181 Misc. 566 | N.Y. Sur. Ct. | 1940
Deceased died in 1911 leaving a will wherein he provided for his widow, who died in 1912. After her death the entire residuary estate was held in trust for the children of deceased. Each child had only the income on his share until he attained age thirty-five. Then he became entitled to his principal. Three children have already passed thirty-five and the youngest will become thirty-five in 1945. Since November, 1911, Title Guarantee and Trust Company has acted as trustee in all of the trusts. Since 1913 William F. Brown has acted as cotrustee in all of the trusts. In 1914 Michael G.
Intermediate accounts of the three trustees were settled by decrees of the court dated respectively May 31, 1917, May 2, 1922, and January 19, 1928. The account now before the court for settlement covers transactions of the trustees from April 20,. 1927, to November 9, 1937, except that the participation of Mr. Ryan in the reported transactions terminated when he died on January 9, 1928. To the account now before the court more than 300 objections have been interposed. As a corollary to their objections and in furtherance thereof the objectants applied to the court to vacate the decrees entered in 1922 and 1928, settling the prior accountings of those periods. These applications are consolidated with the accounting proceeding.
Throughout the life of the trusts the funds have been chiefly invested and' are now invested in so-called guaranteed first mortgages and guaranteed first-mortgage certificates. Many of the whole mortgages in the trusts are asserted by the objectants to have been purchased by the trustees from the corporate trustee itself. The individual trustees are charged with having failed in their duties by negligently permitting these unlawful purchases. In respect of the mortgage certificates or participations it is asserted that notice of the purchase thereof was not given as required by subdivision 7 of section 188 of the Banking Law in effect at the time of the respective purchases. Objectants Barry and Hulswit separately attack the validity of certain investments in mortgage certificates'for their trusts, on the ground that such certificates carried maturity dates coinciding with the due dates of the balances of principal of the mortgages, whereas, other participations in the same mortgages sold to other persons were made to mature on dates when payments in reduction of mortgage principal became due. These separate objections assert that such certificates bought for the trusts were not equal in lien to the certificates thus sold to others.
,,;In addition to the objections based upon the alleged impropriety of the purchases of whole mortgages by the trustees from one of their number and' the objections in respect of the mortgage participations just, outlined, there is a broad attack by all objectants upon all the trustees based- on various forms of neglect and misconduct in the making of the original mortgage investments, in the managing of the mortgages after the investments therein and particularly in the renewal of the mortgages after they became due. The trustees are charged
By appropriate objection the further charge is made against the trustees that the actual determination respecting the trust investments was left to the corporate trustee and it is asserted to have been unable to act with fairness to the trusts because it was motivated by a desire to obtain for itself commercial profits from so-called loan fees and renewal fees paid to it by mortgagors whose mortgages were placed in the trusts. In respect of the so-called loan fees, specific attack is made upon the investments on the further ground that the corporate trustee made a profit from the trusts in the amount of such fees when it sold the investments to the trusts at par. In respect of the so-called renewal fees, objectants assert that the corporate trustee was motivated by a desire to make a commercial profit out of mortgagors who sought renewal of loans held by the trusts and so was unable to make a disinterested decision as to whether a particular trust mortgage or participation should be renewed when it became due. In this connection the objections assert that the trustees could and should have required payments at the time various mortgages and participations became due and that demands for payment were not made because the corporate trustee acted in its own behalf so as to secure the. renewal fee profits available, only if extensions were granted. Various other objections to the account and to the conduct of the trustees are made by object-ants. Some relate to capital commissions, some to income commissi oris, some to so-called expenses of the trust estate listed in the account, some to the form of the account and some to other phases of the administration of the trust. These will be referred to hereafter when the objections are dealt with in detail.
Before proceeding to consideration of those objections which are made by all objectants and which broadly attack the trust investments and the conduct of the trustees, the court will dispose of the separate objection made by Barry and Hulswit
The rule of law that a trustee may not deal with himself is an established standard of trust administration. When self-dealing is discovered the beneficiary has the unqualified right to disaffirm the transaction and to require the return to the trust of the consideration paid. He may require the trustee to make good any damage to the trust after making due allowance for any benefits derived by the beneficiary from the transaction repudiated. The views of the court on transactions of purchase such as are here under attack are stated at length in Matter of Tuttle (162 Misc. 286). The authorities on the point are sufficiently discussed there and will not be further discussed here. The law forbidding this type of purchase being certain, the only open question is one of fact. The record here presents a very full and clear development of all the material and relevant facts.
