Legal Decisions and Discussion RELATING PARTICULARLY TO TRUST COMPANIES Edited by JOHN H. SEARS of the New York Bar [LEGAL DECISIONS OF SPECIAL INTEREST TO OFFICERS OF TRUST COMPANIES WILL BE REVIEWED AND DISCUSSED IN THIS DEPARTMENT. CAREFUL ATTENTION WILL BE GIVEN TO QUERIES OF A legal nature, ARISING OUT OF THE CONDUCT OF THE VARIOUS DEPARTMENTS OF TRUST COMPANIES. SUBSCRIBERS ARE CORDIALLY INVITED TO AVAIL THEMSELVES OF THESE FACILITIES WHICH ARE OFFERED FREE OF CHARGE.] TERMINATION OF A TRUST The termination of a trust, which contains no power of revocation, frequently becomes an important legal problem. It seems that even when all the parties interested in a trust are before a court, when each is sui juris and all join in the application it does not have to terminate the trust but may do so or not in accordance with its own discretion. This is stated by way of dicta in the recent decision of the Supreme Court of California in Gray vs, Union Trust Company of San Francisco (154 Pac. 306). The facts in this case disclose that Helen D. Gray, by two instruments of the same date executed a transfer and trust agreement of certain real and personal property to the trust company as trustee. It was provided that "the net income and revenue and profit less the charge for services of the trustee, shall be paid by said trustee to said trustor." The trustee is entitled to receive for its services two per cent. of the gross income of the trust property. It is also provided that: "This trust shall be irrevocable and shall last during the lifetime of said trustor, and upon her death the trust property shall go to and vest as she shall provide in her last will and testament, and leaving no last will and testament, said property shall go to and vest in her heirs at law, according to the laws of succession of the State of California, as such laws now exist." Miss Gray, being over the age of 21, and claiming to be the only person interested in the trust, except the trust company to the extent of its compensation, sought to terminate the trust and obtained a decree of the lower court to that effect. The trust company appealed, a procedure justified by the final result, as the Supreme Court, reversed the order of the trial court and directed that the relief sought be denied. All the parties interested in this trust are not before the court. A future estate is created in those who will take in case the trustor fails to make an appointment by her will. As it is uncertain who these parties will be, it is impossible to obtain their consent. A similar case in New York was disposed of in the same way. This was Crackanthorpe vs. Sickles (156 N. Y. App. Div. 753, 141 N. Y. 370). There an unmarried woman conveyed property to a trustee, to invest and manage. and pay the net income thereof to her during her life, and at her death to distribute it to such persons as she might designate by her will, or, should she die intestate, then to divide the property among her lawful issue, which she might leave surviving. It was held that there sprung into being upon the birth of each of her children "a vested remainder, subject to open up and let in after-born children, and to be divested either by the death of such child without issue before the death" of the the trustor or by her exercising her power of appointment by will. These children were beneficially interested in the trust and the court consequently held that the trust could not be revoked without their consent. COMPENSATION OF FIDUCIARIES May a testator fix the compensation to be paid his executor in a State where a rate of commission is provided by statute? The Supreme Court of Arkansas says: "Yes." Gordon vs. Greening (182 S. W. 272). "The relation of testator and executor, created by a will, is one of great trust and confidence, and we see no reason why a testator should not only be allowed to name his executor, but should not also be allowed to fix his compensation. common law an executor was not allowed compensation, but that rule has been changed in this State by statute, Section 134 of Kirby's Digest provides the maximum compensation to be allowed administrators and executors, but At this section must be construed to apply when the will has not otherwise provided. Certainly, if the will fixed a greater compensation than that allowed by statute, it would not be contended that only the statutory commissions could be allowed. If the executor named in the will is not willing to serve for the compensation fixed by the will, he is not required to serve, but may decline to do so." As a consequence of this view, the court holds that where a will provided that the executor shall receive the sum of $150 per month for continuing the testator's mercantile business he is not entitled to an allowance of the statutory commission of two per cent. It has said with respect to a provision in a trust deed fixing the amount of a trustee's compensation, that its "reasonableness is not a matter of inquiry, as such contracts are not prohibited by law, and when honestly entered into between trustee and beneficiary the courts will not interfere therewith. Even if the deed fixes the compensation and it appears it is too low to procure competent persons as trustees therefor a court of equity will not allow the trust to fail or be administered less faithfully and vill correct the matter by allowing additional compensation, or if a supplemental agreement adds other duties than under the original trust, additional compensation may be allowed." (Trust Estates as Business. Companies, Sec. 