No new formulation of the questions of law presented upon this appeal, or further statement of the material evidence which must be considered in the determination of these questions is necessary. I accept the careful formulation of the questions of law and the accurate statement of the evidence contained in the opinion of Judge CONWAY. I agree with the conclusion of Judge CONWAY that though the statute authorized a trust company to make investments as "personal or testamentary trustee" in a bond or mortgage held by the trust company "by apportioning to the trust fund a part interest therein" (Banking Law, § 188, subd. *Page 418 7, as amd. by L. 1917, ch. 385), a trust company was not permitted under that statute to invest moneys which it held as trustee by purchasing as trustee whole mortgages owned by it. The rule that a trustee assumes a fiduciary obligation of undivided loyalty and may "not place himself in a position where his interest is or may be in conflict with his duty", and the corollary rule that a trustee may not sell securities as owner and purchase them as trustee, are not technical rules but are general rules of conduct long ago formulated by courts of equity "to prevent fraud and to weaken temptation to dishonesty." A violation of a technical rule may at times be disregarded where the violation was due to ignorance or inadvertence and caused no damages, but disregard of a violation of the rule of equity, even though such violation may be venial, and the trustee may in fact have exercised his judgment and performed his duty honestly, with a view solely to the best interest of the trust estate uninfluenced by his personal interest, would, at least, diminish the usefulness of the rule. "Its rigidity gives it one of its chief uses as a preventive or discouraging influence". (Munson v. Syracuse G. C.R.R. Co., 103 N.Y. 58, 74.) In accordance with that rule, the trustee should be surcharged with all moneys invested by the trustee in mortgages owned by it where the investment was not made by apportioning shares in such mortgages, except insofar as beneficiaries of the trust are barred from objecting to such investments by decrees in accounting proceedings to which the beneficiaries were parties or by releases given by such beneficiaries. I agree, too, that investments made by purchase of whole mortgages owned by the trust company at the time when it decided as trustee to purchase the mortgage should be included in the prohibited investments, even though the transfer to the trustee was made by the Bond and Mortgage Company in accordance with business routine established by the two companies. I disagree with those parts of the decision which hold (a) that there should be included in the prohibited investments purchases made by the trustee of mortgages which were owned by the Bond and Mortgage Guarantee Company, an affiliate of the trust company; (b) that the trustee should be surcharged for some investments made through apportioning parts of mortgages owned by it because notice of such investments was not *Page 419 given in accordance with the statute; and (c) that decrees in prior accountings should be opened and that such decrees and releases given by beneficiaries of the trust were not binding upon the beneficiaries.
The Bond and Mortgage Guarantee Company, it may be conceded, may properly be described as an "affiliate" of the trust company. The same stockholders who control the Title Guarantee Trust Company probably control also the affiliate. Many of the officers and some of the directors are the same, and, as Judge CONWAY points out, there is very close interrelation in the conduct of their affairs and at times they share the use and expense of clerical and executive employees, of advertising and of office space. It conclusively appears, nonetheless, that the two corporations are separate entities. They were formed for distinct though related purposes. The capital of each was used for its own corporate purposes; — the corporate profits of each constituted a fund from which dividends could be paid only to its own stockholders, and the trust company owned only a small fraction of the stock of the Bond and Mortgage Guarantee Company. The close relationship in the conduct of the business of the two corporations formed for related purposes doubtless was useful to both, but in no respect did either lose its identity. The question presented upon this branch of the appeal is not whether the rule which prohibits a trust company from purchasing as trustee securities which it sells as owner should be rigidly enforced (for, as I have said, the companies concededly are not identical), but rather whether the obligation of undivided loyalty has been violated when the trust company purchased as trustee securities which were sold to it by another corporation connected with the trust company by such close ties. As Judge CONWAY points out, in determining whether the relationship between the two companies is so close that the trustee violated its obligation of undivided loyalty "we are relegated to the `tests of honesty and justice' and no rigid yardstick has ever been fashioned which will measure honesty and justice." Concededly there has been no conscious dishonesty by the trust company, and its interest in a possible profit which the Bond and Mortgage Guarantee Company might derive from the sale of its mortgages to the trustee, was I think, too remote to place it in a position where interest might conflict with duty. Under such *Page 420 circumstances I can find no basis for surcharging the trustee with purchases made from its affiliate.
The surcharge for investments made by the trustee by apportioning to the trusts shares in mortgages which the trustee owned, is based upon a conclusion that the trustee failed promptly to notify each beneficiary "of the fact that such investment has been made" as required by the 1917 amendment to section 188, subdivision 7, of the Banking Law. The statute which permitted such investments and required that notice thereof be given promptly does not in terms provide that the investment is invalid unless such notice is given, nor does it provide that upon receipt of such notice the beneficiary may object to the investment. The purpose of the Legislature in requiring statutory notice of the investment is to enable a beneficiary "to identify and establish [his] interest in the mortgage" and to make it unnecessary for a beneficiary to maintain an action "to identify and establish [his] interest in the mortgage." (Matter of UnionTrust Co. [Hoffman], 219 N.Y. 514.) Failure to give notice sufficient for that purpose may properly bar assertion by the trust company that it has, without notice, transferred to the beneficiary of the trust estate a share in a mortgage which it owned. (Matter of Bearns, 251 App. Div. 222, 276 N.Y. 590.) Where a beneficiary is furnished with that information, technical defects in the service of the notice, furnish no ground for rejection of the investment. Here the trust company sent to each beneficiary a quarterly statement of the account and in that quarterly statement the amounts invested in mortgages described in the account appeared. Though at times the quarterly statement failed to state that amounts so appearing were invested in guaranteed certificates of participation rather than in whole mortgages, and though other defects may be urged in the description of the investment, it can hardly be disputed that the quarterly statement contained data sufficient to enable each beneficiary to identify and establish his or her interest in the mortgage. None would be compelled to maintain any action to identify and establish such interest. In such case the purpose of the notice is fully served, and technical objections to the form of the notice do not render the investment illegal. *Page 421
Finally, we reach the question whether the decrees in the accounting proceedings and the releases given by beneficiaries bar the beneficiaries from objecting to transactions included in the decrees or in the releases. The beneficiaries were represented by counsel upon these accountings, and when they gave releases. Though the trust company did not make express disclosure that it had purchased mortgages from itself, it did not conceal what it had done, or refuse to furnish any information which counsel asked. Its failure to state affirmatively that it had purchased mortgages from itself is easily explained by the fact that the trust company at that time did not know that the statute failed to sanction such purchases. The accumulated interest was payable to each beneficiary when the beneficiary reached the age of twenty-one. In some cases that accumulated income was paid to the beneficiary by transfer to the beneficiary of guaranteed mortgages which the trustee had purchased from itself or from the Bond and Mortgage Guarantee Company, and the beneficiary received the indicia of title showing the manner in which the mortgages were acquired by the trust. The beneficiary thus had notice that at least in some instances the trustee was making investments which the beneficiary now urges were illegal. In such case, it seems clear to me, the beneficiary may not claim that there was no full disclosure by the trustee. On the contrary, by failure to object the beneficiary acquiesced in the manner in which the trustee made its investments.
The order of the Appellate Division and the decree of the Surrogate's Court should be modified accordingly.
LOUGHRAN, RIPPEY, LEWIS and DESMOND, JJ., concur with CONWAY, J.; LEHMAN, Ch. J., dissents, in part, in separate opinion.
Order affirmed, etc. *Page 422