In City Bank Farmers Trust Co. v. Cannon (291 N.Y. 125) we stated the rule of undivided loyalty which, in the absence of statute, contrary directions in the instrument creating the trust, or estoppel, is applicable to retention or purchase of its own shares by a corporate trustee. The respondents urge that the rule of undivided loyalty there stated is not applicable here because the shares in the corporate trustee came to the trust from the estate of the testator and because of the broad powers granted to the trustees with respect to investments.
The testator died on October 5, 1926. His will read in part as follows: "I give, bequeath and devise all the rest, residue and remainder of my property, both real and personal, to Charles H. Sanford, Edward L. Robertson and The Syracuse Trust Company in trust, nevertheless, to hold, care for, manage and control the same, to sell and convert into money any part or all thereof, without the authorization or approval of any court, to invest or reinvest the same, or portions thereof, in such interest bearing or income producing securities or property as to the said trustees, in the exercise of their discretion, may seem best, with all the authority, and powers in connection with the same, I would possess, if living * * *.
"* * * in addition to the powers and authority herein conferred upon my said executors and trustees, I authorize and *Page 70 empower my said executors to contract for the sale of, and to sell, with or without covenants of title, any and all of the real property or estate or interest therein, of which I shall die seized or the owner * * *".
Testator's father was one of the subscribers to the original shares of the Trust Company and a member of the board of directors from 1906 to his death in 1921 with the exception of a two-year period. Upon his father's death the testator received 168 shares of the Trust Company from his estate, and, prior to receiving the 168 shares, had bought 10 shares.
On June 12, 1929, a reduction in the par value of the Trust Company's shares from $100 to $25 and a corresponding increase in the number of shares from 15,000 to 60,000 was authorized. At the same meeting an increase of the company's capital from $1,500,000 to $2,500,000 was authorized, and for this purpose 40,000 additional $25 par shares were to be issued. Thus for the 178 original shares ($100 par) the trustees became entitled to receive 712 shares ($25 par) and to subscribe for 474 2/3 shares. A fractional right was purchased for $29 and the trustees subscribed for 475 additional shares, making a total of 1,187 shares which they now hold. For each of these additional shares they paid $75. There was a market for the sale of these subscription rights at a price which varied from $39.50 to $63. Judge Robertson advised that exercise of the subscription rights was proper and he and Mr. Sanford concurred with the Trust Company in deciding to exercise the rights. The subscription to the additional shares was made on September 30, 1929, and resulted in an overdraft of $18,723.56 in the trustees' account with the Trust Company. Five thousand dollars left with the executors by the Surrogate's Court for the purpose of taking care of disputed tax items was also used in payment of the subscription. Sales of securities sufficient to cover the balance of the overdraft were effected by January 31, 1930.
No dividends have been paid on the Trust Company's stock since 1933 and the value of the 1,187 shares at September 19, 1939, the close of the accounting period involved in this litigation, was $9,496 as compared with a book value of $114,864.
In view of the rule of undivided loyalty as applied to the retention or purchase of shares of stock in a corporate trustee, *Page 71 one must, in order to authorize such transactions, find authority either in the statute or in the instrument creating the trust. In 1938 (L. 1938, ch. 356) the Legislature amended the Decedent Estate Law and the Personal Property Law by adding to section 111 of the Decedent Estate Law a new subdivision 6 reading as follows: "6. No fiduciary shall be liable for any loss incurred with respect to any investment not eligible by law for the investment of trust funds if such ineligible investment was received by such fiduciary pursuant to the terms of the will, deed, decree of court, or other instrument creating the fiduciary relationship or if such ineligible investment was eligible when received, or when the investment was made by the fiduciary; provided such fiduciary exercises due care and prudence in the disposition or retention of any such ineligible investment", and by adding a similar provision to section 21 of the Personal Property Law.