In nearly every instance of investment in a whole mortgage the corporate trustee purported to have made the purchase from Bond and Mortgage Guarantee Company. It asserts that the transaction of purchase was genuinely a purchase from an independent agency and that such a purchase does not fall within the condemnation of the rule. The facts in a particular transaction in the Barry trust will serve to exhibit the actual course of dealing of Title Guarantee and Trust Company with Bond and Mortgage Guarantee Company on the
The court holds that in the typical case described no transfer of title to the mortgage was made in fact to Bond and Mortgage Guarantee Company and so holds that the actual transfer was one made directly by the corporate trustee to the trust. This ruling suffices to charge the corporate trustee with the obligation to replace in the capital of the trust all of the moneys invested in the purchase of whole mortgages which were thus ostensibly routed into the trust through Bond and Mortgage Guarantee Company.
A wholly separate reason for reaching the same result was outlined in a measure by this court in Matter of Tuttle (162 Misc. 286, supra). In the present record, however, a great many factors have been developed which were not known to the court when Matter of Tuttle was considered. These should be summarized since the aggregate effect of all of them is to establish an identity between the corporate trustee and Bond and Mortgage Guarantee Company in respect of mortgage transactions and thus to establish a further and wholly independent basis upon which the objections now under consideration must be sustained. In substantial though not in controlling degree share ownership of the corporate trustee and of the Bond and Mortgage Guarantee Company was in the same
Transactions of purchase of whole mortgages which are thus condemned in principle by the court took place during periods covered by the decrees on the earlier accountings. The court has noted briefly its granting of the applications to open such decrees. It may well be that no formal opening of the decrees is required to reach the transactions here criticised (Matter of Denbosky, 245 App. Div. 93, 95) because the schedules in the former accountings did not adequately reveal the facts now established. A typical illustration will suffice to exhibit the defects in the prior accounting schedules. In the 0. J. Ryan trust there was a so-called Curti mortgage for $6,750. According to the stipulation of fact this mortgage was assigned by the corporate trustee to Bond and Mortgage Guarantee Company on November 24, 1925, and on the same date reassigned by the latter company to the trust. The information concerning this mortgage which was reported in the last account is contained in schedule 1-4 of the former account. Therein are reported the investments outstanding at the beginning date of
It is essential now to consider the further defense ' of the accounting trustees which is based upon releases procured ■ from the respective trust beneficiaries when they respectively attained majority. At once it should be noted that these releases are only receipts for income which had accumulated during minority. They do not purport to deal with the principals of the trusts. It is true that they are accompanied by statements of income which included disclosure of principal assets upon which the income had been earned. They revealed certainly no more than did the accounting schedules to which reference has already been made. They revealed nothing of the fact of self-dealing on the part of the corporate trustee. Such releases of course are valid as a bar to further inquiry only if signed after full disclosure of all material facts. That disclosure was not made and so the releases do not furnish any barrier to the prosecution of the objections.
The trustees urge further that irrespective the releases the beneficiaries knew for many years of the actual course of dealing of the corporate trustee and so by acquiescence and loches are now estopped to raise issue as to those transactions. In support of this position they offer correspondence with a firm of Pennsylvania lawyers representing the beneficiaries. Typical of this proof is Accountants’ Exhibit 48 written by the attorneys for Alice Julia Ryan. The letter says in part: “We note that the assignments to the various párties from the Title Guarantee and Trust Company, the original holder of the mortgages, are unrecorded. I assume that the purpose of having the assignments unrecorded is for the convenience of the Title Guarantee and Trust Company in looking after and handling these mortgages.”
The trustees call attention also to the securities receipted for by the beneficiaries when they were paid their accumulated
The commentary heretofore has been limited to the relations between the corporate trustee and Bond and Mortgage Guarantee Company. Some of the whole mortgage instruments were routed through other corporations either wholly owned or controlled by one or the other or both of the corporations already mentioned. The same principle of decision applies to such whole mortgages. Detailed comment thereon will not be made.
