below, pursuant to Rule 5 of

the Alabama Rules of Appellate Procedure, which is akin to 28

U.S.C. § 1292(b). The court below, however, declined to accept this

interlocutory appeal because the trial court’s class action order was

‘tinherently provisional’’ and thus did not involve ‘‘controlling ques-

tions of law."’ First Alabama Bank of Montgomery, N.A. v. Martin,

381 So.2d 32, 35 (Ala. 1980). As will more fully appear, Bank raised

before the trial court in pleadings; at the hearing on class action cer-

tification; in the court below on brief in support of its attempted in-

terlocutory appeal (pp. 45 and 46); and in its brief and argument in the

court below on appeal from the final order of the trial court, the ques-

tion presented for review here, namely, that the trial court and the

court below violated due process guaranties when they permitted this

class action—seeking predominantly enormous money damages—to

proceed to conclusion without any notice whatever to the beneficiaries

of the more than 1250 trusts comprised in the putative class action.

The contrary holdings of this Court in Mullane v. Central Hanover

Bank, 339 U.S. 306 and Eisen v. Carlisle & Jacquelin, 417 U.S. 156,

were cited to the trial court and the court below in support of Bank’s

contentions.

a ee

by regulation of the Comptroller of the Currency and legislation

in many states, including Alabama, § 5-12A, et seq., Alabama

Code 1975, in order that donors or testators of moderately sized

trusts may obtain the benefits of broader planning, diversifica-

tion of risk, economy of management and the sharing of in-

come, capital gains, losses and expenses which are available to a

trust with a larger investment portfolio. If Bank, as trustee of an

individual trust, elects to invest in such a common trust fund, it

purchases participating units in the common trust fund, just as,

if so authorized and desired, it might purchase shares in any

number of mutual investment funds, e.g. Massachusetts In-

vestors Trust, or shares of stock in a corporation, e.g. General

Motors. Bank acts, literally, as an investment company.’ The

action below sought to draw in question the prudence of certain

investments made by Bank in the common bond and equity

funds during the period 1971 through 1978.‘

The class certified by the court below encompasses more than

1,250 trusts of which Bank acted as trustee and 15 as executor.

Bank acted as co-trustee with more than 131 other trustees in

the administration of these trusts, and as co-executor with 6

other persons; and acted under the investment control of at least

140 other persons. There are more than 1,800 known trust

beneficiaries;’ and approximately 2,500 known beneficiaries of

’ Federal Reserve System v. Investment Company Institute, 450

U.S. 46, 55-56:

“*These common trust funds administered by banks would be

regulated as investment companies .. . . were they not exempted

¢ As will more fully appear, 91% of the questioned investment trans-

actions occurred prior to December 31, 1974. (R. li, 2687)

’ There undoubtedly are unknown beneficiaries (regardless of in-

vestigation); minors; incompetents; known beneficiaries (but iden-

tifiable only through the monumental burdens of identifying persons

described in trust instruments as e.g., ‘‘spouse’’, ‘‘child’’, ‘‘next of

kin’, ‘‘heir’’, ‘brother or sister’ or other relative etc.).

—

pension or profit sharing trusts. The known beneficiaries of .

these several and varied trusts are residents of 23 states, the

District of Columbia and Puerto Rico. Measurement of trust in-

vestment performance involves a detailed reconstruction of the

financial history of each trust—an exercise which requires ap-

proximately 1,250 separate accounting procedures.

After the trial court’s dismissal of its interlocutory challenge

to the class action certification which had urged, among other

things, that a class action would be wholly unmanageable

because more than 1250 separate accountings would be re-

quired, Bank—faced with such a class action—then filed a

counterclaim seeking such an accounting. Bank asserted that a

denial of its constitutional right to secure such an accounting

would deprive it of property without due process of law and

deny equal protection of the laws in violation of the Fourteenth

Amendment of the Constitution of the United States.’

The trial court struck the counterclaim ‘‘without prejudice to

the rights of [Bank] to file and prosecute separate actions re-

questing the same relief.’’ (R.II, 155) The court below, noting

Bank’s insistence that the dismissal of its counterclaim for an

accounting violated its asserted constitutional guaranties, sum-

marily disposed of these constitutional issues with the observa-

tion that the trial court ‘‘had the discretion to make necessary

orders for the efficient disposition of class actions [and] ob-

* (R. 172-176) The counterclaim also sought, among other things, a

prompt identification of class members and a direction of notice to

them; the appointment of guardians or guardians ad litem to protect

the interests of minors, unborn, incapacitated, contingent and uncer-

tain beneficiaries; and an accounting in the form of a judicial deter-

mination of the permissibility of the investments made by Bank as

trustee of trusts of which the named plaintiffs and all class members

were beneficiaries during the period in question.

im 6 =

viously felt that to allow the counterclaim would make the class

unmanageable.’’ (Emphasis supplied; App. A, Ms. 16).

Bank had argued to the court below that the named plaintiffs

(Respondents here) could obtain complete relief in orderly and

traditional accounting proceedings in which they could com-

plain, among other things, that none of the their trust funds

should have been invested in the bond or equity fund. And,

Bank earlier attempted to show these courts that the putative

class action was predominantly, if not exclusively for money

damages, and should proceed, if at all, under the requirements

of Rule 23(b)(3), Alabama Rules of Civil Procedure.

The proceedings below demonstrated that Bank’s analysis

was correct. The trial court, after receiving a majority advisory

verdict from a jury, decided that the purchase or sale of certain

designated bond and equity fund securities had been imprudent;

ordered Bank to pay $1,226,798 into the bond fund and

$1,426,254.88 into the equity fund—the difference between the

purchase and sales prices of specified bond and equity

securities; and ordered Bank to pay compound interest on these

sums from the date of sale at the highest Treasury Bill rate. The

Supreme Court of Alabama below, after rehearing, affirmed.

Moreover, the trial court’s order of August 20, 1981, affirmed

without elaboration by the Supreme Court of Alabama,

directed Bank to ‘‘recalculate and restate each quarterly valua-

tion of principal [in the bond and equity funds] as if [the

securities held to have been imprudently acquired or sold] had

neither been purchased nor sold;’’ and Bank was further

ordered to distribute promptly to ‘‘the owners of participating

units, including those participating units previously withdrawn,

any principal amounts due on the basis of such restated quarterly

statements.’’ (R. Il 1315, © 9)

The courts below thus ordered a distribution of money

damages to the class members without any direction whatever as

~~

to how these damages should be computed, let alone related to

any actual injury which any ‘‘owner’’ may have suffered.’

’ Trusts which hold participating units in the common funds may

purchase or sell them only at quarterly valuation dates. Income is

distributed per participating unit on a quarterly basis. The value of the

participating units varies from day to to day in proportion to the

variation in the valuation of all assets held by the two common funds.

Thus there is an enormous variation in the investment experience of

each individual trust which invests in the common funds—a variation

which depends upon the purchase and sales dates of participating

units, and their valuations at these times.

kespondent Gerson’s trusts had a gain in equity fund units; pur-

chased bond fund units at nine separate times at nine different prices;

and sold them on nine occasions at different prices. These prices dif-

fered also from the purchase and sales prices for the other three

respondents. (R. 575-584)

Only two respondents testified and neither was able to relate any in-

vestment experience in the bond and equity funds to any alleged im-

prudent investment of assets of those funds. (R. Il, 1591-96; 1606;

1611; and 1621) Respondents conceded that if the distribution order

below is ‘‘divided among the present holders of participating units,

such beneficiaries would receive an unjustified windfall profit, while

others whose funds had actually been lost but who had withdrawn

before the recovery would not participate in the recovery."’ (Brief of

Respondents below, pp. 83 and 21) Plainly, the impact of Bank’s pe’-

formance as common fund trustee on the individual trusts of the clas:

members cannot be measured without a detailed reconstruction of the

financial history of each trust—an exercise which requires approx-

imately 1250 separate accounting procedures. This is why, indeed, no

other court has ever permitted a class action such as the one certified

below. Schaffner v. Chemical Bank, 339 F. Supp. 329, 334-336

(S.D.N.Y. 1972), is precisely in point:

‘*To the factual and legal complexities presented by the issues of

liability in each trust must be added the further variations in

issues of damages. The theories on which plaintiff seeks

damages for all members of her class will require the minute ex-

amination of the transactions undertaken in each portfolio.”’

—_— Pe

This award of monetary damages to individual class

members—if the judgment below stands—should be binding on

them, and foreclose any subsequent action based on matters

which were, or could have been litigated in this action." The

result would be that class members, who have never been ac-

corded their due process rights to notice, are so affected; or, if

they are not so bound, then Bank has suffered a serious and

manifest injustice of constitutional proportions. But, as already

noted, the courts below certified and tried a class action without

notice to the beneficiaries of the more than 1250 trusts which in-

vested in the bond and equity funds from 1971 through 1978,

thus depriving them of an opportunity to opt-out or to be

represented by counsel of their choice. This omission squarely

violates the due process guaranties enunciated by this Court in

Mullane v. Central Bank, 339 U.S. 306 and Eisen v. Carlisle &

Jacquelin, 417 U.S. 156, 173.’

* Century 21 v. Alabama Real Estate Com., 401 So.2d 764 (Ala.

1981).

* Bank has a ‘‘direct ad personal interest in the outcome”’ of the

issue of whether the judgment below binds more than 1,000 unnotified

trust beneficiaries. Thus Bank has clear standing to seek review of that

question here. Hanson v. Denckla, 357 U.S. 235, 244-45; Chicago v.

A.T. & S. F. R. Co., 357 U.S. 77, 83.

Bank repeatedly raised this constitutional error below and insisted

that the notice to class members required by the constitutional

guarantees of due process cannot be avoided by the attempted legerde-

main by transforming a 23(b)(3) case into a 23(b)(1) or (2) case. For

example, counsel for Bank argued to the trial court (R. 1398):

**We heard, ... that the Court can now ignore notice because the

plaintiffs have decided that they can amend their Complaint and

drop a claim that this is a class action under Rule 23(b)(3), and,

therefore, not have to give any notice. This isn’t correct. The

Supreme Court of the United States in Mulane v. Central

Hanover Bank in 339 U.S., which is cited and quoted extensively

in the leading Eisen v. Carlisle and Jacquelir case has held that

they can’t, ... that personal notice to ai those who can

reasonably be ascertained has to be given. This is a matter of due

process under the Constitution of the United States....’’

a en

Although this Court there made plain that in proceedings

which questioned common fund investments, due process man-

dated this notice to beneficiaries of trusts which had invested in

participating units of these common funds, the Supreme Court

of Alabama below held that such notice could be avoided at a

state trial judge’s discretion:

**First Alabama states that the trial court, by certifying the

class under Rule 23(b)(1) and (b)(2), without giving notice

to the beneficiaries involved, deprived those beneficiaries

of the opportunity to opt-out or to be represented by

counsel of their choice, thereby violating the due process

guarantees of Eisen v. Carlisle & Jacquelin, 417 U.S. 156

(1974), and Mullane v. Central Hanover Bank & Trust

Co., 339 U.S. 306 (1950). The appellants further contend

that the plaintiffs are seeking primarily money damages

and that it was error to allow them to proceed under Rule

23(b)(1) and (b)(2) instead of Rule 23(b)(3). We do not

agree.

**Neither Eisen nor Mullane dealt with notice under Rule

23(b)(1) or (b)(2). In fact, Rule 23(c) provides that notice is

required only in class actions certified under Rule 23(b)(3).

Rule 23(b)(1) and (b)(2) class actions have been held not to

require notice.’’ (Emphasis by the Court)'°

'© App. A, Ms. 14.

«ia

REASONS FOR GRANTING THE WRIT

1. The Alabama Court Of Last Resort Has Decided A Federal

Constitutional Question In A Way Which Conflicts With The

Decisions Of This Court In Mullane v. Central Hanover Bank,

339 U.S. 306 And Eisen v. Carlisle & Jacquelin, 417 U.S. 156.''

Mullane heid that a New York bank, in the course of a

statutory accounting for its investments in common funds, must

send individual notice to all beneficiaries of trusts which had in-

vested in participating units of the common funds whose names

and addresses could be ascertained through reasonable effort.

This Court there, and in the later case of Eisen v. Carlisle and

Jacquelin, 417 U.S. 156, 173, made it plain that this notice to

beneficiaries could not be withdrawn at a trial judge’s discre-

tion; it is mandated by due process guaranties.

The notice requirement of Mullane, in a class action which

seeks money damages because of alleged imprudent investments

»y acommon fund trustee, is a due process guaranty. The con-

titutional mandate of notice cannot be avoided by a shifting of

state class action labels. A fortiori, state courts may not deny

constitutional rights in order to make an ‘‘unmanageable’”’ class

action manageable. In the venerable words of Justice

Frankfurter, the Constitution of the United States ‘‘nullifies

sophisticated as well as simple minded modes of

discrimination.’’'?

'' This is a classic and strong reason for the grant of certiorari. Rule

17.1(c) of the Rules of this Court; William E. Arnold Co. v.

Carpenters District Council, 417 U.S. 12, 14 (‘We granted certiorari

to decide whether the holding of the Florida Supreme Court was con-

sistent with decisions of this Court...’’); Pittsburg v. Alco Parking

Corp., 417 U.S. 369, 371-2 (‘‘Because the decision appeared to be in

conflict with the applicable decisions of this Court, we granted cer-

tiorari and we now reverse the judgment.’’)

'? Lane v. Wilson, 307 U.S. 268, 275.

Indeed, as this Court taught in Eisen v. Carlisle & Jacquelin,

417 U.S. at 173-74, the Mullane decision was the constitutional

reason for the 1966 revision of the federal class action rules so as

to require notice in cases substantively similar to Mullane:

“The Advisory Committee’s Note to Rule 23 reinforces

this conclusion. See 39 FRD 69, 98 (1966). The Advisory

Committee described subdivision (c)(2) as ‘not merely

discretionary’ and added that the ‘mandatory notice pur-

suant to subdivision (c)(2) . . . is designed to fulfill re-

quirements of due process to which the class action pro-

cedure is of course subject.’ Id. at 106-107. The Committee

explicated its incorporation of due process standards by

citation to Mullane v. Central Hanover Bank & Trust Co.,

(Cit.) and like cases.

**In Mullane the Court addressed the constitutional suffi-

ciency of publication notice rather than mailed individual

notice to known beneficiaries of a common trust fund as

part of a judicial settlement of accounts. The Court

observed that notice and an opportunity to be heard were

fundamental requisites of the constitutional guarantee of

procedural due process.”’

The impact of the constitutional error below is enormous and

pervasive. Either unnamed class members who have never

received notice are bound by the judgment below under prin-

ciples of res judicata; or Bank, required to pay millions, will

have secured res judicata protection only as to the four named

plaintiffs.'’

'? As will be noted, at least three federal courts of appeals have held

that, regardless of label, where monetary damages are sought and

made available in a class action, notice is not discretionary but re-

quired, and an individual class member's later suit for damages will

not be barred by res judicata if notice in the class action is inadequate,

let alone nonexistent. Johnson v. General Motors Corp., 598 F.2d

—

Regardless of labels, there can be no serious question that the

class action below sought primarily money damages; and the

judgments below order payment of money damages, albeit

unable to specify recipients, or amounts, or to relate damages to

any injury suffered.

The rationale of the distinction between (b)(1) and (b)(2)

cases - where notice is not required and there is no right to opt-

out - and (b)(3) cases where there must be notice and right to

opt-out, reflects distinctions, with obvious due process over-

tones, based upon the degree of cohesiveness or unity of the

claims, and, conversely, the absence of disparity, separateness

or conflict among claims. If one will be affected by an adjudica-

tion regardless of whether one opts-out of the class litigation -

the (b)(1) or (b)(2) type class action - then due process does not

require notice and an opportunity to remove ones self from

litigation in order to avoid its binding, res judicata, effect. In

contrast, however, when the recovery of money damages is

sought, relief may be awarded in a manner which distinguishes

among individual class members, and these members, therefore,

have a right to notice and to exclude themselves from a lawsuit.

See, Penson v. Terminal Trensport Co., 634 F.2d 989, 993-4

(Sth Cir. 1981) and authorities there cited.

