Court Opinion

ID: 6381757
Source: CourtListenerOpinion
Date Created: 2022-06-25 00:01:42.410433+00
Date Added: 2024-06-11T15:50:22.836581
License: Public Domain

Stearne, J.,
The auditing judge surcharged a corporate cotrustee, and exonerated the individual cotrustee, concerning the investment by the trustees of trust funds in participating mortgage certificates, transferred to the trusts by the corporate fiduciary from other of its trust estates. The participating mortgage *338certificates secured an interest in a single first mortgage secured upon improved central Philadelphia real estate. Neither the form of the investment nor the sufficiency of the security of the mortgage, when created, is challenged.
The basis of the surcharge is:
1. There was no reappraisement of the mortgaged premises at the time of acquisition of the respective participating mortgage certificates;
2. While the intrinsic value of the mortgaged real estate remained the same as when the mortgage was taken, yet, at the time of acquisition of the certificates, there was no market for real estate of that character.
The facts may be briefly summarized. On November 4,1929, Anne W. Penfield, then reputed to be the richest woman in the United States, executed her bond and mortgage to the Girard Trust Company (cofiduciary herein) as “trustee for sundry estates”. The mortgage was for $2,500,000, secured upon improved real estate on the south side of Chestnut Street, east of Broad — in the very heart of the business section of Philadelphia. The real estate, at land value, was appraised for $5,000,000. No question is raised concerning the method of appraisement, or the amount thereof. Allocations were thereafter made by the corporation to between 500 and 600 trusts wherein it was fiduciary. These were evidenced by participating mortgage certificates. From October 19,1931, to March 22, 1932, eight of the participating mortgage certificates, in varying amounts and numbers totaling $23,800, were reassigned to the five testamentary trusts herein involved. No objection is raised as to the form of the investments. The trustees conceded that there were no reappraisements of the mortgaged premises when the various participating mortgage certificates were reassigned to these trusts.
Our first inquiry is whether the auditing judge was correct when he ruled that a reappraisement was necessary. The next consideration, if reappraisements were not required, is whether the certificates were amply se*339cured by real estate of sufficient value, and of proper character.
Before approaching the question of the necessity for reappraisement of such certificates, the true nature and status of a participating mortgage certificate must be considered. It will suffice to say that the genesis of a participating mortgage certificate was a benign device erected by corporate fiduciaries, whereby the fiduciary placed trust money in a common fund, and invested the same in a single mortgage, or in a group of mortgages, taken as “trustee for various trusts”. The trust fund became a “revolving fund” for the benefit of various trusts, and was usually employed for remnant uninvested funds too small for ordinary investment. At the inception the device was employed almost exclusively for minors’ small estates, or parts thereof; otherwise, such funds would have remained idle and unproductive. Such funds were relatively modest in amount, and the mortgage investments were kept most liquid and secure. This practice justly merited the approbation of beneficiaries, fiduciaries, and the courts. After this method of investment became firmly established, its scope widened and deepened. No longer was the practice limited to small or remnant funds, but this form of trust investment became a primary subject for extensive trust investments. The fund was still secured by a single mortgage or by a group of mortgages. Large mortgage pools were created, and participating mortgage certificates issued against such pools. Prior to the Banking Code of May 15, 1933, P. L. 624, such certificates were sold to the public as ordinary investments: see opinion of Deputy Attorney General reported in Mortgage Participation Certificates, 21 D. & C. 199. Such method of trust investment received legislative sanction. As the practice developed and expanded, it had imposed upon it many legislative regulations. While the experience of the past few years may raise doubt as to the wisdom of this type of trust investment, nevertheless, legislative and judicial authority therefor exists. *340Participating mortgage certificates are beyond all doubt legal investments for trust funds.
The act which confirmed and authorized the issuance of participating mortgage certificates is the Act of April 6,1925, P. L. 152. The basis for such certificates, as legal investments, is the Fiduciaries Act of June 7, 1917, P. L. 447, sec. 41. The Fiduciaries Act has been variously amended, the last amendment being the Act of June 24, 1939, P. L. 718. There have been many appellate decisions construing these acts of assembly. Crick’s Estate, 315 Pa. 581, Rambo’s Estate, 327 Pa. 258, and Harton’s Estate, 331 Pa. 507, may be cited, as could many others, which construe the Act of 1925, supra. And such certificates, under the Fiduciaries Act and its amendments, are legal investments: Smith’s Estate, 332 Pa. 581; Swindell’s Estate, 332 Pa. 161; Dillon’s Estate, 324 Pa. 252; Harton’s Estate, supra.
