Opinion ID: 2302870
Heading Depth: 1
Heading Rank: 2

Heading: divided loyalty.

Text: The excepting defendants collectively contend that the plaintiff trustee should have been surcharged for losses sustained with respect to six specified mortgage investments and that the failure of the court below to so surcharge the plaintiff is error. The six investments involved in this category are referred to by the parties as investments Nos. 2, 7, 8, 10, 11 and 12. All of these investments, excepting No. 8, represented securities purchased by the plaintiff from Title Guarantee & Trust Company through its affiliate, Bond and Mortgage Guarantee Company, and were in the form of bonds and mortgages. Bond and Mortgage Guarantee Company guaranteed payment of the investments and Title Guarantee & Trust Company insured the title to the real estate embraced by the mortgages. Investment No. 8 represented participation in a larger mortgage purchased by the plaintiff through a corporate broker. The advisory master found as a part of his factual findings that the investments referred to as Nos. 2, 10, 11 and 12 were purchased by the trustee, acting through a mortgage investment committee of two persons, one of whom was a director of Title Guarantee & Trust Company and Bond and Mortgage Guarantee Company, and the other of whom had been formerly associated in official capacities with both the Title and Mortgage Companies; that investment No. 7 was purchased by the trustee, acting through a mortgage investment committee of three persons, the two persons above referred to and a third person who was also a director of the Bond and Mortgage Guarantee Company; that the maturity date of mortgage investment No. 2 was extended in 1928 by the trustee acting through a committee of two, one of whom was a director of the guarantor Bond and Mortgage Guarantee Company; that the extended maturity date of such mortgage together with the maturity date of mortgage investment No. 11 were extended by the trustee in 1931 and 1930, respectively, through a committee of three, two of whom were directors of the guarantor; and that the mortgage investment No. 8 was purchased through a corporate broker by a committee of two, one of whom was a director of the corporate broker. It is observed that the men who served on the trustee's mortgage committee in the transactions here involved were Macdonald, Downey and Belknap. Macdonald and Downey were directors of the plaintiff and Belknap was a vice-president but not a director of the plaintiff. Additionally, Macdonald and Downey were directors of Bond and Mortgage Guarantee Company, and Macdonald was also a director of Title Guarantee & Trust Company; Belknap was a director of Albert B. Ashforth, Inc., the corporate broker from which mortgage investment No. 8 was purchased. The advisory master concluded that there was no suggestion of actual disloyalty to the trust, that the interest of the trustee's mortgage investment committee in and control over the corporations from which it purchased the above designated securities was so unsubstantial as not to have affected the judgment of the trustee's said committee, and that the trustee should not be surcharged for the losses sustained by the trust on these investments. The advisory master's conclusion is based upon the premise that the members of the trustee's mortgage committee constituted a very small fraction of the directors of the corporation which sold the mortgage securities to the trustee and had no substantial financial interest in the corporations of which they were directors. We do not believe that the inquiry can be resolved solely upon the basis of the extent of the stockholdings of the trustee's mortgage committee personnel in the selling corporations, or the number of members on their board of directors. The vice of the present situation arises from the substantial representation of the selling corporations on the trustee's mortgage committee which in some instances was 50% of the committee and in others, 66 2/3%. The decisions to make mortgage investments of the trust funds were initially made by this committee. The influence of this committee in the ultimate choice of investments cannot be gainsaid. The power of the committee is reflected in the extension of mortgages by the trustee through the committee. Although there was no suggestion that actual disloyalty existed in this case, the opportunity was present. In approving investments for the trustee the committee was in a position to permit the marketing by the selling corporations to the trustee of investments which may not have been so selective as a trustee should insist upon. Moreover, the committee was in a position where the business opportunities which were afforded to the personnel of the committee and the selling corporations by reason of the dual connections of these men could have been of far more importance to them than any financial benefits which would have come to these men as mere stockholders from the sales of securities to the trustee by the corporations of which they were directors. The trustee and the members of its committee through which it acted in investing the funds of the trust should have been in a position where