Mary Wolff, Esq. Robert B. King, Esq.
Wolff Ardis George G. Guthrie, Esq.
Memphis, Tennessee King, Allen & Arnold
Charleston, West Virginia
Rudolph L. DiTrapano, Esq.
DiTrapano & Jackson Stephen G. Jory, Esq.
Charleston, West Virginia Jory & Smith
Elkins, West Virginia
Silas B. Taylor, Esq.
Assistant Attorney General James W.B. Benkard, Esq.
Charleston, West Virginia Davis Polk & Wardwell
New York, New York
Attorneys for Appellee
Attorneys for Appellant
RETIRED JUSTICE NEELY delivered the Opinion of the Court.
JUSTICE BROTHERTON and JUSTICE RECHT did not participate.
JUSTICE CLECKLEY, deeming himself disqualified,
did not participate.
JUDGES FOX and CANTERBURY, sitting by temporary assignment.
1. "A circuit court's entry of summary judgment is
reviewed de novo." Syl. pt. 1, Painter v. Peavy, W. Va. ,
451 S.E.2d 755 (1994).
2. <<"'A motion for summary judgment should be granted
only when it is clear that there is no genuine issue of fact to be
tried and inquiry concerning the facts is not desirable to clarify
the application of the law.' Syllabus Point 3, Aetna Casualty &
Surety Co. v. Federal Insurance Co. of New York, 148 W.Va. 160,
133 S.E.2d 770 (1963). Syllabus Point 1, Andrick v. Town of
Buckhannon, 187 W.Va. 706, 421 S.E.2d 247 (1992).">> Syl. Pt. 2
Painter v. Peavy W.Va. , 451 S.E.2d 755 (1994).
3. "The circuit court's function at the summary
judgment stage is not to weigh the evidence and determine the truth
of the matter, but is to determine whether there is a genuine issue
for trial." Syl. Pt. 3, Painter v. Peavy W.Va. , 451 S.E.2d
4. "Summary judgment is appropriate where the record
taken as a whole could not lead a rational trier of fact to find
for the nonmoving party, such as where the nonmoving party has
failed to make a sufficient showing on an essential element of the case that it has the burden to prove." Syl. Pt. 4, Painter v.
Peavy, W.Va. , 451 S.E.2d 755 (1994).
5. When a jury verdict is premised upon an erroneous
conclusion of law by the trial court as stated in the judge's
charge to the jury, it must be set aside.
6. When a fiduciary is attempting in good faith to
maximize the trust estate for his, her or its beneficiary, yet
innocently violates traditional fiduciary principles, any loss that
occurs through innocent violation may, nonetheless, be offset by
gains achieved at roughly the same time by the same means.
7. In a suit under W.Va. Code 12-6-12  for aiding and abetting a State fiduciary in a breach of trust because of illegal "speculation" with State funds, a defendant may not be heard to argue that its purchase and sale of securities from and to the speculating State fiduciary was not the proximate cause of any loss that may have occurred because other dealers would have traded with the fiduciary if the defendant had not done so; the object of prohibiting third parties from knowingly aiding and abetting fiduciaries in breaches of trust is to prevent all third parties from aiding and abetting, and to achieve this desirable result, no cavil about proximate cause may be allowed.
Neely, Senior Justice:
The issues before us today are whether a summary judgment
for roughly $52 million entered against Morgan Stanley & Co., the
New York securities dealer, in favor of the State of West Virginia
was proper, and whether a jury properly returned a $4.9 million
verdict against Morgan Stanley for constructive fraud. We find
neither proper and reverse.
In 1978, at the behest of then State Treasurer Larrie Bailey, the West Virginia Legislature created the West Virginia Consolidated Fund, which is a state investment pool comprised of idle monies, usually operating funds, of the State and its agencies (both of which were required by law to participate in the Consolidated Fund) and of various local governments (which participated in the Consolidated Fund on an elective basis).See footnote 2 When the Fund was first conceived by Treasurer Bailey, it was a device to earn high interest by putting idle money to work. The Fund was managed by the West Virginia Board of Investments (Board), which was composed of the Governor, the State Auditor and the State Treasurer.
The Board delegated the actual management of the Fund to
the Investment Division of the West Virginia State Treasurer's
office.See footnote 3 The Treasurer's office collected from some fund
participants a fee, in the form of a charge against interest
earnings, to recover its costs in operating the Fund.See footnote 4 When the
events at issue in this case occurred, the Fund managed
approximately $2.5 billion in assets.
In 1984, Treasurer Bailey, an investment professional who
had worked in national brokerage firms and was licensed by the
Securities and Exchange Commission, was defeated for renomination.
Treasurer Bailey's place was taken by A. James Manchin, who had
previously been Secretary of State and who had held other
responsible government jobs where he had acquitted himself with
distinction. Nonetheless, Treasurer Manchin was not an experienced
financial executive. At the same election, Governor John D.
Rockefeller, IV moved on to the United States Senate and Arch A.
Moore, Jr. returned to the governorship after an eight-year hiatus
to begin his unprecedented third term. That left only State Auditor Glen B. Gainer, Jr. as a hold-over member of the Board of
Investments in January, 1985.
The Consolidated Fund (under the policy direction of the
Board of Investments) first began trading government securities (as
opposed simply to buying and holding government securities) in 1983
when Governor Rockefeller was Chairman. During this early period,
however, the State traded small blocks of $5 million to $10
million. Anticipating that an inexperienced Board and an
inexperienced treasurer's staff might not understand the role of
limited trading in short-term securities in managing a large
portfolio, the old Board of Investments (composed of Governor
Rockefeller, Treasurer Bailey and Auditor Gainer), as one of its
last official acts, passed investment guidelines that, among other
things, prohibited the Investment Division from purchasing any
security with a maturity in excess of 90 days without specific
Upon assuming the Treasurer's office early in 1985, Mr.
Manchin immediately appointed Arnold Margolin as Associate
Treasurer in charge of investments. Mr. Margolin had gained
widespread recognition earlier in his career in West Virginia for
his financial expertise and had served with distinction as
Commissioner of Finance and Administration in the latter part of
the Rockefeller administration. Treasurer Manchin retained Kathryn M. Lester as Director of Investments, a position she had held in
Treasurer Bailey's office.
At the first meeting of the new Board of Investments in
February, 1985, Treasurer Manchin introduced a resolution to
overturn the restrictive guidelines put in place by the previous
Board. This resolution was passed over Auditor Gainer's negative
vote. Among other things, the new guidelines, as proposed by Mr.
Manchin and passed by the Board, authorized the investment staff to
buy and sell securities with maturities of up to ten years without
prior Board approval. The new guidelines, by changing portfolio
composition requirements, also enabled the staff to use a larger
percentage of the Fund to trade longer term securities.See footnote 5 Although
in hindsight these changes were disastrous, at the time (and among
the young and inexperienced) these changes were thought to enable
the staff to take advantage of profit opportunities offered by
trading interest-rate-sensitive securities.