Consideration must now be given to the objections which assert insufficiency of notice of the purchase of mortgage participations. Subdivision 7 of section 188 of the Banking Law (amd. L. 1917, ch. 385) provided at the times now pertinent that after making such an investment the banking institution “ shall promptly notify each person of full age and sound mind entitled to the income therefrom of the fact that such investment has been made. ’ ’ The text quoted refers to the authority given to a corporate trustee to make a trust investment in “ a part interest in a bond and mortgage ”. The notice required by the statute is of course a notice that such a part interest has been acquired as an investment of the trust. The objections assert defects in the respective notices which must of necessity be dealt with in the later detailed rulings made on specific objections. Some general discussion of the objections based on the notice requirement is appropriate. In many cases the notice is alleged to have been too long delayed to meet the requirement of prompt notice. In some cases the only notice claimed by the trustees to have been given was a reference in an annual statement of investments on hand to the investment in a share in a mortgage. Objectants point out that some of the so-called notices referred to the investments as investments in bonds and mortgages only and not in parts thereof. The objectants complain of other notices which refer only to “ gtd. ctf.” in describing the investments. They complain of some instances in which the so-called notice referred to the investment as “ mortgage ” without any declaration that a participation only was purchased. They assert that in other instances where the word “ certificate ” was used it was not accompanied by any declaration that only a part share had been purchased.
1. Complete failure to give a notice will result in surcharge of the trustee. (Matter of Heermance, 254 App. Div. 685, affd. sub nom. Matter of Prime, 278 N. Y. 601; Matter of Bearns, 251 App. Div. 222, affd. 276 N. Y. 590; Matter of Gerbereux, 249 App. Div. 751, affd. 274 N. Y. 495; Matter of Dimond, 163 Misc. 611; Matter of Peene, 155 Misc. 155.)
2. No fixed form of words is required. (Matter of Heermance, supra.)
3. A notice which describes a part interest as a bond and mortgage is insufficient. The notice must show expressly that the investment is in a part interest or share. (Matter of Roche, 245 App. Div. 192; Matter of Dimond, supra.)
4. The notice goes to the legality of the investment and either failure to give it or a substantial defeat in it requires surcharge. (Matter of Peene, supra; Matter of Dimond, supra; Matter of Roche, supra; Matter of Bearns, supra; Matter of Gerbereux, supra; Matter of Heermance, supra; Matter of Jones, 155 Misc. 315.)
5. The notice must be given with reasonable promptness. What is reasonable seems to depend upon the surrounding circumstances in each ease. (Matter of Nugent, 280 N. Y. 505, supra.)
6. The beneficiary is not required to show loss traceable to the failure to give notice. Even proof by the trustee that the loss was due to causes other than such failure will not save him from surcharge. (Matter of Bearns, supra; Matter of Peene, supra.) In Matter of Bearns the Court of Appeals received many briefs amicus curiae and rejected vigorously urged views which sought refusal of surcharge unless causal connection was shown between the damage and the lack of notice. It should be noted, too, that it was vainly argued in Matter of Bearns that the statutory authority given by section 111 of the Decedent Estate Law and by section 21 of the Personal Property Law validated the investments despite lack of compliance with the Banking Law.
It is against these standards that the liability of the trustees must be measured. The practice of the corporate trustee here was to issue to the income beneficiaries a quarterly income statement and to give them annually a statement of the princi
Since it was the practice of the trustees to send an annual statement of investments on hand and since sometimes there was variance between the form of reference to the new acquisition given in the quarterly statement and that given in the annual statement, the court holds that the description in the quarterly statement controls and that any defect therein is not cured by what otherwise would have been a proper description in the annual statement. The notice under the statute is a single notice and not a composite one. It is essential to the validity of the investment and it must stand or fall on its quality when first given. Later transactions may operate to effect an estoppel of the beneficiary to urge the point, but when actual compliance with the statute is asserted the notice first given must answer to the legal requirements. The reasons for the strictness of the rules worked out in the authorities cited above were cogently stated by Mr. Surrogate Slateh in Matter of Peene (155 Misc. 155, supra) and need no further exposition. His views have been adopted by the Appellate Division and by the Court of Appeals except perhaps as to the requirement of immediate notice. The court holds that a notice which refers to the new acquisition as that of a bond and mortgage is misleading and inaccurate and hence
[At this point and at later points indicated by asterisks other material. ; included in the opinion of the Surrogate is omitted because of its subordi-' note importance.]
