*1 L. Conaty, Arthur for plaintiff.

Goldberg Goldberg, Goldberg, Philip & B. Leo M. Gold- berg, Kelleher, Thomas F. defendants. Company al., et Trs. vs. Bank Farmers

Reginald Taylor et al. B.

AUGUST 1949. Flynn, C.J., Capotosto, Baker, O’Connell, Condon and Present: JJ. *2 brought by in the trus- equity a bill J. This is

Condon, Taylor, of relative to will Moses tees for instructions the After cause Portsmouth, of deceased. the the town late of was deposition on and and bill, had heard answers been it superior court, hearing final the ready for for decree for accordance to this court determination was certified 1938, chapter 545, §7. laws general with following to of scope as are desired Instructions “Any Ninth of the will: and all securi- of clause provisions time death by owned at the of ties me property my and allotted my executors and trustees and may by be retained for.' provided or shares hereinabove any of trusts ** * may reinvest and trustees invest and jyj-y.executors any of my and the trusts hereunder estate funds and or stocks which securities personal real or estate judicious investments, whether or such they may deem by law for trust prescribed be of the character investments * * my *. I authorize executors and trus- investments reorganization any corporation participate tees to by my in which be held may or stocks estate securities respect steps and take with hereunder, such trusts advised.” they may be thereto as relied the executors and upon have been powers Those following qualification their appointment trustees since authority May 1928 as.their 26, decease on the testator’s a number of the retaining large question The now own stock. has trustee’s corporate illegal notwithstanding retention was arisen whether such quoted. testamentary powers above grant and The testator, widow of Bishop Taylor, Edith banking corporation Company, Loan Farmers’ will executors and named York, were of New October 1926. Mrs. The will was executed on. trustees. Taylor Bishop remarried has nowis Edith Nicholson. corporate banking trustee has modified status, changed City Company its name to Bank Farmers Trust and has with affiliated the National Bank of New York. Both trustees are described their new names in the bill complaint brought against have the benefi- ciaries of the trust who, however, have with united complainants urging testamentary us hold that grant powers quoted above authorized the retention of question guardian the securities in in the trust. The ad *3 by appointed superior represent litem the court to the contingent persons interests of minors and the interests of being position. not ascertainable takes a like usually We are thus without the benefit that comes from advocacy adversary Complainants the earnest of counsel. argue, questions however, that the be to determined are not juris moot, because the beneficiaries sui are desirous that complainants question retain the securities in the trust they and therefore need the instructions of the court to any may end. We have resolved we doubts entertain in the matter of that view, favor and therefore at this time only questions we will determine those which arise as a company result of the affiliation trust with the bank. When the testator executed his will on 25, October 1926 he owned of 1600 shares The Farmers’ Loan and Trust Company, company, hereinafter called the trust and 8213 City shares of National the Bank of New York, hereinafter called the bank. Sometime after he had executed his will company he transferred 750 shares of the trust stock to corporation wholly by Annandale Farm, Inc., a owned him, acquired and additional 1087 shares of the stock of the directly bank. At his death he owned 850 of shares company indirectly and of bank trust 9300 shares and through Farm, Annandale Inc., shares 750 of the trust company. On December 12, 1928 the estate 830 sold reducing of shares the bank stock thus the number to held February split 16, shares. About 1929 bank 8470 its a thereafter the execu- shares on five one basis so 42,350 21, On March 1929 as and held tors trustees shares. 40,000 by selling that total to executors reduced shares 32,000 They to later further sales shares. 2350 shares and 1929, trustees, to September from June also sold a 1930, like repurchased on November later, shares advantage the trust estate. to the amount substantial and the bank had In the meantime trust negotiations a negotiating and as result those been name to Bank Farm- company agreed change trust to its and as to with the bank Company such affiliate ers acquire manner. bank was effect to following The except new trust number company, the shares small such company, of the trust shares qualify directors pro for the benefit were to be held trustees rata of the bank. The stockholders of trust stockholders affiliation were to receive company agreeing five for each bank share of trust new stock give up was thereafter to company. in favor of banking operations the bank commercial *4 its com- business to the trust bank was to surrender trust All of company accepted the trust this stockholders pany. turned their stock and received affiliation, of plan of stock exchange shares new bank for each share of five City Thereafter Bank Farmers company stock. trust was held in trust for the benefit of the Company’s stock Trust Bank City of the National and some of stockholders and directors of that bank thereafter became officers officers trust company. of the and directors Cannon, Y. City 125, In Farmers Trust Co. v. 291 N. Bank of affiliation appeals the court characterized such 131, of group “Thus there was one shareholders who follows: the entire beneficial both com owned interest together and losses of each affected 'Gains them panies. Bank proportionately with the number of alikfe, all shares Ownership of held. of these was in each them shares beneficial of the pro ownership from rata separable trustee’s and no one acquire shares could of dispose or this beneficial interest except by acquiring of Bank disposing shares.” And significantly the court pointed out that when the trustee that case turned the old of certificates stock City National Bank held in the for and received trust them new “acquired certificates it thus as an of the asset trust a substantial beneficial in its own interest stock which only could be by selling City sold in the shares National Bank with it so closely which was affiliated.”

