In re the Accounting of Title Guarantee & Trust Co.

These are cross appeals by the Title Guarantee and Trust Company individually and as surviving trustee under the last will and testament of Cornelius J. Ryan, deceased, and by five objeetant beneficiaries. The facts have been found upon supporting evidence by the learned Surrogate and have been affirmed by the learned Appellate Division. Under our limited jurisdiction that disposes of the facts and leaves to us only the application of rules of law as required by the facts thus established. We shall refer to three points. As to the other points raised we agree with the rulings below or do not reach them because matters of discretion are involved or questions of fact are determined upon supporting evidence. There are other determinations which we have not disturbed because the amount involved in the particular instance is trivial.

The points we shall discuss are argued forcefully upon both sides, due, in part, no doubt, to the amount of money involved and the length of the period covered. The corporate trustee argues that we have here “ formerly well-satisfied beneficiaries endeavoring to take advantage of a technical rule against self-purchase ” of securities and that their objections are afterthoughts due to the real estate collapse in the years succeeding 1929. Whether or not the beneficiaries are thus motivated is irrelevant. There are broad general rules both of the common law and of statute which trustees are obligated to follow. The common law rules, as will appear from many of the citations in this opinion, are of very long standing. Within those rules there is ample room for the exercise by trustees of wise judgment and discretion. The general rules, however, are rigid ones. Even though over a long period breaches of those rules

On the other hand the trustees of the corporate appellant were men of standing in their communities. In the matter of the surcharges which we shall discuss, there are not questions of bad faith as matters of fact but breaches of duty as matters of law. In a very limited number of instances was bad faith, malice or misuse of trust property found by the Surrogate and there, subordinates were at fault. There has been no appeal from those findings and they are not before us, except incidentally.

With this introduction, we discuss a record running to seven volumes, with many moré exhibits than are printed in its four thousand odd pages affecting more than three hundred objections.

Cornelius J. Ryan died a resident of the county of New York on April 20, 1911, leaving a last will and testament which was admitted to probate by the Surrogate of New York County.

The pertinent provisions of the will are those by which the testator gave the residue of his estate to his children, all six of whom are now living and are the objectants in this proceeding. The testator provided that the share of each child living at his death and then under thirty-five years of age should be retained and held by the trustees named in the will until such child reached the age of thirty-five years, the incdme to be applied meanwhile to the education, support and maintenance of such child. The principal of the trust was then to be turned over to him.

Alice J. Ryan, the widow, was appointed executrix by the will and letters testamentary were issued to her on May 25, 1911.

Under the provisions of the will, the widow was also appointed trustee of the trusts, .together with such trust company as she might select. She selected the Title Guarantee and Trust Company (hereinafter referred to as T G & T or as the corporate

The will further provided that Michael Gr. Ryan and William F. Brown should act as cotrustees with T Gr & T upon the death of the widow. She died in October, 1912, and in March of 1913 William F. Brown qualified as trustee as did Michael Gr. Ryan in June of 1914. Michael Gr. Ryan died at Los Angeles in 1928 and ancillary letters testamentary on his estate were issued to William F. Brown. The latter died in 1942 subsequent to the argument of the appeal in the Appellate Division. No successor trustee has been appointed. The T G & T is therefore the sole surviving trustee.

The investments because of which the appellant trustee has been surcharged were in what we shall call whole mortgages or in apportioned part interests in bonds and mortgages. We shall consider first the matter of whole mortgages in connection with the question whether a trust company in this State might lawfully sell, between the years 1917 and 1936, its own mortgages to its trusts. As the appellant trustee phrases it: “ The appellant was not prohibited by the rule against self-dealing from investing the funds of a single trust in a whole mortgage acquired by it in the regular course of its business of loaning money on bond and mortgage.” The decision of that question, which must be to the contrary of the trustee’s contention, is inextricably connected with the question of equal weight and importance, whether the interrelation between the Bond and Mortgage Guarantee Company and the appellant trustee was so close that in the words of the learned Surrogate 1 ‘ there did not exist between them that independence of operation which alone would have validated a purchase of investments for these trusts from Bond and Mortgage Guaranty Company.”

We shall consider first the facts.

The corporate trustee was incorporated in 1882. It was authorized to receive deposits of money, to loan money on real and personal property, to act as trustee “ and to guarantee bonds and mortgages and titles to real estate.” Its first business activities consisted of searching titles and insuring titles to real property. About 1888 it began making mortgage loans. About 1892 it established a trust department and did a limited banking business. It never guaranteed the payment of mort

When B & M was organized it was planned by T G & T, as shown by its minutes, to offer two-thirds of the stock to the then stockholders of T G & T. Whether or not that plan was carried out does not appear. During the first few years of its existence B & M did not pay rent or clerk hire to the corporate trustee for premises occupied by it or clerks used except to the extent that it paid a lump sum for services furnished or rendered. Later it paid rent to the corporate trustee for space occupied in Manhattan and Brooklyn in property owned by the latter but it was not charged for telephone service furnished, until 1931.

From 1910 to 1933 arrangements were made by T G & T, and B & M for sharing expenses of some departments in Manhattan. In Brooklyn B & M had its own staff except that at least the expenses of the sales department were divided equally between the two corporations. Among the departments as to which expenses were shared in Manhattan were: stenographic, auditing (in part), sales and appraisal.

From the 1920’s to 1933 the corporate trustee had branch offices in midtown Manhattan, in the Bronx, on Staten Island and in Jamaica, Long Island City, Mineóla, and Riverhead. In the Staten Island and Jamaica offices there were salesmen and appraisers who were joint employees of both T G & T and B & M. In Long Island City there were one or. more salesmen who were joint employees. There were joint employees in the midtown Manhattan and the Bronx office. The corporate trustee never charged B & M for rent, light or taxes in its offices other than in the downtown Manhattan and the Brooklyn offices.