Thus in 1985, the Investment Division, on behalf of the
Consolidated Fund, launched a program of actively trading U. S.
Government securities. The Investment Division did not act through
an agent (such as a broker) or employ an outside investment advisor; rather, the State entered the bond market as a direct
participant, simultaneously trading one-on-one with numerous
primary dealers, including Morgan Stanley. Importantly for the
case before us, the State's active trading strategy met with
sustained, highly publicized success that garnered lavish accolades
from both the West Virginia press and our citizenry.
Nonetheless, in the spring of 1987, the government bond
market took an unexpected and precipitous nosedive and our
Consolidated Fund, like many other market participants, sustained
enormous losses.See footnote 6 The losses in our Consolidated Fund, amounting
to hundreds of millions of dollars, caused extensive public
outrage. Treasurer Manchin was forced to resign under threat of
impeachment, and Associate Treasurer Margolin (apparently the
designated scapegoat) was sentenced to federal prison for reasons
related to his conduct during the investigation of the losses (but
not for anything that had to do with the losses themselves!)
Before the losses occurred, in the period when the Fund's
strategy was successful, there had been a steady stream of
newspaper articles in the Charleston press with headlines such as,
"Constant Buying, Selling Pays Off for Investment Pool" and
"Flexibility Called Key to Fund's Success." There were reports, for example, that "[t]he State Investment Pool is able to pay
almost 'unbelievable' interest rates . . . because staffers are
able to buy and sell securities at a minute's notice." In
addition, in response to inquiries from potential Fund investors,
the Treasurer's staff made it a practice to explain in detail how
they traded large blocks of securities on a daily basis, profiting
from volatility in the market. Nonetheless, when the losses
occurred, the same press (and public) that had been so eager during
good times to extoll the Investment Division staff's acumen and
expertise, turned savagely on that same staff like dogs on a
In the wake of the shock that $280 million in trading
losses evoked, the State sued Morgan Stanley and several other
securities dealers to recoup part of the loss. Six other Wall
Street firms which did business with the State, including Salomon
Brothers and Goldman Sachs, have paid $28 million to settle claims
arising from their involvement in the debacle.See footnote 7
There are thousands of pages of transcript and documents
in this case. Our review of this voluminous and well-developed
record leads us to conclude that everyone involved in this fiasco
on the State's side was working hard in what they, in good faith, thought to be the best interests of the people of the State of West
Virginia.See footnote 8 Other than the personal satisfaction and opportunities for promotion that inure to good workers generally, none of the
people involved in the losses at issue in this case on the State's
side profited or attempted to profit personally from the trading
undertaken by the Consolidated Investment Fund. Morgan Stanley was
not at any time a fiduciary of the State of West Virginia; Morgan
Stanley was a co-principal, which bought and sold notes and bonds
from and to the State of West Virginia, bought and sold put and
call options from and to the State of West Virginia, and lent money
to the State of West Virginia (secured by bonds owned by the State)
to allow the State to pursue its aggressive trading strategy.
Morgan Stanley did provide investment information to the State and
it aggressively pursued the State as a customer.
In a protracted trial in the Circuit Court of Kanawha County, judgment was entered against Morgan Stanley and in favor of the State for $56,824,183.63, including interest and costs. Roughly ninety percent of that judgment, however, resulted from a summary judgment ruling on the eve of jury deliberations by the circuit court that Morgan Stanley had knowingly aided and abetted the staff of the Investment Division in violating their fiduciary duty to the Consolidated Investment Fund by "speculating" in violation of W. Va. Code 12-6-12 .See footnote 9 Code 12-6-12  provides:
Any investment made under this article shall be made with the exercise of that degree of judgment and care, under circumstances then prevailing, which men of experience, prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation but for investment, considering the probable safety of their capital as well as the probable income to be derived. [Emphasis added.]
There is a narrow period that concerns us here, namely
the period from 10 March 1987 when the State sold a "put"See footnote 10 for $200 million in seven-year Treasury notesSee footnote 11 until 21 April 1987 when John
Mack, the head of Morgan Stanley's fixed income division, developed
serious anxiety about whether the State had abandoned its trading
disciplineSee footnote 12, and having not received adequate reassurance from the
State, ended Morgan's relationship with the State.
There were two transactions with Morgan Stanley that
involved big losses for the State: (1) the 10 March 1987 sale of
the $200 million "put" on seven-year Treasury notes; and (2) the
purchase, beginning on 18 March 1987, of roughly $1.2 billion in
"when-issued" seven-year Treasury notes.See footnote 13 One-third of this latter
portfolio of when-issued Treasury notes was liquidated, but
ultimately $550 million worth of these notes were financed by a reverse repurchase agreement and, as the market price of these
securities declined, large losses were taken.See footnote 14
The loss on the March, 1987 put option was calculated by
the State and accepted by the trial court as the difference between
the price the State paid Morgan for the ten-year Treasury notes
upon Morgan's exercise of its option and the price at which the
State sold those notes (to a third party) on the same day. That
difference was $7,620,313. But when the State sold the put option
to Morgan Stanley, the State received a premium of $843,750 from
Morgan. If the State had invested that premium, it could have
earned interest of $7,992. In determining the total amount of
damages suffered by the State as a result of the March, 1987 put
option, the State credited Morgan with $851,742, representing the
premium the State received plus the interest it could have earned
on that premium against the $7,620,313 loss on the sale of the
securities. Thus, the State suffered a loss on the March, 1987 put
option of $6,768,571.
The State and the trial court calculated the State's
damages on the March, 1987 trading in the when-issued, seven-year
Treasury notes by determining the difference between the purchase
and sale price of the when-issued notes. The State lost money on
all but two of those trades; of the two trades on which it did not
lose, it realized a gain on one and it broke even on the other.
The gain or loss on all transactions with Morgan involving the
when-issued, seven-year Treasury notes was included in determining
the State's net losses, and that amount was undisputed at
$22,723,511.See footnote 15
The case was submitted to the jury on the State's claims of fraud, constructive fraud and punitive damages. These claims were asserted with respect to the same transactions about which the circuit court had entered summary judgment, plus an additional claim related to volume trading. However, the jury was not advised of the amount of money (over $32 million) the court had awarded the State as a result of the summary judgment (qua directed verdict) on the W. Va. Code 12-6-12  speculation claim, although the jury was advised of the court's conclusion that Morgan Stanley had violated Code, 12-6-12  because the transactions at issue were "speculation."See footnote 16 Five weeks of live and video testimony was presented to the jury and, at the end of the trial, the State's lawyers exhorted the jury to punish the "Wall Street . . . hounds of greed" by awarding the State not only restitutionary damages of $40 million, but punitive damages as well.
