The judgment in this case has determined that the plaintiff, as trustee of a testamentary trust, has violated the provisions of the trust instrument and thus is guilty of a breach of the trust committed to its charge by the testator and the court in that it has suffered the capital of the trust fund to be impaired to the extent of nearly six thousand dollars. I think that this conclusion is unjust to the plaintiff and that the principle decided must operate unjustly upon all trustees similarly situated, and, in the nature of things, there must be numerous trusts to which the rule applies. The reasons upon which this result is based are, as I think, strained, and the argument in support of it is based upon theories and speculations that may be correct enough for an expert or trained financier, but are of very doubtful utility in the practical affairs of life. *Page 491
The only violation of the trust that the plaintiff has been charged with is that it paid over to the defendant William J. Baker annually the interest on the United States bonds, constituting the capital of the trust. That is literally the full extent of its offending. If, in so doing, the trustee simply obeyed the will of the testator, it ought to be commended and not punished, since that instrument was the charter that prescribed the powers and duties of the trustee and the rights of the beneficiaries. We must, therefore, examine that instrument in order to see whether the claim that the plaintiff violated any of its terms or provisions has any support. By the will of James Baker, who died in 1876, a share of the estate was devised and bequeathed in trust for the use of his son, the defendant William J. Baker, during his life, with remainder to his children, who it seems are the infant defendants in this case. The trustee was given power to sell the property embraced in such share at public or private sale, and at such time and upon such terms as he might think best, and to invest the proceeds in certain securities named, among which were government bonds. The testator then directs the trustee "to collect and receive the income, dividends and profits thereof and apply the same to the use of my said son William during his natural life," with remainder to his children.
It appears that the trustee named in the will refused to act and that the person appointed in his place resigned, and that by an order of the court made on the 4th of August, 1882, the plaintiff was appointed the trustee of the trust and there was passed over to it by the order the corpus of the fund, consisting, with a small item of cash, of $50,000 par value in United States registered four per cent bonds and $31,000 par value registered four and a half per cent bonds. The latter were to become due in 1891 and the former in 1907. These bonds had been purchased at a premium, which amounted in all to about $10,000. The plaintiff in the administration of the trust paid to the life beneficiary the interest collected on the bonds and no more, and this is the only act claimed to be in violation of its duty as trustee or of the terms of the will *Page 492 creating the trust. A government bond is a contract which imports a loan of money by an individual to the government at a stipulated rate of interest payable at a designated time and place. The "income and dividends" of such a bond is generally supposed to be this interest. It is entirely safe to say that this was the sense in which the testator used these words. The words of the testator should be understood in their general and popular sense unless it appears that he used them in some special or restricted sense. When the testator directed the creation of a trust consisting of these bonds he knew that they could not be purchased without payment of a premium, and yet he directed the trustee to pay the income and dividends of the same to his son. It seems to me that no fair mind can entertain any doubt with respect to the intention of the testator when he made use of the words "income and dividends." He intended that the life beneficiary, his son, should be paid the interest on the bonds.