For the past forty years the main office of the T Gr & T in Manhattan has been at 176 Broadway. Until 1933 the B & M offices were in the same building. About twenty years ago a building was erected around the corner and B & M moved into that. It added an “ L ” to 176 Broadway. The newly erected building could be entered from 176 Broadway. There was no doorway between the two buildings, merely a large open space, until 1932 or 1933. In Brooklyn both companies together occupied an entire building. The building ran through from Remsen Street to Montague Street. B & M was on the fifth floor of the Remsen Street building. The name of each company was lettered on the entrance to the buildings both in Brooklyn and Manhattan.

The B & M books were audited to some degree by T Gr & T. B & M’s by-laws so provided.

B & M kept its most active bank account with T G- & T. TGr&T frequently made open loans to B & M when it needed cash for monthly interest payments, and the companies sold mortgages to one another from time to time, depending upon their respective cash needs.

The real estate appraisal departments, were generally operated by both companies jointly, in the sense that some appraisers were on both payrolls and the appraisals of either company were at the disposal of the other. Some of the trustees of T Gr & T were members of the B & M Mortgage Committee and

Office supplies were bought jointly and the cost shared in and after 1931. In 1933 the companies jointly announced a wage reduction. In its minutes in 1933 T G & T recited that it and B & M “ have for many years maintained close working arrangements to the mutual advantage of each Company”.

In later years numerous advertisements appeared in New York City newspapers in which the names of both companies were mentioned. The companies sometimes advertised jointly and shared the expense. For example, an advertisement appeared in New York (in 1930) referring to the capital funds of $34,000,000 of T G & T and $20,000,000 of B & M. The public was advised that “ this scientific use of the combined fund of $54,000,000 provides the highest degree of protection procurable.” In the same month the trustee advertised, under the title “ In Union There is Strength ”: “ The Title Guarantee and Trust Company and the Bond and Mortgage Guarantee Company are associated to the advantage of borrowers and lenders in the vicinity of Greater New York.” Other joint advertising contained such expressions as: “ Mortgages with Something Behind Them ” and “ A Strong Combination ”. Those advertisements were published with the authority of the officers of the corporate trustee.

Letters were sent to prospective investors by T G & T calling attention to mortgages “ guaranteed by our associate Company, the Bond and Mortgage Guarantee Company ” and reciting that “ * * * the holders of our guaranteed First Mortgages and Guaranteed First Mortgage Certificates have enjoyed peace of mind because they * * * knew that return of the principal in full was guaranteed by our allied Company, Bond and Mortgage Guarantee Company.”

It was the established practice of the trust officer of the trustee to buy for the six Ryan beneficiaries only mortgages guaranteed by B & M. The trust officer, when there were trust funds to invest would call upon the Sales Division of B & M to supply him with a list of available mortgage investments. The B & M sales manager would then supply him with the “ offering sheets ” of mortgages available for purchase. T G

As to whole mortgages we have seen {supra) that the trust officer, when he received the list from the Sales Division of B & M showing mortgages available for purchase or investment, did not know whether T Gr & T or B & M was then the owner of the security. Apparently it was of no moment to him. The appellant trustee in its brief outlines the procedure as follows: “ If ownership of the mortgage chosen by the trust officer was in the B & M, then upon delivery of the trustee’s check in payment of the purchase price, the sale and assignment was made between the B & M and the trustees. If, however, title to the mortgage at the moment happened to be in the T Gr & T, B & M asked for and got an assignment of the mortgage from the T Gr & T and then assigned it to the Ryan trustees, the assignments usually being made on the same day.” In other words, B & M asked for an assignment from T Gr & T individually and reassigned to T Gr & T as trustee under the Ryan will on the same day as a part of one transaction.

Thus we have all but nine of the whole mortgages in the trusts under the Byan will selected for purchase by the trust officer of the corporate trustee for the trusts at times when those mortgages were owned by the trustee in its individual capacity. Concededly, the method of procedure was as to each of those mortgages the same as that followed as to the Bothschild mortgage. As to that the Surrogate found: “ In respect of a so-called Bothschild mortgage a trustees’ check dated March 28, 1932, for $5,500 to the order of Bond and Mortgage Guaranty Company was put in evidence. The cash book of Bond and Mortgage Guaranty Company was examined and the supposed payment of this sum to Bond and Mortgage Guaranty Company was not found recorded among the cash receipts of that company. It was conceded by the accounting corporate trustee that this check was not deposited at all by Bond and Mortgage Guaranty Company, but was endorsed over to Title Guarantee and Trust Company which collected the proceeds. The records of Bond and Mortgage Guaranty Company in respect of investments made by it were examined and such examination disclosed that no entry was made in its records of the acquisition of a Bothschild mortgage. An officer of the Title Guarantee and Trust Company was then asked to produce the cash book of the corporate trustee (which concededly had been the original owner of the $5,500 Bothschild mortgage) and he was asked to show the record of the sale of that mortgage to Bond and Mortgage Gfuaranty Company. He stated that the

The explanation of the corporate trustee is: “ In the cashier’s department of the T G & T there were, every day, as a matter of fact, items to be cleared between the two companies. A list of those was kept and a net check, somewhat similar to bank clearings, was drawn to the debtor or creditor at the end of the day. They likewise frequently endorsed checks to each other, more frequently by the B & M to the T G & T because that was its depositary, and in the exchange of funds those checks were endorsed. They did not go through any hanh account of the B & M. At the end of the day they would match checks against checks, totals against totals. * * * the totals of the charges against each company were compared and ‘ whoever owed whom, then made a check ’ * * *

“ Inasmuch as the check for the payment of the mortgage represented a net transaction there was no necessity for entry on the books of the B. & M except on the daily sheet.”

The daily sheets were not available at the trial having been destroyed long prior thereto. However, there was no direct testimony that the Rothschild check or any of the other checks figured in any such day sheet adjustment.

