Petition for rehearing denied March 17, 1936 ON PETITION FOR REHEARING (55 P.2d 1105) A petition for rehearing indicates that in the original opinion we held that the trustee is not accountable for an unlawful investment made prior to the inception of the trust arrangement between the trustor and the trustee. The petition also asserts that the court did not consider items 4 and 6 of the investment at all.
We take this occasion to disclaim that we made the holding first mentioned. We also desire it to be known that we did consider items 4 and 6 of the investment. There is testimony in the record to the effect that each of the pieces of property known to this record as items 4 and 6 was of double the value of the loan made upon it. The trial court gave effect to this testimony and we think that we are not justified in holding that the trial court erred in doing so.
More than that, the course taken by the parties hereto, with respect to these two items, convinces us that these securities were agreed upon by the plaintiff and defendant. They were held by plaintiff when the trust agreement was made, thereafter reports were furnished semiannually by defendant to plaintiff showing that defendant continued to hold them, and plaintiff *Page 29 accepted the returns from such administration of the trust.
When the trust agreement was made and ever since then under the express provision of the statute a trust company might lawfully invest funds held in trust by it in such bonds, securities or other evidence of indebtedness as might be agreed upon by the trust company and the party creating the trust: General Laws of Oregon 1925, chap. 207, p. 351, § 106; General Laws of Oregon 1927, chap. 164, p. 178, § 4; Oregon Code 1930, § 32-803, subdiv. 5; Oregon Laws 1931, chap. 278, p. 459, § 17, subdiv. 6; Oregon Laws, Second Special Session 1933, chap. 67, p. 187, § 2, subdiv. 6; Oregon Laws 1935, chap. 212, pp. 315, 316, § 1, subdiv. 6; Vol. 5, Oregon Code 1935 Supp. § 22-1214, subdiv. 6.
For these two reasons, it must be obvious the investments were not unlawful at any time. Plaintiff refers to the general rule announced in 37 A.L.R. 560. We quote therefrom:
"II General rule. It has been stated that the power of a trustee to retain investments received from the creator of the trust is, in the absence of contrary statute or provision in the instrument creating the trust, no different than the power to make the investment."
As stated in the original opinion, —
"With respect to all of the items involved herein, there is testimony to the effect that the respective pieces of property securing the respective loans were of twice the value of such respective loans."
It must be apparent that we have not declared any principle at variance with the general rule mentioned in the petition for rehearing and hereinabove quoted.
Plaintiff also urges that she is entitled to a determination by this court whether an investment of *Page 30 trust funds by a trustee in unimproved and uninsured real property is valid.
The alleged failure to maintain insurance is not mentioned in plaintiff's complaint and clearly is an afterthought. At least it is not in issue and no determination thereon should be made.
The particular piece of property, upon which plaintiff bases her claim that the trustee should be held liable because such property is unimproved, is known to this record as the Arlu property. When the investment was made, it was improved real property because there was a building thereon appraised by Mr. Vincent at $10,000 from which rent in the sum of $400 per month was being received and which had a potential rental value of approximately $200 per month more.
A short time before the trial — the exact time is not stated — the owner of the property removed the building and converted the property into a parking lot.
The question presented is whether, under this state of the record, the defendant should be required to account to plaintiff in money for this investment. We think not.
The statute of Oregon does not speak as to the duty of a trustee under these circumstances.
Two rules, however, have been suggested by the courts for the solution of this problem. The first of these is that the trustee, who holds an investment not sanctioned by the settlor or under the statute or by the decisions of the courts, has a duty to sell the security as soon as he can reasonably do so and reinvest the proceeds. The second form in which the rule about a duty to convert is sometimes stated is slightly different. Some courts have said in effect that a trustee holding a nonlegal has a duty to convert the security within a reasonable time and reinvest in legals, except in extraordinary *Page 31 cases when he decides to retain the investment for the trust after having used good faith and reasonable diligence and prudence. Vol. 3, Bogert, Trusts and Trustees, § 686:
"It is believed that the courts will permit trustees faced with conversion problems during the depression beginning in 1929 to consider the effect on the general security market of dumping large masses of trust securities. That such large general conversions of trust assets would reduce the market value of other trust properties and bring on a duty to sell still other securities at a large loss is a fact which may well influence a trustee to postpone conversion. A conversion involving a sale at a figure much below the original or inventoried value of the investment will doubtless not be encouraged. The tendency of the courts will undoubtedly be to exhibit great leniency toward trustees who have used reasonably good judgment in periods of uncertainty and acute financial distress." Ibid, authorities cited in note 21.
The petition for rehearing is denied. *Page 32