A further topic which admits of general treatment is that of the guarantees given by Bond and Mortgage Guarantee Company. It has already been noted that this company and the corporate trustee had a common accounting and auditing staff. The factors which currently affected the worth of the guarantee were known contemporaneously to the corporate trustee. When therefore in July, 1931, the guarantee company declined to make principal payments on guaranteed mortgage^ and certificates then coming due because of defaults ór of maturities, the corporate trustee was at once on notice. When thereafter there occurred the great increases in unpaid principal liabilities in respect of which the guarantee company (contrary to prior practice) had taken advantage of the eighteen months’ grace period, the corporate trustee could no longer say validly that the guarantee was an assurance of safety. And when the account of real property acquired by the guarantee company in foreclosure (carried on its books not at real Worth but at asset values equal to the original mortgage plus all accruals of taxes and interest and plus all acquisition, éosts). rose to unprecedented heights while the cash resourced steadily shrank, it was apparent to the corporate trustee that the guarantee was substantially worthless. By July, 1932, thb, facts known to the corporate trustee made any reliance on the guarantee a violation of the trusteé’s duty. Any renewal made after July 1, 1932, must be justified, if at all, by the property and its history theretofore, disregarding the guarantee.
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* * * The court agrees with objectant [Marie Ursula Ryan Kearney] in her criticism of the management agreement. That agreement surrendered rights which the trustee should have retained but the making of the agreement did not affect the legality of the investment; and since its making is not shown to have caused a loss no surcharge can be made for this reason.
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' The question was raised originally' by certain of the objections to the account respecting the amounts paid for counsel fees. These objections were ultimately withdrawn on the understanding that objectants would oppose any further payments of counsel fees by the trustees in relation to the present accounting and that the trustees and their counsel reserved the right to claim further compensation. While the proceeding was in progress certain payments were made by the trustees out of the capitals of the trusts to counsel representing them on this accounting. Since such payments were made concededly for services on the accounting, the court deems the subject matter of such payments to be within the purview of the present proceeding even though the payments were made at a date subsequent to the closing date of the period accounted for. In view of the court’s conclusions respecting the merits of the objections, the court must hold that further payments to counsel made by the trustees in an effort to avoid surcharge constitute an unwarranted burden upon the trusts. Formal applications to require refunds to certain trusts of money so paid to counsel have been consolidated with this accounting proceeding. The court grants the applications so far as they were not withdrawn, and directs the reimbursement by the trustees to the respective trust funds of the amounts withdrawn therefrom and paid to their counsel for services on this accounting. Since the court has reserved to a further hearing on the settlement of the decree the question of the extent, if any, to
(Supplemental opinion, October 22, 1940.)
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.A second ground of objection to commissions is raised by Hulswit objection 68, Barry objection 55 and (perhaps) T. B. Ryan Committee objection 45. These assert that the commissions on income have been computed erroneously because based on annual rests. These objectants assert that the commissions should be computed on the entire income as a single fund. If so computed the commissions would be materially reduced. The court holds that the form of quarterly and annual reports made by the trustees to the respective beneficiaries sufficiently conformed to the requirements of the statute so as to entitle the trustees to compute their commissions on an annual rest basis. Accordingly these objections are overruled.
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* * * The court has ruled in the main decision that the corporate trustee is required to make good to the trust a very substantial sum of money both in principal and in income account. Insofar as the commissions on income are concerned, they represent in the case of each trustee compensation for the actual rendition of services over the period accounted for. In the case of the individual trustee, he will be permitted to keep the income commissions which he has actually received. Since the directed surcharges will produce additional income in respect of which the individual trustee has rendered no service and since such additional income is derived solely from the beneficiaries’ own efforts to enforce rights which were threatened with loss by the negligence of the individual trustee, he will not be permitted any income commissions on the income so produced. In respect of the individual trustee there is presented at the moment only the further question whether he is entitled to principal paying-out commissions on the corpus of the trust for Ellen Ryan Lynch. Substantial capital surcharges have been made for her benefit. The individual trustee was derelict and inactive in his protection of the principal values of this and the other trusts. His exoneration from surcharge was granted by the court with some reluctance. The court regards his derelictions as sufficient to warrant denial to him of principal paying-out com
In respect of the corporate trustee the court will pursue a policy which has been frequently followed in this court. As to this trustee it will allow commissions for paying out the principal of the trust for Ellen Ryan Lynch and will allow income commissions on the income produced by the surcharges but will credit such commissions only as a final means of completing payment of the surcharges themselves. Since the allowance of commissions in this form presupposes that the trusts have been reconstituted fully as to capital and that the appropriate earnings on a trust capital properly administered are available to the beneficiaries, there may properly be allowed to the fiduciary who thus has made good its liability the same commissions which would have been payable to it had the reconstitution of the trust not have become necessary.
