Opinion ID: 2336142
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Heading: the prudent man investment statute

Text: The principles incorporated in the Prudent Man Investment Statute are not novel. The prudent man rule with respect to investments by a fiduciary was first enunciated in Harvard College v. Amory, 9 Pick. 446 ( Sup. Jud. Ct. Mass. 1830): All that can be required of a trustee to invest is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested. (at p. 461) That case, in which the trustees were not surcharged for losses incurred through investing in common stock, found little acceptance elsewhere. In New Jersey in the case of Gray v. Fox, 1 N.J. Eq. 259 ( Ch. 1831), Chancellor Vroom, after reviewing the English authorities, held: The principle to be extracted from these authorities is, that the loaning of trust money    on private security, is not a compliance with the rule that requires due security, and of course, that such loans are made at the risk of the trustee. (at p. 266) In this country, the amount of public or government stock is very small, and in an inland state like our own, there are few opportunities for investing in that kind of security. The stock of private companies is not considered safe, and investment in that species of stock would scarcely be encouraged by a court of equity. There is, then, no other but landed security that would come within the rule. (at p. 268) This restricted view of a trustee's investment opportunities was followed in New Jersey, Shepherd v. Newkirk, 21 N.J.L. 302 ( Sup. Ct. 1848); Vreeland v. Vreeland's Admn'r., 16 N.J. Eq. 512 ( Prerog. 1863); Tucker v. Tucker, 33 N.J. Eq. 235 ( Prerog. 1880), affirmed 34 N.J. Eq. 292 ( E. & A. 1881), and was in accord with the rule prevalent elsewhere. The decision in King v. Talbot, 40 N.Y. 76 ( Ct. App. 1869), surcharging trustees for investing in equities of reputable corporations, prompted the New York Legislature to create a so-called legal list and was an important factor in inducing several states to adopt constitutional prohibitions against their legislatures giving trustees the power to invest in stocks of business corporations, see Shattuck, The Massachusetts Rule of Trust Investments, 82 Trusts and Estates 23 (1945). Until recent years the majority of states have followed the New York rule and enacted statutes listing investments, or categories of investments, approved for fiduciaries, see The Prudent Investment Theory in Trust Administration, 1 Rutgers L. Rev. 130, 131 (1947). As a result, however, of increasing dissatisfaction with the investment limitations thus imposed, in 1942 a committee of the Trust Division of the American Bankers Association prepared a model statute following the Massachusetts prudent man investment rule. The model statute found considerable favor with the various legislatures, and in the past ten years some 23 states, including New Jersey, have adopted it either in whole or in part or with minor variations. With some seven states adhering to the prudent man investment rule by court decision, it is readily apparent that the rule laid down in Harvard College v. Amory, supra , once generally rejected because it permitted trustees to invest in common stocks, now prevails in a majority of states. The past century and a quarter has seen a gradual but continuous expansion of the investment powers of trustees in New Jersey. At the time of the decision in Gray v. Fox, supra , the only way executors, guardians and trustees could act with safety in making investment of infant's funds was to obtain instructions from the Orphans' Court pursuant to the then existing statute ( Rev. L. 1820, p. 799, § 11) and follow these instructions. Thus, in Gray v. Fox, supra , the court said: In cases coming under the act, trustees may take the responsibility of loss upon themselves, or they may throw it on the court. If the latter course be pursued, the directions of the statute are plain. They must obtain leave and direction for the purpose of putting out the money; not put out the money first, and at some future day, when difficulties are foreseen or loss apprehended, go to the court and obtain a decree of confirmation. (at p. 272) Subsequently this rule applicable to infants' funds was extended by the Legislature to all funds in the hands of executors, administrators, trustees and guardians ( Rev. S. 1847, p. 209). It was almost 20 years, however, before the first definitive statute relating to fiduciary investments was enacted making it lawful to invest trust moneys in any of the bonds issued by this state, provided the deed of trust, the will or the court did not specially direct the manner of investment ( L. 1865, p. 737). Thereafter the statutory legal list evolved as the result of piecemeal additions over the years, see Large, Trustees' Investments in New Jersey, 59 N.J.L.J. 349 (1936), until in 1951 prior to the enactment of the Prudent Man Investment Statute it was comprised