The question here presented is what is the measure of diligence and care required to be exercised by such a corporate fiduciary when it transfers a participating mortgage certificate from one trust to another. Certainly, under Saeger’s Estate, 340 Pa. 73, no extraordinary or unusual diligence and care is prescribed.
But the auditing judge has ruled that it constituted a lack of common skill, common prudence, and common caution not to have reappraised the mortgaged real estate in transferring a participating mortgage certificate from one trust to another.
Assuming the absence of fraud or knowledge (actual or implied) of a deterioration in the value of such mortgaged real estate, apparently there are two views as to the measure of skill, prudence, and caution required by a corporate fiduciary in so transferring a participating mortgage certificate. One view is that the acceptance of a certificate is governed by precisely the same measure of care as if the fiduciary were making an original investment in a single mortgage, or in any other form of authorized trust investment. Under this view, upon each *341acceptance of a certificate, the fiduciary must have the real estate (single or multiple) duly appraised in strict accordance with the act of assembly; it matters not that the corporate fiduciary has issued many hundreds of such participating certificates, and has occasion to daily, weekly, or monthly, make transfers from one trust to another. The other view is that the fiduciary, in accepting such transfer, is only held to good faith and ordinary skill, care, and prudence, and nothing more. To require a reappraisement for each retransfer creates an undue and unjust burden; such a requirement for reap-praisement, for all practical purposes, would eliminate a participating mortgage certificate as a legal investment; thus, an investment of $500 or $1,000 in a participating mortgage certificate might entail the cost of the reap-praisement of real estate, composed of various types, the cost of which could well consume a large part, if not all, of the investment; in the case of mortgage pools, the re-appraisement of hundreds of mortgages would involve even larger costs and expenses. Manifestly, if such re-appraisement is essential, investment in participating mortgage certificates would be impracticable, if not impossible.
As noted in the adjudication, one orphans’ court judge has followed one view, while another has adhered to the latter. A majority of this court hold to the latter view. It is true the auditing judge suggests that the difficulty could be eliminated by frequent appraisals every few months. However, a perpetual appraisement would appear to be a most expensive and impractical operation.
The legislature has obviously considered the problem. The Act of July 2, 1935, P. L. 545, subsec. (7), provides that no new appraisement is necessary to fix the fair value, if an appraisement has been made in accordance with law within three years from the date of the investment. This provision is reenacted in the Act of June 24, 1939, P. L. 718. It is to be noted that it is not mandatory that a reappraisement shall be made within three years. *342The act, in effect, exempts from liability if such appraisement has been so made.
The majority of the court are of opinion that the legislature, in so developing the use of participating mortgage certificates as trust investments, clearly indicated that reappraisement was not required. The Acts of 1935 and 1939 (above cited) were passed after these particular investments were made. But there were no acts of assembly prior thereto which required reappraisement. Had this case been governed by the Acts of 1935 and 1939, these particular certificates were regularly taken as all were transferred well within three years, and after an unchallenged appraisement. Therefore, reflecting the evident meaning of the legislature, a majority of the court hold, under the circumstances of this case, that no re-appraisement was required, and that the trustees are only liable in the event that they failed to exercise ordinary skill, care, and caution.
The next inquiry, therefore, is whether the trustees have failed to exercise ordinary skill, care, and caution. The auditing judge has found as a fact that such duty was not performed.
A finding of fact, like a verdict of a jury, will not be disturbed unless there is manifest error or clear mistake: Dempster’s Estate, 308 Pa. 153; Copeland’s Estate, 313 Pa. 25; Grenet’s Estate, 332 Pa. 111. But where findings of fact are conclusions based upon uncontradicted evidence, and purely the result of reasoning, the rule is different. In such case the court in banc, and the appellate court, are equally competent as the auditing judge to draw conclusions: Dorrance’s Estate, 309 Pa. 151; Boswell’s Estate, 109 Pa. Superior Ct. 365, 368.
The evidence is undisputed. Mr. Cullen and Mr. Sin-berg both testified that the intrinsic value of the real estate remained unchanged from the date of the mortgage until after the investments; also that there were no buyers for this character of property at the time of the investments. The finding of fact by the auditing judge *343was such that such testimony given by these witnesses “are the facts”.
Mr. Cullen testified that the absence of market did not reflect on the intrinsic value of the property; also that conditions had not changed the true intrinsic value of the real estate.