After deliberating only four hours, the jury returned its
verdict finding no actual fraud, awarding no punitive damages, and
awarding $4.9 million, or only slightly more than one-tenth of the
amount demanded, on the constructive fraud claim. Morgan Stanley
asserts here that the circuit court erred in allowing the
constructive fraud claim to go to the jury because the court had
previously granted Morgan Stanley's motion for summary judgment on
the State's claim for breach of fiduciary duty, holding that no
fiduciary relationship existed between the State and Morgan
We agree with Morgan Stanley that the jury verdict must
be reversed, but for reasons different from those that Morgan
Stanley advances: Having decided as a matter of law that Morgan
Stanley participated in "speculation", (see, supra, note 15) the
court's instruction on constructive fraud compelled a jury finding
against Morgan Stanley. Because we conclude that the issue of
whether Morgan Stanley violated Code 12-6-12  is a jury
question, the jury's finding of constructive fraud was based on a finding of illegality on which the trial court should not have
given a binding instruction.
The Court's charge on constructive fraud was as follows:
Constructive fraud is a breach of a legal or equitable duty, which, irrespective of any moral guilt on the part of the defendant, the law declares fraudulent because of its tendency to deceive others, or violate public or private confidence, or to injure public interests. Neither actual dishonesty of purpose nor intent to deceive is an essential element of constructive fraud. Constructive fraud includes violations of public policy or public rights or transactions affected by illegal conduct of any kind. Constructive fraud may involve a mere mistake of fact, but it exists in cases in which the defendant's conduct, although not actually fraudulent, has the consequences and effects of actual fraud. In such a case the law assumes fraud in order to protect valuable social interests.
To establish its claim of constructive
fraud, the State must prove the following
1. That Morgan Stanley breached a legal or
equitable duty owed to the State; and
2. That Morgan Stanley's breach of its duty
a. A tendency to deceive the State;
b. A tendency to violate public or
private confidence; or
c. A tendency to injure public interests.
Trial Court Charge, pp. 21-22.
This instruction, combined with the Court's instruction
informing the jury that Morgan Stanley had violated West Virginia
law by aiding and abetting "speculation," was tantamount to
directing a verdict against Morgan Stanley on the constructive
fraud claim. When a jury verdict is premised upon an erroneous
conclusion of law by a trial court as stated in the charge to the
jury, it must be set aside.
Notwithstanding that Morgan Stanley sedulously cultivated
good customer relations with the State of West Virginia, Morgan
Stanley was nonetheless a principal in the transactions at stake,
not a broker, and Morgan had the right to trade with the State
without undertaking the obligation to insure the State against its
elected officers' lack of wisdom.See footnote 17 "Sophistication", as that term
is used in the investment law, should never be confused with
intelligence, prudence or good luck. (See, supra, note 8.)
Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); Xaphes v. Merrill, Lynch,
Pierce, Fenner & Smith, Inc., 632 F.Supp. 471, 481-483 (D. Me.
1986); 17 C.F.R. § 230.215; 17 C.F.R. § 230.501(a); C. Edward
Fletcher, III, "Sophisticated Investors Under the Federal
Securities Laws," 1988 Duke L.J. 1081.
The State's argument in support of the lower court's summary judgment ruling is concise, logical and based on overwhelming existing law so far as such law goes. In short, the argument is as follows: (1) the Treasurer's staff was prohibited by W. Va. Code 12-6-12  from speculating; (2) overwhelming evidence in the form of taped conversationsSee footnote 18 between Kathy Lester and members of Morgan Stanley's executive staff, as well as Morgan Stanley's own internal documents, conclusively shows that Morgan Stanley knew that the State was speculating; and (3) black letter trust law holds that a person who knowingly aids and abets a fiduciary to violate his fiduciary duty is himself liable for any loss that proceeds from that violation of fiduciary duty. Wooddell v. Bruffy's Heirs, 25 W. Va. 465 (1885). ("A party who concerts, or unites with a fiduciary in any act contrary to the duty of such fiduciary, becomes pa[r]ticeps criminis and will be held liable accordingly." Syllabus Point 2, Wooddell) Restatement (Second) of Trusts, § 326.See footnote 19
The logic of the trial court's ruling is nearly
ineluctable, yet we are still deeply troubled. Much to the
consternation of law students, practicing lawyers and even new
judges, law is not physics with precise rules and mathematical
formulae. Law, like medicine, is an art as well as a science.
That is why we are called "judges" and why Microsoft, even as we
write, is not attempting to supplant us with a new judicial
computer program. There is, therefore, always an element of human
judgment that enters any complicated case, which is why the process
traditionally calls upon the organized collective intelligence of
a trial court judge, trial jury, and at least one appellate court.
The summary judgment ruling of the trial court certainly
comports with the theory of Rule 50, WVRCP, but, nonetheless, this
Court has great anxiety about the overall equity of this case.
Accordingly, we must pause here for a moment in the analysis of
investment and trust law to put what, at the end of the day, is
Morgan Stanley's most compelling argument into historical
perspective. Essentially, Morgan Stanley argues that they were
blameless and that they have a right to have the case submitted to
a jury that will weigh the equities as well as what seems to be the
law. We agree that Morgan Stanley has a right to have the case
tried to a jury.
In 1687, King James, II came to despair of achieving his dream of restoring the Roman Catholic faith to England because an act of Parliament banned from public office anyone except a practicing communicant of the Church of England, thus barring Roman Catholics and dissenting Protestants from royal preferment. Without the ability to place Roman Catholics in high office and then to bestow Crown benefits upon them, James could not assure a Catholic successor because, given James' age, a successful Catholic Regency would need to be put in place for any possible male heir.See footnote 20 James, therefore, without the consent of Parliament, issued an Edict of Indulgence lifting for both Roman Catholics and dissenting Protestants the ban on holding office imposed by statute.
In the spring of 1688, James resolved that he would
require all priests throughout his realm (with a view to giving the
Edict of Indulgence greater legitimacy) to read the Edict of
Indulgence from the pulpit and, in furtherance of that design, he
ordered all bishops to require such reading by their inferior
clergy. The hierarchy of the Church of England, the Lords
Temporal, and the overwhelming majority of citizens-- even
dissenting Protestants-- were outraged! And so, in May of 1688,
seven prominent bishops in the South of England-- the Archbishop,
Lloyd of St. Asaph, Turner of Ely, Lake of Chinchester, Ken of Bath
and Wells, White of Peterborough, and Trelawney of Bristol--
gathered and agreed that they would not comply with the King's
order and, in explanation, prepared and personally delivered to the
King a petition setting forth their grievance that the King was
acting ultra vires. Parliament had, indeed, both in the late reign
of Charles II and in the present reign, pronounced that the
sovereign was not constitutionally competent to dispense with
statutes in matters ecclesiastical. The Edict of Indulgence was,
The King became incensed, and ultimately caused a
criminal information to be brought against the bishops for
seditious libel. To the consternation of the populous, the bishops were imprisoned in the Tower of London pending trial and, in due
course, were brought before a petit jury presided over by
sycophants of the Crown. During that trial, the Crown presented
overwhelming evidence that the bishops published a seditious libel
(as the law then defined "seditious libel") in the County of
Middlesex on the day charged. Although the Crown was essentially
entitled to a directed verdict, the jury nonetheless acquitted.