The transactions involved in the Cannon case (supra), and in this case occurred before the enactment of this statute. Consequently one must turn for authority, if any there be, to provisions of the testator's will under the terms of which the testamentary trust was created. The will contains no retention clause authorizing retention by the trustees of the Trust Company's shares or any other securities. Respondents emphasize the relationship of the parties and the broad grant of power denoted by the phrase "with all the authority, and powers in connection with the same, I would possess, if living". These are broad words and it is claimed that no stronger could have been found to authorize the retention or purchase of securities as trust investments. The circumstances that the testator used these words with reference to the very shares of the corporate trustee forming part of his estate at the time of his death and named the corporate trustee and its president as two of his three testamentary trustees are urged in support of the interpretation of the language of the will as meaning that they should deal with these shares as he himself might have done. There is much force in this argument and if we were dealing with a simple contract it would perhaps prevail. But we are here dealing with the fundamental relationship between a trustee and the beneficiaries of the trust, which we have attempted to define in language which will permit no exception or departure from the rule of fundamental fidelity expressed in *Page 72 Meinhard v. Salmon (249 N.Y. 458, 464); Wendt v. Fischer (243 N.Y. 439, 444); Munson v. Syracuse, G. C.R.R. Co. (103 N.Y. 58, 74); Dutton v. Willner (52 N.Y. 312, 318), a rule which in City Bank Farmers Trust Co. v. Cannon (supra) we declared to have been designed "to obliterate all divided loyalties which may creep into a fiduciary relationship and utterly to destroy their effect by making voidable any transactions in which they may appear." (P. 132.)
The testamentary trust created a trust relationship, a trust administered under law by trustees governed and controlled by the fundamental duties and obligations of the legal status in which they were required to act. We may not infer from broad grants of power "to hold, care for, manage and control" the trust estate; "to sell and convert into money any part or all thereof * * *, to invest or reinvest the same, or portions thereof, in such interest bearing or income producing securities or property as to the said trustees, in the exercise of their discretion may seem best", that such authority was to be exercised without regard to the fundamental duties and loyalties imposed upon all trustees, and we must construe the language used in the same context — "with all the authority, and powers in connection with the same, I would possess, if living" — as a grant of wide power and discretion, to be exercised, however, in the manner and subject to the obligations and duties of trustees. If the testator intended that all these things could be done without regard to the fundamental rule of absolute loyalty and fidelity prohibiting any purchase or retention of securities involving a divided loyalty, the authority should have been stated. The discretionary powers granted were broad but still subject to the prohibitions laid upon all trustees. Although a power is conferred upon the trustee, he cannot properly exercise the power under such circumstances or to such extent or in such manner as will involve a violation of any of his duties to the beneficiary (Carrier v.Carrier, 226 N.Y. 114, 125-126; Restatement, Trusts, § 186, comment f).
It is contended by the executrix of the estate of Edward L. Robertson, who before his death was one of the trustees, that her testator's estate is not subject to a surcharge because his action in approving the retention of shares of the Trust Company and the acquisition of additional shares was entirely *Page 73 disinterested and uninfluenced by any consideration other than the interests of the beneficiaries. That was true, but it is not questioned that he gave his approval to the retention of the shares of the Trust Company held by the testator and to the acquisition of additional shares as well. Under these circumstances his liability as a cotrustee concurring in and approving illegal investments may not be avoided because he was personally uninfluenced by the conflicting interests to which his cotrustees were subjected. The basis of his liability is found in his approval of and acquiescence in such investments which resulted in loss to the beneficiaries. When a cotrustee approves a prohibited investment and such losses result, his liability is clear (Wilmerding v. McKesson, 103 N.Y. 329, 339-340; Matterof Myers, 131 N.Y. 409, 420; Croft v. Williams, 88 N.Y. 384,388-389; Meldon v. Devlin, 31 App. Div. 146, 162-163, affd. on certified questions covering other points 167 N.Y. 573; Restatement, Trusts, § 224, subd. [2], cl. [c]; 2 Scott on Trusts [1939 ed.], §§ 224, 224.4).
Attempt was made in this case to surcharge the trustees for failure to sell undivided one-third interests in certain real estate the value of which greatly depreciated during the depression years. These objections to the trustees' accounts were overruled in both courts below. The questions presented involved determinations of fact and we cannot say as a matter of law that the courts erred in overruling these objections.
In the brief of The Syracuse Trust Company there is a suggestion that, while the life beneficiary of the testamentary trust did not have a power of revocation as did the life beneficiary in the Cannon case (supra) nevertheless the life beneficiary, and through her the remaindermen, were estopped as fully as were the settlor and the beneficiaries claiming under her in the Cannon case. The point is not mentioned in the opinions below and we see no merit in it.
The orders should be reversed and the matter remitted to the Surrogate's Court for further proceedings in accordance with this opinion.