131a.) The mere fact that checks payable to an administrator as administrator are offered for deposit and directed by him to be credited to his individual account is not sufficient to charge the bank with notice of his fraudulent intent and to render it liable for his default. United. States Fidelity & Guaranty Company vs. Home Bank for Savings (88 S. E. 109). In this case the Supreme Court of Appeals of West Virginia says: "For aught a bank would know, a check though payable to its depositor in some representative or fiduciary character, the money would belong absolutely to him, and represent money already paid out by him in discharge of his fiduciary liability; the bank cannot assume that money paid on checks of a fiduciary is being misapproriated, and it has the right to assume that it is being properly appropriated, at least until it has actual notice to the contrary. To place the burden of supervising all such accounts upon a bank of deposit would be unreasonable, and one which few institutions, if any, would be willing to assume; indeed it would be unbearable, and to do so would in many cases deprive all fiduciaries of banking privileges, and work a detriment to estates and fiduciaries generally." But the fact that the bank has knowledge of the character of fiduciary funds calls for "caution" in dealing with and honoring checks upon such deposits, though such knowledge is not sufficient, in and of itself, to create liability, or to cause the bank to require the depositor to place such funds in an account separate and apart from his individual account, according to the late holding of the Appellate Court of Indiana in Miami County Bank vs. State (112 N. E. 40). In this case it is held that the bank is liable where it placed the proceeds of a check payable to the order of "John F. Perry, administrator of the estate of Fred M. Perry, etc." to the credit of the individual checking account of John F. Perry and applied a part of it on indebtedness of Perry to itself. The court conceded the general rule to be that "an administrator or other person having charge of trust funds may deposit them in bank to the credit of his personal account and check them out in the usual course of business, and the bank, though it has knowledge of the character of the funds so deposited, is not thereby made liable to the beneficial, or actual owners of such funds, in the absence of any knowledge on its part that the funds are being misappropriated or misapplied by such trust officer. If the bank with knowledge of the character of the funds so deposited, applies them to the payment of the personal debt of the depositor, due such bank, or knowingly accepts from him payment of his individual debt out of such funds, or knowingly assists, or permits such depositor to misuse or misapply such funds, it may be held liable therefor to the beneficial or actual owner thereof to the amount of the funds so misapplied or misused." (Italics supplied.) This rule is also applied in two other recent cases, namely United States Fidelity & Guar anty Company vs. Union Bank & Trust Company (228 Fed. 448) and Bischoff vs. Yorkville Bank (156 N. Y. Supp. 563). In United States Fidelity & Guaranty Company vs. Union Bank & Trust Company (228 Fed. 448) is appears that a clerk of the courts at Nashville kept his official funds on deposit with the Union Bank & Trust Company, in the name of "Walter S. Rainey, Circuit Court Clerk." These official funds consisted of judgments collected, delinquent taxes paid, and officers' and trustees' fees and costs. He was entitled to take therefrom his own costs and commissions. He deposited his private funds in the same account. It later developed that as clerk he was "short" about $25,000. Because of its liability as surety, the guaranty com pany was compelled to pay about $18,000 to the beneficial owners of the funds committed to his custody. The guaranty company sued the bank for money which it had applied upon the payment of personal obligations of Rainey to the bank. The court holds that the bank is liable for this. The bank is entitled to no protection "in the fact that it acted on the mistaken supposition that mingled in the deposit was enough money belonging to the depositor to satisfy his check. When such a joint fund is drawn upon for a payment to the bank to discharge a mere personal debt to it, the bank takes the money at its peril of having to refund, if in fact the trust deposit is thereby depleted." In Bischoff vs. Yorkville Bank (156 N. Y. Supp. 563) an executor, kept an account "as executor" in "A" bank, and a personal account in "B" bank. He drew checks on "A" bank to the order of "B" bank and deposited the proceeds in his personal account at "B" bank. He repaid loans in "B" bank from his account in that bank and also drew checks against that account to pay his personal obligations to other parties. The majority of the Appellate Division, New York Supreme Court, First Department, holds that "B" bank is liable for the entire amount diverted by the executor, but Justice Scott in a dissenting opinion announces the rule in accordance with the other authorities reviewed in this article. He says: "It must be conceded, of course, that the name in which the checks were drawn gave notice to defendant bank ("B" bank) that Poggenburg (the executor) was depositing to his own personal account, funds of the Schneider estate. But that of itself is not, in my judgment, sufficient to charge the defendant bank with liability for all of the funds so deposited. It was not in my opinion, chargeable