But the decision in this case imputes to him quite another and different intention which it is safe to say never entered into his mind at all, and that is that he intended to direct the trustee to pay to his son, not the four per cent or four and a half per cent interest collected on the bonds, but three per cent or such other reduced rate of interest as would enable him to provide a sinking fund to make good the premium paid for the bonds when they matured. To say that this is what the testator intended when he gave the income of the bonds to his son for life and what the trustee was bound to know from the use of these words in the will, is to ignore entirely the natural and general meaning of the testator's words and to give to them a meaning altogether artificial. The plaintiff paid over the interest to the son just as did the prior trustee who formed the trust, and it seems that the latter was discharged, as a good and faithful servant of the court, by the same order that appointed the plaintiff. The latter might very well suppose that it could not be subjected to loss and censure by the court for following a line of conduct that had been approved in the case of its *Page 493 predecessor in the trust. The plaintiff, in assuming the duties of trustee, had the right to rely not only upon the order of the court conferring the appointment, which was in the nature of an adjudication of the question in the very case (In re Talmage,160 N.Y. 512, 515), but upon the general rules of law as announced in the decisions of this court. It is no part of the functions of courts to make new laws and theoretically, at least, they cannot and do not. They simply decide what the law is and always was upon a given state of facts. Assuming that proposition to be correct, it is clear that the plaintiff in paying the interest on the bonds to the life beneficiary violated no provision of the trust instrument, but, on the contrary, executed the will and intention of the testator according to the law of the land as expressed and defined in at least two recent decisions of this court. (McLouth v. Hunt, 154 N.Y. 179;Matter of Hoyt, 160 id. 607.) In the case last cited nearly $245,000 of the trust fund had been paid in premiums upon bonds, and the life tenant was a daughter. In the case first cited the life tenants were grandchildren. In the case at bar the life tenant is a son and the remaindermen his children. The direction in each of the three wills to the trustees is substantially the same. It was to pay to the life tenant the income of the bonds during the term of the trust with remainder to others. But it was held in both cases cited that it was the duty of the trustee to pay the full interest collected upon the bonds to the life tenant, and that is precisely what the trustee has done in the case at bar, and for which the decision imputes to it a breach of duty and a violation of the trust. The plaintiff followed the law as stated in these decisions. If it made a mistake in doing so it must be because the law, as there announced, was wrong. An attempt has been made to draw some distinction between the cases cited and the one at bar, but the argument in that respect is so attenuated and fanciful that I will not undertake to state it. In my opinion there is no distinction whatever and no inquiring mind open to conviction will be able to perceive or state it in such a way as to command *Page 494 assent. The decisions of this court which embody not only a rule of property but a rule of conduct for the guidance of trustees should not be changed for light or transient causes. The notion that the premiums upon bonds should be borne by the life tenant and not by the remainderman is not in itself so clear nor in its operation so equitable as to justify a departure from precedents. The purchase of government bonds, bearing a low rate of interest, at a premium, was for the benefit of the remainderman rather than the life tenant. The income of the latter was not enhanced, but the security of the former was made stable and certain. In such cases the life tenant should receive the interest without reduction, unless the testator has directed otherwise in his will.
But quite independent of this question, there is another feature of the case which seems to me to be even more unjust to the trustee. The trust is still in operation and the action was for an intermediate accounting. The parties are the trustee, the life tenant and his two children who are entitled to the remainder. The action was sent to a referee to hear and determine. In his report the findings of fact and conclusions of law are separately stated. On the trial the plaintiff's counsel requested the referee to rule and decide that the life tenant should be adjudged liable to refund any income which has been paid to him and which should have been set apart by the trustee as a sinking fund to be added to the principal, and that the trustee might deduct such income improperly paid to the life tenant from any payments of income thereafter payable to him. The referee refused to so find or decide on the ground that it was not within the issues in the action, and the plaintiff excepted to this ruling. I think this ruling was error for which the judgment should be reversed. There were really no issues in the case. All the parties were before the court and all prayed that an accounting be had. The life tenant did not allege in his answer that he had been paid too much, nor did the infant defendants allege that their father had been paid more than he was entitled to. The question of over-payments to the life tenant was not raised by any *Page 495 pleading, but by the court without pleading, as it doubtless might. But the whole case was before the court and it was not embarrassed by any issues whatever. It had the power to do justice to the trustee as well as to the beneficiaries. If the life tenant had been paid too much the court had ample power to order him to restore the excess to the trust fund or to permit the trustee to deduct such excess from any payments made to him thereafter. The court should not have permitted the life tenant and the remaindermen, his two children, to combine and take from the private property of the trustee nearly six thousand dollars for no other reason than that the latter made a mistake in assuming that the direction in the will to pay income authorized it to pay the full interest. The ruling of the learned referee is not calculated, as it seems to me, to promote common honesty or commercial morality on the part of the beneficiaries of a trust when dealing with their trustee. The latter, beyond all question, acted in good faith, and the court had ample power to protect its own officer. If there was a mistake, clearly the life tenant was the beneficiary of it. He, as well as the trustee, was in the attitude of asking the court to do justice, and unless I am greatly mistaken the court had full power in that respect and should have ruled as requested.
The judgment should, for these reasons, be reversed.
GRAY, HAIGHT, LANDON and WERNER, JJ., concur with PARKER, Ch. J., for affirmance as modified; O'BRIEN, J., reads dissenting opinion; CULLEN, J., not sitting.
Judgment accordingly. *Page 496