Kimball v. Whitney
233 Mass. 321
Mass.
1919
Check Treatment
Rugg, C. J.

These are two appeals from a decree of the Probate Court allowing an account of a trustee under the will of Mary Bates. The matters now in controversy relate to certain aspects of the propriety of an investment made by the trustee in February, 1903, of a part of the principal of the trust in so called preferred shares of the Massachusetts Electric Companies at the market price then prevailing, and to the retention of this investment to the end of the period of the account in 1917. The case comes before us by report upon agreed facts.

The facts now pertinent to the decision are that the Massachusetts Electric Companies was an unincorporated association organized and existing under a written instrument entitled “Agreement and Declaration of Trust,” dated in June, 1899. The general features of this agreement were similar to those which • *330have come before the court in numerous cases. Property is transferred to trustees, who hold the legal title to all the assets belonging to the trust and exercise the exclusive management and control of it under the terms of the agreement. Certificates of part ownership, resembling shares of stock in a corporation, are issued to those who are the ultimate owners of the property. See Peabody v. Treasurer & Receiver General, 215 Mass. 129, and cases there collected, and Kennedy v. Hodges, 215 Mass. 112, 114.

The Massachusetts Electric Companies acquired all or a large and controlling majority of the capital stock of thirty-six street railway and electric light corporations in Massachusetts, Rhode Island and New Hampshire. “The companies were merged from 'time to time and in 1906 consisted of the Boston and Northern Street Railway Company, the Old Colony Street Railway Company, and the Hyde Park Electric Light Company. Prior to 1912 the stock of the Hyde Park Electric Light Company was sold and the two other companies were merged, and the name of the consolidated company was changed to the Bay State Street ' Railway Company, of which the Massachusetts Electric Com- ■ panics owned substantially all the common stock, being a large and controlling majority of all the stock. The Massachusetts Electric Companies did not act as an operating company except through its control of the subsidiary corporations, which operated the properties in question. The business of the Massachusetts Electric Companies consisted of holding the stock of the subsidiaries and supervising their management by means of stock control,, and assisting in their financing. . . . Previous to February 26, 1903, a large number of trustees in Massachusetts had invested trust funds in the preferred shares of the Massachusetts Electric Companies and held those investments on that date. Before making the investment in question, the trustee' made reasonable inquiry among bankers and brokers to ascertain how they^ regarded the investment, and received favorable opinions. He acted in entire good faith and so far as the financial and general business conditions and prospect of earnings of the Massachusetts Electric Companies and of the properties controlled by it were concerned there was then no reason to believe the investment to be otherwise than financially sound.” Regular dividends out of earnings at the rate of four per cent per annum *331were paid on these shares to and including July 1, 1904. ■ After that none were paid until January, 1909, and since July 1, 1910, in general they have been paid at the rate of two per cent. In 1912 an issue of new preferred stock was made to take up securities and three quarters per cent of dividends then accumulated. The market value has much diminished.

The rule of law in this Commonwealth governing the conduct of trustees in the investment of the principal of their funds was stated in these words in 1830 in Harvard College v. Amory, 9 Pick. 446, 461: “All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.” Good faith and sound discretion, as these terms ought to be understood by reasonable men of good judgment, were thus made the standard by which the conduct of trustees is to be measured. That is a comprehensive principle. It is wide in its scope.' It is not limited to a particular time or a special neighborhood. It is general and inclusive, so that while remaining itself fixed, it may continue to be a safe guide under new financial institutions and business customs, changed commercial methods and practices, altered monetary usages and investment combinations. It avoids the inflexibility of definite classification of securities, it disregards the optimism of the promoter, and eschews the exuberance of the speculator. It holds fast to common sense and depends on practical experience. It is susceptible of being adapted to whatever conditions may arise in the evolution, of society and the progress of civilization. Although more liberal to investing trustees than the law of some States and countries, it has frequently been reaffirmed and never doubted in this jurisdiction. Lovell v. Minot, 20 Pick. 116. Brown v. French, 125 Mass. 410. Pine v. White, 175 Mass. 585, 590. Green v. Crapo, 181 Mass. 55. Corkery v. Dorsey, 223 Mass. 97, 101.

In the application of this rule to varying facts it often has been held that, while some investment of trust funds in certain securities might be justified, a disproportionate amount of the total *332ought not to be embarked in a single kind of stock or bonds. Dickinson, appellant, 152 Mass. 184. Davis, appellant, 183 Mass. 499. That particular point is not within the present report and therefore is not before us. Several cases have arisen where the facts showed improper investments in improvements upon real estate. Brigham v. Morgan, 185 Mass. 27. Warren v. Pazolt, 203 Mass. 328. In Taft v. Smith, 186 Mass. 31, a second mortgage upon real estate, and in Thayer v. Dewey, 185 Mass. 68, land in another State, were held not improper investments as patter of law upon the facts disclosed. It was decided in Kinmonth v. Brigham, 5 Allen, 270, 279, that the investment in a trading partnership could not be sanctioned.