with notice of the purposes to which the executor applied the money which he had deposited to his individual account, except indeed so much thereof as was paid to the defendant direct. (Italics supplied.) The executor was well within his rights, if he saw fit to do so, to deposit the estate funds in an account standing in his individual name, and there would have been no obligation resting upon the depository bank in such a case to investigate, as to each check he might draw upon it, what disposition he made of the proceeds of that check." PENDTHRIFT TRUSTS Several recent decisions involving the validity and manageme...of spendthrift trusts indicate the growing employment of this method of protection. The object is to bestow the use of income, without creditors of the beneficiary being able to reach either the principal which produces the income or the income itself before the trustee has paid it over to the beneficiary. The validity of such trusts is now generally acknowledged, so long as they are created for the benefit of someone else. The converse of this rule is that one may not create such a trust for his own benefit. Rice vs. Merrill (111 N. E., 860) citing Pacific National Bank vs. Windram (133 Mass. 175). The doctrine that upholds a spendthrift trust when established for another is that a donor has the right to give his property to another upon any condition which he sees fit to impose, and that, inasmuch as such a gift takes nothing from the prior or subsequent creditors of the beneficiary to which they previously had the right to look for payment, they cannot complain that the donor has provided that the property or income shall go or be paid personally to the beneficiary free from the claims of creditors. In McColgan vs. Walter Magee (155 Pac. 995) the Supreme Court of California holds that where a trust for four sons was terminable at the election of not less than three except that by agreement it could be continued as to one, free from seizure by creditors, such attempted spendthrift trust was invalid, as the trust property is then contributed by the beneficiary. The property was his own on determination of the first trust, and the creation of the new trust was an attempt to take from creditors that which they had a right to reach. In the decision of the Supreme Court of Pennsylvania In re Thaw's Estate (97 Atl. 108), it appears that under the last will of William Thaw, who died in 1889, the Fidelity Trust Company was made trustee for Harry K. Thaw. The principal of the trust fund amounted to nearly half a million dollars the interest to be paid semi-annually. The opinion recites that in 1908 Harry Thaw was regularly indicted and tried in the State of New York on a charge of felonious homicide. He was found not guilty because of insanity at the time of the commission of the offense, and, under the laws of New York was committed by the court to Matteawan State Hospital, there to remain until discharged by due course of law. While he was thus confined and on July 10, 1913, he caused to be presented to the orphan's Court of Allegheny County a petition setting forth that during the five years last past the trustee had not paid him any part of the income, that he had made a demand of the trustee for $30,000, a sum well within the accumulations of interest then in the hands of the trustee, and that this demand was refused. trust company answered that its refusal to pay was because Mr. Thaw had been committed to Matteawan asylum, where he still was under a judicial finding that he was insane, and having The brought this fact to the attention of the court, it was willing to submit to such order as the court might deem proper in the premises. Mr. Thaw then averred that he was sane and asked that the issue of his sanity be tried. In order first to decide whether it should institute proceedings to determine this, the trust company selected certain alienists, who made an examination and reported that it would be "unwise to commit any very large sum of money into his personal charge." This was not the equivalent of a finding of lunacy and the court ordered that all the income be paid to Mr. Thaw. It is held, however, that the trust company's course was the proper and prudent one and that it is entitled to reimbursement of its expenses in having the alienists make the examination. The court says that payment to him so long as his mental disability remained might well have been imputed as negligence, notwithstanding the fact that the lunacy had been declared in the course of a criminal trial in a foreign State. "It was the knowledge of this fact that put the trustee upon notice, and it could not thereafter continue its payments without incurring risk itself and imperiling as well the estate, which it was its highest duty to protect and conserve." Chicago Savings Bank and Trust Company A comparison of the deposits of the Chicago Savings Bank & Trust Company since 1903 shows that the average annual increase amounted to over $1,000,000, the total for April 12,1916, amounting to $8,170,083 as compared with $7,269,020 on January 1, 1915. The capital is $1,000,000, surplus and undivided profits, (net), $267,319. Resources total $9,453,356 including cash and due from banks of $2,263,753 ; loans and discounts, $2,895,073; time loans on collateral, $1,217,641; demand loans on collateral, $829,602; loans on real estate, $607,425 ; bonds and securities, $1,602,989. The officers are: President, Lucius Teter; vice-presidents, Edward P. Bailey, John A. McCormick, Raymond