The whole prosecution was preposterous! Thus, we have what is
perhaps the leading (but not the earliest) instance in Anglo-
American law of "jury nullification"-- a valuable prerogative that
intrudes itself into the rational court mechanism when,
notwithstanding technical legal rules, the application of those
rules to the facts at hand would be an utter outrage and such that
all mankind should exclaim against it at first blush.See footnote 21
In our modern law the standard for granting summary
judgment has been well set for quite a while. We recently
summarized the law in syllabus points 1 through 4 of Painter v.
Peavy, W. Va. , 451 S.E. 2d 755 (1994):
1. A circuit court's entry of summary judgment is reviewed de novo.
2. <<"'A motion for summary judgment should
be granted only when it is clear that there is
no genuine issue of fact to be tried and
inquiry concerning the facts is not desirable
to clarify the application of the law.' Syllabus Point 3, Aetna Casualty & Surety Co.
v. Federal Insurance Co. of New York, 148
W.Va. 160, 133 S.E.2d 770 (1963)." Syllabus
Point 1, Andrick v. Town of Buckhannon, 187
W.Va. 706, 421 S.E.2d 247 (1992).>>
3. The circuit court's function at the
summary judgment stage is not to weigh the
evidence and determine the truth of the
matter, but is to determine whether there is a
genuine issue for trial.
4. Summary judgment is appropriate where
the record taken as a whole could not lead a
rational trier of fact to find for the
nonmoving party, such as where the nonmoving
party has failed to make a sufficient showing
on an essential element of the case that it
has the burden to prove.
The State, then, argues that any investment whose profit potential
(and exposure to loss) derives from attempts accurately to predict
future market fluctuations is necessarily speculative because no
one can consistently and accurately predict the market.
We believe the issue of whether the trial court was
correct in entering summary judgment is very close, but subjecting
Morgan Stanley to a roughly $52 million judgment without benefit of
jury review seems inappropriate for reasons that are perhaps at
odds with a mechanistic approach to law but, nonetheless, comport
with overall equity. As Dean Pound once said: "Jury lawlessness is
the great corrective of law in its actual administration."See footnote 22 And, although jury nullification is out of favor as an explicit jury
function in modern times, it is still worth savoring Mr. Justice
Jay's charge to the jury in the civil case of Georgia v.
Brailsford, 3 U.S. 1, 3 Dall. 1, 4, 1 L.Ed. 483, 484 (1794):
It may not be amiss, here, Gentlemen, to remind you of the good old rule, that on questions of fact, it is the province of the jury, on questions of law, it is the province of the court to decide. But it must be observed that by the same law, which recognizes this reasonable distribution of jurisdiction, you have nevertheless a right to take upon yourselves to judge of both, and to determine the law as well as the fact in controversy. On this, and on every other occasion, however, we have no doubt, you will pay that respect, which is due to the opinion of the court: For, as on the one hand, it is presumed, that juries are the best judges of facts; it is, on the other hand, presumable, that the court are the best judges of law. But still both objects are lawfully, within your power of decision. [Emphasis added.]
Mr. Justice Jay's jury instruction would not be given
today in federal court, yet even in federal court there remains an
abiding respect for the power of the jury to nullify oppressive
law, even if there is no express right on the part of the jury to
do so. See, e.g., Sparf v. United States, 156 U.S. 51, 15 S.Ct.
273, 39 L.Ed. 343 (1895); United States v. Dougherty, 473 F.2d 1113
(1972); United States v. Moylan, 417 F.2d 1002 (1969); United
States v. Spock, 416 F.2d 165 (1969).
Although we recognize that Rule 50, WVRCP would seem to
be at odds with a defendant's right to have a jury pass on the
total justice of a civil cause unless there are disputed questions
of fact, in a case such as the one before us where the judgment is
not for unjust enrichment or gains made by Morgan Stanley, but is
more in the nature of a fine or an effort to shift the loss among
equally guilty parties, the defendants certainly meet the standard
of Syl. pt. 2 of Painter v. Peavy, supra, that inquiry into the
facts will clarify the application of the law.See footnote 23
In hindsight, of course, the proposition that no one can predict the market is eminently unexceptionable, and had the Consolidated Investment Fund been managed by members of America's old-monied élite, where children are taught from the cradle the two cardinal rules for preserving fortunes: (1) never spend principal; and, (2) never attempt to predict the market, none of these losses would have occurred. But the people who were managing the Consolidated Investment Fund had neither the benefit of hindsight nor did they come from old money. To be specific, the record reveals that both Mr. Margolin and Ms. Lester were upwardly mobile, middle class working persons in their mid 30's. Like so many other enthusiastic and ambitious persons before them, they tended to confuse profits in a bull market with intelligence. (Again, see, supra, note 8.)
A great deal of harsh law has grown up to terrorize
fiduciaries into honesty and prudence. Morgan Stanley points out
that notwithstanding the circuit court's conclusion that the State
was "speculating" (a conclusion to which old money would
immediately jump) Morgan Stanley is nonetheless entitled to a jury
determination of whether Morgan Stanley knowingly aided and abetted
the Treasury staff in violating W. Va. Code 12-6-12  under
the facts of this case. And, although it is a close issue, we
agree. W. Va. Code 12-6-12  defines speculation in terms of
what a prudent man would do with his own portfolio; a West Virginia
jury might look more like the salesmen at Morgan Stanley than the
members of this Court, so the jury might conclude that Morgan
Stanley and the staff of the Treasurer's office behaved reasonably
at the time.See footnote 24
The people at Morgan Stanley made a lot of money helping
the staff of the Treasurer's office play the bond market, but only
a jury can apportion Morgan's salesmen's actions between genuine
enthusiasm and simple cupidity. Certainly the record reveals that
everyone in the bond trading process at issue in this case was
enthralled by his or her overall success until the bottom fell out.
Young persons who have grown up in prosperous times don't expect
catastrophe, which is why Wall Street's most successful blue sky
salesmen are young, upwardly mobile persons who honestly believe
that blind hogs can consistently find acorns.
At least since Sparf v. United States, supra, the
American rule has generally been that juries have the power to
nullify, but do not have the right to do so.See footnote 25 But this precious academic distinction is simply a recognition that the laws of men
cannot be applied with the same consistency or precision as the
laws of physics. In the words of Morris Cohen in the 1916 issue of
The Harvard Law Review:See footnote 26
We urge our horse down hill and yet put the brake on the wheel--clearly a contradictory process to a logic too proud to learn from experience. But a genuinely scientific logic would see in this humble illustration a symbol of that measured straining in opposite directions which is the essence of that homely wisdom which makes life livable.