In the face brought of such a situation about by the corporate trustee the court held that thereafter undivided loyalty the trustee to the trust did not exist, saying: “The officers trustee responsible the administra- tion of the under a duty unremitting trust were with loyalty both serve the interest of Trust Company and the interest of the trust conflicting estate. These were interests insofar as the trust City investment the National Bank required shares decision whether to hold or to sell the falling shares in a market. large The sale this number might have seriously affected the interests of the Trust Company depressing the value of these shares in a rapidly deteriorating market. Consequently the trustee had conflicting interests to deciding serve or not sell to sell.” Durston, the recent case of Matter 297 N. Y. 64,

the court of appeals Bank reasoning followed the Cannon, supra, Farmers Co. v. applied it to the following factual situation. appointed Testator three one trustees of whom was a whose shares the testator held a substantial investment. In his will *5 with reference to testator, property the had given he them in trust, expressly vested his all trustees “with the authority, and connection with I powers would same, if living.” The possess, trustees retained the stock Later company. trust on split its stock of four for one and basis also its capital increased stock authorizing each stockholder to subscribe for new stock. held for they exchanged the old stock trustees

The new stock for additional and subscribed new stock rights. of their exercise of the trust of the stock held that the retention

The court testamentary pro- by the not authorized company was “that infer therefrom declined to They expressly vision.. to the regard without was to be exercised authority such all trustees” loyalties imposed upon and fundamental duties * * * grant language as “we must construe said: in the however, exercised, to be discretion, wide power and duties of trustees. subject obligations manner and to the be done things these could If intended that all the testator loyalty rule of absolute regard the fundamental without to or retention of securi- any purchase fidelity prohibiting authority should have loyalty, involving a divided ties broad discretionary granted were powers been stated. upon laid all trustees.” subject to the but still prohibitions Ridings, from Matter it would seem However, upon not insist appeals N. Y. that the court does 417, 418, excusing the trustee from verbiage by the testator explicit clear- loyalty exemption but such must rule, the undivided relate to owned previously from the will to ly appear “that language under review was There the by the testator. funds, shall the investment said Trustee, said in the legal for trust funds State to investments be confined any investment as left may but continue York, of New * * *.” the same may me or sell the fact that the beneficiaries at view of bar, the case duty of the trustees to sell asserting that it was are not not other- and that are the trust the stock of in retain- of the trustees objecting prior conduct wise testator at his decease held which were ing stocks to their seeking instructions with them join but a consequence obtained as the new stock authority to hold what upon not called decide we are affiliation, in question concerning stock trustees duty was enough to decide It will be time affiliation. before the *6 if question when and a real controversy presented is to us wherein we full may have the benefit of adversary views.

