## Facts

- A testamentary trust arose in 1920 under Alice M. Sullivan’s will, paying all income to her living issue and distributing principal to surviving issue in 1991 (21 years after her last child’s death in 1970).
- The beneficiaries bringing suit were great-grandchildren of the settlor, serving as current income beneficiaries and likely remaindermen.
- The principal assets were undivided interests in three aging downtown Providence commercial buildings (Jones, Wheaton-Anthony, and Alice), which the trustee was authorized to sell.
- The trustee did not perform periodic appraisals, did not keep adequate records, and made no accounting for decades.
- Over time, the trustee managed the property largely to maximize current income, with little modernization or capital investment.
- Downtown commercial values declined significantly after World War II; the trustee sold the buildings in 1945, 1970, and 1979 for total proceeds of about $185,000, compared with values exceeding $300,000 at the trust’s inception.
- Beneficiaries sued seeking an accounting and equitable relief, alleging the trustee favored income beneficiaries and allowed principal to erode.
- The district court found breach of fiduciary duty, ordered a substantial surcharge keyed to restoring 1950-era principal value, and removed the trustee; the trustee appealed and the beneficiaries cross-appealed (including on attorneys’ fees).

## Issues

1. Whether the trustee breached fiduciary duties—especially impartiality between income beneficiaries and remaindermen—by retaining and managing depreciating real estate to maximize income without adequate appraisals, planning, modernization, or timely sale.
2. Whether the district court’s surcharge methodology (using 1950 as a remedial base year and reconstructing what principal would have been with proper administration) was a lawful and reasonable exercise of equitable power.
3. Whether prior proceedings involving the trust barred the beneficiaries’ claims under res judicata or collateral estoppel.
4. Whether removal of the trustee and denial of beneficiaries’ attorneys’ fees were within the district court’s equitable discretion.

## Decision

- The First Circuit modified and otherwise affirmed the judgment.
- The court upheld the finding that the trustee breached fiduciary obligations by failing over many years to respond to an evident conflict between maximizing income and protecting principal, thereby favoring income beneficiaries over remaindermen.
- The court approved a substantial surcharge aimed at restoring the trust principal to its inflation-adjusted 1950 value, while making limited technical modifications to the calculation.
- The court rejected preclusion defenses because earlier proceedings did not conclusively resolve the fairness and lawfulness of the long-term retention and management of the buildings.
- The court affirmed removal of the trustee and upheld the denial of attorneys’ fees to the beneficiaries as not an abuse of discretion.

## Legal Principles

- A trustee must act impartially, giving due regard to the competing interests of income beneficiaries and remaindermen, and may not systematically favor income generation at the expense of principal preservation.
- A trustee has a duty not to retain property that is certain or likely to depreciate in value solely because it produces high income, absent adequate provision to protect principal (including amortization or comparable measures).
- A trustee’s limited preference for retaining inception assets cannot justify prolonged retention and neglect once a serious fairness problem is or should be apparent.
- Courts exercising equitable jurisdiction over trusts have broad remedial authority to surcharge a trustee by reconstructing what the trust principal would have been with proper administration, including use of a reasonable historical base year and hypothetical sale/reinvestment assumptions.
- Trustee removal is an equitable remedy available when misconduct and loss of beneficiary confidence threaten proper administration; fee awards from the trust corpus remain discretionary.

## Conclusion

The court held that prolonged, poorly documented retention of deteriorating commercial real estate to maximize current income breached the trustee’s duty of impartiality and justified equitable relief, including a large surcharge designed to restore lost principal value and removal of the trustee, while leaving fee determinations to the district court’s discretion.


Dennis v. R.I. Hosp. Tr. Nat'l Bank, 744 F.2d 893 (1st Cir. 1984)