Consequently, we would suggest that when a civil case involves law
that is sufficiently obscure, tenuous and convoluted that a
reasonable person could find it surprising, a court may submit the
matter to a jury in order to guarantee that the judgment accords
with the community's sense of moral probity. This seems to us to be
a proper compromise between outright recognition of the propriety
of jury nullification (such that a defendant would be entitled to
an instruction on the subject) and a mechanistic approach to law that applies Rule 50, WVRCP principles with insufficient
flexibility.See footnote 27
Morgan Stanley also assigns error to the trial court's
failure to allow Morgan Stanley to offset any losses that might
have occurred because of Morgan's aiding and abetting the
aggressive trading strategy of the Treasurer's office with profits
that were made using the same strategy. (The profits, of course,
would need to come from the same type of speculation, if
speculation it were.) Here we agree, and to the extent that we
appear to depart from existing law in other jurisdictions, we do so
intentionally and in full recognition that we are, perhaps,
breaking new ground.See footnote 28
Just as the law of property makes a distinction between
innocent and willful trespassers in terms of the measure of damages
that may be recovered,See footnote 29 we hold today that it is appropriate in fiduciary matters to make a distinction between innocent and
willful fiduciary violations. Morgan Stanley is a major financial
institution that employs thousands of honest, decent, working-class
people whose call on our solicitude is in no way attenuated by the
fact that they live in New York.
The record strongly suggests that Morgan Stanley never
intentionally set out to injure the State of West Virginia, the
State's political subdivisions, the State's citizens or the State's taxpayers. Nonetheless, the record also strongly suggests that
Morgan Stanley did know that the people who were running the
Investment Division of the West Virginia State Treasurer's office
were not potential nominees for the Nobel Prize in Economics and
that, from time to time, by almost anyone's standard, the West
Virginia traders were engaged in rather more risky dealings than
was appropriate for fiduciaries. It is for the jury to determine
what effect the "trading discipline" (see, supra, note 12) that Ms.
Lester told Morgan Stanley the State maintained had on Morgan
Stanley's "knowing" aiding and abetting and on Morgan Stanley's
The record shows that Associate Treasurer Margolin told
Morgan Stanley in no uncertain terms that there were lots of
dealers available to trade with the State of West Virginia, and
that if Morgan Stanley had scruples about what the Treasurer's
office was doing, the Treasurer's office would take its business
elsewhere. Morgan Stanley has families to feed and expenses to
meet. To say that Morgan Stanley is a regular business suffering
all the competitive pressures that are prominent in a global
economy is hardly derogatory, and Morgan Stanley's seeking new
customers in an aggressive manner to stay solvent is not per se
grounds for punishing it. Certainly Morgan Stanley never undertook
the duties of an insurer.
Consequently, we hold today that the law in West Virginia
is that when a fiduciary (or aider and abetter) is attempting in
good faith to maximize the trust estate for his, her or its
beneficiary, yet innocently violates traditional fiduciary
principles, losses that occur through innocent violation may,
nonetheless, be offset by gains achieved at roughly the same time
by the same type of violations. Essentially, we are simply
reformulating Restatement (Second) Trusts § 213, Comment d in a
slightly more candid and comprehensive manner. In this regard, the
jury must determine that the fiduciary, or any person who aided and
abetted the fiduciary, acted out of honorable motives and did not
intentionally violate his, her or its fiduciary duty or
intentionally and knowingly aid and abet such violation. If,
therefore, the jury concludes that the fiduciary and/or any aider
and abetter is entirely innocent of intentional wrongdoing, then
the jury may offset losses that arose from speculation with gains
that arose as a direct result of the same type of speculation.
Finally, Morgan Stanley argues that Morgan Stanley is not
the proximate cause of the State's loss. Simply put, Morgan
Stanley asserts that if Morgan Stanley had not traded with the
State of West Virginia, numerous other dealers would have done so.
We are not inclined to accede to this proposition because strict
liability in fiduciary law is designed to discourage all third
parties from knowingly cooperating with a fiduciary in the breach
of a trust. It is true that if Morgan had withdrawn from trading with the State, other houses probably would have continued to
trade, but the point to be made is that no one who was an
experienced investment executive should have cooperated with the
State or aided and abetted the State if, indeed, the State was
"speculating" rather than "investing."
Much of what concerns the Court in this case involves the specter of large-scale, bankrupting entrepreneurial lawsuits brought against deep-pocket defendants in fori where the plaintiffs are the home team. For more than a decade, this Court has been at the forefront in explaining the structural bias inherent in a federal system comprised of 53 freestanding court systemsSee footnote 30 in which every independent system has roughly the same law-making powers that the courts of England enjoyed at the time of the American Revolution. In areas of law such as product liability or securities dealers' liability where the typical profile involves: (1) an in-state plaintiff; (2) an in-state judge; (3) an in-state jury; (4) in-state witnesses; (5) in-state spectators; and, (6) an out-of-state defendant, it hardly requires Nostradamus to predict that the out-of-state defendant will not enjoy surpassing confidence that he is standing on a level playing field. In this profile of cases, there is potentially a competitive race to the bottom among state jurisdictions to garner for themselves whatever insurance fund is available before other jurisdictions exhaust the fund.
Furthermore, equal protection principles are largely
unavailing to correct this structural problem because areas of law
that involve the recurrent appearance of the "in-state plaintiff/
out-of-state defendant" profile tend to be carved out of the
general body of tort law for special rules, such as "absolute
liability without fault" (product liability) or "no offset of
profits against losses" (fiduciary liability). We have explained
these matters time and time again, and we have urged the Supreme
Court of the United States to make national rules in all the areas
where the competitive race to the bottom is prominent.See footnote 31
West Virginia is a small state with severe economic
problems, but we have always aspired to be a good neighbor.
Although on many occasions we have had no choice but to be a part
of the competitive race to the bottom, see Blankenship v. General Motors Corp., 185 W. Va. 350, 406 S.E.2d 781 (1991),See footnote 32 we are not
cynical; we have done our utmost to urge the Supreme Court of the
United States to make national law and correct the problems of
which we are necessarily a part. Blankenship, supra; TXO
Production Corp. v. Alliance Resources Corp., 187 W.Va. 457, 419
S.E.2d 870 (1992), aff'd, ___ U.S. ___, 113 S.Ct. 2711, 125 L.Ed.2d
366 (1993)See footnote 33. Furthermore, we have fallen in wholeheartedly behind
the Supreme Court of the United States whenever that Court has made
halting efforts at achieving national law uniformity. Garnes v.
Fleming Landfill, Inc., 186 W.Va. 656, 413 S.E.2d 897 (1991).