The judgment below erred as a matter of constitutional law in

permitting this class action to proceed to judgment without

notice to the individual class members, in square conflict with

the mandates of due process as enunciated by this Court in

Mullane v. Central Hanover Bank, 339 U.S. 306 and Eisen v.

432, 438 (Sth Cir. 1979); Penson v. Terminal Transport Corp., 634

F.2d 989, 994-995 (Sth Cir. 1981); and Crowder v. Lash, 687 F.2d 996,

1008 (7th Cir. 1982). The Eleventh Circuit has adopted as its law all

relevant holdings of the Fifth Circuit. Bonner v. City of Prichard, 661

F.2d 1206 (11th Cir. 1981).

Carlisle & Jacquelin, 417 U.S. 156. This failure to give notice re-

quires, as in Eisen, 417 U.S. at 179, a dismissal of the class ac-

tion.'*

2. Federal Courts Of Appeals Have Decided A Federal Con-

stitutional Question In A Way In Conflict With The Decision

Of The Supreme Court Of Alabama Below.’

The Fifth Circuit in Johnson v. General Motors Corp., 598

F.2d 432, 438 (1979), held that even in a 23(b)(2) action, when

both monetary and injunctive relief are sought, notice is man-

datory if absent class members are to be bound. Citing'* Eisen

v. Carlisle & Jacquelin, 417 U.S. 156 at 474 and Mullane v. Cen-

tral Hanover Bank, 339 U.S. 306, it held:

'* Notice now cannot cure this constitutional infirmity. Although

this attempted class action covers the period 1971-78, only investments

in 30 specified securities have been questioned; and 91% of these in-

vestment transactions occurred before December 31, 1974 (R. II,

2687). Yet the judgment below purports to bind all beneficiaries of

trusts which bought participating units in the common funds as to all

investment transactions (including acquisitions of the participating

units themselves) from 1971 through 1978—without any notice; and

without an opportunity to get out of the class action, or to be

represented by other counsel, or to question other transactions, or to

assert any financial injury to themselves. Conversely, if these more

than 1,250 unnotified beneficiaries are not so bound, the Bank will

have been required to pay several millions of dollars in damages to

bind only the four named plaintiffs who have not even sought to prove

measurable financial damages to them resviting from the questioned

common fund transactions.

'' This is an established reason for review on certiorari. Rule

17.1(b) of the rules of this Court; Katzinger v. Chicago Metallic

Corp., 329 U.S. 394, 398 (‘‘We granted certiorari because of a conflic-

ting decision [between the Pennsyivania Supreme Court and the

Seventh Circuit Court of Appeals}’’); MacGregor v. Westinghouse

Co. 329 U.S. 402.

'* Cited passim. For example (598 F.2d at 436):

**In Eisen, the Supreme Court endorsed the Advisory Commit-

tee’s position that the notice provisions of Rule 23 must be inter-

preted so as to bring the conduct of class litigation within the

minimum requisites of due process. 417 U.S. 173-75."’

—"

‘Before an absent class member may be forever barred

from pursuing an individual damage claim, however, due

process requires that he receive some form of notice that

the class action is pending and that his damage claims may

be adjudicated as part of it.’’

In Penson v. Terminal Transport Co., 634 F.2d 989, 994 (Sth

Cir. 1981), the court held that ‘‘where monetary relief is sought

and is made available in a Rule 23(b)(2) class action, notice is no

longer discretionary but is required at some stage in the pro-

ceedings. Johnson v. General Motors Corp., 598 F.2d 432 (Sth

Cir. 1979)."" (Emphasis by the Court) It elaborated (634 F.2d at

995):

‘**This Court has consistently held that a class member’s in-

dividual suit will not be barred by res judicata if notice of

the prior judgment in the class action is inadequate. (Cit.)

Since the notice ... that was mailed to Penson was inade-

quate, Penson’s present action is not barred by res

judicata.”

The Seventh Circuit in Crowder v. Lash, 687 F.2d 996, 1008

(1982) agreed with the Fifth Circuit holdings that ‘‘before a

class member may be barred from pursuing an individual claim

for damages, he must have been notified that he was required to

adjudicate his damage claims as part of a prior class action

-_,”

'’ The decision below likewise is in conflict with the Seventh Cir-

cuit’s decision in Simer v. Rios, 661 F.2d 655 (7th Cir. 1981), that

notice to class members of settlement is ‘‘necessary as a matter of con-

stitutional due process’’ since ‘‘an individual’s claim cannot be ex-

tinguished without notice and an opportunity to be heard,’’ citing

Mullane v. Central Hanover Bank, 339 U.S. 306, 313-14. (611 F.2d at

664) Such notice is constitutionally required, the court held, even

though the settlement judgment does not bind the absent putative

class members, since ‘‘the practical effect of the settlement was to

distribute the $18 million dollar fund ... in a manner that may have

been aed to the interests of putative class members.’’ /d. at

=

The judment of the Supreme Court of Alabama squarely con-

flicts with the decisions of these federal courts of appeal when it

holds that due process under the federal constitution does not

require notice to these numerous class members in a class action

which seeks to adjudicate their rights to money damages.

Moreover, the judgment of the Supreme Court of Alabama

has really permitted a ‘‘fluid class action recovery’’, and thus

conflicts as well with the decisions of the Second, Fourth and

Ninth Circuits that such a procedure also violates the constitu-

tional requirement of due process. Eisen v. Carlisle & Jacquelin,

479 F.2d 1005, 1018 (2nd Cir. 1973);'* Windham v. American

Brands, Inc., 565 F.2d 59, 72 (4th Cir. 1977);'* and Jn Re Hotel

Telephone Charges, 500 F.2d 86, 90 (9th Cir. 1974),?°

'* “Even if amended Rule 23 could be read so as to permit any

such fantastic procedure, the courts would have to reject it as an

unconstitutional violation of the requirement of due process of

law. But as it now reads amended Rule 23 contemplates and pro-

vides for no such procedure. Nor can amended Rule 23 be con-

strued or interpreted in such fashion as to permit such pro-

cedure. We hold that ‘fluid recovery’ concept and practice to be

illegal, inadmissible as a solution of the manageability problems

of class actions and wholly improper.”’

'? “Nor, as the district judge held, can the difficulties inherent in

proving individual damages be avoided by the use of a form of

‘fluid recovery.’ Such a method of computing damages in a class

action has been appropriately branded as ‘illegal, inadmissible

as a solution of the manageability problems of class actions and

wholly improper.’ ’’ (Citing Eisen, 479 F.2d at 1018)

20 **We agree with the decision reached in [Eisen] that allowing

gross damages by treating unsubstantiated claims of class

members collectively significantly alters substantive rights under

the antitrust statutes. Such enlargement or modification of

substantive statutory rights by procedural devices is clearly pro-

hibited by the Enabling Act that authorizes the Supreme Court

to Promulgate the Federal Rules of Civil Procedure.”’

="

3. The Decision Below Conflicts With Decisions Of Other

State Courts Of Last Resort In The Determination Of A Fun-

damental And Important Constitutional Question.

Other state courts, relying primarily on Mullane and Eisen,

hold that due process mandates notice to absent class members

regardless of technical labels affixed to class actions or of state

procedural requirements. Frankel v. City of Miami Beach, 340

So.2d 463, 469-70 (Fla. 1977); National Lake Development, Inc.

v. Lake Tippecanoe Owners Ass’n, 417 So.2d 655, 657 (Fla.

1982); Williams v. State of Louisiana, 350 So.2d 131, 137-38

(La. 1977); Frank v. Teachers Insurance & Annuity Ass’n., 71

Ill.2d 583, 376 N.E.2d 1377, 1382 (1978);*' Grigg v. Michigan

Nat’l Bank, 72 Mich. App. 358, 249 N.W.2d 701 (1976).

The decision below also conflicts with the Uniform Class Ac-

tions Act, Sec. 7(d), approved in 1976 by the National Con-

ference of Commissioners on Uniform State Laws, which re-

quires that the detailed notice specified in its § 7(b) ‘‘shal/ be

given’’ by personal or mailed service to ‘‘[e]Jach member of the

class . .. whose monetary recovery or liability is estimated to ex-

ceed $100.”’

There is a clear danger that class action judgments rendered

without notice to individual class members in Alabama and

other states which might adopt its view will have no binding res

judicata effect in the federal and state courts which require such

notice as a matter of constitutional guarantee. Any of the

thousands of beneficiaries of the 1,250 trusts involved in the ac-

tion below appear to be free to institute similar suits seeking ad-

ditional damages in the federal or state courts of the 23 states in

which they reside. These undesirable consequences flow directly

from the decision below; and only this Court can prevent them.

*! The class relief sought in the Illinois case was not monetary

damages but the reformation of retirement annuity contracts to in-

clude a cash-surrender provision.

~.

The issue here presented is also of major practical impor-

tance. As of January 1, 1982, 32 states, like Alabama, had

adopted class action procedures patterned after the 1966 Federal

Rule 23.?? If the decision below stands unreviewed, the courts of

these states will surely be tempted to follow Alabama and hold,

erroneously, that the burden of notice to class members in actions

which seek money damages may be eliminated by the simple

label of 23(b)(1) or (2). Only this Court can avoid this unfor-

tunate—and unconstitutional—result by an authoritative

reassertion now of its decisions in Eisen and Mullane that due

process does indeed require notice to class members in class ac-

tions for money damages.

4. The Judgment Below, Which Deprived Bank Of Its Well

Established And Constitutionally Protected Right To Insist

Upon An Accounting Of Its Trust Investment Activities

Because Such Accounting ‘‘Would Make The Class Un-

manageable’’, Is A Stark Departure From Elemental Concepts

Of Due Process Law.

The court below denied Bank its well established right to in-

sist upon an accounting, not only with respect to those matters

drawn in question by the beneficiaries, but as to its entire ad-

ministration of each trust. III Scott on Trusts, 3 Ed., § 260, pp.

2217-18; Restatement 2d of Trusts, § 260. In the circumstances

of this case the court below deprived Bank of its pronerty

without due process of law and denied it equal protection of the

laws in violation of Fourteenth Amendment guaranties.

7? Arizona, Arkansas, Colorado, Delaware, Florida, Hawaii,

Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland,

Massachusetts, Minnesota, Missouri, Montana, Nevada, New Jersey,

New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania,

South Dakota, Tennessee, Texas, Utah, Vermont, Washington, and

Wyoming. Newberg on Class Actions, § 1210(b), Supp.

—

When one’s property interests are at stake ‘‘[t}he fundamen-

tal requirement of due process is the opportunity to be heard

and it is an ‘opportunity which must be granted at a meaningful

time and in a meaningful manner’ *’. Parratt v. Taylor, 451

U.S. 527, 540 citing Armstrong v. Manzo, 380 U.S. 545, 552.

An accurate and fair assesment of liability and damages is im-

possible without an analysis of the investment experiences of

each trust which invested in the common funds and of the finan-

cial impact on each such trust of the common fund transactions

drawn in question. The court below simply exacerbates the con-

stitutional violation when it attempts to explain that such ac-

countings are presently ‘‘unmanageable’’ but may be brought

later in ‘‘individual actions’’ after the conclusion of this long,

expensive and complex litigation.

5. The impact of the judgment below is grave and of national

concern, whether or not it becomes precedent in the highest

courts of states outside Alabama. Bank is a national banking

association. Nevertheless, it is confined to the state courts in a

putative class action such as this. And so are its national banking

counterparts in all other states.

This Court in Mercantile Nat’l Bank v. Langdeau, 371 U.S.

555, 558-9, restated traditional teachings of more than a cen-

tury:

‘*National banks are federal instrumentalities and the

power of Congress over them is extensive. ‘National banks

are quasi-public institutions, and for the purpose for which

they are instituted are national in their character, and,

within constitutional limits, are subject to the control of

Congress and are not to be interfered with by state

legislative or judicial action, except so far as the lawmak-

ing power of the Government may permit.’ Van Reed v.

Peoples Nat. Bank, 198 U.S. 554....”’

a

It is essential, therefore, that this Court protect this national

bank—and all others—from the interference of state judicial ac-

tion in the form of state class action procedures which would be

clearly impermissible under the federal rules, let alone if judged

by due process standards.’’

Congress did not intent such interference with the operations

of national banks when, in the last century, it withdrew their

right to invoke the jurisdiction of federal courts simply because

they were created by and exercised their powers under acts of

Congress. Moreover, Congress and national banks properly

must look to this Court for protection against this impermissible

interference. The occasion for this Court's review of this state

judicial action is at hand.

af Eisen, 417 U.S. at 173 and Mullane. See also authorities cited in

section 2, supra.

=

CONCLUSION

For the foregoing reasons it is respectfully submitted that the

Petition for Writ of Certiorari should be granted.

OF COUNSEL:

STEINER, CRUM & BAKER

P. O. Box 668

Montgomery, AL 36101

LANGE, SIMPSON,

ROBINSON

& SOMERVILLE

1700 Ist Alabama

Bank Bidg.

Respectfully submitted,

M., ROLAND NACHMAN,

JR.

P. O. Box 668

Montgomery, AL 36101

(202) 834-2222

Counsel of Record

ROBERT E. STEINER, III

P. O. Box 668

Montgomery, AL 36101

HENRY E. SIMPSON

WILLIAM G.

SOMERVILLE, JR.

1700 Ist Alabama

Bank Bldg.

Birmingham, AL 35203

Attorneys for Petitioner

— =

APPENDIX A

THE STATE OF ALABAMA — — JUDICIAL

DEPARTMENT

THE SUPREME COURT OF ALABAMA

SPECIAL TERM, 1982

80-853

First Alabama Bank of Montgomery, N.A.

Vv.

Charlotte Kyle Martin, Kathleen Gerson,

Gloria Alieta Parker, and Virginia G. Weldon

Appeal from Montgomery Circuit Court

TORBERT, CHIEF JUSTICE.

This is a class action. The plaintiffs are beneficiaries of ap-

proximately 1,250 individual trusts, of which the bank is

trustee. As trustee of these individual trusts, the bank invested

certain assets comprising the principal of those trusts in par-

ticipating units of two common trusts funds, a bond fund and

an equity fund.

After First Alabama purchased and sold certain units and

made certain investments that resulted in substantial losses to

those funds, the plaintiffs sought a declaration as to the duty of

the bank and its liability to account, a declaration that certain

investments were imprudent, and affirmative relief requiring the

bank to restore to the common trust funds the losses sustained

because of the bank’s allegedly improper investments.

Prior to the certification of the class, First Alabama took the

position that this action would require a full accounting of each

— *. po

of approximately 1,250 individual trusts. The trial court did not

agree. After the original appeal to this Court,' First Alabama

filed a delayed counterclaim, requesting a full accounting of its

own acts as the trustee of the individual trusts. The court subse-

quently struck this counterclaim, without prejudice to First

Alabama’s right to maintain individual suits for an accounting.

The case then proceeded to trial on the issue of whether the

bank was prudent or imprudent in the purchase or sale of thirty

specified securities. Over First Alabama’s objection, the trial

court impaneled an advisory jury pursuant to Rule 39%(c),

ARCP, to aid the court in its determination of these issues.’ The

testimony was then heard orally by the trial court and the ad-

visory jury. Special interrogatories requiring a ‘‘yes’’ or ‘‘no”’

answer were submitted to the advisory jury and, while it was

unable to reach a unanimous verdict, as to the majority of issues

it ruled ten to two against First Alabama.

At that time, the trial judge made his own findings of fact and

on June 24, 1982, the court entered an order which found that

the defendant as trustee of the common bond fund purchased

the following debentures: ATICO Mortgage Investors, Barnett

Mortgage Trust, Guardian Mortgage Investors, Justice Mort-

gage Investors, Midland Mortgage Investors, and Security

Mortgage Investors. The trial court concluded that the purchase

' This case was previously before this Court in an unsuccessful at-

tempt by First Alabama Bank to appeal from the class certification.

First Alabama Bank of Montgomery, N.A. v. Martin, 381 So. 2d 32

(Ala. 1980).

