Court Opinion

ID: 6380368
Source: CourtListenerOpinion
Date Created: 2022-06-24 23:59:49.369465+00
Date Added: 2024-06-11T15:50:19.922053
License: Public Domain

Stearne, J.,
dissenting. — I dissent from the legal principle enunciated by the majority, viz, a fiduciary may invest trust res in preferred and common stock of private corporations where the trust instrument waives the restrictions imposed by legislative enactment concerning “legal investments”.
The petitions for declaratory judgments, with two selected cases (Carwithen’s Estate, no. 3089, October term, 1928; Donovan’s Estate, no. 239, July term, 1911) as vehicles, is an effort by certain corporate fiduciaries to secure judicial determination upon this subject.
Under present economic conditions certain corporate stocks frequently possess better intrinsic worth and brighter future prospect than do some bonds and mortgages of high grade. Fiduciaries are being importuned to enter the field of preferred and common stock investments — by life tenants who desire higher income yield, and by apprehensive remaindermen who fear the present security of a fixed obligation.
We freely concede that a fiduciary’s investment in cor*88porate stock is justified where the creator of the trust expressly authorizes it. Also, even in the absence of explicit language of authorization, where unequivocal words are used which clearly indicate an intent that the fiduciary may so invest. Such situations are matters for judicial constructions, and each will must be interpreted in its own language. In the absence of express words or of necessary implication, the problem presented concerns the legal effect of an unqualified exemption granted a fiduciary from adhering to the statutory “legal investments”. This distinction, while narrow, is of extreme importance. The great bulk of cases arise where general words are used such as “without limiting my trustee to legal investments”, etc. If such general words are judicially held to authorize investments in corporate stock, a new fiduciary investment field will be opened in this Commonwealth, involving countless millions of dollars, the ill or benign effect of which is the subject of considerable speculation and sharp difference of opinion.
No case has been cited in Pennsylvania which is directly in point, nor have we been able to find one. The majority opinion is a learned treatise and compendium of the law and history of trust investments and unquestionably constitutes a valuable contribution upon this subject matter. We regret, however, to be unwilling to concur in its basic conclusion.
The fundamental difference in opinion between the majority and minority lies in the opposed conception of the basic nature of a trust investment. It is the difference between a loan at interest and ownership with profits. The majority view testator’s exemption from adhering to legal investments as an authority not only to make loans but to become co-owners by acquiring stock in corporations. The minority, upon the contrary, hold that such-exemption never permits the trustee to use trust res to become a co-owner in a business enterprise.
Apparently the majority reach their conclusion in somewhat the following manner: Trustees are under the *89cloak of protection if, exercising due care, they adhere to what the legislature has defined as trust investments. But where the creator of the trust removes the barrier, then the fiduciary has an open unrestricted field, subject only to the duty of due care. Evidently the protection of due care is held to extend merely to corporate stocks and no further. Apparently, in their opinion, if a trustee invests in other forms of ownership it will not be regarded as an exercise of due care, and therefore the investment would be improper. The minority, upon the contrary, are firmly of opinion that the manifest spirit of the courts and legislature, reflected in all of the decisions and acts, is that the trustee in investing trust funds must at all times maintain the role of lender rather than buyer. The Supreme Court very early ruled that the true test as to investment by the trustee is (1) security of principal and (2) an immediate income from the investment: Pray’s Appeals, 34 Pa. 100, 110. It should also be remembered that a prudent man in his own estate, with the object of making money, may take greater risks than a trustee: Hart’s Estate (No. 1), 203 Pa. 480, 485. Where a trust is erected it has been repeatedly ruled that the life tenant is the primary object of testator’s concern, with the remaindermen protected so far as the security of the investment is concerned. All the apportionment cases, from Nirdlinger’s Estate, 290 Pa. 457, down to date, reflect. this thought. Thus, when a trustee invests trust funds he must keep constantly in mind that the life tenant is entitled to immediate income insofar as it lies within the power of the trustee. Such thought is reflected in the A. L. I. Restatement of Trusts, sec. 227 (a), wherein it is stated that the trustee is limited to:
“. . . such investments as a prudent man would make of his own property having primarily in view the preservation of the estate and the amount and regularity of the income to be derived". (Italics ours.)
The weakness in the majority’s view, in our opinion, is the placing of a sort of financial halo about a share of *90corporate stock, which apparently becomes more brilliant if the stock sells high on the stock exchange and the statement of assets and liabilities, and the record of dividend payments, read well. They overlook that, in the last analysis, a share of stock in a private corporation is nothing more or less than a certificate of ownership. A corporation is in essence a partnership, or an association of owners, with liability limited by statutory enactment. With a share of stock no dividends may be obtained until a majority of the elected board of directors so decree. The principal may be secure enough today, but there is no insurance concerning tomorrow as to obligations incurred by the board of directors affecting value. There is no guaranty that there will ever be a dividend. A fixed obligation, on the other hand, presupposes an immediate fixed return, which may be promptly enforced.
The minority recalls the financial history of trust investments in this Commonwealth, narrated in the majority opinion. We remember the reasons reflected in the constitutional debates for the insertion of the article in the Constitution as to trust investments, and the protection still maintained concerning trust funds by subsequent constitutional amendment, and the Fiduciaries Act of June 7, 1917, P. L. 447, and the Act of 1985. The enactments were aimed for the protection of trust funds from the vicissitudes of trade, business and speculation, by limiting such investments to loans. Under such constitutional and statutory provisions such loans must be of the highest character. Until the Act of July 2, 1935, P. L. 545, such loans were legal investments only if secured upon the real estate or obligations of the Government, the State or its agencies. It is to be observed that the Act of 1935 still strictly adheres to loans but extends legal investments to a strictly high grade of bond, and about which is thrown the greatest of protection. Nowhere does the word stock of private corporations appear. To illustrate how restricted a stock investment was regarded, see the Act of June 13, 1836, P. L. 589, which *91requires the committee in lunacy to secure permission of the court should he desire to invest in corporate stock: Davidson’s Estate, 324 Pa. 90. To show how strictly the court requires adherence to law, a fiduciary is surcharged if he permanently invests the funds in a savings account of a bank and a loss ensues: Hazelbaker’s Estate, 113 Pa. Superior Ct. 32; Byrnes’ Estate, Supreme Court opinion of January 11,1937 (not yet reported).
I am not disturbed concerning the rulings of the courts in England and other States in this country. Massachusetts has never had any statute or rule as to “legal investments”. It regards solely the necessity for the exercise of common prudence. New York operates under a statutory code. In England, and most other States, modern decisions upon this subject are the result of legislative enactment.
Nor am I swayed by the apparent emergency or existing demand. In the important deficiency judgment case our Supreme Court did not hesitate to strike down the act irrespective of the alleged emergency, or how benefically the act may have appeared to operate: Beaver County B. & L. Assn. v. Winowich et ux., 323 Pa. 483.
The minority hold that the acts and decisions clearly indicate that the basic idea of a trust investment is an assured immediate income to the life tenant, with due regard as to the security of the principal. I protest against this court sanctioning trustees embarking upon the financial seas of oionership, whether it be in common or preferred capital stock or in some other form of property or equities. If such a situation is deemed wise and desirable, then the responsibility rests with the legislature and not with the courts. •