Morgan Stanley, therefore, is entitled to tell its story
to a jury for many of the same reasons that the seven prelates in
1688 were entitled to tell their story to a jury. At trial, Morgan
Stanley may explain to a jury what it thinks the word "speculation"
in W. Va. Code 12-6-12  means and the jury may then, with
proper instructions, determine whether Morgan Stanley's actions
were within the Code requirement for investments, and Morgan
Stanley is entitled on the issue of damages to attempt to show that it and its counter-principals in the State Treasury acted in good
faith with an honest intent to benefit the fiduciary estate.
Accordingly, the judgment of the Circuit Court of Kanawha
County is reversed, the jury verdict heretofore entered on the
theory of constructive fraud is set aside, and the case is remanded
to the circuit court of Kanawha County for further proceedings
consistent with this opinion.
Reversed and remanded.
Footnote: 1 "Victory has a hundred fathers, but defeat is an orphan." Count Galeazzo Ciano, Diary (1946) vol. 2, 9 September 1942.
Footnote: 2 See W. Va. Code 12-6-8 .
Footnote: 3 See W. Va. Code 12-6-4  and 12-6-12 .
Footnote: 4 W. Va. Code 12-6-6 .
Footnote: 5 By "longer term securities" I mean notes and bonds with maturities between two and thirty years. Short term securities are less sensitive to interest rate changes than longer term securities because an investor can simply wait until maturity when the security will pay its face principal amount.
Footnote: 6 On 27 March 1987, President Ronald Reagan announced possible trade sanctions against Japan. With the release of this news, the entire bond market-- including the seven-year, when-issued Treasury notes that are an important part of this case-- began to fall.
Footnote: 7 For an excellent summary of what happened, see Leslie Wayne, "Big Risks, Big Losses, Big Fight," The New York Times, 23 April 1995, Section 3, page 1.
Footnote: 8 Anyone who believes that Treasurer Manchin, Mr. Margolin, and Ms. Lester were particularly gullible or unusually enthralled with their own good luck, should read today's press to put what our West Virginia portfolio managers did in perspective. The urge to get rich quick is irrepressible! For example, the front page of the third section of The Wall Street Journal on 22 May 1995 had a story by Suzanne McGee under the headline, "A Big Investor Feels Little Fear of Derivatives" that went as follows:
NEW YORK -- For many institutional
investors, derivatives are too hot to handle
these days. But don't tell that to Richard
Rose, the chief investment officer of the San
Diego Employees' Retirement System.
Mr. Rose is a true believer, at least when
it comes to one of the most traditional
derivative-investment strategies: putting
money into managed futures. Run by managers
known as "commodity-trading advisers," these
funds use publicly-traded futures and options
to bet on price trends in currencies,
commodities, stocks and bonds.
Just last week, Mr. Rose, persuaded his
fund's board members to more than double the
fund's current allocation to managed futures,
to 5% of its assets, boosting its total
investment in these products to about $110
million from $45 million. In addition, he won
approval to use futures in an "overlay"
strategy: putting up only the margin, or
collateral, required to take positions in
futures and options markets. That means that
instead of having to keep $110 million in a
separate account, the fund will be able to
deploy those funds elsewhere. The $16 million
or so required for margin payments for the
managed-futures positions will come from its
"This is really kind of revolutionary for
the industry; we seem to be the first
institution to take this next, very logical step," Mr. Rose says, referring to the overlay strategy. But, he adds, "There are, historically, good rates-of-return associated with accepting a higher degree of volatility."
Not only is this doofus trading in futures derivatives for a pension fund, but he's leveraging on margin! What's worse, The Wall Street Journal itself, in the person of Ms. McGee, seems to be confusing profits in a bull market with intelligence yet again! I wonder if Mr. Rose believes that he is the first person to have figured out that there are "good rates-of-return associated with accepting a higher degree of volatility?" Treasurer Manchin, Mr. Margolin and Ms. Lester simply found themselves on the receiving end of the "volatility" parameter.
Footnote: 9 The parties and the trial court refer to the court's ruling as a "summary judgment," but it is closer to a Rule 50, WVRCP directed verdict than it is to a traditional Rule 56, WVRCP summary judgment because the Court's decision was made after all the evidence was presented at trial. The confusion arises, perhaps, because today under Rule 50, WVRCP, it is no longer necessary to go through the formal process of submitting the case to the jury so that the jury will enter the verdict as directed. Rule 50(a), WVRCP
Footnote: 10 A "put" is an undertaking to buy a bond or other financial instrument, such as a stock, at a future time for a certain price. Thus, if I sell a "put" undertaking to buy seven-year, five percent Treasury notes with a face amount of $10 million for $10 million, and long-term interest rates increase during the 90 days from the
time I sell the put until it expires, I must still buy the bonds for $10 million notwithstanding that their market value may have declined by as much as $500,000 because their interest rate yield remains five percent for seven years while new bonds in the market will be paying, say, six percent.
Footnote: 11 Technically, Treasury notes have maturities of one to ten years, while Treasury bonds have maturities of longer than ten years, but both are commonly referred to as "bonds."
Footnote: 12 Mr. Margolin and Ms. Lester assured Morgan Stanley that the State employed a rigorous trading discipline: the State sold as soon as it began to take a loss and it sold as soon as there was a reasonable profit. To the extent such a discipline was followed, loss exposure was reduced.
Footnote: 13 "When-issued" Treasury notes are notes that the Treasury has announced will be issued, but whose coupon rate has not yet been declared. Market participants may buy the right to purchase these instruments before they are issued and there is active trading; the problem is that the right to purchase also entails the obligation to purchase.
Footnote: 14 A "reverse repurchase agreement" is a device used when a trader in securities has undertaken to buy securities with the expectation that he will sell his right to buy the securities at a profit before he must actually pay. However, if a person cannot sell his right to purchase the securities (with its reciprocal obligation to buy the securities at a particular price) at a profit, but only at a loss, a dealer will lend the trader enough money to pay for the securities, taking the securities themselves as collateral, and the trader may then hold the securities in the hopes that the market will rise.
Footnote: 15 On 6 May 1992, the circuit court directed a verdict on the W. Va. Code 12-6-12  speculation claim in a principal amount of approximately $32 million, later increased, with the addition of interest, to roughly $52 million.
Footnote: 16 In this regard, the court's instruction to the jury as part of a connected charge was as follows:
"The monies at issue in this lawsuit were part of
the State's Consolidated Fund and as such were required
by law to be invested in accordance with the provisions
of the West Virginia Investment Management Law. Among
other things, the Investment Management Law provided that
investments made on behalf of the State 'shall be made
with the exercise of that degree of judgment and care,
under circumstances then prevailing, which men of
experience, prudence, discretion and intelligence
exercise in the management of their own affairs, not for
speculation but for investment, considering the probable
safety of capital as well as the probable income to be
derived from the investment.'
