Case Name: In the Matter of the Accounting of Central Hanover Bank and Trust Company, as Trustee under the Will of Frederick A. Hoyt, Deceased. Central Hanover Bank and Trust Company, Individually and as Trustee, Appellant; Fredericka H. Haslup et al., Respondents
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1945-07-19
Citations: 294 N.Y. 373
Docket Number: 
Parties: In the Matter of the Accounting of Central Hanover Bank and Trust Company, as Trustee under the Will of Frederick A. Hoyt, Deceased. Central Hanover Bank and Trust Company, Individually and as Trustee, Appellant; Fredericka H. Haslup et al., Respondents.
Judges: 
Reporter: New York Reports
Volume: 294
Pages: 373–397

Head Matter:
In the Matter of the Accounting of Central Hanover Bank and Trust Company, as Trustee under the Will of Frederick A. Hoyt, Deceased. Central Hanover Bank and Trust Company, Individually and as Trustee, Appellant; Fredericka H. Haslup et al., Respondents.
Argued Hay 15, 1945;
decided July 19, 1945.
J. Quincy Hunsicker, 3rd., Hersey Eggington and Albert B. Maginnes for appellant.
I. The investments in mortgage participations, by appellant’s taking a whole bond and mortgage in its own name for allocating shares of the investment to separate trusts and making such allocation of shares of such investments to the trust now in question, were in full compliance with the provisions of the will, conferring power to invest in “ securities, expressly authorized ” for savings banks. (Matter of Union Trust Co. [Hoffman Estate], 219 N. Y. 514.) II. The statutory term “ bonds and mortgages ” (Banking Law, former § 239, subd. 6) includes parts or shares, as well as wholes, thereof. (Chesterman et al. v. Eyland, 81 N. Y. 398; Barry v. Lambert, 98 N. Y. 300; Matter of Union Trust Co. [Hoffman Estate], 219 N. Y. 514; Matter of Doblin, 152 Misc. 406; Matter of Ryan, 291 N. Y. 376; Matter of Flint, 240 App. Div. 217, 266 N. Y. 607; Matter of Smith, 279 N. Y. 479; Matter of Farina, 279 N. Y. 780; Matter of Weinroth, 254 App. Div. 733; Matter of Jones, 161 Misc. 795; Matter of Dalsimer, 160 Misc. 906, 251 App. Div. 385; Matter of Stupack, 274 N. Y. 198.) III. The will should be construed in the light of the widespread usage and common understanding of a provision authorizing investment in securities permitted for savings banks, as entitling the fiduciary to invest in mortgage participations. (Matter of Doblin, 152 Misc. 406; Matter of Stupack, 274 N. Y. 198; Matter of Smith, 279 N. Y. 479.) IV. Testator in confining his reference to the savings bank law to the “ securities ” authorized by such law, and in appointing appellant, a trust company, as his fiduciary, plainly intended that the manner and procedure for the exercise of appellant’s powers, including the manner of exercising the power to invest in “ bonds and mortgages should be governed by the statutes regulating the exercise of powers of trust companies and not by the statutes regulating the exercise of powers of savings banks, literal compliance by a trust company with the latter being impossible. (Matter of Doelger, 254 App. Div. 178, 279 N. Y. 646; Matter of Farina, 253 App. Div. 511, 279 N. Y. 780; Central Hanover Bank and Trust Company v. Brown, 30 N. Y. S. 2d 85; In re Gibson’s Will, 40 N. Y. S. 2d 727; Wilmerding v. McKesson et al., 103 N. Y. 329; Chesterman et al. v. Eyland, 81 N. Y. 398; Matter of McCafferty, 147 Misc. 179; Croft v. Williams et al., 88 N. Y. 384; Matter of Mann, 147 Misc. 873; Reid v. Sprague, 72 N. Y. 457; Matter of Garvin, 256 N. Y. 518.) V. The surcharge respecting the rubber company shares is predicated upon a plain mistake of fact and not upon unauthorized “ retention ”, the sole ground of objection. ‘ It violates both (a) the express and the effective testamentary exoneration of appellant from liability for loss, incurred in good faith, and (b) the adjudicated right of a fiduciary to participate in a consolidation, even if retention of the new securities would be unauthorized, as long as the new securities are sold within a reasonable time. (Matter of Garvin, 256 N. Y. 518; Matter of Clark, 136 Misc. 881, 232 App. Div. 781, 257 N. Y. 132; Matter of Cuddeback, 168 Misc. 698; In re See’s Estate, 38 N. Y. S. 2d 47; Crabb v. Young, 92 N. Y. 56; Matter of Clark, 257 N. Y. 132; Matter of Kramer, 172 Misc. 598; In Re Olney’s Estate, 20 N. Y. S. 2d 884; Chemical Bank & Trust Co. v. Ott, 274 N. Y. 572; In the Matter, etc., of Estate of Weston, 91 N. Y. 502; Matter of Clark, 257 N. Y. 132; Matter of Parsons, 143 Misc. 368, 238 App. Div. 883; Matter of Horton, 166 Misc. 768.)