they could act exclusively in the interest of the trust in pursuance of the duty imposed upon them by law to exercise the utmost fidelity to the trust. Manifestly the trustee's committee was not in such a position. As directors and trustees of the selling corporations they owed an obligation to such corporations to exert every effort to effect the sale of mortgage securities and, since the payment of the mortgages was guaranteed by the Bond and Mortgage Guarantee Company, to seek and obtain extensions thereof when desirable to the guarantor company. As representatives of the trustee it was their obligation to approve the purchase of only such mortgage securities, and to grant such extensions thereon, as would be for the sole benefit of the trust. The conflicting interests of these men is obvious. The factual situation here presented is somewhat novel but the legal principle that undivided loyalty is of the very essence of a trust relationship and that a trustee may not place itself in a position where its interest is or may be in conflict with its duty is firmly entrenched in our jurisprudence and is nonetheless applicable and controlling. The high standard of conduct imposed upon a trustee by the New York courts is succinctly stated in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 ( Ct. of App. 1928), wherein Mr. Chief Justice Cardozo said:    Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the disintegrating erosion of particular exceptions. Wendt v. Fischer, 243 N.Y. 439, 444, 154 N.E. 303. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. See also In re Ryan's Will, 291 N.Y. 376, 52 N.E. 2d 909 ( Ct. of App. 1943), and In re Lewisohn, 294 N.Y. 596, 63 N.E. 2d 589 ( Ct. of App. 1945). The salutory principle is one of public policy and has been long recognized by the courts of this State. See Staats v. Bergen, 17 N.J. Eq. 554 ( E. & A. 1867); Shanley v. Fidelity Union Trust Co., 108 N.J. Eq. 564 ( Ch. 1927); Gates v. Plainfield Trust Co., 121 N.J. Eq. 460 ( Ch. 1937); affirmed, 122 N.J. Eq. 366 ( E. & A. 1937); In re Bender, 122 N.J. Eq. 192 ( Prerog. 1937); affirmed, 123 N.J. Eq. 171 ( E. & A. 1937); Rothenberg v. Franklin Washington Trust Co., 127 N.J. Eq. 406 ( Ch. 1940); affirmed, 133 N.J. Eq. 261 ( E. & A. 1943); Taylor v. Errion, 137 N.J. Eq. 221 ( Ch. 1945); affirmed, 140 N.J. Eq. 495 ( E. & A. 1947); Liberty Title and Trust Company v. Plews, 6 N.J. 28 (1950). The rule has been recognized by the United States Supreme Court. Magruder v. Drury, 235 U.S. 106, 59 L.Ed. 151 (1914). In Camden Trust Co. v. Cramer, 136 N.J. Eq. 261, 266 ( E. & A. 1944), Justice Heher stated the rule as follows:    It is both sound law and good morals that a fiduciary may not, in case of conflict, subordinate the cestui's interest to his own. Undivided loyalty is of the very essence of the relationship. The trustee is under a peremptory duty of complete loyalty and fidelity to the cestui. Self-interest can never be the determinative. He cannot serve two masters in an area of service involving divergent and discrepant interests. In the present case mortgage investments Nos. 2 and 11 were extended by the trustee acting through its committee, as earlier noted, and one of the committee members while a director of the selling corporation appraised two of the mortgage investments (Nos. 11 and 12) for the trustee. With respect to the appraisals the advisory master noted that It is true that the cestui que trust does not in such case have the same safeguard which he would have had if an `outside' appraisal had been obtained; the director whose actions are assailed could more easily have palmed off upon the trust a poor investment, but concluded that the possibility that the director was subjected to a greater temptation to act against the interests of the trust merely because he made the appraisal is remote and insufficient to lay upon the corporate trustee the heavy burden of absolute liability. But the philosophy underlying the rule is not premised on comparatives or measured by degrees. The rule is referred to in the cases as inexorable and one of uncompromising rigidity and does not permit of any division of loyalty. Complete loyalty to the trust does not mean almost complete loyalty nor does undivided loyalty permit slightly divided loyalty. Any whittling away of the established rule or the philosophy supporting it would result in the disintegrating erosion against which admonition was given by Mr. Chief Justice Cardozo in the case of Meinhard v. Salmon, supra . The only manner in which the application of the stringent rule which imposes absolute liability upon a trustee for a violation of its duty of undivided loyalty may be avoided is where the cestuis que trust have been fully informed of the details of the transaction and have concurred or acquiesced therein. That is not the present case. It is our conclusion that since at least one-half and in some cases two-thirds of the trustee's mortgage committee were in a position of conflicting interests, the trustee is liable for losses sustained in this category of transactions although there is no showing of actual disloyalty. It is necessary that every possible temptation be removed from the trustee.