Greenawalt's Estate , 343 Pa. 413 ( 1941 )

There is no express provision in the will which authorizes the retention of non-legal securities, nor can I find in its phraseology any grant of such authority made with the "utmost clearness" required by our decisions (Barker's Estate, 159 Pa. 518,528, 529, 28 A. 365, 367; Taylor's Estate, 277 Pa. 518,524, 121 A. 310, 311). Apart from that, however, I must dissent in this case because of certain other contentions made by appellants which I believe to be sound.

Testator died in 1898, and, while he appointed executors (his wife and the Commonwealth Trust Company) but not trustees, he in fact provided for a trust to last during his wife's life; at her death the estate was to be distributed among his children. The widow died in 1932. The trust company, as surviving executor, filed an account seven years thereafter, which disclosed that the estate consisted almost entirely of stock of Western Union Telegraph Company and Commonwealth Trust Company, together with participations in a large number of mortgages.

The Commonwealth Trust Company stock was not owned by the testator at the time of his death but was acquired by his executors a short time thereafter on account of the distributive share to which he was entitled in the estate of his previously deceased brother;¹ some additional stock was subsequently obtained by exercising subscription rights given to the stockholders. This stock, which has been held in the estate for forty years, has long since become valueless, although there were times during that period in which it could have been sold for as much as $350 per share. Aside from the duty on the part of the trustee to convert the stock within a reasonable time, it is clear that it had no right to hold stock of its own company among the assets of the estate. In Scott on Trusts, volume 2, pp. 883, 884, section 170.15, it is said: "Where the trustee is a corporation, the question arises whether it is proper for it to hold in trust shares of the corporation itself. The question is whether it is a breach of trust to invest trust funds in the purchase of such shares, or to retain such shares where they were owned by the settlor and were received by the trustee as part of the original trust estate. . . . The question is whether there is such a divided loyalty, such a conflict of personal interest and interest as trustee, that it is improper to make such an investment or to retain it. A trust company or bank is, of course, subject to liability if it is negligent in making or retaining an investment in its own shares. . . . The question of the duty of the trustee with respect to the holding in trust of its own shares, however, goes beyond the question of negligence. The trustee, particularly in times of stress, cannot take an entirely disinterested attitude on the question whether it should sell or retain the shares. It has an interest in the maintenance of the market value of its shares, and is therefore subject to a temptation to retain the shares which it holds in trust, although it may be to the interest of the beneficiaries that the shares should be sold. The trustee ought not to put itself in a situation where its own interests may conflict with those of the beneficiaries. For this reason it seems clear that it is improper for a corporate trustee to make an investment in the purchase of its own shares, even though the purchase is not made from itself, and that it is improper for the trustee to retain such shares although it received them as original investments, unless it is authorized to do so by the terms of the trust or by statute." The wisdom of these principles is well illustrated in the present case, because, not only was there a sharp reduction in the value of the Commonwealth Trust Company stock in 1927 owing to an extensive defalcation by one of the company's employees, but there then followed a more or less steady decline in the price of the stock until, from 1933 on, it lost all value whatever. Nevertheless the trust company never sold it, thus, whether deliberately or otherwise, serving its own interest instead of the interest of the estate of which it was a trustee. Whatever construction may be put upon the will as to investments in general, it certainly did not contemplate or authorize the retention of a stock which the trustee, according to all accepted principles of equity and morals, could not properly hold in that capacity.

The Western Union Telegraph Company stock also was acquired by the executors from the estate of the testator's brother. It was inventoried at $75 per share, and after the death of the widow, at which time the trust according to the terms of the will came to an end, it could have been sold at the same price. It is stated by appellants that it now has a value of about one-third that amount.

I think that the trustee is clearly subject to surcharge in connection with many of the mortgage participations. The system pursued by the company was to purchase mortgages with its own funds and on its own account; at later periods participating interests were sold to individual investors and to estates of which it was a trustee.² In other words, the company, after holding these mortgages as absolute owner in its commercial department, sold participations therein to itself as trustee of this and other estates. It is true that where mortgages are originally acquired by a trust company as investments for trust funds, and the allotments of interests therein are promptly made to its trust estates, the transaction will be regarded from the standpoint of substance rather than form and therefore as if the purchase of the mortgages, or the rights therein, had been made with the funds of the trust estates in the first instance (see Guthrie's Estate, 320 Pa. 530,532, 182 A. 248, 249, 250). In the present case, however, the original purchases were made by the trust company for resale at any time thereafter either to individual investors (with the company's guaranty), trust estates, or both, and in several instances participating interests were not allotted or sold by the trust company to the Greenawalt estate until two,three, four, seven, or even eight years after the trust company had originally purchased them. Certainly this constituted a clear violation of the rule forbidding a trustee to sell his individual property to himself as fiduciary: Tracy v. CentralTrust Co., 327 Pa. 77, 192 A. 869; Saeger's Estate, 340 Pa. 73,78, 79, 16 A.2d 19, 22; Stollenwerk's Estate, 134 Pa. Super. 115,118, 3 A.2d 961, 962.

Since there were these flagrant transgressions against the law in connection with the Commonwealth Trust Company stock and a large number of the mortgage participations, the findings of "due care" by the court below are wholly immaterial.

As to the alleged acquiescence by the beneficiaries in postponing the filing of the account after the death of the testator's widow, that did not in any way affect the legal propriety of the investments. Nor is there any evidence in the record that appellants saw or actually knew the contents of the periodic statements rendered by the trust company to their mother, or that they did, or failed to do, anything by reason of which they are now estopped from asserting the rights to which they were entitled as remaindermen when the trust expired, according to the will, upon the death of the life tenant.

For the reasons stated I dissent from the affirmance of the decree.

¹ The shares received were those of the Commonwealth Guarantee, Trust and Safe Deposit Company (which at that time was the name of the Commonwealth Trust Company) and of the First National Bank of Harrisburg which later merged with the Commonwealth Trust Company.

² The company did not issue participation certificates; it did, however, make appropriate notations on its books to indicate ownerships.