of a variety of securities, including bonds, preferred stocks and shares of savings and loan associations ( R.S. 3:16-1 et seq. ). The New Jersey Prudent Man Investment Statute as enacted ( L. 1951, c. 47; N.J.S. 3 A :15-18 et seq. ) constitutes an addition to and not a repeal of the existing statutes regulating fiduciary investments. Section 1 ( N.J.S. 3 A :15-18) includes several key definitions: (d) `investments' includes property of every nature, real, personal and mixed, tangible and intangible, which persons of ordinary prudence and reasonable discretion acquire for the purpose of preserving their capital and of realizing income; and specifically includes, solely by way of description and not by way of limitation, bonds, debentures and other corporate obligations, capital stocks, common stocks, preferred stocks, and shares of any open-end or closed-end management type investment company or investment trust registered pursuant to the federal investment company act of 1940, as from time to time amended; (e) `legal investments' includes all investments which a fiduciary is authorized to make pursuant to any statute of this state, other than this article; and when a fiduciary invests in, or when a trust estate holds a participation in a legal common trust fund, such participation shall be deemed to be a legal investment; (f) `limited legal investments' includes all investments which are not legal investments; and when a fiduciary invests in, or when a trust estate holds, a participation in a discretionary common trust fund, such participation shall be deemed to be a limited legal investment; Section 2 ( N.J.S. 3 A :15-19) sets up the standard of care and judgment required of fiduciaries: In investing and reinvesting money and property of a trust estate and in acquiring, retaining, selling, exchanging and managing investments, a fiduciary shall exercise care and judgment under the circumstances then prevailing, which persons of ordinary prudence and reasonable discretion exercise in the management of their own affairs, considering the probable income as well as the probable safety of their capital. By Section 3 ( N.J.S. 3 A :15-20) a limitation is placed upon the investments authorized: Within the limitations of the standard prescribed by section 3A:15-19 of this title, a fiduciary may invest in any investments whatsoever; but no fiduciary shall make any investment for a trust estate in any limited legal investment if, on the valuation date, the aggregate value of all limited legal investments held in such trust estate exceeds, or if the investing in such limited legal investment would cause such aggregate value to exceed, 40% of the aggregate value of all the property which constitutes the principal of such trust estate. Sections 4 through 7 ( N.J.S. 3 A :15-21 to 24) deal with mechanics of trust administration and are not here important. Section 8 ( N.J.S. 3 A :15-25) recognizes the precedence to be given to the terms of the trust instrument and the superintending jurisdiction of the court: If a trust instrument prescribes, defines, limits or otherwise regulates a fiduciary's powers, duties, acts, or obligations in acquiring, investing, reinvesting, exchanging, retaining, selling, valuing or otherwise acting with respect to the property of a trust estate, the trust instrument shall control notwithstanding this article; but nothing herein shall affect the jurisdiction of the superior court to order or authorize a fiduciary to depart from the express terms or provisions of a trust instrument for the causes, in the manner, and to the extent otherwise provided by law. Section 9 ( N.J.S. 3 A :15-26) purports to construe certain phrases pertaining to investment commonly found in trust instruments: Whenever any trust instrument or any statute of this state,    directs or authorizes a fiduciary to make any investment for a trust estate in `legal investments,' or in `investments in which a fiduciary may by law invest' or in `legal investments for trustees' or uses words of similar import, such words shall, in the absence of an express provision to the contrary contained in such trust instrument or such statute, be taken to include limited legal investments of the aggregate value as limited by this article. By Section 10 ( N.J.S. 3 A :15-27) it is provided that nothing in the statute shall require a fiduciary to invest in limited legal investments; section 11 ( N.J.S. 3 A :15-28) makes applicable to limited legal investments the law generally applicable to legal investments; and the final section 12 ( N.J.S. 3 A :15-29) makes the statute applicable retrospectively as well as prospectively: This article shall apply to and govern trust estates heretofore and hereafter created, fiduciaries heretofore and hereafter appointed, and trust instruments heretofore and hereafter made. It is readily apparent that the Prudent Man Investment Statute has the effect of expanding the types of investments which a fiduciary