So much for the facts on that phase of the controversy. We now turn to the legal question presented, as to whether an amendment in 1917 to Banking Law, section 188, subdivision 7, changed the common law rule as to self-dealing so as to permit a trust company to sell whole mortgages to itself as trustee. We use the words “ trust company ” because the amendment applied only to trust companies and not to other corporate trustees.

We shall therefore, now consider the applicable law as to (1) the whole mortgages which the learned Surrogate found to have been 11 routed ” through B & M by the trustee in its individual capacity to itself as trustee as indicated and (2) the whole mortgages (nine in number as indicated supra) which happened to be in the name of B & M at the time of their selection as a medium of investment for the beneficiaries T. B. Ryan, Lynch, Kearney and C. J. Ryan by the trust officer of the corporate trustee.

It seems hardly necessary to cite authorities in support of the settled rule of law that a trustee may not sell its own property to a trust nor mingle its own funds with those of a trust. That rule applies equally to corporate as well as individual trustees except as changed by statute. (American Law Institute, Restatement of the Law of Trusts, § 170; Doud v. Holmes, 63 N. Y. 635 ; Matter of Long Island Loan & Trust Co., [1904] 92 App. Div. 1 , 4, affd. on opinion below 179 N. Y. 520 ; Matter of Union Trust Co. [Hoffman], [1916] 219 N. Y. 514 ; Matter of Young, [1937] 249 App. Div. 495 , 500, affd. 274 N. Y. 543 ; in Matter of Nugent, [1939] 254 App. Div. 663 , affd. 280 N. Y. 505 , the question of self-dealing by the trustee was not raised and all questions of fact had been resolved against the objectants.) The statement in Matter of Union Trust Co. (Hoffman), supra, at page 521: “ there is no difference between a corporate trustee and an individual trustee in its or his duty in

In Matter of Union Trust Co. (Hoffman) {supra), the corporate trustee had purchased whole mortgages solely for the purpose of distributing or allocating part interests therein among certain of its trusts and did so upon completing the purchase. In its records it made a written declaration of trust for each of the participating trusts and notified each life tenant at once by letter of the allotment to the trust in which he was interested. Upon an accounting in one of the trusts, the beneficiaries questioned the legality of the transaction. The trust company established that the practice complained of was followed by trust companies generally. The learned Surrogate condemned the practice for a number of reasons, one of which was that the title to the mortgage being in the individual name of the corporate trustee, it could readily be converted if the corporate trustee became financially embarrassed but felt bound to overrule the objection.

Following the affirmance in the Appellate Division without opinion, this court considered the matter at length and in discussing the propriety of commingling trust funds said: “ The trust investments to which objections are made * * * are

We also said: “ The advantages that are frequently to be secured by combining trust funds to make a large and more satisfactory investment than can be made of the funds of one trust without combination are of sufficient importance and value to the several trust funds to overcome any disadvantage that may arise from the fact that the several owners of the investment may thereafter differ in the matter of handling the same. Trust funds have been from time to time combined for investment with satisfactory results and the practice is generally recognized as proper for a trustee. (11 Ruling Case Law, 143; Barry v. Lambert, 98 N. Y. 300 ).”

We criticized the trustee for investing the trust funds in its individual name and not as trustee but affirmed, saying (p. 522): “ The order of the Appellate Division affects only transactions which have been reported to the beneficiaries, and for that reason should be affirmed, * # * . ”

It is important to note the facts in the Union Trust Company case. There the trust company determined as a part of the transaction how much money from each of several trusts would be used in making the loan on behalf of those trusts. It was a trust investment for several trusts. It was not a matter of selling, to a trust, apportionments of or shares in mortgages placed as a matter of business — the business of loaning money on mortgages. It was a matter of making a trust investment for several trusts at one time in one mortgage. The question of a sale by a corporate trustee to one of its trusts toas not in issue. No funds of the Union Trust Company were ever joined in the

The decision in the Union Trust Company case was rendered December 28,1916. In March of 1917 the then Chairman of the Senate Committee on Banking introduced a bill which became chapter 385 of Laws of 1917. It continued old subdivision 7 of section 188 of the Banking Law, as enacted by Laws of 1914, chapter 369, which read as follows:

“ Investments. All investments of money received by any such corporation, and by any trust company chartered by special act, prior to May eighteen, eighteen hundred and ninety-two, as executor, * * * or testamentary trustee, * * * shall be at its sole risk, and for all losses of such money the capital stock, property and effects of the corporation shall be absolutely liable, unless the investments are such as are proper when made by an individual acting as trustee, executor, * * * or such as are permitted in and by the instrument or words creating or defining the trust ”, but added the following:

‘ ‘ Investments in bond and mortgage by any such corporation as * * * personal or testamentary trustee, * * * may be made by apportioning to any estate or fund held by such corporation in any of such capacities a part interest in a bond and mortgage held by or in the name of such corporation, individually or in any representative capacity, and any such part interest may be repurchased at its face value by such corporation individually or in any representative capacity; but such bond and mortgage shall be a legal investment for trustees under the laws of this state and the records of such corporation shall at all times show every interest in the said bond and mortgage and any part interest in such bond and mortgage so apportioned shall at all times be and remain at least equal in lien to any other interest therein and such corporation shall promptly notify

each person of full age and sound mind entitled to the income therefrom of the fact that such investment has been made. * * (Emphasis supplied.)