Merely then assuming deciding without that prior the affiliation of the trust and the bank the trustees were by language the testator hold the the authorized Farmers’ Loan and Company and of the City National Bank which by were held at testator his decease, testamentary language did such also authorize the acquisition of the new of the National Bank City stock in exchange for in stock, especially such view of the circum stances which affiliation took and the place consequences resulting Upon therefrom? careful consideration matter light supreme of the importance the law of the loyalty rule, trusts undivided we are of the opinion, weighing after comparative values cases factual presenting situations similar to the case at that bar, by the trustees were not authorized to retain testator new bank after stock the affiliation. We think this view only by is supported expressed views Bank Cannon, supra, and Farmers Trust Co. v. Matter of Durston, but of In re supra, by Trusteeship also the cases Stone, and Farr v. First Camden Nat. Bank Ohio St. Co., Super. & Trust 4 N. J. 89. testamentary “all provision Stone case was

statutory limitations and restrictions as to the investment may of trust funds now force hereafter be enacted being hereby expressly the state of Ohio waived me * * a xhe named as trustee whose held After her capital stock testatrix shares. decease with other company merged this similar trust companies Company to form the Union Trust which became successor and continued to hold After its shares trust. trustee observing “specific authority that there was no conferred to the bank stock” the court said: “Our studied con- retain clusion, case, corporate to the instant applicable own an in- acquire cannot shares of stock as trustee in a without trust, or retain its own shares vestment, *7 136

express authorization bring- terms instrument ing existence, trust into or by provision of law.” The court noted that the keep trustee did not the shares of bank stock owned the testatrix but, by acquired the merger, its own subsequent shares came into existence to her de- cease. It held that the trustee no circumstances had authority to hold it those shares should have sold them after the merger.

In Farr case a somewhat similar situation was pre- as sented insofar the effect of merger of two corporations is concerned. Testator held stock two one a banks, trust company, the other a national bank. In will his he appointed company gave trust trustee and it broad powers over stocks and bonds the trust estate so his executors trustee “shall be under no responsibility by reason of their either to decision hold or to sell any of such or stocks bonds or therein.” interests Under this provision the court held that implicitly the trustee could have properly retained the the two stocks of banks before the merger but question was, could it hold the stock of the new trust company obtained lieu thereof merger? after

Under a statute in New Jersey this is expressly permitted if the new bank was substantially the equivalent of the merged banks. Riker, re Estate 125 N. Eq. J. 349. Following that case the New Jersey court found that new trust was substantially similar to the old but not to the national bank pointed out some of the differences. The court held that notwith standing testamentary provision the trustee had no authority to hold its own stock obtained in exchange for the shares of the national bank stock, although it did not base decision on a violation of the undivided loyalty rule. However, opinion our the case stands for proposition that testamentary authority retain stocks does not include other stocks obtained lieu thereof as a merger result of a of two corporations, unless the new corporation virtually as old corporation. same right of. a corporate trustee to retain its own shares varying under circumstances has been at considered some length a comparatively recent law review article. L. Rev.

Harv. 601. Some of the cases herein referred to are discussed that article as are a number of other cases but none of them except Bank Farmers Trust Co. v. Cannon, supra, appear have the same similar features of affiliation are present in the case at bar. think We *8 those features, the effect of which was so clearly described that case, bring the case at bar within the requirement holding corporate to trustee strict com- pliance with the undivided loyalty rule.

Here the corporate trustee, by negotiating with the National City Bank finally and agreeing to an affiliation with it by virtue of which the bank became to all intents and purposes ego the alter of the trust company, created a situation by virtue of it acquired a huge additional block of its own stock that amounted in the aggregate to slightly more than 29 cent per of the testator’s estate. In this connection it said In re Trusteeship was Stone, supra, at page 302: “Since a trustee is a fiduciary of the highest order and charged is with the utmost fidelity to his trust, he must refrain from creating situations where his own are interests brought into conflict with those of the doing from trust, things those which would tend to interfere with the. of a wholly exercise disinterested and independent judgment. In accepting a trust, the trustee presumed to know obligations con- limitations high nected with office if and, his he transgresses, must abide the consequences.”

