Gartenlaub v. Union Tr. Co. of S.F.

Objections interposed to the settling of an annual account of a testamentary trustee form the basis of the present appeal. The decedent, Abraham Gartenlaub, who died June 1, 1914, devised and bequeathed the greater part of his estate in trust to the Union Trust Company of San Francisco and empowered the trustee to convert into money the estate thus received and invest the same in certain de- -scribed bonds. By the terms of the will the trustee was directed to pay to Alice G.

Pursuant to the provisions of the will, the trustee has invested funds of the trust estate in certain bonds -which it purchased at a premium. Obviously the amount of the premium cannot be collected from the obligor when the bonds mature, for the latter is liable only for the face value thereof. Consequently, if the bonds are retained by the trustee until maturity, the principal of the trust estate will be depleted by an amount equal to the premium paid. For the purpose of preventing a shrinkage of the principal in this manner, the trustee has, on each coupon date, deducted a portion, of the interest collected on the bonds and credited the same to principal. It is calculated that at maturity the sum of the amounts thus taken from interest and credited to principal will equal the premium originally paid for the bonds. This deduction from interest is assigned by appellant as an unwarranted diminution of the income of the life tenant.

Whether a premium paid for securities purchased by a trustee for a trust estate should be charged against the principal or the income of the estate has never been decided in California and upon this question we find the decisions in the other states in sharp conflict. Whatever view may be accepted, it is clear that some definite rule of action must be prescribed by this court and departures therefrom permitted only where the creator of the trust has given a clear and unmistakable direction to the contrary of that rule. The determination of the course to be pursued by trustees in such cases cannot be made wholly dependent upon the peculiar circumstances of each case as it arises, as has been attempted in some states. (McLouth v. Hunt, 154 N. Y. 179 , [ 39 L. R A. 230 , 48 N. E. 548 ]; Hemenway v. Hemen way, 134 Mass. 446 , 452; Shaw v. Cordis, 143 Mass. 443 , [ 9

The decisions which hold that a premium must be charged wholly to the principal of the trust estate, which is the rule contended for by appellant, are based largely upon the reason that a premium is paid to secure safety of investment, as well as high interest, and that, therefore, the premium is for the benefit of the remainderman as well as the life tenant. There is also the argument that there is a possibility that the bonds may be sold before maturity and, owing to fluctuations in market value, may, when thus disposed of, bring more than the sum for which they were purchased, so that these matters are likely to balance themselves in time. (Hite v. Hite, 93 Ky. 257 , [ 40 Am. St. Rep. 189 , 19 L. R. A. 173 , 20 S. W. 778 ]; In re Penn-Gaskell's Estate, 208 Pa. 346 , [ 57 Atl. 715 ].) [1] The weight of authority, however, and, we believe, the better view, is the rule finally adopted in New York in the case of In re Stevens, supra, to the effect that, “in the absence of a clear direction in the will to the contrary, where investments are made by the trustee, the principal must be maintained intact from loss by payment of premium on securities having only a definite term to run.” This rule has been consistently followed in New York (Dexter v. Watson, 54 Misc. Rep. 484 , [ 106 N. Y. Supp. 80 ]; Furniss v. Cruikshank, 191 App. Div. 450 , [ 181 N. Y. Supp. 522 , 528]), and has been adopted in New Jersey, Connecticut, and Wisconsin. (Bal lantine v. Young, 74 N. J. Eq. 572 , [ 70 Atl. 668 ]; Curtis v. Osborn, 79 Conn. 555 , [ 65 Atl. 968 ]; In re Wells, 156 Wis. 294 , [ 144 N. W. 174 ]; see note, 4 A. L. R. 1249 .)

This duty to restore to principal the total amount invested in the bonds cannot be evaded upon the theory that the bonds may, as a result of fluctuations in market value, be sold at higher prices than those for which they were purchased. A trustee is not permitted to buy and sell on speculation. The fluctuations in market value after purchase by the trustee are merely changes in the value of the assets of the trust estate, which are to be wholly disregarded in any accounting between life tenant and remainderman for funds from the trust estate invested in income-bearing property. (In re Stevens, supra.)

[2] The deduction from interest of the amount paid as premium is not a violation of sections 723 and 724 of the Civil Code, prohibiting accumulations of income except during minority and for the benefit of the minor. The entire net income from the bonds is distributed, for, as previously stated, a portion of the interest on the bonds is in reality return of a part of the principal invested therein to the