? First Alabama had also filed several affirmative defenses dealing

with the statute of limitations, laches, estoppel, release,—and ac-

quiescence. It was agreed that these issues would not be heard by the

advisory jury, so additional evidence was heard on these issues, as well

as to the extent of damages suffered by the plaintiffs, after the ad-

visory jury was dismissed.

=

of these securities by the bank as trustee did not measure up to

the ‘‘prudent man’’ standard and were, therefore, imprudent.

Because it found the purchase of these securities imprudent, the

court found it unnecessary to decide whether the sale of these

securities also had been imprudent. These securities were Real

Estate Investment Trusts (REIT’s), as described later in this

opinion.

In its order, the court also found that the bank as trustee of

the common equity fund purchased stock of the following com-

panies as investments for the common equity fund: American

Garden Products; Ames Department Stores; Beverage Canners;

CNA Financial; Elixir Industries; First Mortgage Investors;

Hav-a-Tampa; Kinney Services; Loomis Corporation; Mortgage

Associates; Transamerica Corporation; Universal Oil Products;

Wynn Oil Co.; Associated Coca-Cola Bottling Company; Cox

Broadcasting; Rust Craft Greeting Cards; and Sealed Power.

The trial court concluded that the purchase of these securities by

the bank as trustee did not measure up to the ‘‘prudent man’’

standard and were, therefore, imprudent. Because it found the

purchases of these securities imprudent, the court found it un-

necessary to decide whether the sale of these securities also had

been imprudent.

The court also found that the bank as trustee of the common

equity fund purchased the following securities: Allied

Chemicals; Amfac; Blue Bell; Pabst Brewing Company; and

Purolator. The court concluded that the bank’s purchases of

these securities did meet the ‘‘prudent man’”’ standard but that

their sale did not. The trial court concluded that both the pur-

chase and the sale of Green Giant stock and Syntex stock were

prudent. The court based its conclusions upon the test set out in

Birmingham Trust National Bank v. Henley, 371 So. 2d 883

(Ala. 1979).

a pen

On August 19, 1981, the court ruled against First Alabama on

all of its special and affirmative defenses, readopted its class ac-

tion order of June 24, 1981, and ordered First Alabama to pay

$1,226,798.00 into the bond fund and $1,426,354.88 into the

equity fund. These sums represented the difference between the

purchase and sales prices of the six bond fund securities and

twenty-two of the equity fund securities. The bank was further

ordered to pay interest on these sums.

At trial, the plaintiffs introduced evidence of a ‘‘common

trust plan’’ that had been adopted by First Alabama and ap-

proved by the Comptroller oi the Currency. Testimony showed

that the essential investment purpose of the bond fund was to

produce income and that the essential investment purposes of

the equity fund were the appreciation of equity and production

of income. The plan recognized that the valuation of the in-

vestments of the common trust funds would vary periodically

and it had specific provisions as to how the funds would be

valued quarterly to reflect the market value of investments. The

evidence showed that the method of valuation was carefully

spelled out in that plan, but that First Alabama did not follow

that method.

I. Evidence as to Imprudence of Investments

in the Equity Fund.

In regard to the equity fund, the court found that the pur-

chase of seventeen of the twenty-four designated equity fund

securities had been imprudent. As to these seventeen securities,

the court found it unnecessary to decide whether their sale was

imprudent but did conclude that the sale of five of the remain-

ing seven securities had been imprudent.

Evidence was introduced showing that in 1973 the board of

directors of First Alabama reduced to writing what it considered

to be minimum standards of safety. Al Byrne, the vice president

So

and senior trust officer of the bank admitted, however, that

these standards were followed prior to 1973 as unwritten

guidelines and were generally so followed at the time in which

the sales and purchases in question were made. These standards

were: (1) A rating of B+ or better by the Standard and Poor

ratings (S & P) (B+ being an average rating and B being a

speculative rating); (2) a minimum of 1,500,000 shares of stock

in the hands of the public; and (3) annual sales of at least $100

million. Byrne testified that the bank generally invested in com-

panies with at least ten years’ experience in business and a

record of increased earnings. He stated that the companies

would generally be rated by one of the rating services. First

Alabama claimed that the bank’s minimum standards were

primarily designed for individual trusts, rather than common

trust funds, yet Byrne stated that when purchases were made for

the two common funds, bank policy required that those

minimum standards adopted by the bank be followed. Evidence

was also presented showing that deviations were permitted from

those standards adopted by the board of directors with the ap-

proval of the trust investment committee so as to accomplish its

goals.

The plaintiffs offered evidence that these standards had not

been followed. For example, Associated Coca-Cola, Cox

Broadcasting, Rust Craft Greeting Cards and Sealed Power

were rated B + but failed to meet the Bank’s requirement of one

hundred million dollars in annual sales. In addition, the follow-

ing stocks failed to meet the minimum requirement of a B+

rating: American Garden Products; Ames Department Stores;

Beverage Canners; CNA Financial; Elixir Industries; First

Mortgage Investors; Hav-a-Tampa; Kinney Services; Loomis

Corp.; Mortgage Associates; Transamerican Corp; Universal

Oil Products; and Wynn Oil Co.

Dr. Robert Johnston, chairman of the finance faculty of the

School of Business of George Mason University and expert

—

witness for the plaintiffs, testified that First Alabama, as

trustee, should have invested defensively. According to

Johnston, a trustee should first provide for the safety of the

principal and then obtain an adequate return. He based his con-

clusions upon a treatise by Dr. Benjamin Graham, which stated

seven criteria for testing the safety of investments. These criteria

were (1) a minimum of $100 million in aniual sales; (2) a current

ratio of at least two to one (current assets should be twice cur-

rent liabilities); (3) a net working capital to long-term debt ratio

of at least one to one (net working capital being current assets

less current liabilities and long-term debt meaning obligations

that mature in more than one year); (4) earnings stability

(positive earnings for the last ten years); (5) a good dividend

record; (6) an earnings growth measure of at least one-third per

share over a ten-year period, averaging the first three years and

the last three years to remove extremes; (7) a moderate price earn-

ings ratio of no more than fifteen to one; and (8) a moderate

ratio of price to assets of no more than one and one half to one.

Johnston believed that a trustee should not purchase stocks

which failed to meet any one of these standards. Applying these

standards, Johnston concluded that:

1. The purchase of the Allied Chemicals stock did not meet

standards 6 and 7.

*2. The purchase of the American Garden Products stock did

not meet standards 1, 4, 5, 6, 7, and 8.

*3. The first purchase of Ames Department Stores stock failed

standards 1, 5, 7, and 8. The second purchase of Ames Depart-

ment Stores stock failed standards 1, 5, and 8.

* The trial court concluded that the purchases of these stocks were

imprudent.

as ,

4. The first purchase of Amfac stock failed standard 3. The

second purchase of Amfac stock failed standards 3 and 7. The

third purchase of Amfac stock failed standards 2 and 3.

*5. The purchase of Associated Coca-Cola stock failed stan-

dards 1, 2, 3, 5, 7, and 8.

*6. All four purchases of Beverage Canners stock failed stan-

dards 1, 4, 5, 6, 7, and 8.

7. The first purchase of Blue Bell stock failed standard 8. The

second purchase of Blue Bell stock passed all eight standards.

*8. The purchase of CNA Financial stock failed standards 4,

5, and 6.

*9. Both purchases of Cox Broadcasting stock failed stan-

dards 1, 3, 5, 7, and 8.

*10. All three purchases of Elixir Industries stock failed stan-

dards 1, 2, 4, 5, 6, 7, and 8.

*11. The purchase of First Mortgage Investors stock failed

standards 1, 5, 7, and 8.

12. Both purchases of Green Giant stock satisfied all eight

standards.

*13. The purchase of Hav-a-Tampa stock passed ali eight

standards.

*14. The Kinney Services securities were convertible preferred

securities and should not have been in the equity portfolio.

*15. Both purchases of Loomis stock failed standards 1, 3, 4,

5, and 6.

*16. The purchase of the Mortgage Associates stock failed

standards 1, 4, 5, 6, 7, and 8.

— =

17. The purchase of the Pabst Brewing stock passed all eight

standards.

18. The purchase of Purolator stock failed standards 7 and 8.

*19. All four purchases of Rust Craft Greeting Cards stock

failed standards 1, 2, 7, and 8.

*20. The purchase of Sealed Power stock failed standards 2,

3, 7, and 8.

21. The first purchase of Syntex stock failed standards 7 and

8. The second purchase of Syntex stock failed standard 8.

*22. The first puchase of Transamerica stock failed standards

6, 7, and 8 with standards 2 and 3 not being applied. The second

and third purchases of Transamerica stock failed standard 6

with standards 2 and 3 not being applied.

*23. The first purchase of Universal Oil stock failed standards

2, 6, and 7. The second purchase of Universal Oil stock failed

standards 2 and 6.

*24. The Wynn Oil stock failed standards 1, 4, 5, 6, 7, and 8.

The bank, however, contested Johnston’s opinion by

testimony from Walter McConnell, an investment banker from

New York, who stated that Graham’s book was intended for

amateurs and not trustees. Also, Johnston on cross-

examination was forced to admit that only five of the thirty

stocks in the Dow Jones industrial average would meet these

criteria. Johnston did not believe that a trustee could protect the

principal against inflation by investing in common stocks.

However, he did believe buying stocks in an oid established

company which paid high dividends is better than investing in a

new venture.

Walter McConnell, as an expert witness for the bank, listed

various criteria to be applied in testing the soundness of an in-

—_

vestment. Among these were the stability of the company, its

financial soundness, its debt/equity ratio, the quality of its

management, the company’s product, and its standing in the in-

dustry. He testified that those criteria would not be affected by

market cycles or ups and downs in the market. He stated that in

his opinion the investments were prudent, though he could not

say that his company had recommended the purchase of these

stocks while he was an adviser.

McConnell testified that he believed a trustee must take infla-

tion into account in making trust investments. He stated that

the most popular approach was to invest in the very best com-

panies, i.e., the best ‘‘growth’’ companies. The idea was that

with companies whose earnings and dividends were growing faster

than inflation one would be protected against inflation.

Another approach, according to McConnell, was not as popular

but was still used by some large banks. This approach was to

buy stocks in companies that were not well known, /.e., not well

recognized and which were selling at much lower prices than the

stocks of better known companies. McConnell analyzed the

twenty-four stocks at issue and concluded they had a faster

growing rate than the general market, and their earnings were

also growing faster than the general market, but they were sell-

ing at a lower price-earnings ratio. He concluded that First

Alabama used a rational investment approach and that the pur-

chases of these twenty-four stocks were prudent. He further

testified that S & P ratings were not intended to be used as in-

vestment recommendations and that experienced analysts do

not use S & P ratings as a guide to sound investments. He fur-

ther testified that it would be imprudent to buy or sell solely

because of the S & P ratings, because one would not be using

judgment in his decisions. Evidence was also introduced show-

ing that the S & P ratings were issued with a warning that they

should not be used solely as market recommendations.

— A-10 —

Eldon Davis, a former trust investment officer of the bank,

who was the trust investment officer at the time the investments

were made, testified for First Alabama by deposition. He stated

that in 1971 and 1972 the stock market was very high. The

‘**Favorite 50’’ stocks were selling at extremely high prices so he

decided to seek out securities that were undervalued in relation

to the higher priced ones. He further stated that he did not rely

on prospectuses, because the SEC requires a prospectus to be

**plastered with a high degree of risk,’’ and ‘‘will not let you say

anything good about the securities,’’ /.e., will not allow a pro-

spectus to make favorable forecasts or projections. He likewise

stated that he saw little difference in stocks rated B, or

speculative, and B+, or median, since the rating services ‘‘just

don’t understand the business they are in.’’ It was Davis’s opin-

ion that it is best to buy securities in the growth cycle of a com-

pany and not after it has matured.

First Alabama also introduced evidence from brokers who

had made recommendations as to the stocks in question. Yet,

Davis stated that at no time were they recommended as ‘‘safe’’

investments. Evidence was also presented that the recommenda-

tions were from brokers who had an interest in inducing the

purchase of the stock.

II. Evidence as to Imprudence of

Purchases in the Bond Fund.

Substantial questions arose in regard to the bond fund con-

cerning the purchase of securities of six real estate investment

trusts (REIT’s). REIT’s are entities primarily engaged in mort-

gage lending on security of real estate, or in a combination of

lending with the ownership and commercial development of real

estate. One witness called REIT’s ‘‘the mutual funds of real

estate.’’ In September 1971, First Alabama purchased the

unsecured debentures of six REIT’s for $2,608,443.00, which

comprised 23.2 percent of the principal of the bond fund. First

— A-ll —

Alabama suffered a 47.03 + % loss on these bonds when they

were sold for $1,381,645.00, for a total loss of $1,226,798.00.

Questions were raised as to whether REIT’s are safe trust in-

vestments. Kenneth Campbell, an expert witness for First

Alabama, testified that the purchases of the REIT’s were pru-

dent investments. Yet he had called REIT’s ‘‘shaky legal under-

takings’’ in his book, New Opportunities in Real Estate Trusts

29 (1978).

Testifying for the plaintiffs, Dr. Johnston stated that REIT’s

were risky investments. He applied a test set out by Benjamin

Graham in his book Security Analysis (4th ed. 1962), which in-

cluded size of the company, ratio of income to fixed charges,

ratio of income to fixed charges in the company’s worst year,

ratio of income to funded debt, value of property ratio, ratio of

net assets to funded debt, and a debt to capital funds ratio.

Johnston testified that Graham’s standards required one to

look at the record of an REIT for a period of seven to ten years

before making the investment, in order to determine the ratio of

income to fixed charges. This was impossible here, however,

because all of the REIT’s were ‘‘too new’’ to apply this test.

Johnston concluded that all six of the REIT’s failed to meet the

test suggested by Graham. Johnston concluded it was a poor

decision to purchase REIT’s because there were other options

available which were less risky.

The plaintiffs also offered the prospectuses of the REIT’s,

which contained several pages of risk factors. These risk factors

pointed out: (1) That the issuers were mortgage trusts engaged

in making high-risk development and construction loans; (2) the

competition in that field; (3) the conflict of interest with the

sponsor-advisor; and (4) the fact that they operated principally

on a leverage basis (that is, borrowing capital to increase earn-

ings). Plaintiffs’ evidence showed that the REIT’s were making

high-risk !oans dependent upon the borrower’s ability to pay.

— A-12 —

The plaintiffs contended that if the borrower had good credit, it

could borrow directly from the bank and not have to pay the

REIT fee.

Campbell, testifying for the bank, stated that the REIT’s con-

cept has limited if not dangerous application for mortgage lend-

ing trusts. John Davis, hired by First Alabama to replace Eldon

Davis as trust investment officer, testified that in his opinion the

purchase of the six REIT’s was imprudent because they were all

leverage. Davis testified that the REIT’s would not meet the

standards of the Bank today.

Mr. Byrne testified that in 1972 First Alabama’s standards for

bond purchases were to buy bonds from companies that were

well managed, that were generally AA or better, that had the

ability to withstand industry trauma, and that were the larger

companies available in the bond market. None of the six REIT’s

met those standards.

III. Special Defenses

The purchase and sale dates of all securities involved were

stipulated to have been at least one year prior to the filing of this

action on December 27, 1978. The defendant subsequently

pleaded six special defenses, which were denied. As to the

statute of limitations and laches, the plaintiffs stated that the

defendant was still acting as trustee and that defendant showed

no evidence that it had been materially harmed by the fact that

the action was filed only in 1978.

As to acquiescence and ratification, the defendant offered no

evidence to show that the beneficiaries were advised that the

bank had made these purchases or that the minimum standards

adopted had not been followed. Neither did the bank offer

evidence of any change in its position in reliance on anything

done by the beneficiaries sufficient to give rise to an estoppel.

— A-13 —

The bank produced a box of releases which it claimed absolved

it of any liability. The defendants alleged that these releases

would excuse First Alabama from any liability for losses caused

by imprudent acts. After hearing the evidence presented, the

court held that the defendant did not meet its burden of proof

to sustain these six defenses and dismissed all of them.