It is the very cornerstone of the argument of the appellant trustee and one to which it returns again and again, that by that addition to the former section 188, subdivision 7, the Legislature in 1917 permitted a trust company to sell whole mortgages to itself as trustee and not merely to apportion parts of them, and that such permission was so accorded until 1936 when the addition to section 188, subdivision 7, made by Laws of 1917, chapter 385, was repealed and the following enactment substituted by Laws of 1936, chapter 898:

“ But no corporate fiduciary shall purchase securities from itself. On and after this act takes effect no such corporation shall invest in any part interest in a bond and mortgage on behalf of any estate or fund held by such corporation as executor, * * * personal or testamentary trustee, * * #. Any such part interest in a bond and mortgage heretofore apportioned to any estate or fund and held by such corporation as * * * personal or testamentary trustee * * * and outstanding at any time in the hands of any estate, fund or person may be repurchased at its face value by such corporation individually. * * * It is the intent of this act to prohibit after ■ August thirty-first, nineteen hundred thirty-six any future apportionments or investments of any part interests in bonds and mortgages to or investments in part interests of bonds and mortgages for any estate or fund of which such corporation is executor, * * * personal or testamentary trustee, * * *

The appellant trustee argues that to say that the addition or amendment to section 188, subdivision 7, in 1917 merely permitted the apportioning of parts of mortgages held by or in the name of a trust company and continued the prohibition against the sale of whole mortgages by a trust company to itself as trustee is to defy logic and common sense; that while the statute permitted the apportionment of parts of bonds and mortgages in terms, the Legislature did not intend trust companies or the courts to follow those terms because so to do would result in the unreasonable holding that a trust company could apportion to itself as trustee a 99% part of a bond and mortgage held by it or in its name and yet it could not properly sell 100% of that

This argument necessitates a consideration of the case of Union Trust Company (supra) and the amendments to the three statutes, to which reference has been made, in their relation one to another, since we think that that relation has been misapprehended.

Matter of Union Trust Co. (Hoffman) (supra) was decided in 1916. In it this court implicitly reaffirmed its previous decisions that a trustee could not deal with itself as to trust property but followed prior decisions permitting a trustee “ to combine several trust funds in an investment in a single bond and mortgage, held by the trustee in its own name, provided that the transaction was carried out in manner there described, which would adequately protect the rights and interests of the beneficiary of the -trust fund.” (Matter of Smith [Lehman, J.] 279 N. Y. 479 , 484, 485; [Emphasis in original].) From the rule prohibiting self-dealing by a trustee, except as amendments thereto have been made by statute beginning in 1917, this court has never deviated but has preserved the “ rule of undivided loyalty ” against the “ disintegrating erosion ” of particular exceptions. (Wendt v. Fischer, 243 N. Y. 439 ; Meinhard v. Salmon, 249 N. Y. 458 .)

It is contended that the 1917 amendment to section 188, subdivision 7, was a codification of the rule as declared in the Union Trust Company case but it is clear from a study of the case and a reading of the amendment that that is not a correct interpretation of the statute. The statute covered an entirely different situation. The Union Trust Company case permitted a corporate trustee to distribute a mortgage in its entirety-among several trusts for which it had been purchased, where there had been prompt notification of the distribution to the beneficiaries. That did not cover a situation where a trust company such as

While the 1917 amendment was an enabling act, as far as a trust company trustee was concerned (and not as far as individuals or other corporate trustees were concerned), it did not cover still other situations. For instance, a natural person trustee could not apportion a part interest in a bond and mortgage to himself as trustee. No fiduciary, natural or corporate, could make an original “ investment of trust funds in a certificate of any fractional share, even in a single mortgage * * (Matter of Stupack, [Lehman, J.] 274 N. Y. 198 , 210; Matter of Smith, supra pp. 484, 485 .) A trust company could not sell to itself as trustee a share or part of a bond and mortgage which was not held by or in its name. Personal Property Law, section 21, and Decedent Estate Law, section 111 (which latter had been taken in 1909 from former Personal Property Law, § 9), were applicable to both natural and corporate fiduciaries and had been affected only to the extent required by the 1917 amendment to section 188, subdivision 7. “At the sanie session the Legislature passed a bill which was intended to authorize all fiduciaries to invest in ‘ parts or shares ’ of such mortgages which were not held in the name of the fiduciary. That bill- was vetoed by the Governor, but a similar bill was passed in 1918 and became chapter 544 of the Laws of 1918, amending * * # section 111 of the Decedent Estate Law

The statutory plan was then complete. The appellant trustee here, for instance, could

1. Combine “several trust funds in an investment in a single bond and mortgage, held by the trustee in its own name,” and distribute under the circumstances and in the manner indicated and outlined in Matter of Union Trust Co. (Hoffman) (supra) or

2. It could invest by apportioning to a trust of which it was trustee “ a part interest in a bond and mortgage held * * * in the name of such corporation ” (the appellant trustee) in accordance with the 1917 amendment of Banking Law, section 188, subdivision 7, or

i 3. It could invest “ in shares or parts ” of bonds and mortgages which were not held by it nor in its name under the 1918 amendments to Personal Property Law, section 21, and Decedent Estate Law, section 111.

A failure to realize the fact that a complete legislative plan was formulated and enacted leads to misapprehension of the amendments and of the necessity for the amendments to Personal Property Law, section 21, and Decedent Estate Law, section 111. Those two sections did not relate only to invest

To return now to those two statutes. Personal Property Law, section 9, was the predecessor to both and as enacted .in 1902 by chapter 295 read as follows: ‘ ‘ Investment of trust funds. — An executor, administrator, guardian, trustee or other person holding trust funds for investment may invest the same in the same kind of securities as those in which savings banks of this state are by law authorized to invest the money deposited therein, and the income derived therefrom, and in bonds and mortgages on unincumbered real property in this state worth fifty per centum more than the amount loaned thereon.”

It so read in 1904 when Matter of Long Island Loan & Trust Co., (supra) was decided forbidding self-dealing by a corporate trustee.