In the present case the testator has given no direction that the principal of the trust estate should bear the loss occasioned by the wearing away of premium. The bequest to appellant of three-fourths of the “entire net income” cannot be interpreted as such a direction in view of the fact that part of the interest on the bonds is not, strictly speaking, income, but a return of capital. It is pointed out that the testator provided that no investments of trust funds should be made in bonds of the United States, “for the reason that said bonds yield too low a rate of interest.” At the time of the healing, United States Liberty bonds were yielding a higher rate of interest than many of the bonds of the trust estate after the deduction from their interest return of a proportionate part of the premium. This, it is urged by appellant, shows that no deduction should be made from the interest on the bonds of the trust estate, since the return to the life tenant would thereby be made lower than intended by the testator. This inference cannot be drawn from the provision in question, for any inference deduced from the provision in regard to United States bonds must be based upon the facts existing at the time the testator made the provision. At the time the will was executed and that the testator died, the year 1914, the interest on United States bonds was far lower than the lowest yield of any bonds of /the trust estate after deductions on account of premium. The will contains the following provision: “If at the end of any one year it shall appear that my said wife has not received an average of at least the sum of seven hundred and fifty ($750) dollars for each month of said year . . . then <md in that event said trustee shall resort to the personal property of the corpus of said trust estate, and thereout shall take sufficient to make up and pay over to my said wife a sum sufficient to make the aggregate receipts of my said wife the equivalent of seven hundred and fifty ($750) dollars for each month of said year.” (Italics ours.) Appellant’s income from the estate has not fallen below the sum of $750 per month, but has far exceeded that minimum and, eonse

The order appealed from made an allowance to the trustee of five hundred dollars as compensation to its attorney for legal services rendered by the latter upon a former appeal to the supreme court from an order settling the second annual account of the trustees (Estate of Gartenlaub, ante, p. 375, 16 A. L. R. 520 , 197 Pac. 90 ]), and $250 for services rendered upon the hearing of the fourth annual account of the said trustee. It is contended that these matters constituted litigation between the life tenant and remaindermen which was not hostile to the trust itself and in which the participation of the trustee was gratuitous and uncalled for, and, therefore, that the trustee is not entitled to an allowance for attorney’s fees. [3] It is a general rule that trustees are entitled to reimbursement for expense incurred in good faith in the execution of the trust. (Denvir v. Park, 169 Mo. App. 335 , [ 152 S. W. 604 ].) While the participation of a trustee in litigation between rival claimants not involving the execution of the trust would seem unwarranted, the present case does not present such a state of facts. The litigation arose upon the settling of the trustee’s accounts and concerned the interpretation of the .instrument creating the trust and a determination of the proper mode of executing the trust. The trustee was, therefore, directly interested in its representative capacity and was not without authority to employ a legal representative in the interests of the trust estate. “The rule which has been applied in a great variety of cases affecting the administration and execution of trusts is that a trustee has a right, whenever necessary to the proper administration, preservation, and execution of the trust and the prosecution or defense of action, to employ counsel and to be reimbursed from the trust estate for whatever sums he has paid for the services of such counsel. The rule is applicable even though the cestm que trust employed counsel to represent the same interests, and although, to a certain extent, the private and personal interests of the trustee may also be involved in the litigation.” (39 Cyc. 339.) It is immaterial

The five hundred dollars thus allowed the trustee for attorney’s services rendered in the litigation, as well as an additional allowance for so-called “ordinary” services of attorneys in connection with the preparation and presentation of the annual account of the trustee, were ordered paid from the income of the trust estate. The reasonableness of the sums allowed is not questioned, but it is claimed that they should have been charged to principal rather than income. The decision of Cogswell v. Weston, 228 Mass. 219 , [ 117 N. E. 37 ], lays down the following rule for the payment of the expenses incurred in the execution of a trust: “The regular annual or periodically recurring expenses arising in the administration of a productive trust commonly are paid out of the income, while extraordinary and unusual expenses are chargeable against the capital. 'The costs of litigation generally fall in the latter class. These rules apply in cases where the question concerns life tenants and remaindermen, both guiltless of any wrong against the trust and where the point of incidence of proper expenses must be determined as between innocent persons.” The following cases hold that costs of litigation in connection with the execution of a trust are payable from the principal of the trust: In re Osborne, 209 N. Y. 450 , [Ann. Cas. 1915A, 298, 50 L. R. A. (N. S.) 510 , 103 N. E. 723 , 731]; In re Schaefer, 222 N. Y. 533 , [ 118 N. E. 1076 ]; affirmed, 178 App. Div. 117 , [ 165 N. Y. Supp. 19 , 23]. [4] Where litigation becomes necessary to remove a doubt or ambiguity so as to insure the correct administration of the trust, the expense is an extraordinary charge which, unless otherwise provided by the testator, should be borne by all parties. If the expense of litigation incident to the trust is paid from principal, the life tenant, as well as the remainderman, shares the burden, for in that event

The order appealed from must be modified in accordance with the rule set forth in the immediately preceding paragraph. That is to say, the income must be credited and principal charged with the amount allowed to the trustee as compensation for its attorney for “extraordinary” services in connection with the execution of the trust. The trial court is directed to so modify the order, and when so modified the order will stand affirmed, without costs to either party upon.this appeal.

Sloane, J., Wilbur, J., Olney, J., Shaw, J., Angellotti, C. J., and Lawlor, J., concurred.

A petition for modification of judgment was denied by the court on June 9, 1921.

All the Justices concurred.