In its final order the court ordered the defendant to take

whatever actions should be necessary to place the common trust

funds and beneficiaries in the same position they would have oc-

cupied had the bank fully performed its duties. As to the lost

principal that was unrecovered, the court determined from the

evidence that investment in one-year treasury bills would be fair

to the parties. As to the income that the common trust funds

would have earned without the transactions complained of, the

court ordered First Alabama to calculate the accounts as if it

had fully performed the duties as the plaintiffs claimed it should

have performed, and to recalculate the accounts as if it had

promptly reinvested all the additional income at specified one-

year treasury bill rates ranging from 4.61% to 13.23% and

averaging 7.5%.

The initial issue raised by the appellant is whether the plain-

tiffs have standing to invoke the jurisdiction of the equity court

to supervise the bank as trustee of the common funds. First

Alabama contends that the plaintiffs do not have such standing

and contends that they have no proprietary interest in the assets

of the bond and equity funds, since the bank itself holds legal ti-

tle to the assets in the common trust funds. This is without

merit.

It has long been the law in Alabama that where a trustee does

not perform his duty to protect the trust, the beneficiaries may

sue in equity to protect their rights. Riley v. Bradley, 252 Ala.

282, 41 So. 2d 641 (1948); Ex parte Jonas, 186 Ala. 567, 64 So.

960 (1914). Supervising the administration of trusts is a well-

— A-14 —

recognized ground of equity, Scott v. Mussafer, 223 Ala. 153,

134 So. 857 (1931), and the regulation and enforcement of trusts

is one of the original and inherent powers of the equity court.

Silverstein v. First Nat. Bank of Birmingham, 231 Ala. 565, 165

So. 827 (1936).

Appellants also contend that the trial court erred in holding

that this was a proper class action under Rule 23(b)(1) and

(b)(2), ARCP. First Alabama states that the trial court, by certi-

fying the class under Rule 23(b)(1) and (b)(2), without giving

notice to the beneficiaries involved, deprived those beneficiaries

of the opportunity to opt-out or to be represented by counsel of

their choice, thereby violating the due process guarantees of

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), and Mullane

v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). The

appellants further contend that the plaintiffs are seeking

primarily money damages and that it was error to allow them to

proceed under Rule 23(b)(1) and (b)(2) instead of Rule 23(b)(3).

We do not agree.

Neither Eisen nor Mullane dealt with notice under Rule

23(b)(1) or (b)(2). In fact, Rule 23(c) provides that notice is re-

quired only in class actions certified under Rule 23(b)(3). Rule

23(b)(1) and (b)(2) class actions have been held not to require

notice. Bolton v. Murray Envelope Corp., 553 F.2d 881 (Sth

Cir. 1977); Robinson v. Union Carbide Corp., 544 F.2d 1258

(Sth Cir. 1977).

We are also unable to agree that this class should have been

certified under Rule 23(b)(3). As stated by this Court in the

former appeal of ihis case, ‘‘The lower court’s rather lengthy

certification order ... clearly discloses that each of the factors

set forth in Rule 23 was carefully considered before the class ac-

tion determination was made. The order does not reveal any

abuse of discretion.’’ First Alabama Bank of Montgomery,

N.A. v. Martin, 381 So. 2d 32, 35 (Ala. 1980). If the trial court

— A-15 —

applies the correct criteria to the facts of the case, the decision is

considered to be within its discretion. Bermudez v. United

States Department of Agriculture, 490 F.2d 718 (D.C. Cir.

1973). Furthermore, the fact that a Rule 23(b)(1) or (b)(2) suit

may ultimately result in a monetary recovery from a defendant

does not prevent certification under those subdivisions. Senter

v. General Motors Corp., 532 F.2d 511 (Sth Cir.), cert. denied,

429 U.S. 870 (1976); Robinson v. Lorillard Corp., 444 F.2d 791

(4th Cir. 1971). See also, Muzquiz v. City of San Antonio, 378

F. Supp. 949 (W.D. Tex. 1974), aff’d, 520 F.2d 993 (Sth Cir.

1975), judgment vacated and remanded on other grounds, 438

U.S. 901 (1978), wherein a Rule 23(b)(2) class was certified

where an accounting and restitution were sought along with in-

junctive relief, and Bermudez v. United States Department of

Agriculture, 490 F.2d 718 (D.C. Cir. 1973), wherein a suit for

declaratory relief also sought the payment of benefits pursuant

to that declaration under Rule 23(b)(2). We thus hold that the

trial court did not err in certifying the class under Rule 23(b)(1) -

and (b)(2).

First Alabama next argues that the trial court erred in dismiss-

ing its counterclaim, which sought an accounting of the 1,250

trusts that participated in the two common funds during the

period of time in question. Appellant insists that such a

dismissal deprives it of its right as a trustee to ask for an account-

ing of each trust and thereby deprives it of its property without

due process of law. The facts show, however, that First

Alabama did not file this counterclaim until after this Court’s

original decision in this case. Under Rule 13(f), ARCP, leave of

court to set up the counterclaim is in the discretion of the trial

court and we cannot say that this discretion was abused. Fur-

thermore, under Rule 23(c)(4), the court has the discretion to

make necessary orders for the efficient disposition of class ac-

tions. The court obviously felt that to allow the counterclaim

would make the class unmanageable. It therefore properly

— A-16 —

dismissed the counterclaim without prejudice, reserving the

right in First Alabama to bring individual actions for account-

ing.

Another issue raised on appeal is whether the trial court erred

in dismissing the six special defenses of First Alabama, thus

holding that this action was not barred by the statute of limita-

tions or by the principles of laches, acquiescense, ratification,

equitable estoppel, or release. We find no error in the trial

court’s dismissal of these defenses. First Alabama contends that

the fact that all purchases and sales of the bond and equity

securities occurred more than one year from the filing of the ac-

tion in 1978 should cause this action to be barred. The appellant

contends that the long-standing rule that the statute of limita-

tions does not run in favor of the trustee of an express trust

while the trust continues, Benners vy. First Nat. Bank of Birm-

ingham, 247 Ala. 74, 22 So. 2d 435 (1945), is inapplicable and

that the bank should be treated as a constructive trustee. A con-

structive trust, however, is a creature of equity which operates

to prevent unjust enrichment. Such a trust will be found either

when property has been acquired by fraud or when, in the

absence of fraud, it would not be equitable to allow it to be re-

tained by the constructive trustee. Brothers v. Moore, 349 So.

2d 1107 (Ala. 1977). In an express trust, legal title to the trust

must vest in the trustee, along with the power and duty to

manage the trust property. Hillcrest Golf and Country Club v.

Paterson, 217 F. Supp. 176 (N.D. Ala. 1963), aff'd, 330 F.2d

613 (Sth Cir. 1964). First Alabama has already stated that it

holds legal title to the assets of the common trust funds. Thus, it

is clear that there existed an express trust between First Alabama

and the plaintiff class.

Neither do the principles of laches, acquiescence, ratification,

or equitable estoppel apply. First Alabama states that the class

members received annual reports and quarterly statements that

should have given them notice of the sales and purchases

— Aci? —

and should have led to earlier complaints. Yet the law in

Alabama places the burden of proving these affirmative

defenses on the party asserting them. Thus, in order for the doc-

trine of laches to apply, First Alabama places the burden of

proving these affirmative defenses on the party asserting them.

Thus, in order for the doctrine of laches to apply, First

Alabama was charged with showing that the alleged neglect or

omission of the plaintiffs to assert their rights caused prejudice

to the defendant. Multer v. Multer, 280 Ala. 458, 195 So. 2d 105

(1966). Likewise, for the doctrine of estoppel to apply, the

defendant must prove a change in position in reliance upon an

act or omission of the other party. Hendricks v. Blake, 291 Ala.

575, 285 So. 2d 82 (1973). The trial court held, and the evidence

showed, that First Alabama did not meet its burden in regard to

these defenses.

As to the defenses of acquiescence and ratification, the

following rule applies:

‘**The rule that beneficiaries cannot question the propriety

of a trustee’s act, omission, or transaction to which they

have given their approval or consent is operative only

where the trustee has made a full disclosure and the

beneficiaries had full knowledge of all the material facts

and circumstances, particularly those relating to the risk

involved; or ought to have had such knowledge by reason

of means and opportunities directly at their command.

They must have had knowledge of, and understood, their

rights. They must have been aware of the impropriety or

breach of trust involved in the act, omission, or transac-

tion which they approved or to which they gave their con-

sent. In some cases, it has been said that the rule is

operative only where their knowledge is actual, and it is

clear that the rule is not operative by reason of facts of

public record which the beneficiaries are under no obliga-

tion to search. It has been held that the beneficiaries must

— A-18 —

not only have been acquainted with the facts, but that they

must have been apprised of the law, and of how the facts

would be dealt with by a court of equity.’’

76 Am. Jur. 2d Trusts § 337 (1975). There was no evidence

shown that First Alabama, as trustee, made full disclosure of its

actions. The only information received by the beneficiaries was

the annual statements, which showed only the purchase and sale

of the investments. No disclosures were made informing the

plaintiffs of a failure to follow the standards adopted by the

bank’s trust department. Thus, we find no error in the trial

court’s holding that these defenses did not apply.

First Alabama also contends that many of the trusts involved

in this litigation were terminated and releases were signed prior

to the commencement of this suit, which would have released

the bank from liability and would reduce the judgment by

$500,000.00. These releases, however, were signed upon ter-

mination of the trusts and released the bank from further liability

on the individual trust accounts. They did not purport to release

First Alabama from liability as trustee of the common funds

while it still acted in its capacity as trustee. During the portion

of the trial concerning damages, the following occurred:

“MR. CRENSHAW: Your Honor, | understand from Mr.

Nachman that there is no claim that any of these

Releases undertook to release the Bank as trustee of

the common funds.

**MR. NACHMAN: Well, our position is that none of these

people were beneficiaries of the common fund. It

relates to the trust of which they were beneficiary,

and it carries with it our contention of releases against

any losses [that] may have been incurred by the in-

dividual trust by virtue [of] an investment that he was

Participating in in the common fund. They are the

— A-19 —

class members, the beneficiaries of the individual

trusts. Of course, this goes back to one of our earlier

points as to why they have no standing.’’

The trial court found that the appellant did not sustain its

burden of proof as to this issue, and we agree.

The next issue raised on appeal is whether this Court should

apply the ore fenus rule to this action. First Alabama contends

that the rule should not apply because not all testimony was

taken orally. Again, we do not agree. While there was

evidence taken in the form of documents, and while depositions

were read into evidence, the trial judge heard a considerable

amount of oral testimony. The trial court was placed in the best

position to decide the case. It is the law in Alabama that where

evidence has been presented orally, a presumption of correct-

ness attends the trial court’s conclusion on issues of fact, if these

conclusions were based totally or in part on oral testimony. This

Court will not disturb the trial court’s conclusions unless they

are clearly erroneous and against the great weight of the

evidence. Cougar Mining Co. v. Mineral Land & Mining Con-

sultants, Inc., 392 So. 2d 1177 (Ala. 1981); Raidt v. Crane, 342

So. 2d 358 (Ala. 1977); Adams Supply Co. v. United States

Fidelity & Guaranty Co., 269 Ala. 171, 111 So. 2d 906 (1959).

Due to the fact that the court reached its conclusion after hear-

ing oral testimony, we hold that the ore fenus rule is applicable

in this case.

The principal issues to be determined on the merits of this

case are whether the trial court erred (1) in finding that the bank

acted imprudently in buying or selling the securities, and finding

First Alabama to have breached its trust, (2) in assessing interest

as a surcharge for imprudent investments, and (3) in ordering a

distribution of money damages to the members of the class

without identification of the recipients or calculation of their ex-

act damages.

= A-3D =

The standard to be followed in determining whether a trustee

has breached his duty to the trust was stated in Birmingham

Trust National Bank v. Henley, 371 So. 2d 883 (Ala. 1979):

‘*The general definition of a trustee’s investment duties

was first stated by the Supreme Court of Massachusetts in

Harvard College v. Amory, 9 Pick. 446, 461, 26 Mass. 446,

461 (1830):

** *All that can be required of a trustee to invest, is, that

he shall conduct himself faithfully and exercise a sound

discretion. He is to observe how men of prudence, discre-

tion and intelligence manage their own affairs, not in

regard to speculation, but in regard to the permanent

disposition of their funds, considering the probable in-

come, as well as the probable safety of the capital to be in-

vested.’

‘**The Restatement of the Law of Trusts 2d, § 227 (1959),

States the rule in the following language:

** ‘In making investments of trust funds the trustee is

under a duty to the beneficiary

** *(a) in the absence of provisions in the terms of the

trust or of a statute otherwise providing, to make such in-

vestments and only such investments as a prudent man

would make of his own property having in view the preser-

vation of the estate and the amount and regularity of the

income to be derived ....’

““BTNB is liable to the Trust in the Birmingham Realty

matter only if it breached some duty to the Trust in refus-

ing to make this investment at the time the decision was

made. Was it an investment which a prudent man, manag-

ing his own affairs, would have made, based upon infor-

mation then available? Liability cannot be based on the fact

— A-21 —

it subsequently developed that the investment would have

been a good one. This is but the converse of the rule that a

trustee is not liable if he makes an investment in a security

which subsequently depreciates in value. III Scott on

Trusts, § 204, supra, expresses the rule as follows:

‘* *The failure to make a profit which does not result

from a breach of trust does not subject the trustee to

liability. Thus if by the terms of the trust he is permitted

but is not directed to invest in certain securities, he is not

liable for failure to make the investment, although the

securities subsequently appreciate in value. ...’

**The rule has also been summarized by Headley, 7rust

Investments, [97] Trusts & Estates 739 (1952), as follows:

‘** *The first and all inclusive requirement of the law is

that a trustee shall act with complete and undivided loyalty

to his trust. Second is that a trustee shall act prudently in

the selection and management of investments. The

elements of prudence are:

** (1) Care — a trustee must gather and weigh the facts

and base his decisions on them rather than on rumor or

guesswork;

** *(2) Skill — a trustee must exercise the skill of the

average person as a minimum; and if he has more than

average skill he must exercise such skill as he has;

** (3) Caution — a trustee must not take chances which

will imperil the accomplishment of the purposes of the

trust.

** *... There must be balance between security of prin-

cipal and amount and regularity of income; and the govern-

ing motive of the trustee must be sound investment for a

long period and not speculation for a profit...’

as A-%? ==

‘*With specific reference to a trustee’s investing in com-

mon stocks, this author says:

‘* «... They represent no promise to return a dollar

amount to the investor; their dividends are dependent on

earnings and the action of a board of directors; they have

always afforded an attractive vehicle for speculation.

Nevertheless some of them have demonstrated, over a long

period of years, the qualities required for sound permanent

investments. Intrinsic values have been maintained and

dividends have been adequate and regular. The principal

has been reasonably safe for a number of reasons: compe-

tent management, sound financing, position in an essential

industry, a successful record and an adequate market....’ ””

371 So. 2d at 894-96. Tested by this standard, we cannot say

that the trial court committed reversible error in finding that the

defendant did not fulfill its duty of caution, to preserve the trust

corpus above all else, while striving for a regularity of income.

As to the imprudence of the equity fund, First Alabama con-

tends that since Alabama is a ‘“‘legal list’’ state, and since the

beneficiaries had given their permission for the bank to invest in

items not on the legal list, then the beneficiaries have no com-

plaint for investments that have gone awry. This argument is

without merit. As a trustee, First Alabama has a duty to

preserve the trust property and make it productive. III Scott on

Trusts § 227 (3rd ed. 1967).

First Alabama also contends that the only reason for holding

it liable for the losses on the purchase and/or sale of the

securities was that the ratings were below B+ on the S & P

chart, and that the only reason for holding it liable for the losses

on the REIT’s was that there was no Moody’s or similar rating.

First Alabama asserts that to hold it liable here on such evidence

— A-23 —

would impose a duty upon trustees that would make them ab-

solute insurers against a drop in market price. This, however, is

not the case. First Alabama cannot be held liable for its failure

to meet its own standards. This is only one factor in the deci-

sion. The evidence in this case supports the decision of the trial

court that First Alabama failed to fulfill its primary responsibility

which was to provide for the safety of the trust’s principal. The

secondary responsibility was to insure an adequate return.