Then in 1907, section 9 was amended to read as follows, by Laws of 1907, chapter 669: ‘ ‘ Investment of trust funds. — An executor, administrator, guardian, trustee or other person holding trust funds for investment may invest the same in the same kind of securities as those in which savings banks of this state

While the added last quoted sentence was but a statutory statement of the common law rule (Matter of Long Island Loan & Trust Co., supra), viewed historically and in its context it was no doubt added so that a title guaranty insurance company such as appellant might not sell to itself as trustee, under the new legislative addition (“ hereunder ”), a bond and mortgage, the payment of which had been guaranteed by it, and then collect one-half of one per cent for its guaranty in addition to its commission as trustee. That statutory purpose is made perfectly clear if we take out the period after the word “ investments ” in the next to the last line of the statute as quoted and change the “ B ” in “ But ” to a small instead of a capital letter. By that 1907 amendment recognition was given to the mortgage guaranty business since it permitted fiduciaries to pay stipulated guaranty premiums out of trust income for such guarantees. Only three years before, the Legislature by Laws of 1904, chapter 543, had authorized title guaranty insurance companies to “ guarantee or insure the payment of bonds and mortgages.” The appellant trustee, it is true, had been organized under a special act as the German-American Loan and Trust Company of New York by Laws of 1882, chapter 392 but in that Act in section 9 the corporation had been given the power “ to guarantee bonds and mortgages and titles to real estate.” That power was continued in the amendatory Laws of 1883, chapter 367, and in the statute Laws of 1884, chapter 167, changing the name of the corporation to Title Guarantee and Trust Company. So that the appellant trustee, incorporated under a special act, B & M, organized under

The addition of the same sentence forbidding self-purchase to Banking Law, section 188, subdivision 7, when it was amended in 1936, as indicated (supra), was merely a statutory statement of the common law rule as applied in Matter of Long Island Loan & Trust Co., (supra), in 1904, when there was no such provision either in the then applicable sections of the Banking Law or the Personal Property Law (Decedent Estate Law, § 111 had not been then enacted as a companion section to Personal Property Law, § 9. It was first enacted in 1909.) Failure to include such a sentence in the 1917 amendment to the Banking Law, when it was unnecessary, or adding it to the 1936 amendment, when it still was unnecessary, may assuredly not be considered as evidencing a legislative intent in 1917 to thereby confer upon a trust company trustee (as distinguished from all other corporate trustees) the power to sell whole mortgages to a trust of which it was trustee when in carefully chosen words and to meet a definite existing situation the Legislature provided for the apportioning by a trust company to itself as trustee of a part interest in a bond and mortgage held by or in its name. »

We have now indicated the reason why T G & T must be surcharged as to the mortgages “ routed ” through B & M. A similar reason requires that T G & T must also be surcharged as to the nine other whole mortgages, adverted to {supra). There was no relaxation as to those mortgages of the fundamental rule of undivided loyalty to a trust nor of the rule that a trustee shall not place itself in a position where its interest may be in conflict with its duty. It must be said here that the relation between the appellant trustee and B & M was so close and so interdependent that there could not be “ undivided loyalty ” by the former to the trusts nor independence of operation by either the trustee or B & M when the interest of either was involved. That the appellant trustee had placed itself in a

It is not a question whether the appellant trustee and B & M are separate legal entities. They are. The corporate trustee argues that because the companies “ co-operated in certain respects for mutual efficiency and economy which was entirely lawful ” there was no merger. We shall concede that. The learned Surrogate, however, found that the assignment by T G & T to B & M and the reassignment on the same day, as a part of one transaction, by B & M to T G & T as trustee, with no evidence of real ownership of the mortgages in B & M, was a transaction made directly between T G & T and T G T as trustee and that there was no transfer of title to the mortgage to B & M, and we cannot say, on this record, that that finding, supported as it was by evidence, was incorrect as a matter of law. In Berkey v. Third Avenue Ry. Co. (Cardozo, J.) ( 244 N. Y. 84 , 95) we said “ Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice. (Ballantine, Parent and Subsidiary Corporations, 14 Calif. Law Review, 12, 18, 19, 20).” We quoted that language in Rapid Transit Subway Construction Company v. City of New York (Lehman, J.) ( 259 N. Y. 472 at 489), and then added: “ Here we are relegated to the * tests of honesty and justice ’ and no rigid yardstick has ever been fashioned which will measure honesty and justice.” So in the instant case we are relegated to like tests since we cannot say that there is here any relation of parent and subsidiary, or any merger of corporate personality, between T G & T and B & M. The law in this type of case has not endeavored to fashion a yardstick to measure honesty and justice but, recognizing its impotency, has instead set up as a preventive measure, the rule that a trustee may not deal with itself nor mingle its own funds with those of the trust.

The prohibition against self-dealing or mingling of funds by a trustee does not depend upon any question of fraud but is

The process of loaning money upon mortgages by T. G. & T., of selling them in order to obtain money to again loan on mortgages with the accompanying collection of loan fees, was so continuous and so bound up with the operations of B & M which guaranteed both the mortgages and parts apportioned and serviced the mortgages, that the business of either would have been seriously affected by the interruption in the relationship

Under the circumstances the corporate trustee had placed itself in a position where its interest was or might be in conflict with its duty. Either is sufficient to cause surcharging of the trustee. (3 Bogert on, Trusts and Trustees [1935] § 543; Magruder v. Drury, 235 U. S. 106 ; Jackson v. Smith, 254 U. S. 586 ; Ten Eyck v. Craig, 62 N. Y. 406 ; Pyle v. Pyle, 137 App. Div. 568 , 572, affd. 199 N. Y. 538 ; Wendt v. Fischer, supra; Meinhard v. Salmon, supra.) We shall quote from but one of the authorities cited. In Ten Eyck v. Craig (supra, at p. 419 ) we said: ‘ ‘ The rule is inflexible, that he shall not place himself in a position where his interest is or may be in conflict with his duty. The reason of the rule, as remarked by Kent, J., in Bergen v. Bennett, ( 1 Cai. Cas., 19 ), is to bar the more effectually every avenue to fraud. . Such a purchase, though it may not originate in any purpose to defraud, is a constructive fraud, because the natural tendency is mischievous and harmful. The rule is founded in the highest wisdom. It recognizes the infirmity of human nature, and interposes a barrier against the operation of selfishness and greed. It discourages fraud by taking away motive for its perpetration. It tends to insure fidelity on the part of the trustee, and operates as a protection to a large class of persons whose estates, by reason of infancy, infirmity, or other causes, are intrusted to the management of others.”