The interpretation of a statute is a question of law
for the Court, and I have concluded that the word
'speculation' as used in the Investment Management Law
refers to a financial transaction in which there is a
real and identifiable risk of loss depending ordinarily
on market fluctuations. Speculation also refers to a
strategy that is inherently unsafe because its outcome is
not susceptible to prediction with any reasonable degree
I have concluded that Morgan Stanley is liable to
the State as a matter of law for the damages sustained by
the State as a result of the when-issued transactions,
the reverse repurchase transactions and the put option
transaction because those transactions with Morgan
Stanley violated West Virginia law since they were for
speculation, not for investment. The fact that I have
found those certain transactions to be speculative is not
evidence of fraud. The State must establish, separate
and apart from that legal ruling, each and every one of
the elements of its fraud claims by clear and convincing
Trial Court charge, pp 13,14.
This instruction, telling the jury that Morgan Stanley had
behaved illegally by violating the investment statute, is important
later when we consider the vague instructions on "constructive
Footnote: 17 It is hard to find fraud-- constructive or otherwise-- when officials at the State Treasury were: (a) sophisticated investors; and (b) audited by other State officials, including the State Legislative Auditor. The Board of Investments approved the actions that are at issue in this case and, to the extent that any Board of Investment guidelines were violated, such guidelines were simply internal rules; to say that Morgan Stanley could not reasonably have relied on Mr. Margolin's and Ms. Lester's undisputed and very earnest representations that deviation was permitted by the Board is tantamount to confessing that West Virginia officials must at all times be treated as either children or incompetents. We are unwilling to accede to this proposition. Again, see, supra, note 8, which strongly suggests that competent adults who do not need to be led around on a leash do, occasionally, buy a piece or two of blue sky.
Footnote: 18 All conversations between the Treasurer's office and the dealers in New York were routinely recorded so that there would be a verbatim record of trades made.
Footnote: 19 But see also, W. Va. Code 31-4D-7(a)  which provides:
No person who participates in the acquisition, disposition, assignment or transfer of a security by or to a fiduciary including a person who guarantees the signature of the fiduciary is liable for participation in any breach of fiduciary duty by reason of failure to inquire whether the transaction involves such a breach unless it is shown that he acted with actual knowledge that the proceeds of the transaction were being or were to be used wrongfully for the individual benefit of the fiduciary or that the transaction was otherwise in breach of duty.
Footnote: 20 See, Thomas Babington Macaulay, History of England, Everyman Edition, J.M. Dent & Sons Ltd. (London, 1964) Vol.II, pp. 114-174.
Footnote: 21 For an excellent summary of the early history of nullification, see, Philip B Scott, "Jury Nullification: An Historical Perspective on a Modern Debate", 91 W.Va.L.Rev. 389.
Footnote: 22 Roscoe Pound, "Law in Books and Law in Action," 44 Am.L.Rev. 12, 18 (1910). See also, Sparf and Hansen v. United States, 156 U.S. 51, note 6 at 110 (1895) (Gray and Shiras, JJ., dissenting).
Footnote: 23 It is a mistake to think that in counter-principal trading one side's losses are the other sides' gains. Suppose the State buys a security for $10 from Dealer X and then sells it to Dealer Y for $8; the State thus has a "loss" of $2, which under the plaintiff's theory in this case is assessable against either Dealer X or Dealer Y. But by no means does either Dealer X or Dealer Y necessarily have a gain of $2 from its transaction with the State. Dealer X's profit, if any, depends on whether it had paid less than $10 when it originally purchased the security it then sold to the State. If it had paid more than $10, it too would have a loss. Dealer Y's profit, if any, depends on whether it is able to get more than $8 when it tries to sell the security it bought from the State. If dealery sells for less, dealery too will have a loss. Either dealer's profit or loss depends entirely upon shifts in market price as it transacts business with other counter- principals.
Footnote: 24 After all, if there had been a Dow Jones Index Fund in
September, 1929, the prudent investor who had heavily invested in such a fund as the quintessential exercise in "modern portfolio management" would have been a hurt'n cowboy by January, 1930. Indeed, it is wonderful fun to watch young instructors in economics wax eloquent about the intersection of supply and demand curves for endless weeks in basic economics courses while spending but a bare moment discussing what happens to markets when entire curves shift right or left (as the result, for example, of war, technological innovation, shifts in taste, or price shifts in substitute goods.) In the real world, of course, rightward and leftward shifts in supply and demand functions are the primary jeopardy to which business is subject. Bonds can be wiped out by inflation; land values can be destroyed by depression; common stocks can be devalued by international competition that eliminates barriers to entry and destroys oligopolies; and, a "balanced" portfolio does little for a person in a country ravaged by a shooting war.
Footnote: 25 "[Juries] have the physical power to disregard the law, as laid down to them by the court. But, I deny that...they have the
moral right to decide the law according to their own notions or pleasure. On the contrary, I hold it the most sacred constitutional right of every party accused of a crime that the jury should respond as to the facts, and the court as to the law....This is the right of every citizen, and it is his only protection." Sparf v. United States, 156 U.S. 51 at 74, 15 S.Ct. 273, 282, 39 L.Ed. 343, 351 (1895).
Footnote: 26 Morris R. Cohen, The Place of Logic in the Law, 29 Harv.L.Rev. 622, 639 (1916).
Footnote: 27 In 1991 there were proposed statutes or constitutional amendments pending in seven states that would require judges to instruct jurors on their right to ignore the law and vote their consciences. Other states were considering similar legislation. See, M. Kristine Creagan, "Jury Nullification: Assessing Recent Developments," 43 Case Western Reserve L. Rev. 1101 (1993). Currently, the three states that permit jury nullification are: Georgia, Indiana and Maryland.
Footnote: 28 Courts have generally held that, where a trustee made several improper investments some of which resulted in a profit and others in a loss, the trustee cannot set off the profit against the loss. State ex rel. Bottcher v. Bartling, 149 Neb. 491, 31 N.W.2d 422 (1948) (citing Restatement of Trusts, § 213); Pennsylvania Co. for Ins. on Lives and Granting Annuities v. Gillmore, 142 N.J.Eq. 27, 59 A.2d 24 (1948) (citing Restatement of Trusts, § 213); King v. Talbot, 40 N.Y. 76 (1869); City Bank Farmers Trust Co. v. Evans, 255 App.Div. 135, 5 N.Y.S.2d 406 (1938), reargument denied In re Sterling's Estate, 256 App.Div. 967, 11 N.Y.S.2d 223 (1939); Schuster v. North Am. Mort. Loan Co., 44 Ohio Law Abstract 577, 65 N.E.2d 667 (1942); Cuyler's Estate, 5 D. & C. 317 (Pa.1924); Adye v. Feuilleteau, 3 Swanst. 84n, 1 Cox 24 (1783); Ex parte Lewis, 1
Gl. & J. 69 (1819). (The rule is most strongly applied when a party seeks to mitigate damages by balancing losses against gains with respect to different parts of the trust property.)
When there has been a breach of trust involving successive
dealings with one part of the trust property, however, a different
rule is applied. Some cases have allowed a set off of profit
against loss on the grounds that there was, in substance, a single
breach of trust. MacBryde v. Burnett, 132 F.2d 898 (4th Cir.
1942); Jennison v. Hapgood, 10 Pick. (Mass.) 77, 111 (1830);
McInnes v. Goldwaite, 94 N.H. 331, 52 A.2d 795 (1947); English v.
McIntyre, 29 App.Div. 439, 447, 51 N.Y.S. 697 (1898); Lacey v.
Davis, 5 Redf.Surr. (N.Y.) 301 (1882); In re: Porter's Estate, 5
Misc. 274, 25 N.Y.S. 822 (1893). See Marcus v. Otis, 168 F.2d 649
(2d Cir. 1948), reaffirmed 169 F.2d 148 (1948).
If a trustee purchases property in breach of trust and then
sells that property for a loss, it has been held that he is
accountable only for the net profit or chargeable with the net
loss. Baker v. Disbrow, 3 Redf.Surr. (N.Y.) 348 (1878), aff'd 18
Hun. 29, 30 (1879), aff'd mem. 79 N.Y. 631. The same rule has been
applied where the property was first sold at a loss and the
proceeds invested at a profit. Fletcher v. Green, 33 Beav. 426
Whether the trustee is allowed to offset profit against the
loss primarily turns on the way the improper transactions are
structured, and not explicitly on whether the breach of trust was
intentional or unintentional. Restatement, (Second) Trusts §213
states, in pertinent part:
§213. Balancing Losses against Gains
A trustee who is liable for a loss occasioned
by one breach of trust cannot reduce the
amount of his liability by deducting the
amount of a gain which has accrued through
another and distinct breach of trust; but if
the two breaches of trust are not distinct,
the trustee is accountable only for the net
gain or chargeable only with the net loss
Our reading of the law instructs us that § 213 is the
traditional characterization that allows a court to temper the wind for the shorn lamb, but in the case before us we find that simply characterizing a course of conduct as "one transaction" or "several transactions" is itself outcome determinative. What would lead to one or the other characterizations at the end of the day is the court's conclusion about whether the trustee was morally culpable or whether the trustee simply made an honest mistake. Furthermore, although throughout this case the Board of Investments and the Investment Division of the Treasurer's office have been characterized as fiduciaries, they certainly do not resemble the classic "trustees" who administer estates and trusts and around whom the classic language of the law of trusts has arisen.
Restatement, (Second) Trusts §213, Comments a and d state:
a. Distinct breaches of trust with respect
to different parts of the trust property. A
trustee who is liable for a loss occasioned by
a breach of trust with respect to one portion
of the trust property cannot reduce the amount
of his liability by deducting the amount of a
gain which has accrued with respect to another
part of the trust property through another and
distinct breach of trust.
Thus, if the trustee improperly invests part
of the trust funds in securities which he
sells at a profit and improperly invests
another part of the trust funds in other
securities which he sells at a loss, the
beneficiary can accept the transaction on
which there was a profit and reject that on
which there was a loss; he can compel the
trustee to account for the profit on the
former securities and charge the trustee with
the loss on the later securities.
d. Breaches of trust which are not distinct.
If the trustee makes a profit and also incurs
a loss through breaches of trust which are not
distinct, the beneficiary is not entitled to
recover the amount of the profit without
deducting the amount of the loss, or to charge the trustee with the loss without deducting the amount of the profit.
Footnote: 29 It is the prevailing rule in West Virginia that an "innocent" trespasser who has acted in "good faith" mining or removing minerals from the land of another, is liable to the owner for the full value of the minerals removed, computed as of the time the trespasser converted them to his own use, less the expenses of extraction. Reynolds v. Pardee & Curtin Lumber Co., 172 W. Va. 804, 310 S.E.2d 870 (1983); Spruce River Coal Co. v. Valco Coal Co., 95 W. Va. 69, 120 S.E. 302 (1923) (coal); Pan Coal Co. v. Garland Pocahontas Coal Co., 97 W. Va. 368, 125 S.E. 226 (1924) (coal; stating rule). See also, 21 A.L.R.2d § 3.
In Syl. pt. 8 of Pan Coal, supra, we ruled:
If the trespass be committed, not
recklessly, but through inadvertence or
mistake, or in good faith, under an honest
belief that the trespasser was acting within
his legal rights, it is an innocent trespass,
and the measure of damages for the coal mined
and carried away is the value of the coal in
place, usually to be ascertained by finding
its value at the pit-mouth or loading tipple
and deducting therefrom the expense of mining
and carrying it to the pit-mouth or tipple.
But if the trespass be wilful, in an action
for the value of the coal so mined, the
measure of damages is its value at the pit-
mouth or loading tipple, without deduction for
mining and carrying it to the place of
The measure of damages for a trespasser's removal of coal or
other minerals depends upon whether the trespass was innocent or
wilful. Syl. pt. 8, Pan Coal, supra. Syl. pt. 9 of Pan Coal
In an action for the recovery of the value
of coal mined by a trespasser, the damages
therefor are compensatory only, whether the
trespass be innocent or wilful. The
disallowance of labor and expense in case of
wilful trespass is not based on the ground of
allowing plaintiff exemplary or punitive
damages, but on the principle that one who
wilfully commits a wrong is not entitled to
profit thereby, while the innocent trespasser,
who in good faith has improved the property,
has acquired a certain right in it and is
entitled to credit for the value added thereto
at his expense, whenever the plaintiff asserts
his right to the property. (p.376).
See also, Restatement 2d Torts § 920, stating:
Benefit to Plaintiff Resulting from
When the defendant's tortious conduct has caused harm to the plaintiff or to his property and in so doing has conferred a special benefit to the interest of the plaintiff that was harmed, the value of the benefit conferred is considered in mitigation of damages, to the extent that this is equitable.
Footnote: 30 These are the court systems of the fifty states, the state- like court systems of the District of Columbia and Puerto Rico, and the federal system. These disparate systems are only loosely held together by the Supreme Court of the United States.
Footnote: 31 Furthermore, were the Supreme Court of the United States to undertake to make such national rules on a case by case basis, there would be an entirely wholesome mid-course correction in tort law that would preserve many of tort law's genuine contributions to a safe and just society. As it stands, however, when reform comes, it is likely to be part of a larger ideological counter-revolution that will necessarily involve wholesale mucking about by novices who never tried a case and have no idea of the balance of off- setting terrors necessary to make the system work.
Footnote: 32 Blankenship was an engraved invitation to the U.S. Supreme Court to review the entire product liability, competitive race to the bottom problem and begin the process of national rule-making. The defendant, alas, was not attuned either to subtlety or irony; it settled!
Footnote: 33 See also, R. Neely, The Product Liability Mess: How Business Can Be Rescued from State Court Politics, Free Press (New York, 1989), (also available in Japanese from Toshiaki Hasegawa, Tokyo, 1991).