The difference between speculation and investment is well

described by Dr. Headley in Headley, 7rust Investments, 97

Trusts & Estates 739 (1952), quoted above in the quotation from

Birmingham Trust National Bank v. Henley, 371 So. 2d at 895.

As Dr. Headley states, one who buys common stocks with the

idea of selling them on the market for higher prices is

speculating. One who is making a prudent investment examines

the stocks’ intrinsic values and purchases them for a long-term

investment. Walter McConnell, testifying for the defendant,

stated that one approach adopted by trust managers is to pick

established stocks and not worry about subsequent turns in the

market price. It is obvious that neither Headley’s standards, nor

those mentioned by McConnell, were consistently used by First

Alabama.

Dr. Robert Johnston, an expert witness for the plaintiffs, also

testified as to how a trustee should conduct his investments. Dr.

Johnston stated that, in his opinion, trustees should invest

defensively and protect the principal. He testified that most of

the seventeen stocks later found to be imprudent investments

would fail to mcet his tests. While Walter McConnell, an expert

witness for tlte bank, stated that he believed the purchases to be

prudent, he could not say that he, as an investment adviser for a

number of trust companies, had ever recommended the pur-

chase of any of the twenty-four stocks at issue.

Finally, the testimony of Eldon Davis, who made the in-

vestments at issue, further strengthens the holding of the trial

= A-24 =

court. As stated above, Mr. Davis testified that he did not look

at prospectuses, that he saw little difference between a stock

rated B+, or median, and one rated B, or speculative, that he

did not think the rating services understood their business, and

that he tried to buy undervalued stocks instead of the higher

priced, more established ones. All of this evidence, taken

together, supports the holding of the trial court that First

Alabama was imprudent with regard to purchases made for the

equity fund.

We also find no error in the trial court’s holding that the sale

of the five stocks was imprudent. Even Eldon Davis testified in

his deposition that he was against the sale of these stocks and

had recommended that they be held. Mr. McConnell, testifying

for First Alabama, stated that during the recovery period after

the recession the five stocks all had higher recovery rates than

the S & P 500. It seems reasonable to state that had these stocks

not been sold at the bottom of the market, there would have

been no loss. It is true that a trustee will not be held liable under

ordinary circumstances for losses due to unforeseen depression

or recession of the stock market. Yet, where the course of dealing

of the trustee is such that it causes the loss, a trustee will be

liable. First Nat. Bank of Birmingham v. Basham, 238 Ala. 500,

191 So. 873 (1939). Here, First Alabama sold these stocks at or

near their lowest price levels, against the advice of its own trust

officer, and at the time the country was just beginning to

recover from the worst recession since the 1930’s. We cannot

hold as a matter of law that the trial court erred or was plainly

and palpably wrong in its conclusion that a reasonable and pru-

dent man would have held these stocks. We therefore affirm the

trial court’s decision that the sale of the five stocks was impru-

dent.

It does appear clear from the evidence before the trial court

that the investment in six REIT’s for the common bond fund

— A-25 —

was imprudent. The six REIT’s were all three years old or less,

they were not listed among the top REIT’s in the country, and

they were among the weakest of the nation’s REIT’s. They did

not meet the standards of Al Byrne, Robert Johnston, and Ken-

neth Campbell, all experts in the case. Thus, we hold that the

trial court committed no error in holding against First Alabama

as to the purchase of the six REIT’s.

First Alabama aiso insists that the trial court erred in ordering

the bank to pay interest on the judgment at an interest rate based

on the one-year treasury bill rates and to compound such in-

terest quarterly. The defendant says that for it to have invested

in treasury bills initially would have been improper, and for it

now to be forced to calculate interest as if it had invested in this

method will also be improper. First Alabama cites Gordon v.

Brunson, 287 Ala. 535, 253 So. 2d 183 (1971), where this Court

held that an interest surcharge for breach of trust should be no

more than the rate of return that would have been earned had

the trustee properly performed his duties and that compound in-

terest will be imposed only where there is an evil or corrupt in-

tent. The defendant states that Gordon mandates that only sim-

ple interest be charged on the judgment and that the treasury

bill rate of interest is too high. We agree. While the rate and

amount of interest is a matter within the sound discretion of the

trial court, it is error for the court to order compounded interest

without a finding of evil or corrupt intent. Therefore, because

the trial judge in this case made no finding of evil or corrupt in-

tent, only simple interest should be charged.

Finally, the defendant contends that the trial court ordered a

distribution of money damages to the class members without

identification of the members or of their exact damages. This is

not the case. The evidence shows the names of the beneficiaries

of the 1,250 trusts, all of which names are on file in First

Alabama’s computer. The order of the trial court sets out in

— A-26 —

detail how this calculation and distribution are to take place.

Thus, we cannot agree with the defendant that the trial court

was in error on this point.

After careful consideration of the many issues presented on

appeal, this Court has determined that the trial court did not err

in finding for the plaintiffs. We reaffirm the ‘‘prudent man

rule,’ which states that a trustee must only exercise sound

discretion, conduct himself faithfully, and manage funds en-

trusted to him as men of prudence, discretion, and intelligence

would manage their own affairs, having due regard for the safety

of the corpus and probable income. Harvard College v. Ar-

mory, 26 Mass. (9 Pick) 446 (1830). See also, Birmingham Trust

National Bank v. Henley, 371 So. 2d 883 (Ala. 1979). We con-

clude that the trial court applied the ‘‘prudent man rule.’’ Based

upon the foregoing principles and the ore fenus rule, the finding

of imprudence by the trial court is due to be affirmed. As to the

compounding of interest, we hoid that the trial court did com-

mit error and we reverse with instructions to charge simple in-

terest on the judgment.

AFFIRMED IN PART, REVERSED IN PART, AND

REMANDED WITH INSTRUCTIONS,

Jones, Shores, Embry,** Beatty, and Adams,** JJ., concur.

Faulkner, J., recused.

* While this Justice did not sit at Oral Argument, he has listened to

the tapes of the Oral Arguments and studied the briefs.

— A-27 —

APPENDIX B

January 14, 1983

80-853

prudent man would have held these stocks. We therefore affirm

the trial court's decision that the sale of the five stocks was im-

prudent.

It does appear clear from the evidence before the trial court

that the investment in six REIT’s for the common bond fund

was imprudent. The six REIT’s were all three years old or less,

they were not listed among the top REIT’s in the country, and

they were among the weakest of the nation’s REIT’s. They did

not meet the standards of Al Byrne, Robert Johnston, and Ken-

neth Campbell, all experts in the case. Thus, we hold that the

trial court committed no error in holding against First Alabama

as to the purchase of the six REIT’s.

First Alabama also insists that the trial court erred in ordering

the bank to pay interest on the lost principal at a rate equal to

one-year treasury bill rates. The defendant says that for it to

have invested in treasury bills initially would have been im-

proper, and for it now to be forced to calculate interest as if it

had invested in this method will also be improper.

The rate and amount of interest is a matter in the sound

discretion of the court to be determined by the circumstances of

each case and should, at a minimum, restore to the beneficiaries

the income they otherwise would have received. Pennsylvania

Co. v. Wilmington Trust Co., 41 Del. Ch. 153, 189 A. 2d 679

(1963). By using the treasury bill rate, the court set out a readily

determinable specific interest rate to be applied in each year. It

is Our Opinion that the trial court did not abuse its discretion

here.

— A-28 —

Additionally, First Alabama argues that it was improper for

the trial court to compound the interest paid on the lost prin-

cipal on a quarterly basis. First Alabama cites Gordon v. Brun-

son, 287 Ala. 535, 253 So. 2d 183 (1971), where this Court held

that an interest surcharge for breach of trust should be no more

than the rate of return that would have been earned had the

trustee properly performed his duties and that compound in-

terest would be imposed only where there was an evil or corrupt

intent. The defendant states that that case mandates that only

simple interest be charged on the judgment. We do not agree.

In Alabama, a court of equity is authorized to mold its decree

$0 as to adjust the equities of the parties and meet the necessities

of each situation. Coupounas v. Morad, 380 So. 2d 800 (Ala.

1980); BBC Investment Co. v. Ginsberg, 280 Ala. 148, 190 So.

2d 702 (1966). Where a trustee makes an investment that is im-

proper, it is equitable for the court to put the parties in the posi-

tion they would have occupied except for the breach of trust.

Here, the Bank as trustee of the Common Trust Fund was re-

quired to pay income quarterly to the individual trusts. Clearly

the Bank as trustee of the individual trusts would have been

under a duty to distribute or reinvest the income that should

have been received. Since it is clear that such income was not

distributed, we hold that the trustee would have been required

to reinvest the same. Opinion of the Justices, No. 65, 244 Ala.

456, 13 So. 2d 559 (1943). First Alabama argues that Gordon,

supra, mandates that only simple interest is due to the

beneficiaries absent a finding of evi! or corrupt intent on the

part of the trustee. While we agree that a situation where the

trustee is guilty of evil or corrupt intent is ove situation where

interest is compounded, it is clearly not the on/y one.

We find support for this result from several authorities. Scott

indicates, ‘‘It has also been held that [the trustee] is liable for

compound interest where it was his duty to reinvest interest

received by him....’” A. W. Scott, Law of Trusts § 207.2 (1967).

The Restatement 2d of the Law of Trusts also supports this

result:

— A-29 —

“If the trustee is under a duty to reinvest interest received

by him and accumulate it for the beneficiary, and fails to

do so, he is chargeable with compound interest, since if he

had not committed a breach of trust he would have receiv -

ed compound interest.”’

Restatement (Second) of Trusts, Comments, § 207 (1959). Since

we have held that the trustee would have been required to

reinvest the income on the lost principal, it is clear that the trial

court’s order to compound interest and to make such computa-

tions on a quarterly basis is without error,

Finally, the defendant contends that the trial court ordered a

distribution of the fund to the class members without identifica-

tion of the members or their exact loss. This is not the case. The

evidence shows the names of the beneficiaries of the 1,250 trusts,

all of which names are on file in First Alabama’s com-

puter. The order of the trial court sets out in detail how this

calculation and distribution are to take place. Thus, we cannot

agree with the defendant that the trial court was in error on this

point.

After careful consideration of the many issues presented on

appeal, this Court has determined that the trial court did not err

in finding for the plaintiffs. We reaffirm the ‘‘prudent man

rule,’’ which states that a trustee must only exercise sound

discretion, conduct himself faithfully, and manage funds en-

trusted to him as men of prudence, discretion, and intelligence

would manage their own affairs, having due regard for the safety

of the corpus and probable income. Harvard College v. Ar-

mory, 26 Mass. (9 Pick.) 446 (1830). See also, Birmingham

Trust Nationa: Bank v. Henley, 371 So. 2d 833 (Ala. 1979). We

conclude that the trial court applied the ‘‘prudent man rule.”’

Based upon the foregoing principles and the ore fenus rule, the

findings of the trial court are due to be affirmed.

— A-30 —

AFFIRMED

Jones, Shores, Embry,** Beatty, and Adams,** JJ., concur.

Faulkner, J., recused.

ON APPLICATION FOR REHEARING

TORBERT, CHIEF JUSTICE.

After the original opinion was issued, a motion was made by

the appellees to amend the original judgment by adding thereto,

pursuant to § 12-22-72, Code 1975, ten percent of

$2,653,152.88, the amount the circuit court ordered the Bank to

pay into the two trust funds. The motion is denied.

The ten percent penalty provided by § 12-22-72 is not imposed

unless the ‘udgment is for money. L/oyd v. Stewart, 258 Ala.

627, 64 So. 2d 884 (1953).

The apjellees took the position in their briefs and oral argu-

ment thai this was not a suit at law for money damages, but was

a request for equitable relief to enforce the duties of a paid

trustee.

The judgment of the circuit court declared that certain pur-

chases and sales of securities by the Bank, as trustee of the Equity

Fund and the Bond Fund, were imprudent and that the trans-

actions constituted a breach of the fiduciary duty owed by the

Bank to the plaintiffs and their classes, and ordered the Bar’ to

do specified acts to put the two trust funds and the classes of

plaintiffs in the same position they would have occupied if the

Bank had not breached its duty but had fully performed.

Section 12-22-72, Code 1975, provides that when a judgment

or decree is entered for money, whether debt or damages, and

the same has been stayed on the execution of bond with surety,

** While this Justice did not sit at oral argument, he has listened to

the tapes of the oral arguments and has studied the briefs.

— A-31 —

if the appellate court affirms the judgment of the court below, it

must also enter judgment against all or any of the obligors on

the bond for the amount of the affirmed judgment, 10%

damages thereon, and the costs in the appellate court.

In Wheeler v. First National Bank of Sante Anna, Cal. 73

P.2d 889, 892 (Cal. 1937), where the beneficiary of a trust

sought to cancel transfers made by trustee to trustor, it was held

that a provision for the payment of $5,000 into the trust corpus

by the defendant was not a money judgment for damages or

debt.

In Moore v. Carney, 269 N.W. 2d 614, 617 (Mich. Ct. App.

1978), where the judgment ordered a corporation and two of its

directors to restore a minority shareholder to the position she

occupied prior to oppressive acts, which began in 1969, by re-

quiring the defendants to purchase the minority shareholder’s

stock from her at the value of the stock in 1969, it was held that

the judgment was not a money judgment but was part of an

equitable remedy.

The judgment in this case was not a judgment for money as

debt or damages. Section 12-22-72, Code 1975, does not apply

to this judgment. Rather, the treasury bill rate of interest will

continue to be applied until the funds are restored to the

beneficiaries.

ORIGINAL OPINION MODIFIED; OPINION EXTEND-

ED; AFFIRMED; MOTION FOR PENALTY DENIED; AP-

PELLANT’S APPLICATION FOR REHEARING OVER-

RULED; APPELLEES’ APPLICATION FOR REHEARING

GRANTED.

Jones, Shores, Embry,** Beatty, and Adams,** JJ., concur.

Faulkner, J., recused.

** While this Justice did not sit at oral argument, he has listened to

the tapes of the oral arguments and has studied the briefs.

— A-33 —

APPENDIX C

February 2, 1983

THE STATE OF ALABAMA —

JUDICIAL DEPARTMENT

IN THE SUPREME COURT OF ALABAMA

OCTOBER TERM, 1982-83

80-853

First Alabama Bank of Montgomery

v.

Charlotte Kyle Martin, et al.

ORDER

First Alabama Bank, having filed in this Court its petition for

stay of judgment, wherein it states that it intends to file a peti-

tion for writ of certiorari to the Supreme Court of the United

States and seeks a stay of judgment pending disposition of the

petition for writ of certiorari in the Supreme Court of the

United States, and the response of the appellees thereto having

been submitted and duly examined and understood by the

Court,

IT IS, THEREFORE, ORDERED that the judgment be, and

the same is hereby, stayed for a period of ninety (90) days from

January 14, 1983, conditioned upon the appellants filing in this

Court a supersedeas bond as provided in Section 2101(f) of the

Judicia! Code.

IT IS FURTHER ORDERED that First Alabama Bank, or its

attorney, shall file in this Court a copy of the petition for cer-

tiorari filed in the United States Supreme Court and that unless

a copy of such petition for certiorari is filed in this Court within

— At =

ninety (90) days from January 14, 1983, the stay herein ordered

shall automatically terminate.

IT IS FURTHER ORDERED that if First Alabama Bank, or

its attorney, filed in this Court within ninety (90) days from

January 14, 1983, a copy of the petition for writ of certiorari filed

in the United States Supreme Court the, stay shall remain in full

force and effect pending proceedings on the writ of certiorari in

the Supreme Court of the United States, or until the further

orders of this Court.

Torbert, C. J., and Maddox, Jones, Shores, and Adams, JJ.,

concur.

Embry and Beatty, JJ., dissent.

Faulkner, J., recuses himself.

Almon, J., not sitting.

— A-35 —

APPENDIX D

THE STATE OF ALABAMA —

JUDICIAL DEPARTMENT

THE SUPREME COURT OF ALABAMA

OCTOBER TERM, 1979-80

78-775

First Alabama Bank of Montgomery, N.A.

Vv.

Charlotte Kyle Martin, et al.