Concededly, the legislative command had some force, included as it was in a statute which relaxed in a limited way an ancient common law rule. On well settled principles of statutory construction ‘ ‘ when a statute confers a right, privilege, or immunity, the regulations, forms, or conditions which it prescribes for its acquisition are imperative, in the sense that non-observance of any of them is fatal.” (Maxwell on the Interpretation of Statutes, 6th ed., 1920, at p. 650.) The author further states: “ Where powers or rights are granted, with a direction that certain regulations or formalities shall be complied with, it seems neither unjust nor inconvenient to exact a rigorous observance of them as essential to the acquisition of the right or authority conferred: and it is therefore probable that such was the intention of the Legislature.” Concededly, if no notice were given, self-dealing and mingling of funds by T. G. & T. was improper. (Matter of Bearns, 251 App. Div. 222 , affd. 276 N. Y. 590 .) Did it have to be a prompt notice? Did it have to be a notice which to young men and women, unfamiliar with the mortgage market and neither lawyers nor real estate operators, would indicate that an apportionment had been made to a trustee of a part interest in a bond and mortgage owned by the trustee individually? We think that it was so required. That is what the statute provided. That was the condition upon which was based the extraordinary boon conferred upon a trust com

When we turn to the apportionments here we find that concededly there was neither intent nor attempt to give a notice under Banking Law, section 188, subdivision 7. The most that can be said is that the appellant trustee urges that while it is true that no attempt was made to comply with the statute by a specific notice thereunder, the quarterly statement sent by it to beneficiaries was a compliance and if that were not, then an annual statement later sent to beneficiaries was a compliance. Clearly these are after-thoughts but we shall nevertheless discuss and consider them. In that consideration, it will be well to remember that in Matter of Union Trust Company (Hoffman) (supra), a letter was promptly sent to each beneficiary advising of the investment made.

We shall first consider the quarterly statement. There is a “ Specimen Quarterly Statement rendered to beneficiaries by Trustees ” printed in the record. It is dated April 15th, 1931, and, after being addressed to a beneficiary, reads in part: “ Dear Madam: The following is a statement of collections and disbursements for the above account, the check in settlement having been deposited to your account in our Brooklyn Banking Department, subject to your check.” Then there is a heading “ Received ” followed by a statement of interest and dividend receipts. Then there appears the following : ‘ ‘ Paid Out ’ ’ and entries thereunder. For clarity there is now appended a copy of the second sheet of the Specimen

The appellant trustee asserts that the entry under “ Paid Out ” was notice under section 18, subdivision 7, that T G- & T was the owner of the mortgage and had apportioned to itself as trustee for the beneficiary named in the quarterly statement a part interest therein in the sum of $900. A mere reading of the quarterly statement is a full and complete answer. It was not a notice under the statute at all but if it should be so termed, it was a notice that a mortgage, and not an apportioned part of a bond and mortgage, had been purchased.

The appellant trustee then argues that, assuming that to be true, the annual statement constituted the required statutory notice. The annual statement, of course, contained no statement of investments made for the trust but only a statement of investments held in the trust. We pass over the point that

Statement of Securities Held by Title Guarantee and Trust Company and William F. Brown, Surviving Trustees Under the Will of Cornelius J. Ryan for the Benefit of Ann Frances Ryan.

April 20, 1928.

MORTGAGES

SEMI-INT. ANNUAL RATE MATURITY DAYS AMOUNT INT. Martino.......... .54 Gtd. Jul. 1/28 Jan-Jul. +$8 500 00-$233 75 Dorite Const. Co., Ine., 54 ft Feb. 25/30 Jan-Jul. + 2 250 00 61 87 Mott 54 ft Mar. 29/30 Jan-Jul. + 6 500 00-178 75 Handel Const. & Land Corp., 54 ft Jan. 6/29 Jan-Jul. + 5 500 00-151 25 Lerner 54 ft Jul. 1/30 Jan-Jul. + 8 000 00-220 00 Fincone Bldg. Corp. 5* ft Ctf. Sept. 1/28 Jan-Jul. + 2500 00-68 75 Killanna Realty & Const. Co., Ine., 54 ft ft Sept. 17/30 Jan-Jul. + 1400 00-38 50 Siegel............. Gem Concrete & .54 Gtd. Feb. 4/31 Jan-Jul. + 7 000 00-192 50 Const. Co. Inc., Gem Concrete & 54 ft Ctf. Feb. 1/31 Feb-Aug. + 4 000 00-110 00 Const. Co., Inc., 556 — 7th Avenue 54 ft ft Feb. 1/31 Feb-Aug. + 3 000 00-82 50 Corp., (1/6 Interest Mar-Sept. in $122,500.) 54 Str. Part. Mar. 31/32 31st +20 416 66-561 45 Schwartz......... .54 Gtd , Apr. 7/28 Apr-Oct. + 1300 00-35 75 Montone......... .54 ft Oct. 13/28 Apr-Oct. + 2 750 00-75 62 Daly 54 ft May 3/29 Apr-Oct- + 5 500 00-151 25 Vastóla Gerrittsen Park, 54 ft Apr. 23/30 Apr-0 ck + 6 000 00-165 00 Inc., 54 ft Nov. 19/29 Apr-Oct. + 2 500 00-68 75 White, Delia J 54 ft Nov. 12/30 Apr-Oct. + 4 500 00-123 75 Krauss Bldg. Corp., 54 ft Apr. 2/29 Apr-Oct. + 3 750 00-103 12 Krauss Bldg. Corp. Witmar Realty 54 ft Apr. 2/29 Apr-Oct. + 3 750 00-103 12 Corp., (1/6 Interest Str. Apr-Oct. in $375,000 Mtge). 5 Part. Apr. 15/37 15th +62 500 00-1 562 50