The situation created by the corporation trustee in the case at bar one was which the testator did not contemplate when he authorized the trustees to retain stocks already to estate, trust invest securities character prescribed by law, and to participate reorganization corporations which the testator held stocks. a re- As sult of the affiliation wrought by the corporate trustee’s as the longer held the stocks

own act the trustees no same time of and the control decease, held at the his testator longer independent was no over such stocks designated as one of his trustees. company he knew Company Bank Trust is not the same City The Farmers Company. institution the Farmers’ Loan and Trust bank, a mere nominal captive former is has limited in identity own, strictly scope and is its field of narrow trust business. operations considered bank state its would not be stock this stock language authorizing meaning testamentary within Opinion, Bowen an bank stocks. trustees invest hand the Farmers’ Loan and R. I. 200. On the other corporation which, Company independent was an Trust actually authorized to conduct and affiliation, (cid:127)before the was business, including commer- banking did conduct a full Hence in banking acquiring and trust cial services. Bank stock and the new Company Farmers *9 made National Bank stock as result the affiliation corporate trustee the trustees exceeded possible authority thereby loyalty their violated the undivided rule. we find argued, however, have should

Complainants compre- intention which had a much broader testator taking events which later possibility place hended the occurred a result of the affiliation of bank actually as they urging point this stress company. years one hundred disclosing that for over facts evidence Taylor family closely pre- fortunes been have institutions, both so much so eminently identified with “dynasty” of a which come aspects to resemble the would authority if held to without to an end the trustees are be “The now hold this trust. retain the shares of the testator and long participation continued interest and in the the Bank and the Trust Com- family his affairs of he argue, “justify inference that pany,” complainants likely, it or at least at the time possible, considered execution of his will that the relationship of the Trust Com- pany and the Bank might in the future become closer and that they might in some way become affiliated.” They fur- ther argue that “If he thus foresaw the possibility of an even closer relationship between the Trust Company and the Bank than that which existed at the time of the execu- tion of his will and during the remainder of his it lifetime,” would compel the conclusion that authorization his will to retain investments also authorized retention of the stock of the bank affiliation. after

Our answer to that contention is that for us to find such an intention from those premises would be to our rest con- clusion on pure conjecture and not any on inference that may reasonably be drawn from the will or the circumstances surrounding the testator at time he executed it. We cannot speculate thus on what the testator would have intended the language he used had he known that question stocks in in his trust estate would be exchanged in such a manner effect they would all become shares of stock of the trust company that succeeded the company which he named as trustee. In our opinion the situation here is not like the one approved which was in In re Ryan’s Estate, 186 Misc. 688. Nor do we think it similar to either Boardman, Petitioner, 16 R. I. 131, or Doar Doar, v.

R. I. 18.

The long historical connection of the testator and his an- cestors with the trust company and the bank is not a suffi- *10 cient basis on which to the„extreme rest conclusion for which the complainants contend. Notwithstanding those circum- stances the testator conceivably might not have desired that per 29 cent of the of funds his estate should continue to be invested in the stock of the corporate trustee thus depriving so substantial a portion of his trust estate of the full of benefit loyalty undivided Or, rule. what is more likely, he never considered implications a such situa- tion at all it because did not exist and was not even in

140 testamentary the time he made his

contemplation either at at time of decease. dispositions or his which claim are Complainants they cited several cases among important, close to the case at bar which the most Estate, 413; Pa. Glau- our are Greenawalt’s 343 opinion, Estate, Balfe, 22; 192; App. 350 Pa. Matter 245 Div. ser Estate, Bank 611; Inre 178 Mise. Robisonv. Elston Easton’s Co., App. 113 Ind. We have examined & Trust 633. those they and are not certain that a different adopt cases view Insofar, from the we follow here. however, one tendency indicate a to a more liberal construction the will or trust instrument favor of the trustee order to avoid a rule consequences violation of the of undivided loyalty wewe must decline follow them.

We adhere to the rule of strict in such a case construction The power favor of trust. of the trustee should be with rest upon established the utmost clearness conjecture. presumption against of the law such is and, in provision investments the absence of clear to the all doubts contrary, regarding scope language upon the claim for made must be re- power such is claim. against party making solved See Barker’s Estate, Following Pa. rule it been well' 159 518. this has language said that the under should be limited to review compass narrowest and should not be so construed toas create a situation which is abhorrent to the law. Wendt v. Fischer, N. Y. And in Bogert 439. it stated Trusts enlarging 377, §683, “Clauses the trustee’s investment strictly They are must powers also be followed construed^. fidelity.” with close whole, therefore,