A further question which remains for decision on the subject of commissions concerns itself with the withdrawal by the trustees of so-called normal commissions on the gross rents received out of the so-called 42nd Street property from 1933 to 1936. This is the property which was taken over in a salvage operation in the year 1933. From the date of its acquisition it has operated at a deficit in every year. It is impossible to ascertain from the accounting schedules whether or not normal commissions were in fact charged on gross rents, but the trustees by an affidavit filed October 18, 1940, have stipulated to the effect that such commissions were taken during three years ending in 1936. They now ask that their withdrawal of these commissions be validated and that the right on their part to the taking of two normal commissions on gross rents for the period post 1936 and to the end of the accounting period be also established. The property from which the rents were derived was in a salvage operation. The rules respecting this type of operation are stated in Matter of Chapal (269 N. Y. 464) and Matter of Otis (276 N. Y. 101). Under these rules all transactions of income and outgo are to be dealt with in principal account until the time arrives at which a net sum is available for income distribution after all principal advances in the salvage operation have been repaid. The general rule respecting the allowance of commissions is stated in Beard v. Beard (140 N. Y. 260). In that case it was stated explicitly that no commissions are allowable either as principal or income commissions on what are investments and reinvestments of capital. In a salvage operation all of the proceeds of the
The final question which remains for determination co'ncern's itself with the rate of interest on surcharges to be paid by the corporate trustee. The rule for the interest penalty payable by a trustee is stated in King v. Talbot (40 N. Y. 76, 95) where it is said: “ Where the failure of a trustee in his duty is wilful, or characterized by bad faith, the highest rate of interest should be imposed. But where good faith and honest mistake concur, the rate of interest rests in a discretion, that permits the consideration of all the circumstances, which show that substantial justice can be done to the cestui que trust, by allowing a less rate. Hence, in such case, we may not close oiir eyes to the fact, that in a long course of years, such as are now under consideration, there are periods in which it is impracticable to realize on investments, which give the requisite assurance of safety, the highest interest allowed by law. That loans, for long periods, will rarely be taken, on such security, at the highest rate. That, in a commercial community like our own, fluctuations are frequent and large, and especially, that in the management of funds of considerable amount there must necessarily be intervals when funds lie idle, seeking investment, notwithstanding all reasonable diligence on the part of the trustees.”
The Restatement of the Law of Trusts (§ 207) says in part: “ If the breach of trust consists in an improper sale of trust property or an improper purchase of "‘property for the trust, the trustee is chargeable with interést at the current rate of return on trust investments, unless the breach of trust was intentionally committed, in which case he" is ordinarily chargeable with interest at the legal rate.” ■
An informal discussion of the question of liabilityfor interest is found in 37 A. L. R. 447, 55 A. L. R. 950 and 112 A. L. R. 833.
Except in the instances which are hereinafter párticularizéd, the court has not found that there existed on the part'of-this corporate trustee such bad faith or malice or misuse "of trust property as to invoke the penalty of interest at -the legal rate. The parties (without surrendering their respective legal positions on the subject of liability for interest) have stipulated that the average rate of return on trust investments for1 the
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(Supplemental opinion, January 2, 1941.)
The attorneys for successful objectants in this accounting proceeding seek to have .fixed counsel fees or costs or both and to have the amount thereof charged to the corporate trustee or,to both'trustées. .The court is asked by the applicants to: exercise the power resident in it under special circumstances to make whole the successful parties by such a charge against the ■ trustees personally. While special circumstances may justify an allowance of counsel fees to a successful party and may justify ¿ charge of such allowance against anothe.r party in a . proceeding in this court, the court does not deem the,.present accounting proceeding one in which such power should be exercised. There is here accounted for a very substantial body of investments in property, in respect of many
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The court has also taken into account the fact that a very large body of objections was sustained but that the trustees successfully resisted the attack upon them in respect of other challenged investments. In reaching the result hereafter stated, due allowance has been made for this factor.
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These costs are directed to be paid to the respective attorneys for the respective beneficiaries. The respective amounts thereof are charged to the corporate trustee as an addition to the surcharge against it. The court has by its main decision exonerated the individual living trustee and the now deceased trustee from personal liability for the surcharges. Since the main decision puts the responsibility for refund to the estate upon the corporate trustee, it is appropriate that the liability for costs should be limited to such trustee.
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It is appropriate now that a decree settling the account pursuant to this and the prior rulings of the court should be submitted.