Again the statement was as to “ Mortgages ” and not as to apportionments of part interests in bonds and mortgages. The appellant trustee, however, urges that wherever there appears under the heading “ Rate ” the figures and letters “ 5% Gtd Ctf” or “Gtd” (the mortgages against which the entries “ Str. Part.” appear are not here involved) that, as to the mort

There were other notices (denominated Statements) and other quarterly and annual statements sent to beneficiaries which contained wording which the learned Surrogate found apprised the beneficiaries that there had been apportioned to them part interests in bonds and mortgages of the appellant trustee. Whether or not such notices or statements were specific attempts to comply with the Banking Law, section 188, subdivision 7, or complied therewith it is enough that it has been found that notification as commanded by the Legislature was received by those entitled to it. Those were findings of fact, supported by the evidence, which have been affirmed by the Appellate Division and are not reviewable in this court. (See Surrogate’s Court' Act, § 71.)

The full consideration of the facts, ante, as to self-dealing by the appellant trustee, the mingling of its funds with those of the trusts and the interdependency of T G & T and B & M necessitate but a brief discussion of two remaining related points. There have been three prior accountings: a decree of May 31, 1917, settling the accounts through December 31, 1916, a decree of May 2, 1922, settling the accounts through October 20, 1921, a decree of January 19,1928, settling the accounts through April 20,1927. Surcharges were sought not only with respect to transactions occurring during the period of the present accounting but also with respect to those occurring during the periods of the two prior accountings ending in 1921 and 1927. The learned Surrogate granted the application of objectants so far as was necessary to throw open to decision all of the objections to the purchases of whole mortgages upon the ground that the prior accounts “ wholly failed to reveal the manner in which the mortgages were acquired.” The learned Surrogate took as a typical instance of such failure, the statements with respect to the Curti mortgage in a prior accounting. He said: “ In the C.

There were only six apportionments of part interests in bonds and mortgages held by the appellant trustee, and those were in the Hulswit and T. B. Ryan trusts, at the time of the previous accounting. It was unnecessary to open the prior decree as to those apportionments since no notice under Banking Law, section 188, subdivision 7, had been given until at least six years after their purchase and they had been carried either in the annual statement or in the 1927 account as a bond and mortgage and not as an apportionment.

It is the contention of the appellant trustee that each beneficiary had full knowledge of the self-purchase by it and acquiesced therein. That contention proceeds upon the following facts. The beneficiaries were infants when the trusts were set up and income was accumulated for each during minority. They lived in Scranton, Pa. and were represented by a firm of lawyers there, except that one beneficiary was also represented by an additional New York City lawyer for a brief period. As they reached majority the accumulated income was turned over to them after a list of all the securities in the respective trusts had been submitted to their attorneys in order that the beneficiaries might select securities instead of cash as payment. Bach in turn selected securities consisting, among others, either of

The general release was as to accumulated income only and not as to principal. That was all it purported to be. The appellant trustee so construed the document when it filed subsequent accounts. In each instance, the accounting subsequent to the release included a period antedating the release. The releases disclosed no more than the accounting schedules in the subsequent accountings. Concededly there was no disclosure of either the self-dealing of the appellant trustee nor of the interrelation between T Q- & T and B & M to either the beneficiaries or their attorneys and the releases would be a defense only if there had been.

As indicated (supra) none of the mortgages or apportionments accepted by the beneficiaries in lieu of cash for accumulated income is here involved and no direct disclosure of improper conduct is claimed. What, then is the contention of the appellant trustee ? We shall take the transaction with T. B. Ryan when he reached his majority. In at least one other trust, the beneficiary never saw any papers so that the T. B. Ryan trust probably presents favorably for it the contention of the appellant trustee. After T. B. Ryan signed the release, he signed a receipt for ten bonds and mortgages, together with numerous other documents of title including assignments, extension agreements, guarantee policies, and three mortgage apportionments. Apparently he signed the release and later' obtained the documents. The transaction was by correspondence and mail. The appellant trustee urges that since among those papers

The appellant trustee phrases it more clearly as follows in its brief as appellant:

“ These beneficiaries cannot now successfully assert that they believed that by mere accident, only the certificates and mortgages which they selected from a pool of investments were of one origin and that all that remained in the portfolio representing principal had been purchased from other sources.”

“ Disclosure of any invalidity in trust investments is sufficient if there be brought home to those who have a right to complain such facts and circumstances as to warrant the conclusion that comparable investments received comparable treatment, whether of purchase or of service; that possible defects in one found their counterpart in others of the same type and kindred.

“ Such knowledge was brought home to these beneficiaries. The disclosures made to them were sufficient to point out the specific procedure followed by the trustees in making these investments. If they felt that there was any such self-purchase, as they now complain about, they could have made their protest known to the trustees and the evil, if evil it was, could and would have been eliminated, and without loss to the trustee.”

There is no evidence that any beneficiary or any attorney for any beneficiary had any knowledge of self-dealing by the appellant trustee or of the relationship existing between T G- & T and B & M before the present accounting. The learned Surrogate found to the contrary. He said “ The court finds on the contrary that the beneficiaries and the Pennsylvania lawyers were equally in the dark as to the self-dealing of the corporate trustee. The whole tenor of the documents signed by the beneficiaries and the letters written by or for them indicates a belief

Matter of Long Island Loan & Trust Co. ( 92 App. Div. 1 , affd. on opinion below, 179 N. Y. 520 , supra) is in point both on the matter of opening the decrees and the claimed acquiescence. There it was said in the opinion, which this court adopted as its own: “ It does not appear to be seriously contended that the trustees had a right to deal with the trust fund in the manner which it is agreed was done, but it is urged that the life tenant * * * has been estopped by a former decree. It appears that in 1893 the trustee made a report to her in which appears this entry: ‘ February 1, 1893, L.I.L. & T. Co., T. Donohue Mtge. No. 3, $7800.’ Just how this was calculated to give the life tenant notice of the state of facts which is now developed, it is difficult to understand. * * *.