Appeal from Montgomery Circuit Court

BEATTY, JUSTICE.

Defendant, First Alabama Bank of Montgomery, seeks to ap-

peal from an order certifying an action against it as a class ac-

tion under ARCP 23(b)(1)(A), 23(b)(1)(B) and/or 23(b)(2) and

designating two classes of plaintiffs. The purported appeal as of

right is dismissed and the alternative request for permission to

appeal is denied.

In December, 1978, plaintiffs Charlotte Martin and Kathleen

Gerson filed suit against defendant First Alabama Bank

{hereinafter ‘‘Bank’’] charging that the Bank, by making im-

prudent investments with the assets of two common trust funds

controlled by it, had violated its duties as trustee of the common

funds. Two other plaintiffs were later added by amendment.

The original plaintiffs and the intervenor-plaintiffs all are

beneficiaries of trusts of which the Bank is (or was) trustee.

The complaint, as last amended, claims that as trustee of the

individual trusts the Bank took from the plaintiffs and others

— A-36 —

similarly situated instruments under which it was given the

discretionary power to invest the assets of the trust in par-

ticipating units of two Common Trust Funds (the ‘Bond

Fund”’ and the ‘‘Equity Fund’’) maintained by the Bank. Plain-

tiffs averred that from 1971 through 1978 the Bank used

substantial portions of the principal of the individual trusts to

purchase units in one or both of the common funds, and that in

its capacity as manager of the common funds the Bank made

imprudent investments with the monies in the common funds,

which investments resulted in substantial losses to the funds.

Plaintiffs sought an order that the suit could properly be main-

tained as a class action under ARCP 23(b)(1) or 23(b)(2), a

declaration that the defendant ‘tas a paid Trustee was

chargeable with the primary duty of maintaining the integrity

and safety of the principal of the trust funds’’ which was in-

vested in each of the common funds, a declaration that the

defendant is liable to account to each of the common trust

funds ‘‘for all losses resulting from the making of imprudent,

unsafe, speculative, or risky investments and for loss of income

thereon,’’ and a declaration that certain investments made by

the Bank as manager of the common funds were in fact impru-

dent. The complaint further sought to require the Bank to

restore to the common trust funds the losses allegedly sustained

because of the Bank’s improper investments.

As we have indicated, plaintiffs seek to maintain this suit as a

class action under ARCP 23. They contend that they should be

permitted to sue both for themselves and ‘‘as representative par-

ties on behalf of all persons similarly situated, who held

beneficial interests in participating units’’ of each of the com-

mon trust funds from 1971 through 1978. The Bank has con-

tinuously opposed the certification of the action as a class ac-

tion. After months of discovery regarding the issues posed by

the class action allegations, the trial court conducted a hearing

on the class action question. The court then entered an order (1)

— A-37 —

certifying the suit as a class action under ARCP 23(b)(1)(A),

23(b)(1)(B) and/or 23(b)(2), and (2) denominating two classes of

plaintiffs: a class composed of beneficiaries whose trust funds

were invested in the ‘‘Bond Fund”’ from 1971 through 1978 and

a class composed of beneficiaries whose trust funds were in-

vested in the ‘Equity Fund’’ during the same period. The trial

court accordingly denied defendant’s motion to dismiss the

complaint and its motion for partial summary judgment on the

class action aspect of the complaint. Defendant then filed a

notice of appeal to this Court and, alternatively, submitted a

petition for permission to appeal from an interlocutory order.

As a general proposition, one has the right to appeal only

from a ‘‘final judgment”’ of the circuit court. See Code of 1975,

§ 12-22-2. The first question presented here is whether the cir-

cuit court’s order allowing this suit to proceed as a class action

under ARCP 23 was a final judgment which will support an ap-

peal as a matter of right. We hold that it was not.

A final judgment has been defined by this Court as an order

or decree which puts an end to all matters litigated or which

ought to have been litigated with respect to a particular con-

troversy. /n re Estate of Amason, 347 So. 2d 393 (Ala. 1977).

An order certifying a class is inherently not a fina/ judgment,

even regarding the class certified, because ARCP 23(c) expressly

permits the trial judge to revise his original order at any time

before passing on the merits of the case. As the United States

Court of Appeals for the Second Circuit pointed out in Parkin-

son v. April Industries, Inc., 520 F. 2d 650 (2d Cir. 1975):

The granting of a class designation is in no sense an effec-

tive termination of any aspect whatever of the litigation,

but only directs the form in which the action will proceed.

The initial order is strictly provisional and by the terms of

— A-38 —

Rule 23(c)(1) ‘‘may be altered or amended before the deci-

sion on the merits.’’ An order granted prior to discovery

may be reevaluated on the basis of acts emerging from a

fuller record, and a decision by an appellate court upon an

appeal from the initial order would not settle the propriety

of the designation once and for all because new informa-

tion might well require a revision of the original order by

the district court. The possible likelihood of successive ap-

peals on the same issue, a concern which lies at the heart of

the final judgment rule, exists.

520 F. 2d at 653.

The validity of the view that ‘‘orders granting class certification

are interlocutory’’ — as has been held in a host of federal ap-

pellate court decisions [see, e.g., Re Cessna Aircraft

Distributorship Antitrust Litigation, 518 F. 2d 213 (8th Cir.)

cert. den. 423 U.S. 947, reh. den. 423 U.S. 1039 (1975); Blackie

v. Barrack, 524 F. 2d 891 (9th Cir. 1975); Katz v. Carte Blanche

Corp., 496 F. 2d 747 (3rd Cir.) cert. den. 419 U.S. 885 (1974);

Bennett v. Behring Corp., 525 F. 2d 1202 (Sth Cir.) cert. den.

425 U. S. 975 (1976)] — was recently sustained by the U. S.

Supreme Court in Coopers & Lybrand v. Livesay, 437 U. S.

463, 476 (1978). We find the federal cases on this issue most per-

suasive, and, accordingly, hold that we are without jurisdiction

to entertain the Bank’s attempt to appeal as a matter of right.

See McKleroy v. Gadsden Land & Development Co., 126 Ala.

184, 28 So. 660 (1900).

In addition to asserting that it has a right to maintain an ap-

peal from the trial court’s order allowing this case to proceed as

a class action, First Alabama Bank has alternatively petitioned

this Court for permission to appeal from an interlocutory order.

We deny the Bank’s ARAP 5 petition for permission to appeal.

—<

Rule 5, ARAP, the means by which a party may obtain in-

terlocutory review of a non-final order, is a composite of FRAP

5 and 28 U.S.C. § 1292(b). See ARAP 5, Committee Com-

ments. Because this Court has not previously had occasion to

address the question of when, if ever, interlocutory review of an

order granting class action status is warranted, we have engaged

in a rather extensive review of the federal cases dealing with the

appealability ve/ non under 28 U.S.C. § 1292(b) of class action

orders. Our survey of the pertinent decisions of the federal

courts, as well as an in-depth analysis of the arguments of the

parties, has convinced us that interlocutory orders which grant

class certification are not susceptible to effective review.

As is required under ARAP 5, the Bank’s petition for permis-

sion to appeal contains the trial judge’s certification that the in-

terlocutory order ‘‘involves a controlling question of law as to

which there is substantial ground for difference of opinion, that

an immediate appeal from the order would materially advance

the ultimate termination of the litigation and that the appeal

would avoid protracted and expensive litigation. . . .”’ This

Court, however, is not bound by the trial court’s conclusion

that an immediate appeal is desirable, for ARAP 5 mandates

that both the trial court and the Supreme Court concur in allow-

ing an appeal from an interlocutory order. See, e.g., Control

Data Corp. v. International Business Machines Corp., 421 F.2d

323 (8th Cir. 1970). The discussion which follows is a brief sum-

mary of our reasons for refusing to grant permission to appeal

in this case.

As we have mentioned, class action determinations are in-

herently provisional under the terms of ARCP 23. The trial

court is at liberty to alter or amend the order granting class ac-

tion status at any time before deciding the merits of the case.

The court may even terminate the class status if further

developments so dictate. See Wilcox v. Commerce Bank, 474 F.

— A-40 —

2d 336 (Sth Cir. 1973). Our intervention at this preliminary stage

would constitute an uncalled-for encroachment upon the trial

court’s power to manage its own cases and would place this

Court in the position of an advisory panel. That is not our func-

tion.

We are also unable to perceive any ‘‘controlling question of

law’’ posed by this case in its present posture that might merit

our attention pursuant to Rule 5, ARAP. Determinations allow-

ing class actions to proceed rest largely within the discretion of

the trial court; in the words of Judge Frankel of the U. S.

District Court for the Southern District of New York, such a

decision ‘‘involves a particular appraisal of specific facts and is

to a measurable extent discretionary.’’ Shelter Realty Corp. v.

Allied Maintenance Corp., 442 F. Supp. 1087, 1089 (1977). As

our system of jurisprudence is largely predicated on the studied

discretion of trial judges, we are not at all disturbed by the fact

that decisions of such moment as orders permitting a class ac-

tion to proceed must be made by the individual trial judges

without the assistance of appellate courts. See Anschul v. Sit-

mar Cruises, Inc., 544 F. 2d 1364 (7th Cir. 1976). Only if it ap-

pears that a trial court arbitrarily refused to apply the criteria

enunciated in ARCP 23 to the facts of a particular case would

we be inclined to permit an interlocutory appeal from an order

granting class certification. The lower court’s rather lengthy cer-

tification order in this case clearly discloses that each of the fac-

tors set forth in Rule 23 was carefully considered before the

class action determination was made. The order does not reveal

any abuse of discretion.

Our decision to refuse to grant permission to appeal in the in-

stant case is buttressed by some of the language employed by the

Third Circuit Court of Appeals in Link v. Mercedes-Benz of

North America, Inc., 550 F. 2d 860 (3rd Cir. 1977). The Link

case was an attempted appeal under 28 U.S.C. § 1292(b) of an

— A-4] —

interlocutory order certifying a plaintiff class of some three

hundred thousand persons pursuant to FRCP 23(b)(3).

Although the district court had certified certain questions as

‘*‘controlling’’ the Court of Appeals refused to review the order

determining the class. After pointing out that acceptance of §

1292(b) appeals in unexceptional cases would constitute an

“erosion of the prohibition against ‘piecemeal’ appellate

review,’’ the court ruled that:

[A class action] determination, in and of itself, does not

present a “‘controlling question of law’’ to which this court

should be hospitable under § 1292(b). If the district court

has qualms about determining the class, because it has a

serious question whether it is ‘‘applying[ing] the correct

criteria to the facts of the case,’’ . . . (a) it should hesitate

in determining the class until reasonably assured of the

correctness of its ruling and (b) it should not certify for §

1292(b) consideration without stating persuasive reasons

why the particular class action question is so unusual as to

demand the intervention of an appellate court. In afford-

ing immediate appellate review of ‘‘controlling questions

of law,’’ § 1292(b) was not designed to substitute wholesale

appellate certainty for trial court uncertainty under cir-

cumstances where, as here, the Rule gives broad discretion

to the district court to revise its class action determination

at any time prior to the decision on the merits.

550 F. 2d at 863.

The considerations articulated by the Link court concerning

§ 1292(b) appeals apply with equal force to appeals under ARAP

5. The trial judge here did not specify what questions of law he

felt were controlling, and the arguments advanced by the Bank

regarding the alleged misapplication of the Rule 23 criteria by

the trial court have not persuaded us that any such questions ex-

ist. As a result we deny the Bank’s request for permission to ap-

peal.

— A-42 —

APPEAL DISMISSED; REQUEST FOR PERMISSION TO

APPEAL DENIED.

Torbert, C. J., Maddox, Faulkner, Jones, Almon, Shores

and Embry, JJ., concur.

— A-43 —

APPENDIX E

IN THE CIRCUIT COURT OF

MONTGOMERY COUNTY, ALABAMA

CIVIL ACTION

NUMBER CV-78-1491-H

Charlotte Kyle Martin and Kathleen Gerson, etc., et al,

Plaintiffs

V.

First Alabama Bank of Montgomery, N. A.,

Defendant

FINDINGS OF FACT, CONCLUSIONS OF LAW

AND JUDGMENT

This action is brought by the named Plaintiffs pursuant to

Rule 23, Alabama Rules of Civil Procedure, against First

Alabama Bank of Montgomery, N. A., hereinafter called he

**Bank’’. Upon consideration of the pleadings and the evidence,

the Court makes the following Findings of Fact, Conclusions of

Law, and Judgment:

1. At all times herein material, the Bank has maintained two

Discretionary Common Funds, known as the ‘‘Bond Fund”’

and the ‘‘Equity Fund’’. The Bank is, and throughout the rele-

vant times, has been the sole Trustee of each such fund. The only

investments in the two funds are made from individual Trusts,

of which the Bank is Trustee or Co-Trustee. The named Plain-

tiffs are or were beneficiaries of individual Trusts of which the

Defendant was Trustee or Co-Trustee, of which Trusts certain

funds were invested in one or more of the two common funds.

Investments were made in the two common funds by more than

1,200 Trusts, under which the Bank was Trustee or Co-Trustee.

— A-44 —

2. In the management of the Equity Fund and the Bond

Fund, the Bank owed to the named Plaintiffs and the classes

represented by them, the fiduciary duty to manage the in-

vestments in the common fund as:

‘**A prudent man would make of his own property, having

in view the preservation of the estate and the amount of in-

come to be derived. . ."’ The Restatement of the Law of

Trusts, 2d, Section 227 (1959)

In determining the prudence of the purchase and sale of the

securities discussed below, the Court has applied the standards

adopted by the Supreme Court of Alabama in Birmingham

Trust National Bank v. Henley, 371 So.2d 883 (1979).

3. On July 26, 1979, the Court entered a class action Order,

pursuant to Rule 23, ARCP. The Court herewith re-adopts the

findings of the Order of July 26, 1979.

4. On June 24, 1981, the Court entered an Order declaring

certain purchases and sales of securities by the Bank, as Trustee

of the Equity Fund and the Bond Fund, to have been impru-

dent; and that said transactions constituted a breach of the

fiduciary duty owed by the Bank to the Plaintiffs and their

classes. The Court herewith re-adopts the findings of the Order

of June 24, 1981.

5. Having made such determination and declaration, the

Court proceeds to consider the relief which should be granted

and the actions necessary to be performed by the Bank to fulfill

its continuing obligation as Trustee of the two common funds.

In the opinion of the Court, justice requires that so far as is

possible, the Bank must be required to put the two trust funds

and the classes of plaintiffs in the same position as they would

have occupied had the Bank not breached its duty, but had fully

and faithfully performed the same. The Bank has at all times oc-

cupied, and continues to occupy, the position of a Trustee; and

=~ Als =

has at all times owed and still owes to each of the members of

the plaintiff classes, the high fiduciary duty required of a paid

Trustee. Until final settlement of these issues with each of the

Plaintiffs, the Bank continues to owe such fiduciary duty. The

determination that the Bank breached its fiduciary duty at the

time of purchase or sale of securities in the common funds does

not relieve the Bank from such continuing fiduciary duty.

6. So far as the principal invested in the securities above

decreed to have been imprudent purchases, the relief is plain.

The Bank must be required to restore to each of the common

funds, the entire amount expended from the principal of those

funds in the making of the imprudent investments, and is re-

quired in all respects to treat the principal of such common

funds as if said imprudent investments had never been made.

Where funds were received by the Bank upon the sale of the

securities found to have been imprudently purchased, such

receipt Operates as a credit against the total sums imprudently

invested.

7. Throughout the period from 1971 to date, and until its duty

is discharged by full performance, the Bank has owed to each of

the members of the Piaintiff classes the duty to prudently invest

the principal of the funds entrusted to it. This duty has been

summed up by stating that it is the duty of the Trustee to invest

in securities returning the highest income commensurate with

safety, safety being always the first and income the second con-

sideration. ‘‘Equity regards that as done which ought to be

done’’; and the parties should be put in the same position they

would have occupied had said funds been promptly and properly

invested.

8. The plan pursuant to which the two common funds are

established provides for a fiscal year beginning on December 1.

Units in the two funds were purchased for the individual Trusts,

based on quarterly valuations of all securities held in the com-

— = vo

mon fund. Liquidation of units were based on the same quarterly

valuations. In determining the relief herein provided, the Court

has considered the plan under which the two funds are managed.

During the period of time covered by the litigation, par-

ticipating units in the common funds have been purchased by

individual trusts and participating units have been liquidated.

As to all funds lost as a result of the Bank’s breach of its

fiduciary duty, the loss of principal in the common funds should

be restored so that the participating units would receive the

benefit or payment of the restoration of such loss just as if the

principal of the common funds had not been imprudently in-

vested by the Bank. Under the plan, income is to be distributed

quarterly. The income lost as a result of the imprudent in-

vestments must be restored for the benefit of the participating

units, and where participating units have been liquidated, the

income which should have been earned must be distributed to

the owners of the liquidated units.

9. Adjustment of Lost Principal, Bond Fund. The Court

finds that as a result of the Bank’s breach of its fiduciary duty in

the purchase of those securities described in Paragraph | of the

Order of June 24, 1981, the Bond Fund sustained a loss of prin-

cipal in the amount of $1,226,798.00. The Bank should be re-

quired to put the Bond Fund and the holders of beneficial in-

terests therein, in the same position they would have occupied

except for such breach of duty. The Bank is, therefore, ordered

and directed to recalculate and restate the quarterly valuations

of the Bond Fund from December 1, 1971, to date as if the im-

prudent purchases had not been made. The principal of the

Bond Fund should thus be restated as if the principal amount

invested in the imprudent securities was held in cash instead of

in the securities found to be imprudent. As of the date of sale of

each of said imprudent securities, a certain amount was con-

verted into cash and thereafter held by the Bank, and,

presumably, was properly invested. To reconstitute the fund as

—_ Se

if such imprudent purchases had not been made, it is necessary

for the Bank to replenish the principal of the Bond Fund as of

the date of each such sale, by paying into the principal account

of the Bond Fund the difference between the purchase price of

each such security and the sale price thereof. The Bank is

ordered to forthwith pay into the principal account of the Bond

Fund the said sum of $1,226,798.00. The Bank is further

ordered to recalculate and restate each quarterly valuation of

principal as if such securities had neither been purchased nor

sold. The Bank is further ordered to promptly distribute to the

owners of the participating units, including those participating

units previously withdrawn, any principal amounts due on the

basis of such restated quarterly statements.

10. Adjustment of Lost Income, Bond Fund. The evidence

shows that the Bond Fund received income on the securities im-

prudently purchased, down to the date of their disposition.

Such income was distributed each quarter to the then holders of

participating units. The Court does not find that any adjust-

ment of income is required for such period down to the sale of

each of the imprudent securities.

As of the date of each sale thereof, the Bank received the pro-

ceeds of the sale which, it is assumed, were properly invested in

other securities. The Court, therefore, finds that there has been

no loss of income as to that portion of the principal which was

recovered by sale and reinvested. However, the Court finds as a

fact that the Bond Fund, and thereby the holders of the par-

ticipating units therein, have lost the income which would and

should have been earned on that portion of the principal lost, as

set Out in Paragraph 9 above. The Court has considered what

would have been an appropriate investment for such Fund, fair

to the Bank and fair to the beneficiaries. The Court, having

considered the evidence, finds as a fact that it would have been

reasonable for the Trustee to have invested said fund in 1-year

—e Pe

Treasury Bills. The Bank is, therefore, required to recalculate

each quarterly statement by calculating income on the dif-

ference between the purchase price and the sales price of each

imprudent security from the date of the sale to the end of the

fiscal year in which the sale took place, at the l-year Treasury

Bill rate in effect at the beginning of such fiscal year; and,

thereafter, for each fiscal year at the 1-year Treasury Bill rate in

effect at the beginning of such fiscal year. Each of these rates is

set Out in Paragraph 15 below.

Such additional income would and should have been received

by the Bank during each fiscal year and that income would have

been additional income, available for distribution at each

quarterly date. Since such distribution was not made, such in-

come would have come under the provision of the

Comptroller’s Regulation 9.10, which requires the prompt

reinvestment of funds awaiting distribution. The Court finds as

a fact that such income awaiting distribution should have been

reinvested in 1-year Treasury Bills, at the rate in effect for each

such year. It is, therefore, ordered that the Defendant

recalculate said quarterly statements as if all income on hand, as

of November 30th of each year, had been reinvested in 1-year

Treasury Bills, at the income rate in effect at such date.

The Bank is ordered and directed to forthwith pay to the

Bond Fund, all of the amounts of income calculated under the

foregoing Paragraph, such payment to be for the benefit of par-

ticipating units in said Bond Fund. The Bank is further ordered

to promptly distribute such income payment to the owners of

participating units, including those participating units previously

withdrawn.

11. Adjustment of Principal, Equity Fund. \n the Order of

June 24, 1981, the Court found in Paragraph 2 that the Bank

had breached its fiduciary duty in the purchase of seventeen

securities therein described. As a result of such breach, the

— A-49 —

Equity Fund sustained a loss of principal in the amount of

$1,173,179.03. The Bank owes the same duty in the Equity

Fund as in the Bond Fund and the Bank is, therefore, ordered

and directed to recalculate and restate the quarterly valuations

of the Equity Fund since December 1, 1971, as if the imprudent

purchases had not been made. The principal of the Equity Fund

should thus be restated as if the principal amount invested in

such imprudent securities were held in cash instead of the

securities found to be imprudent. As of the date of sale of each

of said imprudent securities, a certain amount was converted into

cash and thereafter invested by the Bank. To reconstitute the

fund as if such imprudent purchases had not been made, it is

necessary for the Bank to replenish the principal of the Equity

Fund as of the date of each such sale by paying into the prin-

cipal account of the Equity Fund, the difference between the

purchase price of each of such seventeen securities and the sales

price thereof. Thereby the principal of the Equity Fund will be

restated the same as if such securities had not been either pur-

chased or sold. The Bank is ordered to forthwith pay to the

Equity Fund the said sum of $1,173,179.03. The Bank is further

ordered to recalculate and resiate each quarterly valuation of

principal as if such securities had neither been purchased nor

sold. The Bank is further ordered to promptly distribute to the

owners of the participating units, including those participating

units previously withdrawn, any principal amounts due on the

basis of such restated quarterly statements.

12. Adjustment of Income, Equity Fund. As in the case of the

Bond Fund, distributions were made from the Equity Fund

which included dividends received by the Bank from the stocks

imprudently purchased, down to the date of the sale of each of

such securities. The Court does not consider it necessary to

make any adjustment of such income down to the date of sale.

As each such imprudent security was sold, the Bank recovered a

portion of the principal expended in purchase and it is assumed

—_—e

invested such proceeds in prudent securities. The Court,

therefore, finds no loss of income except on the actual loss of

principal, that is, the difference between the purchase price and

the sales price of each of such imprudent securities. The par-

ticipating units in the Equity Fund are entitled to receive income

which should have been earned on the principal which was lost

and the Court orders and directs the Bank to recalculate and

restore such income to the Equity Fund and to the participating

units therein, as was directed in connection with income in the

Bond Fund in Paragraph 10 above. The Bank is ordered and

directed to forthwith pay to the Equity Fund, all of the amounts

of income calculated under the foregoing Paragraph, such pay-

ment to be for the benefit of participating units in said Equity

Fund. The Bank is further ordered to promptly distribute such

income payment to the owners of participating units, including

those participating units previously withdrawn.

13. In the Order of June 24, 1981, the Court found in

Paragraph 14 thereof that the Bank had breached its fiduciary

duty in the sale of five securities described therein. The plain-

tiffs have argued that the Bank should be required to account to

the Equity Fund for the difference between the price realized

from the sale of the five common stocks and the highest market

price for the stocks prior to the trial of this case. While authority

exists for such an approach, the Court finds that in equity and

fairness, the Bank should be and hereby is ordered and directed

to pay into the Equity Fund the sum of $253,175.85, the same

representing the difference between the purchase price and the

sales price for the five securities. The Bank is ordered and

directed to treat and pay the loss of principal relating to said five

securities in the same manner as is provided in Paragraph 11 for

the seventeen securities found to have been imprudently pur-

chased.

14. As to the income which should have been earned on the

five securities described in 13 above, the Bank is ordered and

— A-51 —

directed to treat and to pay such income as is provided in

Paragraph 10 relating to the Bond Fund.

15. In considering what rate of return is appropriate to be used,

the Court has considered a number of possibilities, including

rates of return on prime commercial paper, federal fund rates,

and rates on United States Government Securities. The Court,

having considered the evidence, finds that the appropriate rate

to be used by the Bank in calculating the income which should

have been earned, is the 1-year Treasury Bill rate in effect at the

beginning of each fiscal year. The rates to be used by the Bank

for each fiscal year shall be as follows:

Fiscal Year Beginning

December 1 Rate

1973 7.56%

1974 6.79%

1975 6.16%

1976 4.64%

1977 6.52%

1978 9.44%

1979 10.92%

1980 13.23%

16. The Bank has asserted as special defenses, laches and the

Statute of Limitations. It is undisputed that throughout the en-

tire period, and until today, the Bank is acting as sole Trustee of

an express trust. Inherent in an express trust is the idea that the

beneficiaries repose trust and confidence in the Trustee and in

its faithful performance of duty. By these defenses, the Bank,

in effect, says that the Plaintiffs were wrong in reposing such

confidence in it and that the Plaintiffs should sooner have taken

formal legal action against the Bank. In the opinion of the

— A-52 —

Court, this position of the Bank is not well taken. The Bank has

submitted no sufficient evidence of prior knowledge by the

beneficiaries of breach of trust or any delay in taking proper ac-

tion for relief.

The doctrine of laches is well set out in Muller v. Multer, 280

Ala. 458, at 461, 195 So. 2d 105:

‘*The doctrine of laches may be defined generally as a rule

of equity by which equitable relief is denied to one who has

been guilty of unconscionable delay, as shown by surround-

ing facts and circumstances, in seeking that relief.

‘Laches’ has been defined as such neglect or omission to

assert a right, taken in conjunction with lapse of time and

other circumstances causing prejudice to an adverse party,

as will operate as a bar in equity.’’

The fact that the Plaintiffs relied on the Bank to faithfully

perform its fiduciary duties does not constitute a neglect or

omission to assert a right. The Bank has not shown that lapse of

time or other circumstances caused any prejudice to the Bank.

There has been no death of a material witness; no facts have

become obscure because of delay. The Bank produced

testimony of the individual employee responsible for the pur-

chases and sales in question. The defense of laches has not been

proven.

Nor can the Bank avail itself of the defense of Statute of

Limiations. This is not a tort action where damages are sought

at law for negligence. This is a proceeding in equity to enforce

the fiduciary duties of the Trustee of an express trust. It is firmly

established that so long as there has been no denial or repudia-

tion of the trust, the Statute of Limitations does not run in

favor of a Trustee of an express trust. 76 Am. Jur. 2d, p. 794,

Trusts, Sec. 587. This has long been the law in Alabama. Ben-

ners v. First National Bank of Birmingham, 247 Ala. 74, 79; 22

— A-53 —

So. 2d 435, and cases cited; McCarthy v. McCarthy, 74 Ala.

546. The defense of Statute of Limitations is not available to the

Bank in this case.

17. The Bank contends that certain members of the Plaintiff

classes are barred from participation in the restoration of losses

to the common funds by virtue of having executed releases. The

Bank argues that the amount to be restored to the common

funds should be reduced by the amounts otherwise allocable to

individual trusts in which a release was given. Under Alabama

law, releases must be construed according to the intent of the

parties, Code 12-21-109. The releases in this case are in evidence.

The releases run from the individual trust beneficiaries to the

Bank in its capacity as Trustee of the several individual trusts

and do not purport to release the Bank in its separate capacity as

Trustee under the Bond Fund and Equity Fund. There is

nothing contained in the releases to suggest any intent to release

the Bank of potential claims for breach of its fiduciary duty in

its capacity as Trustee of the common funds. Moreover, the

releases are predicated upon the recital that the Bank, as Trustee

of the several individual trusts, has delivered to the beneficiaries

thereof the full amount due. Since the value of the participating

units in the common funds held by the individual trusts will be

increased under this Judgment, this recital has proven to be fac-

tually erroneous and, therefore, represents a material mutual

mistake of fact. The Court is of the opinion and finds that the

releases are not a defense and that the obligation of the Bank to

restore the losses to the common funds as set forth above, is not

to be diminished or reduced because of the releases.

18. Nothing in this Decree shall be construed as an adjudica-

tion of any right or liability as to any payment made to any trust

or interest retiring from either the Bond Fund or the Equity

Fund which, by such recalculation, might be considered to be an

overpayment by the Trustee to the retiring beneficial interest.

— A-54—

19. The Court has considered whether it is necessary to ap-

point a Special Master or Referee to supervise compliance with

this Decree. The Court is of the opinion that such action is not

necessary at this time. The spirit of this Decree is plain, that the

Class Plaintiffs be put in the same position they would have oc-

cupied except for the breaches of fiduciary duty. The letter of

this Decree is equally plain, that the Defendant perform such

acts as are necessary to put the Class Plaintiffs in that position.

The Court recognizes that this Decree requires the Defendant to

make numerous recalculations of Quarterly Statements. The

Court heard the oral testimony of the witness, Crane, which

testimony showed that the Defendant had already had its com-

puters perform numerous recalculations of the type required by

this Decree. The Court, therefore, does not feel that the Defen-

dant will have any difficulty in understanding and implementing

this Decree. However, should the Defendant require assistance

or guidance in complying with this Decree, the Court will con-

sider an application by either party to appoint a Referee or

Special Master to supervise such performance.

20. Tiie costs incurred in this matter are hereby taxed against

the Defendant, First Alabama Bank of Montgomery, N.A., for

which let execution issue. By separate Order, the Court will set

down for hearing a determination of what items are to be taxed

as costs, including Plaintiffs’ claim that Plaintiffs’ attorneys’

fees should be so taxed.

DONE this the 19th day of August, 1981.

/s/ Perry O. Hooper

CIRCUIT JUDGE

— A-55 —

APPENDIX F

IN THE CIRCUIT COURT OF

MONTGOMERY COUNTY, ALABAMA

Civii Action No.

CV-78-1491-H

Charlotte kyle Martin,

Kathleen Gerson, et al.,

Plaintiffs,

VS.

First Alabama Bank Of

Montgomery, N.A.,

Defendant.

ORDER

Pursuant to the Pre-Trial Order entered in this cause on May

12, 1981, the Court with an advisory jury, pursuant to Rule

39(c) of the Alabama Rules of Civil Procedure, commenced the

trial of the issue of whether the defendant’s acquisition and/or

sale of certain securities scheduled in Exhibit ‘‘A’’ in the Pre-

Trial Order measured up to the standards required of a paid

trustee. Upon consideration of the evidence adduced at such

trial, the Court makes the following findings of fact and conclu-

sions of law:

1, The defendant as trustee of the Common Bond Fund pur-

chased the following debentures, viz: ATICO Mortgage In-

vestors, Barnett Mortgage Trust, Guardian Mortgage Investors,

Justice Mortgage Investors, Midland Mortgage Investors, and

Security Mortgage Investors. The Court is of the opinion and

finds that the purchase of such securities by the defendant as

— A-56 —

such trustee did not measure up to the standards required of it.

Having concluded that the purchases of said securities were im-

prudent, it is not necessary for the Court to decide the issue of

whether the subsequent sale of the same was prudent or impru-

dent.

2. The defendant as trustee of the Common Equity Fund pur-

chased stock of the following companies as investment in the

Common Equity Fund, viz: American Garden Products, Ames

Department Stores, Beverage Canners, CNA, Elixir, First Mort-

gage Investors, Hav-A-Tampa, Kenney Services, Loomis Cor-

poration, Mortgage Associates, Transamerica, Universal Oil

Products, Wynn Oil, Associated Coca-Cola Bottling Company,

Cox Broadcasting, Rust Craft Greeting Cards, and Sealed

Power. The Court is of the opinion and finds that the purchase

of such securities by the defendant as such trustee did not

measure up to the standards required of it. Having concluded

that the purchases of said securities were imprudent, it is not

necessary for the Court to decide the issue of whether the subse-

quent sale of the same was prudent or imprudent.

3. The Court finds that the purchase by the bank as trustee of

the Common Equity Fund of the following securities measured

up to the standards required of a paid trustee, viz: Allied

Chemicals, Amfac, Inc., Blue Bell, Inc., Green Giant, Pabst

Brewing Company, Purolator, Inc., and Syntex.

4. The Court is of the opinion and finds that the sale by the

defendant as trustee of the Common Equity Fund of the follow-

ing securities did not measure up to the standards required of a

paid trustee, viz: Allied Chemicals, Amfac, Inc., Blue Bell, Inc.,

Pabst Brewing Company, and Purolator, Inc.

5. In reaching the conclusions and findings set forth above,

the Court has applied the standards adopted by the Supreme

Court of Alabama and set forth by it in the case of Birmingham

Trust National Bank v. Henley, 371 So. 2d 883.

— A-$7 =

6. The trial of all remaining issues in this case shall be con-

ducted by the Court without a jury to commence as set forth in

a separate order entered on this date.

DONE this the 24th day of June, 1981.

/s/ PERRY O. HOOPER,

Circuit Judge

— A-59 —

APPENDIX G

IN THE CIRCUIT COURT OF

MONTGOMERY COUNTY, ALABAMA

Civil Action No.

CV-78-1491-H

Charlotte Kyle Martin

and Kathleen Gerson,

et al.,

Plaintiffs,

Vv.

First Alabama Bank Of

Montgomery, N.A., a

National Banking Corpor-

ation,

Defendant

ORDER ON CLASS ACTION DETERMINATION

This cause came On regularly to be heard before the under-

signed Circuit Judge on July 3, 1979, upon the Plaintiffs’ Mo-

tion for Class Action Determination and upon the Defendant's

Motion to Dismiss the aspect of the case which seeks to main-

tain the suit as a Class Action, or in the alternative for partial

summary judgment on said aspect. Parties were present in court

and by counsel.

The Court having considered the evidence presented and hav-

ing heard argument of counsel and having considered briefs,

makes the following findings of fact. In connection with these

findings, the Court takes, as it must, the allegations of the com-

plaint as true. Whether or not plaintiffs will ultimately prevail

on such allegations is not, of course, before the Court on this

class action determination, and is not here decided. The Court

finds as follows:

1. The Defendant First Alabama Bank of Montgomery, N.A.

maintains two Discretionary Common Trust Funds, known as

the ‘‘Bond Fund”’ and the ‘‘Equity Fund’’, of which the Bank is

the sole trustee, and into which funds of individual trusts are

deposited for investment. Only individual trusts of which the

Bank is trustee or co-trustee may purchase participating units in

the Common Trust Funds.

2. The funds of more than 1200 trusts have been invested in

units of the two common trust funds during the period covered

by the suit. Each of such participants potentially has the same

claim as the named plaintiffs, and would have been affected by

the investment decisions of the Bank in its role as trustee of the

common funds. The class is thus so numerous as to make

joinder of all members impracticable, and the requirement of

Rule 23 (a)(1), A.R.C.P., is therefore clearly met.

3. The Plaintiffs’ complaint charges the Defendant with

breach of its duty as trustee in making certain investments with

the funds of the common bond and equity funds, which Plain-

tiffs allege resulted in losses to those funds. Plaintiffs seek to

compel Defendant to restore those losses. The factual questions

concerning Defendant’s conduct as trustee of the common

funds and the legal questions of its liability to restore any losses,

or other relief, are common to all members of the class. The

complaint does not make a claim for any breach of trust duties

by the Bank in its other capacity as trustee or co-trustee of the

individual trusts which held participating units in the common

funds, or of individual trusts which did not hold any such par-

ticipating units. Whether or not any trust beneficiary has any

complaint or cause of action for individual investment decisions

of the Bank acting in another capacity is not now before this

Court in this suit.

~ Ati —

The Rule 23(a)(2) requirement that there be questions of law

or fact common to the class is met. Although, for purposes of

rule 23 (a)(2), such questions need not predominate, Vernon J.

Rockler Co. v. Graphic Enterprises, Inc., 52 F.R.D. 335, (D.

Minn, 1971) they would seem to be predominant here, except

for individual allocation of damages in the event of a recovery

by plaintiffs. Such individual damage questions do not defeat

class treatment, Esplin v. Hirshi, 402 F. 2d 94 (10th Cir., 1968).

4. Plaintiffs are all beneficiaries of trusts which hold or held

participating units in the common funds. It is clear that if any

investment or investments in these funds were ultimately deter-

mined to have been made in breach of Defendant’s duty of

prudence and due care, such finding would apply to all affected

participating units, not to Plaintiffs alone. The plan of the

Discretionary Common Trust Funds, in evidence herein, re-

quires that all units be identical and that they be in all respects

treated the same. The named Plaintiffs represent trusts which

have or do participate in one or both such funds, and have held

units throughout the period covered by the suit. Their claims are

typical of the claims of the class, Rule 23 (a)(3), A.R.C.P.

5. Plaintiffs are represented by two Montgomery law firms

and one Birmingham firm all with experience in class actions

and other litigation. Plaintiffs in their several depositions, and

in their conduct of this litigation to date have clearly evidenced

their determination to pursue these claims to a conclusion.

These class plaintiffs have no conflicts with the unnamed class

members which would prevent their vigorous representation of

the class. The Court finds that the named Plaintiffs fairly and

adequately represent the class here, Rule 23(a)(4), A.R.C.P.

Having determined that the Plaintiffs meet the four re-

quirements of Rule 23 (a), the Court proceeds to consider

whether the action is to be maintained as a class action under

Rule 23(b).

— Af?

The Court has considered the alternatives to a class action.

There appears to be no feasible, practicable such alternative.

Unquestionably, individual suits by each of the numerous in-

dividual Trusts seeking to rectify the wrong common to all of

them would result in 2 multiplicity of actions and be contrary to

the spirit of the rules, and particularly the remedy sought to be

reached by Rule 23. Prosecution of such separate actions would

create a risk of inconsistent and varying adjudications, while an

adjudication with respect to one individual member of the class

in this action would, as a practical matter, be dispositive of the

interests of all other persons similarly situated.

The Court has considered whether this action should be main-

tained as a class action under Rule 23 (b)(1), (b)(2), or (b) (3).

The authorities hold that when there is a choice between class

action under Rule (b)(1) or (b)(2) on the one hand and (b)(3) on

the other, the Court should order that the suit be maintained as

a class action under Rule (b)(1) or (b)(2) rather than under

(b)(3), Berman v. Narrangannsett Racing Assn., 48 F.R.D. 333

(D.R.1., 1969); Van Gemert v. Boeing, Co., 259 F. Supp. 125,

(S.D., N.Y., 1966).

The reasons for prefering classification under Rule 23 (b)(1)

or (b)(2) over (b)(3) are both practical and legal. If the action is

classified as a Rule 23 (b)(3) action, members of the class may

elect not to be included and thereby will not be bound by the

judgment, while a judgment under rule 23 (b)(1) or (b)(2) binds

everyone in the class. No one may opt out and bring a second

suit to relitigate the same issues or claims, Berman v. Narragann-

sett Racing Assn. supra. The Court further finds:

6. Rules 23 (b)(1)(A) and (B) provide that class action treat-

ment is appropriate where:

(1) The prosecution of separate actions by or against in-

dividual members of the class would create a risk of

— i —

(A) Inconsistent or varying adjudications with respect to

individual members of the class which would establish in-

compatible standards of conduct for the party opposing

the class, or

(B) Adjudications with respect to individual members of

the class which would as a practical matter be dispositive of

the interests of the other members not parties to the ad-

judications or substantially impair or impede their ability

to protect their interests:

Here, the complaint sets up a claim for the trustee to restore

funds to the common trust funds, based on allegations that the

trustee made certain imprudent investments in breach of its

duties as trustee of the common funds. An adjudication either

that the trustee did breach its duty in management of the com-

mon funds or that it did not, would, as a practical matter, and

perhaps as a legal matter, be depositive of the interests of other

trusts holding participating units in the funds, and would

substantially impair the ability of absent class members to pro-

tect their interests. If a suit by one plaintiff established a breach

of duty as to one or more common fund investments and a right

to have the funds restored, while a suit by another plaintiff

resulted in a finding of no breach of duty, the Bank, as the party

opposing the class, could not act in a consistent way with

reference to the separate adjudications.

While the two provisions are stated the alternative in the

Rule, the Court finds that the criteria of both Rule 23 (b)(1)(A)

and 23 (b)(1)(B) are met.

7. Plaintiffs also seek a declaration that Defendant is to ac-

count to the common funds for certain alleged losses which are

averred to have been the result of imprudent trust management.

Plaintiffs then seek restoration of the sums so accounted. The

Bank as trustee of the common funds, has maintained that it

—

owes no duty of such accounting or restoration, to the named

Plaintiffs or to others holding participating units.

A declaration such as Plaintiffs seek would affect the class as

a whole, and would direct uniform conduct on the part of

Defendant with respect to the class as a whole. The Court

therefore additionally finds, as a separate alternative in addition

to the findings of paragraph 6 above, that the criteria of rule 23

(b)(2) are met.

Based on the foregoing findings of fact, the Court concludes:

(A) Plaintiffs have met the requirements of Rule 23 (a)(1)-(4)

A.R.C.P. in that:

1. The class is so numerous that joinder of all members is im-

practicable;

2. There are questions of law or fact common to the class;

3. The claims of the representative Plaintiffs are typical of the

claims of the class; and

4. The representative Plaintiffs will fairly and adequately pro-

tect the interests of the class.

(B) Plaintiffs have further met the requirements of Rule

23(b)(1)(A), A.R.C.P. in that the prosecution of separate ac-

tions by individual members of the class would create a risk of

inconsistent or varying adjudications with respect to individual

members of the class which would establish imcompatible stand-

ards of conduct for the defendant Bank (the party opposing the

class).

(C) Plaintiffs have also met the criteria of Rule 23 (b)(1)(B),

A.R.C.P. in that the prosecution of separate actions by in-

dividual members of the class would create a risk of adjudica-

tions with respect to individual members of the class which

— A- 65 —

would as a practical matter be dispositive of the interests of the

other members not parties to the adjudications or substantially

impair or impede their ability to protect their interests.

(D) Plaintiffs also have met the requirements of Rule 23 (b)(2)

in that the Bank has acted or refused to act on grounds generally

applicable to the class, thereby making appropriate final injunc-

tive or declaratory relief with respect to the class as a whole.

(E) The Court, having fully considered the matters, is of the

opinion and finds that this action should be maintained and

should proceed as a class action, separately and severally under

Rules 23(b)(1)(A), 23(b)(1)(B) and/or 23(b)(2), A.R.C.P. on

behalf of two classes:

(1) A class comprised of Plaintiffs and all others similarly

situated, a portion of whose funds were invested by the Defen-

dant as Trustee, in the Common Trust Fund of the Defendant,

known as the ‘‘Bond Fund’’, during the period alleged in the

complaint, as amended.

(2) A class comprised of Plaintiffs and all others similarly

situated, a portion of whose funds were invested by the Defen-

dant as Trustee in the Common Trust Fund of the Defendant,

known as the ‘‘Equity Fund’’, during the period alleged in the

complaint, as amended.

(F) Defendant’s motion to dismiss the complaint as last

amended and the class action aspect of it, is due to be hereby is

DENIED.

(G) Defendant’s motion for partial summary judgment on the

class action aspect of Plaintiff’s complaint is also due to be and

hereby is DENIED.

(H) The stay of discovery on the merits of Plaintiffs’ claim

heretofore entered is hereby lifted and terminated.

— es

(I) All other matters are reserved.

Done and ordered this 26th day of July, 1979.

/s/ Perry O. Hooper

Circuit Judge

a fv 6} —

APPENDIX H

RULE 23, ALABAMA RULES OF CIVIL PROCEDURE

Rule 23

Class Actions

(a) Prerequisites to a Class Action. One or more members of a

class may sue or be sued as representative parties on behalf of all

only if (1) the class is so numerous that joinder of all members is

impracticable, (2) there are questions of law or fact common to

the class, (3) the claims or defenses of the representative parties

are typical of the claims or defenses of the class, and (4) the

representative parties will fairly and adequately protect the in-

terests of the class.

(b) Class Actions Maintainable. An action may be maintained

as a class action if the prerequisites of subdivision (a) are

satisfied, and in addition:

(1) the prosecution of separate actions by or against in-

dividual members of the class would create a risk of

(A) inconsistent or varying adjudications with respect to in-

dividual members of the class which would establish incompati-

ble standards of conduct for the party opposing the class, or

(B) adjudications with respect to individual members of the

class which would as a practical matter be dispositive of the in-

terests of the other members not parties to the adjudications or

substantially impair or impede their ability to protect their in-

terests; or

(2) the party opposing the class has acted or refused to act on

grounds generally applicable to the class, thereby making ap-

propriate final injunctive relief or corresponding declaratory

relief with respect to the class as a whole; or

—-

(3) the court finds that the questions of law or fact common

to the members of the class predominate over any questions af-

fecting only individual members, and that a class action is

superior to other available methods for the fair and efficient ad-

judication of the controversy. The matters pertinent to the fin-

dings include:

(A) the interest of members of the class in individually con-

trolling the prosecution or defense of separate actions; (B) the

extent and nature of any litigation concerning the controversy

already commenced by or against members of the class; (C) the

desirability or undesirability of concentrating the litigation of

the claims in the particular forum; (D) the difficulties likely to

be encountered in the management of a class action.

(c) Determination by Order Whether Class Action to be

Maintained; Notice; Judgment; Actions Conducted Partially as

Class Actions.

(1) As soon as practicable after the commencement of an ac-

tion brought as a class action, the court shall determine by order

whether it is to be so maintained. An order under this subdivi-

sion may be conditional, and may be altered or amended before

the decision on the merits.

(2) In any class action maintained under subdivision (b)(3),

the court shall direct to the members of the class the best notice

practicable under the circumstances, including individual notice

to all members who can be identified through reasonable effort.

The notice shall advise each member that (A) the court will ex-

clude him from the class if he so requests by a specified date; (B)

the judgment, whether favorable or not, will include all

members who do not request exclusion; and (C) any member

who does not request exclusion may, if he desires, enter an ap-

pearance through his counsel.

— A-69 —

(3) The judgment in an action maintained as a class action

under subdivision (b)(1) or (b)(2), whether or not favorable to

the class, shall include and describe those whom the court finds

to be members of the class. The judgment in an action maintain-

ed as a class action under subdivision (b)(3), whether or not

favorable to the class, shall include and specify or describe those

to whom the notice provided in subdivision (c)(2) was directed,

and who have not requested exclusion, and whom the court

finds to be members of the class.

(4) When appropriate (A) an action may be brought or main-

tained as a class action with respect to particular issues, or (B) a

class may be divided into subclasses and each subclass treated as

a class, and the provisions of this rule shall then be construed

and applied accordingly.

(d) Orders in Conduct of Actions. In the conduct of actions

to which this rule applies, the court may make appropriate

orders: (1) determining the course of proceedings or prescribing

measures to prevent undue repetition or complication in the

presentation of evidence or argument; (2) requiring, for the pro-

tection of the members of the class or otherwise for the fair con-

duct of the action, that notice be given in such manner as the

court may direct to some or all of the members of any step in the

action, or of the proposed extent of the judgment, or of the op-

portunity of members to signify whether they consider the

representation fair and adequate, to intervene and present

claims or defenses, or otherwise to come into the action; (3) im-

posing conditions on the representative parties or on in-

tervenors; (4) requiring that the pleadings be amended to

eliminate therefrom allegations as to representation of absent

persons, and that the action proceed accordingly; (5) dealing

with similar procedural matters. The orders may be combined

with an order under Rule 16, and may be altered or amended as

inay be desirable from time to time.

— A-70 —

(e) Dismissal or Compromise. A class action shall not be

dismissed or compromised without the approval of the court,

and notice of the proposed dismissal or compromise shall be

given to all members of the class in such

This text is long and has been trimmed here. Open the source document for the complete record.