Apparently, the auditing judge, from the testimony, concludes that the market value was nil, or zero. His conclusion also is that “intrinsic value, where there is no market, is a speculative value . . .”
We have read the testimony with considerable care, and cannot attribute to it the implications which the auditing judge draws. As we read it, the witnesses did not say that in 1931 and 1932 this real estate possessed no value whatsoever. Nor did the witnesses say or infer that the “intrinsic value” which they, or the appraiser, fixed was the result of a speculative consideration.
It is a matter of judicial knowledge that, save in exceptional circumstances not here present, almost every form of tangible property has some value and market. It is futile to suggest that most real estate, however undesirable, cannot be sold at a price.. We cannot agree, from this testimony, that the real estate could not have been sold at any price and had no market at all. What we deduce from the testimony is that in the opinion of the trustees this real estate “was the most desirable in the center of Philadelphia”; that “eventually that property would be used for the construction of a very large building”; that in October 1931 there were no buyers for large central real estate sites; that the real estate was regarded as being of the kind that would be sold to a purchaser who wanted “that type of property”. In other words, it was regarded as most valuable real estate to a purchaser who wished to use it for the erection of a large building, or other central real estate development.
Concerning the time within which a market is available, it is also a matter of judicial knowledge that there *344is a vastly wider market for inexpensive dwellings than for ground which requires the expenditure of enormous sums to purchase and develop. The former class sells quickly, whereas the latter moves much more slowly, because of the limited use and existence of persons willing and able to finance such purchases.
As to intrinsic value: The uncontradicted testimony of Messrs. Cullen and Sinberg was that in 1931 and 1932 the intrinsic value of the real estate was $5,000,000, and unchanged as appraised in 1929. While the auditing judge accepted “as a fact” the testimony of these witnesses, he ruled that “Intrinsic value, when there is no market, is a speculative value depending upon uncertain future events”. Again: “It seems to me that a property which does not carry itself, and which has no market value, is not mortgageable no matter what the intrinsic value.”
In the view of the majority these findings are deductions from the testimony. As we read the testimony it was stated that intrinsic value remained as appraised, even though there were no offers or buyers for the property at the time of investment. We cannot decide that the trustees acted with a lack of skill, prudence, and caution in investing in this participating mortgage certificate where: Within two years the real estate had been conservatively appraised at $5,000,000, at ground value only; the first mortgage was for $2,500,000 (50 percent of its appraised value) ; it constituted one of the largest assembled pieces of land in central Philadelphia; where the bond and mortgage were executed by the then reputed richest woman in the United States, whose personal property revealed ownership of many millions of dollars of invested personalty; it was known that at or about the time of the execution of the mortgage the owner had declined a firm offer of $6,500,000 as inadequate; and where no default in payment of taxes and interest occurred until after 1932.
*345It is true that when the mortgage was taken the real estate did not “carry itself”. With an unchallenged ap-praisement of ground value of double the principal of the mortgage, and with the bond of one who was regarded as the wealthiest woman in America, insufficient revenue for carrying the real estate is of little importance. See Heyl’s Estate, 331 Pa. 202, 203-204.
These are continuing trusts. No distribution of principal is now being made. An additional reason for refusing a surcharge at this time is that a loss has not been definitely established. The real estate taken in foreclosure has not yet been liquidated. According to the record, at the sheriff’s sale on December 5, 1938, the real estate was sold to the mortgagee for $2,400,000. This is conclusive evidence of its value: Bugh’s Estate, 95 Pa. Superior Ct. 29; White’s Estate, 322 Pa. 85; Marsh, to use, v. Bowen, 335 Pa. 314; Skolnek’s Estate, 342 Pa. 49. A deficiency judgment was entered amounting to $964,247.41. This judgment has been presented against Mrs. Penfield’s estate, which is pending in this court before another auditing judge. According to that record, while the estate may prove to be insolvent, there are strong indications of possible solvency. If the estate is solvent, and if the salvage operation is completed, it may well be that there will be no loss at all, and the decision in this proceeding may prove wholly academic.
As no surcharge is to be imposed, we shall not consider in detail the question of the exoneration, by the auditing judge, of the individual cotrustees. If the surcharge had been sustained, a majority of the court would have held, in the facts of this case, that all of the trustees should be jointly responsible. We would not have limited liability solely to the corporate cotrustee.
The exceptions are sustained and the adjudication, as thus modified, is confirmed absolutely.