“ The trustee accounted in 1898, but none of the questions here raised was put in issue in that proceeding, and the decree on that accounting discharged the trustee only as to the assets directed to be distributed thereunder and the amount of the trust estate. As the trustee claims this decree to have worked an estoppel, the burden of proof is upon the trustee to show clearly that the question in issue in this case was litigated and determined in the former proceeding (Rudd v. Cornell, 171 N. Y. 114 , 127, and authority there cited), and having failed to show this, the life tenant is not estopped to assert her rights at this time. Nor is the position of the trustee changed by the fact that the life tenant made a motion in May, 1903 to open the decree of August, 1898, in which the matters here involved were set up as a reason for opening the former decree. The opening of the former decree rested in the discretion of the learned Surrogate, and as the former decree did not attempt to settle any of the questions which are urged on this motion, the denial of the motion did not affect any substantial right of the life tenant, and, under well-established rules, it could not work an estoppel on this accounting.”

That rule has been followed in this State to date, (Wendt v. Fischer, supra; Matter of Young, supra; City Bank Farmers Trust Co. v. Cannon, 291 N. Y. 125 .

The order should be affirmed, with costs to all parties filing separate briefs payable out of the estate.

(dissenting in part). No new formulation of the questions of law presented upon this appeal, or further statement of the material evidence which must be considered in the determination of these questions is necessary. I accept the careful formulation of the questions of law and the accurate statement of the evidence contained in the opinion of Judge Conway. I agree with the conclusion of Judge Conway that though the statute authorized a trust company to make investments as “ personal or testamentary trustee ” in a bond or mortgage held by the trust company “ by apportioning to the trust fund a part interest therein ” (Banking Law, § 188, subd.

The Bond and Mortgage Guarantee Company, it may be conceded, may properly be described as an “ affiliate ” of the trust company. The same stockholders who control the Title Guarantee i& Trust Company probably control also the affiliate. Many of the officers and some of the directors are the same, and, as Judge Conway points out, there is very close interrelation in the conduct of their affairs and at times they share the use and expense of clerical and executive employees, of advertising and of office space. It conclusively appears, nonetheless, that the two corporations are separate entities. They were formed for distinct though related purposes. The capital of each was used for its own corporate purposes; — the corporate profits of each constituted a fund from which dividends could be paid only to its own stockholders, and the trust company owned only a small fraction of the stock of the Bond and Mortgage Guarantee Company. The close relationship in the conduct of the business of the two corporations formed for related purposes doubtless was useful to both, but in no respect did either lose its identity. The question presented upon this branch of the appeal is not whether the rule which prohibits a trust company from purchasing as trustee securities which it sells as owner should be rigidly enforced (for, as I have said, the companies concededly are not identical), but rather whether the obligation of undivided loyalty has been violated when the trust company purchased as trustee securities which were sold to it by another corporation connected with the trust company by such close ties. As Judge Conway points out, in determining whether the relationiship between the two companies is so close that the trustee violated its obligation of undivided loyalty “ we are relegated to the * tests of honesty and justice ’ and no rigid yardstick has ever been fashioned which will measure honesty and justice.” Concededly there has been no conscious dishonesty by the trust company, and its interest in a possible profit which the Bond and Mortgage Guarantee Company might derive from the sale of its mortgages to the trustee, was I think, too remote to place it in a position where interest might conflict with duty. Under such

The surcharge for investments made by the trustee by apportioning to the trusts shares in mortgages which the trustee owned, is based upon a conclusion that the trustee failed promptly to notify each beneficiary “ of the fact that such investment has been made ” as required by the 1917 amendment to section 188, subdivision 7, of the Banking Law. The statute which permitted such investments and required that notice thereof be given promptly does not in terms provide that the investment is invalid unless such notice is given, nor does it provide that upon receipt of such notice the beneficiary may object to the investment. The purpose of the Legislature in requiring statutory notice of the investment is to enable a beneficiary “ to identify and establish [his] interest in the. mortgage ” and to make it unnecessary for a beneficiary to maintain an action “ to identify and establish [his] interest in the mortgage.” (Matter of Union Trust Co. [Hoffman], 219 N. Y. 514 .) Failure to give notice sufficient for that purpose may properly bar assertion by the trust company that it has, without notice, transferred to the beneficiary of the trust estate a share in a mortgage which it owned. (Matter of Bearns, 251 App. Div. 222 , 276 N. Y. 590 .) Where a beneficiary is furnished with that information, technical defects in the service of the notice, furnish no ground for rejection of the investment. Here the trust company sent to each beneficiary a quarterly statement of the account and in that quarterly statement the amounts invested in mortgages described in the account appeared. Though at times the quarterly statement failed to state that amounts so appearing were invested in guaranteed certificates of participation rather than in whole mortgages, and though other defects may be urged in the description of the investment, it can hardly be disputed that the quarterly statement contained data sufficient to enable each beneficiary to identify and establish his or her interest in the mortgage. None would be compelled to maintain any action to identify and establish such interest. In such case the purpose of the notice is fully served, and technical objections to the form of the notice do not render the investment illegal.

The order of the Appellate Division and the decree of the Surrogate’s Court should be modified accordingly.

Lotjghran, Rippey, Lewis and Desmond, JJ., concur with Conway, J.; Lehman, Ch. J., dissents, in part, in separate opinion.

Order affirmed, etc.