The precise point reported for our determination is “Whether the organization of the Massachusetts Electric Companies was such on February 26, 1903, that the investment of any portion of the trust funds in its preferred shares was as a matter of law improper.” Put in another way, it is, whether a finding that such investment was proper as matter of fact must be pronounced wrong as matter of law. The form of the report imports a finding of all facts, so far as the facts can go, in favor of the investment.

Tested by the standard established by our law, it cannot quite be said that in February, 1903, the investment of any portion of trust funds in preferred shares of the Massachusetts Electric Companies was improper and unwarranted as matter of law.

It might have been found from the nature of the properties held by the companies, the character of the agreement and the general purposes of the so called trust, that it was designed as a permanent investment, that the combination in a single ownership of the stock of so many different public service corporations covering such extent of territory and serving as matter of common knowledge numerous populous communities, was expected to equalize fluctuations of earnings and to stabilize the rate of dividends. The corporations whose securities were held were not in process of construction but were completed properties in actual operation. The extent of their earnings is not shown, but. regular payments in way of dividends were made until a considerable period after the present investment was made. The form in which the case is presented to us warrants and even requires the assumption that the earning power of the public serv*333ice Corporations whose securities were owned had been sufficiently tested so that at the time of the investment prudent and sagacious men of experience made purchases of these shares for permanent holding.

In the light of the agreed facts and the form of the report it is not necessary to determine whether the agreement and declaration of trust constituted a partnership among the shareholders as in Williams v. Boston, 208 Mass. 497, Frost v. Thompson, 219 Mass. 360, see Dana v. Treasurer & Receiver General, 227 Mass. 562, or a trust as in Williams v. Milton, 215 Mass. 1, where most of the earlier cases are reviewed. Assuming for the purposes of this decision that it was a partnership does not render the investment unwarranted as matter of law. On that assumption it was a partnership of a peculiar kind. It was not an ordinary business, commercial or trading partnership. The nature of its authorized investments seemingly removed it as far as possible from the common incidents of a copartnership adventure. Apparently it was guarded as fully as was practicable from speculative features and the oscillations of value incident to varying conditions of trade. There is nothing in the record to indicate that the amount of shares issued exceeded a conservative valuation of the securities owned. The rights of the shareholders were carefully guarded by the terms of the agreement. Their responsibility was reduced to a minimum so far as possible by written statement of obligations. It was expressly stated that the trustees had no power to bind the shareholders personally. All persons dealing with the trustees were confined by the agreement to the property of the so called trust to the exoneration of shareholders. See Hussey v. Arnold, 185 Mass. 202, 204; Williams v. Boston, 208 Mass. 497, 501; Carr v. Leahy, 217 Mass. 438, 440; Rand v. Farquhar, 226 Mass. 91, 96.. It was required of the trustees to stipulate in every obligation into which they might enter that the shareholders should not be held liable personally. Whatever may be held ultimately as to the force and effect of those terms in the trust agreement, they manifest an effort to reduce the liability of the shareholders to the lowest limit. In any event, such liability of shareholders was not greater than the liability of stockholders in manufacturing corporations at the time the investment was made, which was before the court in Harvard College v. Amory, *3349 Pick. 446. See Child v. Boston & Fairhaven Iron Works, 137 Mass. 516, for an historical review of our statutes respecting stockholders’ liability for debts of the corporation. The exercise of sound judgment and good faith and a strict compliance with the terms of the agreement by the trustees would have a strong tendency to relieve the shareholders from all responsibility. The kind of corporations in which the trustees were to hold stock were chiefly and primarily public service corporations operating mainly in this Commonwealth, and of corporations incidental to or furnishing supplies to such public service corporations. The law of this Commonwealth for many years has made provision for careful supervision of the issue of stocks and bonds ohpublic service corporations to the end that such securities may represent only honest investment necessary for valuable use to the public.

The agreed facts show that good faith and sound discretion, measured by the prevailing practice of men of experience and good judgment in such matters, were exercised in making the investment here assailed. That is the standard as established by the authorities to which reference has been made. Giving due weight to all the considerations affecting the trust agreement, no sufficient reason appears for'declaring the investment unwarranted. The case is close, but falls within the rule of Harvard College v. Amory, ubi supra.

The retention of these shares and the failure to sell them before the end of the period of accounting cannot be declared improper as matter of law under all the circumstances. The decision of the question whether to sell an investment of trust funds on a falling market is a perplexing one. The agreed facts are that “except in so far as the propriety of retaining the investment was affected by the character of the organization in contemplation of law, there was nothing in the future outlook of the Massachusetts Electric Companies and its subsidiaries which required the trustee as a matter of sound discretion to dispose of the shares.” The case upon this point is-governed in principle by Bowker v. Pierce, 130 Mass. 262.

Decree of Probate Court affirmed.