In this proceeding for settlement of an intermediate account of a testamentary trustee, the Surrogate sustained objections that were filed by beneficiaries and surcharged the account accordingly. The Appellate Division affirmed.
The first surcharge is for the amount of losses which resulted from investments of the trust principal that were made in parts of bonds and mortgages. On this branch of the case the question is one of testamentary construction.
The will of the testator was probated in 1929. By ITEM SEVENTH thereof, he left three quarters of his residuary estate to the trustee. ITEM EIGHTH directed payment of the whole of the net income to the testator's only daughter during her life. ITEM NINTH gave a one-third remainder to the daughter's heirs and a two-ninths remainder to each of the three sons of the testator. ITEM ELEVENTH directed the trustee "to invest and re-invest any and all moneys placed in the trust created under ITEM SEVENTH hereof or which may be by it realized from any sale or sales of property or securities constituting a part of the trust created under ITEM SEVENTH hereof, only in such securities as savings banks under the Banking Laws of New York are expressly authorized to invest deposits."
At the times in issue, investment of the funds of savings banks was regulated by former section 239 of the Banking law (see, now § 235). Nowhere in that section was there any direct reference to parts of bonds and mortgages. Moreover, the following provision in respect of bonds and mortgages was thereby made: "A savings bank may invest the moneys deposited therein * * * in the following property and securities and no others * * *. Bonds and mortgages on unincumbered real property situated in this state" (subd. 6). In the face of that statutory formula, the Surrogate felt impelled to find that the investments in parts of bonds and mortgages were a departure by the trustee from the duty imposed upon it by the above Item Eleventh of the testator's will, — i.e., the duty to invest the trust funds "only in such securities as savings banks under the Banking Laws of New York are expressly authorized to invest deposits." A majority of the Appellate Division were of the same opinion.
The funds of the trust were to be laid out "only" in those forms of security which the New York statute "expressly *Page 379 authorized" as fit for the investment of savings bank deposits. The power thus carefully defined by the testator necessarily excluded other general or implied powers, since the meaning of the conditioning words was plain and did not beget any incongruity or unfairness. No explicit expression in the New York statutes empowered savings banks to invest deposits in parts of bonds and mortgages. Hence the investment of the trust funds in fractional assets of that character was without any warrant, as the courts below have held.
The same former section 239, subd. (6), of the Banking Law contained this restriction: "No investment in any bonds and mortgages shall be made by any savings bank except upon the report of a committee of its trustees charged with the duty of investigating the same, who shall certify to the value of the premises mortgaged or to be mortgaged, according to their judgment, and such report shall be filed and preserved among the records of the corporation." No such investigation was ever made by the trustee in connection with any of the investments that are here in dispute. In the judgment of the courts below, this omission was a further reason for liability on the trustee's part. Again we agree. The trustee is a bank of deposit and trust company. It had a real estate committee composed of a number of its directors and, that being so, its plea of structural inability to obey the last-stated requirement of the statute is not impressive.
Each of the challenged investments was the result of an apportionment of a whole mortgage which had theretofore been held by the trustee in its personal name. In most instances, this period of antecedent individual ownership in the trustee had continued for a number of years before any part of the security was distributed to the present trust. Whether that line of action was in keeping with the strong fiduciary standard of undivided loyalty may be open to doubt; but this record, as it happens, does not call upon us to take account of that matter.
Appraisals were supplied to the trustee on its purchases of the whole mortgages. Those estimates, we think, had become worthless by reason of age. There is even less force in the trustee's evidence that values were discussed in its mortgage department. The applicable statute, as we have noticed, *Page 380 required that valuations be authoritatively indorsed and kept on file.
The trustee says the beneficiaries acquiesced in its breaches of the trust. On this head, the Surrogate said: "Since it appears to my satisfaction that neither the life beneficiary nor the remaindermen of this trust estate were fully apprised of the facts, and of their rights under the law applicable, and how the acts sought to be confirmed or ratified would be dealt with by a court of equity they are not estopped from objecting to the account." In its affirmance of that finding the Appellate Division was unanimous.
No charge is made of concurrence by any other party in the misconduct of the trustee. Nor is any claim made of actual knowledge by any other party of the failure of the trustee to certify the values of the mortgaged properties. Thus there was ample room for the finding of lack of such conscious assent as will debar a beneficiary from redress for a mishandling of his interests in the execution of a trust.
We pass now to another transaction for which an additional surcharge has been imposed. Among the assets of the estate of the testator were 200 shares of common stock of the American Hard Rubber Company. Conformably to his will these shares were retained in the trust. In 1941, steps were taken to consolidate the rubber company with another concern, through a plan whereby preferred shares of the consolidated company were to have new priorities over its common shares. For some reason, the trustee did not carry out its election to take common stock of the consolidated company in exchange for the common shares of the rubber company that were in the trust. The consolidation was effectuated on December 26, 1941. On that date, the market value of 200 shares of common stock of the rubber company was $3,450. On February 28, 1942, the trustee sold its 200 shares thereof for $2,750.93. The amount of the surcharge is the difference of $699.07.
The trustee was not in duty bound to dispose of its shares of the common stock of the rubber company as soon as the consolidation plan became effective on December 26, 1941. Whether the subsequent period of retention exceeded a reasonable time was the true question on this branch of the case. The Surrogate should now pass upon that question. *Page 381
The orders should be modified in accordance with this opinion, with costs to all parties appearing separately and filing briefs, and the matter remitted to the Surrogate's Court for further proceedings.