in this State may legally make by permitting an investment of not to exceed 40% of the corpus of his trust in any investments, even though not previously considered legal, providing the appropriate degree of care and judgment is utilized and the terms of the trust agreement or an order of the court are not violated. Beyond expanding the types of investments which a fiduciary may legally make, the statute effects no change in the rights and obligations of a fiduciary. Now as heretofore a trustee, if he would avoid being surcharged, is limited to investing in those types of investments authorized by statute, in the absence of controlling provisions in the trust agreement or an appropriate order of the court. Now as heretofore a trustee in making investments of whatever type must exercise that degree of care and judgment which persons of ordinary prudence and reasonable discretion exercise in the management of their own affairs, and must give due consideration both to the probable income from and the safety of the investment so that the interests of both the life tenants and the remaindermen shall be promoted to the fullest extent compatible with the interests of the other. Further, it is plain that the provision of the statute making it applicable to prior created trusts is not constitutionally objectionable. The statute as thus applied in no way impairs the obligation of any contract or interferes with or alters any vested right or legal remedy that antecedently existed. It is the rule in this State that a trustee, in the absence of a contrary provision in the trust instrument or court order, may invest the corpus of the trust in such investments as are legal or permitted by statute at the time the investments are made, Bankers Trust Co. v. Bacot, 6 N.J. 426 (1951); Ritchie v. Farrelly, 16 N.J. Super. 214 ( Ch. Div. 1951); Reinhardt v. National State Bank, 130 N.J. Eq. 34 ( Ch. 1941); Reiner v. Fidelity Union Trust Co., 126 N.J. Eq. 78 ( Ch. 1939), reversed on other grounds, 127 N.J. Eq. 377 ( E. & A. 1940). There is sound reason for this rule. Unless the trust instrument provides otherwise, it is presumed that the trustor intended that his trustee should have the power to make such investments of the corpus of the trust as the Legislature in its wisdom might from time to time permit. As stated in Reiner v. Fidelity Union Trust Co., supra , where the trust agreement gave the trustee power on the redemption of certain stock to invest the proceeds derived therefrom in such securities as are by the laws of the State of New Jersey designated as legal investments for trust funds: To interpret the language of this trust instrument as requiring that the trust funds should be invested only in securities which were legal investments for trust funds at the time of the creation of the trust is to attribute to the creator of the trust a complete lack of ordinary intelligence.    it is absurd to assume that the creator of the trust did not contemplate situations would arise from time to time, which would induce the legislature to change the types of legal investments because of changes in economic conditions which would render investments safe at one time, unsafe at another time. What the creator of this trust (who undoubtedly was possessed of ordinary common sense) must have believed, was that investments which were approved by the legislature or by the courts for trust funds would be more likely to be safer investments than other investments. Where the intention of the creator of the trust is thus carried out quite obviously there is no interference with the vested rights of the beneficiaries. In this regard it is to be noted that the Prudent Man Investment Statute expressly recognizes that the trust instrument is controlling as to the investment powers of the trustee ( N.J.S. 3 A :15-25). The section of the statute providing that such terms as legal investments, investments in which a fiduciary may by law invest, or legal investments for trustees, shall be taken to include limited legal investments ( N.J.S. 3 A :15-26), does not operate to countermand the trustor's intent, but is merely an indirect way of stating that such limited legal investments to the extent permitted are in fact legal. For the Legislature to have labeled the investments authorized by this statute as limited legal investments does not make them any the less legal than the investments authorized by other statutes and labeled as legal investments. The limitation on limited legal investments has nothing to do with the legality of the investments but solely with percentage of the trust which the trustee may invest therein. Being in agreement with the trial court in its holding that the Prudent Man Investment Statute is not rendered unconstitutional by virtue of the retrospective provision thereof, we need next consider the statute as applied to the specific trusts, created prior to its enactment, of which the plaintiff is the trustee.