Jules G. Evens and Samuel Lawrence Brenglass for Fredericka H. Haslup and another, respondents.
I. Investment in mortgage participations is not permitted under the provision of the will restricting investments “ only in securities, expressly authorized ”, for savings banks. (Matter of Reid, 170 App. Div. 631, 218 N. Y. 640; Matter of London, 104 Misc. 372, 187 App. Div. 952; Roseboom v. Roseboom et al., 81 N. Y. 356; Matter of Buechner, 226 N. Y. 440; Matter of Barrett, 141 Misc. 637; Matter of Riecke, 165 Misc. 566; Matter of Easton, 178 Misc. 611, 266 App. Div. 713; Matter of Ryan, 291 N. Y. 376; Matter of Dalsimer, 160 Misc. 906, 251 App. Div. 385, 277 N. Y. 717; Matter of Waxelbaum, 156 Misc. 45; Matter of Haydock, 158 Misc. 404; Matter of Goebel, 177 Misc. 553; Matter of Campbell, 38 N. Y. S. 2d 827, 267 App. Div. 783.) II. Respondents are not estopped by any acquiescence in, or ratification of, the unauthorized investments in the mortgage participations. (Adair et al. v. Brimmer et al., 74 N. Y. 539; Meinhard v. Salmon, 249 N. Y. 458; Matter of Long Island Loan & Trust Co., 92 App. Div. 1, 179 N. Y. 520; Matter of Young, 249 App. Div. 495, 274 N. Y. 543.) III. The retention by appellant trustee of the common stock of the rubber company after the receipt by it of notice that the company would reorganize and consolidate with another corporation, constituted an investment in a stock not authorized by the will. (Stark v. National City Bank, 278 N. Y. 388; Mertz v. Guaranty Trust Co., 247 N. Y. 137.)
J. Hampden Dougherty, special guardian, for Mary Hoyt and others, infants, and for others, respondents.
I. Each of the real estate mortgages objected to was an improper investment because the appraisal requirements imposed as to savings bank mortgages were never complied with. Personal inspection and appraisal by appellant’s trustees was requisite. (Matter of Easton, 178 Misc. 611, 266 App. Div. 713.) II. Valuation at the time of acquiring participations was essential. (Matter of Dimond, 163 Misc. 611; Matter of Dalsimer, 160 Misc. 906.) III. The wholly exceptional language of this will forbade investment of the trust fund in parts of any mortgages — even in parts of mortgages legal for savings banks. Participations were not expressly authorized by the Banking Law. IV. The Banking Law "forbade appellant’s procedure. V. As to alleged estoppel of beneficiaries, the law is contra. (Matter of Doelger, 254 App. Div. 178; Adair et al. v. Brimmer et al., 74 N. Y. 539; Matter of Haydock, 158 Misc. 404; Matter of Bannin, 142 App. Div. 436.) VI. The retention clause of the will was inapplicable to the rubber stock transaction.

Opinion:
Loughran, J.
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 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.
Bach 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, 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 wifi 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 hot 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.
The orders should he 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.