On we are of the opinion given which we to the language construction have testator the case at bar is with rule of con- consonant struction be followed such and is more cases consistent objectives sought with the fundamental to be obtained loyalty the undivided rule of the law of than trusts would be a more liberal construction favor of the trustee. *11 In our opinion the fidelity of trustees will be better as- sured and the integrity and security of trust estates better served not countenancing any relaxation of the un- divided loyalty rule unless it clearly appears testator settlor intended to exempt the trustee from that rule. Because the complainants here have not met test we have concluded that the trustees, after the affilia- tion of the and the bank, were- without authority to retain the shares of stock which they ob- tained as a result of such They affiliation. should have divested themselves of such stock within a reasonable time after the affiliation.

There are two other questions the answers to which are necessarily governed by the answer above. Were the trus- tees authorized to retain the new bank stock which they indirectly obtained as a result of liquidating Annan- dale Farm, Inc.? Were the trustees authorized to retain the 5000 shares of new bank stock purchased in replacement of equal an number which they had previously sold after the affiliation? The answer to question each course is in the negative. The exceedingly profitable re- sults which flowed from the sale and later repurchase of 5000 shares of the new bank stock and which complainants have expressly called to our attention to show, we suppose, ’ how well the beneficiaries of the trust have been rewarded by the financial acumen and astute management of the trust on the part of the can trustees in no wise weigh with inus our determination of questions propounded.

In what we have said here and in what we have held as to the applicable law governing the trustees after affiliation we have not passed and did not intend to pass any judgment on the prudence of the trustees in the course administration the trust either before or after the affiliation trust and the bank. We have been concerned only with the question of the power of the trustees, under the testamentary authority, to continue investments question.

142 to this court may present parties Ocober

On to be opinion, in with this decree, accordance a form of in the court. superior entered Reargument. for Motion

On 16, 1949. NOVEMBER above-entitled After our opinion Per Curiam. requested per- respondents of the filed certain cause was was request reargument, motion for file a to mission At- duly filed. thereupon a motion was granted. Such alleged it was which, certain affidavits thereto were tached thereof. support in the were motion, filed Fran- respondents motion was after such Sometime Huntington retained addi- Taylor Edith Taylor and cis interests. Such counsel their represent to tional counsel motion court or argue open permission requested bearing additional evidence to present chambers request Their motion. made points on some including cause those in the by other counsel supported was respondents motion on behalf of filed such already who had well as Taylor Huntington as Edith Taylor and Francis for request per- Later a second respondents. other certain was made on be- further evidence present still mission consideration, After each those respondents. half of such motion We consider the refused. shall hereby requests filed. originally reargument as for entertaining requests court in this practice always been, as far as reargument has motions to file containing motion a written to receive aware, we are request on which rests grounds of the statement motion to consider that argument, oral without thereafter, We care deny reargument. have or grant in camera with such prac motion accordance fully considered that no cause has been opinion are we tice and argument. We have warrant further which would shown reference to the affidavits without that conclusion reached additional evidence. proposed or the motion attached to containing Affidavits new evidence form no part of a motion to reargue, and on such a motion we do reopen the case for the purpose of receiving additional evidence.

The other points which are outlined the motion were, in our opinion, substanially briefed orally argued at the *13 hearing the cause before us. There appears to us no valid why reason such points should again be argued. It is from apparent the tenor of the motion that counsel do not agree with the court that the undivided loyalty rule ap- plicable in the circumstances this cause. We can only reiterate our firm opinion that it is.

Motion denied. Angelí, Edwards & Edwards, Walter A. Robert E. Jacob- son, for complainants. Allen,

Hinckley, Tillinghast Wheeler, & Allen, Arthur M. Matthew W. Goring, F. Pickard, Robert Hogan Hogan, & Hogan, Edward T. Hogan, Laurence J. for certain respond- ents. & Harvey, William R. Harvey, J. Havre, Russell

Sheffield guardian ad litem and representative of contingent in- terests. Di

Louis Biase vs. John Louis Nardolillo. Luigi

Same vs. Nardolillo.

AUGUST 1949. Flynn, C.J., Capotosto, Baker, Condon O’Connell, JJ. Present: