First Ala. Bank, N.A. v. Martin - 425 So. 2d 415 (Ala. 1982)

Rule:

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. Supervising the administration of trusts is a well-recognized ground of equity, and the regulation and enforcement of trusts is one of the original and inherent powers of the equity court. The prudent man rule states that a trustee must only exercise sound discretion, conduct himself faithfully, and manage funds entrusted 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.

Facts:

Appellant bank, First Alabama Bank of Montgomery N.A., held accounts in trust for appellee trustee beneficiaries namely Charlotte Kyle Martin and Kathleen Gerson et al., for investment. Appellant bank made a number of bad investments wherein appellant invested certain assets comprising the principal of those trusts in participating units of two common trust funds, a bond fund and an equity fund. As a result, the accounts lost a great deal of principal. Appellees then brought suit claiming that appellant violated the prudent man standard. The trial court took evidence of the investments that appellant made, and the reasonableness of the expectation of expected gain. The trial court determined that some of the investments violated the prudent man standard, and ordered reimbursement of principal plus interest to the accounts. Appellant challenged the ruling and argued that the claim was barred by the statute of limitations, laches, acquiescence, ratification, equitable estoppel and release.

Issue:

Was the appellant bank liable to appellees after making bad investment on trust accounts it held?

Answer:

Yes.

Conclusion:

The court affirmed the judgment of the lower court. The court held that appellant bank failed the prudent man standard by making bad investments that a reasonably prudent investor would not make under the circumstances, hence, appellant was properly ordered to refund the lost amount of principal plus interest. The court, thus, reaffirmed the prudent man rule, which stated that a trustee must only exercise sound discretion, conduct himself faithfully, and manage funds entrusted 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. The court also determined that appellant's defenses did not apply because appellant was required to invest appellees' fund wisely and it failed to do so. The court upheld the trial court's ruling requiring reimbursement of appellees' accounts.