E. Durham, W. T. Bacon; cashier, Wm. M. Richards; asst. cashiers, W. A. Nicol, William T. Anderson; secretary, Edward J. Prescott; asst. secretaries, John C. Armstrong, F. O. Birney; manager real estate loan dept., H. L. Schmitz; asst. mgrs. bond dept., Jess B. Hawley, C. H. Fox; auditor. Leroy E. Wilson. More than fifty members of the staff of the Guaranty Trust Company of New York have applied for instruction this summer at the Government Military Training Camp at Plattsburg. A recent canvas showed that more than fifty members of the Guaranty staff have had either military of naval training. A Practical Demonstration of the Branch Banking The Corn Exchange Bank has not only the distinction of being the largest State bank in New York but may claim credit for having developed the system of branch banking along the most successful and scientific lines. This bank began business 63 years ago in 1853 and in 1899 inaugurated the plan of conducting branches in this city. At the present time the bank manages a chain of 36 branches, located in different sections throughout Greater New York. As an accessory the Corn Exchange Bank has 17 safe deposit vaults which are owned by the Corn Exchange Safe Deposit Company. The bank also owns in fee simple 16 banking houses including the large, modern bank and office building at 15 William street. The Corn Exchange Bank believes in the policy of taking its depositors into its confidence in regard to rendering statements of financial condition. Under date of May 1st the bank issued a descriptive statement which makes clear to those who are unaccustomed to dissecting the ordinary bank statement, the various items of resources and liabilities. following is a copy of the May 1st statement which contains some excellent hints in connection with the publication of financial reports. THE BANK OWES TO DEPOSITORS PAYABLE ON DEMAND... A conservative banker always has this-indebtedness in mind, and he arranges his assets so as to be able to meet any request for payment. For this purpose we have: I. CASH. (Gold. Bank Notes and Specie) and with legal depositories returnable on demand. II. CHECKS ON OTHER BANKS............ Payable in one day. III. LOANS TO INDIVIDUALS AND CORPO RATIONS. Payable when we ask for it, secured by collateral of greater value than the loans. IV. WE OWN BONDS. ... Of Railroad and other corporations of first quality and easily salable. V. WE HAVE LOANS. Payable in less than three months on the average, largely secured by collateral. VI. WE OWN BONDS AND MORTGAGES AND REAL ESTATE. VII. OUR SIXTEEN BANKING HOUSES. . All located in New York City. TOTAL TO MEET INDEFTEDNESS..... VIII. THIS LEAVES A SURPLUS OF... The $112.136,047-57 $36,838,862.55 9.081.454.03 12,791.940.98 17.991,169.41 41,157.054-72 1.247.221.76 3.159.494-51 .$122,267,197.96 $10,131,150.39 Which becomes the property of the Stockholders after the debts to the depositors are paid, and is a guarantee fund upon which we solicit new deposits and retain those which have been lodged with us for many years. The Corn Exchange Bank has one of the most efficient executive staffs in the city and also has the advantage of a strong board of directors. William A. Nash is chairman of the board and Walter E. Frew, president. The Mechanics and Metals National Bank of the City of New York A Valuable Booklet Surveying War The Mechanics and Metals National Bank of New York has published a booklet of 50 pages, bearing the title "War Loans and War Finance." It contains a record of the cost of the war in Europe, together with a summary of the permanent loans that have been made, and statistics of the debt, past and present, of the nations at war. A few of the items in the booklet are: Present cost of the war, daily.. $91,000,000 Total cost to August 1, 1916.... 45,000,000,000 Debt of Europe, August 1, 1914. 22,000,000,000 Debt of Europe, August 1, 1916.. 70,000,000,000 Interest on debt, 1914.. 740,000,000 Interest on debt, 1917, at least.. 2,800,000,000 Indicated proportion, gov't expenses to people's income, 1917, 17.8 per cent. The booklet is designed with the special purpose of having lasting value as a financial record of the war in its first two years, and is being distributed to the bank's customers throughout the United States. The New York Federal Reserve Bank is now comfortably established in the new quarters in the Equitable building which are provided with every modern equipment for speedy handling of business. Payment of Fourth Installment of Reserves The Federal Reserve Bank of New York has received from member institutions approximately $2,750,000 as the fourth installment on reserves required by the new banking act. The new currency system has now been in operation a year and a half. For the next six months the member banks in reserve cities must keep on deposit with the Reserve banks five-fifteenths of the total reserve required, an increase of cne-fifteenth over the amount required for the half year just closed. Country banks must now keep four-twelfths instead of three-twelfths of the total reserve with the central banks. The reserve city members are required to maintain a total reserve of 15 per cent. of demand deposits and 5 per cent. of time deposits and the country banks 12 per cent. and 5 per cent., respectively. Coal & Iron National Bank With total deposits of $10,089,065 reported under date of May 1st the Coal & Iron National Bank of New York is making steady progress. Combined resources are $12,367,633; loans and discounts, $5,948,793. The capital is $1,000,000, surplus fund and undivided profits, $728,753. |