cedure in place of a corporation, thus evolving the present form of "trustee" plan. All group series issues reorganized to date in New York City have used this plan, and it has been applied in a considerable number of issues where only one mortgage constitutes the underlying security.

The original statutory procedure is somewhat similar to that under Section 77B of the Bankruptcy Act. Reorganization of an issue is effectuated by court approval of a plan of reorganization, plus consent by holders of two-thirds of the issue, which binds all holders." The trust indenture is made part of the plan of reorganization. A unique feature of the standard plan is that it provides for the selection of the trustee in accordance with the wishes of the holders as ascertained by ballot, either by court appointment or by nomination and election by the holders. The plan provides for transferring from the State officials who have been administering them to the trustee, all properties and rights which are security for the issue. This may include title to properties on which foreclosure has already been taken, or possession of mortgage deeds, rights of action against various persons, and always the right of action against the guaranty company on the guaranty. Depending on the status of the property, the trustee's function with respect to it at the time he enters upon the trust may vary all the way from collection and distribution of interest on an undefaulted underlying mortgage to active management of a property on which foreclosure has taken place. Subsequent changes in the status of the property may make necessary the assumption of a changed relation to it. The trust declaration and the reorganization plan accordingly give the trustee powers not possessed by the guaranty company, in order to facilitate his task should he be called on either at once or later to manage the property. The security holders retain their old certificates, generally stamped with a notation that they are subject to the reorganization plan. The creation of the trusteeship is thus the first stage of reorganization of the issue, the reorganization of the underlying property or properties being the second stage. The court retains a residual jurisdiction over the trustee, and the declaration of trust permits the trustee to perform practically all types of second-stage reorganizations merely upon court approval, normally ex parte unless the court shall require notice to holders, and without further consents from the holders.

14 Schackno Act, Secs. 6, 8. There are alternative procedures under the Mortgage Com mission Act, but since Schackno Act procedure is more usual, these need not be considered. The reorganization plans offered under Mortgage Commission Act, Sec. 7, do not differ from those under the Schackno Act, and we are informed that no reorganization plans have been offered under Mortgage Commission Act, Sec. 10.

Cf. supra note 8.

These broad powers of the trustee are in the first place subjected to what appears to be an unusually high standard of general duty to the trust. A striking feature of this standard form declaration of trust is the form of the exculpatory clause, which, unlike the ordinary form under which the trustee is liable only for gross negligence or willful misconduct, provides that the trustee is liable for mere negligence.16 Whether this rise in the level of the trustee's obligation is real or illusory will, however, depend in practice on whether the clauses making the trustee liable for negligence are nullified by other clauses exempting him from liability for action taken upon professional advice.1

He is specifically granted a considerable number of powers looking toward reorganization. He is permitted to undertake on his own motion all normal managerial and ministerial acts required in the ordinary course of administration of real estate property,18 and in addition he has the power to extend an underlying mortgage or mortgages for a limited period,1o and the power to foreclose and buy in on behalf of all certificateholders at foreclosure sale.20 Certain more drastic powers both in the operation of the properties and in their reorganization are exercised only upon court approval, secured ex parte unless the court in its discretion directs that notice be given the certificateholders. These powers include the extension of an underlying mortgage or mortgages for more than the limited period specified, reducing or deferring interest on a mortgage, borrowing money, selling trust assets, appointing agents, paying reorganization fees and expenses."1

The trustee is under no specific duty to undertake any of these acts. He is merely empowered to perform them. But the whole intention of the declaration of trust is toward activity rather than passivity on his part. The declaration of trust significantly omits the common clause permitting the trustee to refuse to act unless requested by a specified percentage of the security holders and un

1 F-1 Trust Declaration, XIII-a: "* provided however, that nothing in this declaration of trust contained shall exempt any trustee from liability arising out of his own willful misconduct, bad faith or negligence." Id, XIII-d: "The trustee [s] shall not be liable for any error of judgment or for any loss arising out of any act or omission in the execution of this trust so long as they act [he acts] in good faith and without negligence."

"F-1 Trust Declaration, XIII-e: "The trustee[s] may consult with legal counsel, engineers, accountants, appraisers and surveyors, and any act or omission to act under this declaration of trust or in connection with the execution of this trust, taken, suffered, or omitted in good faith by the trustee [s] in accordance with the opinion of any such counsel, engineers, accountants, appraisers or surveyors, shall be conclusive on the certificate holders and the trustee shall be fully protected in respect thereof.

18 F-1 Trust Indenture, VIII-a-n.

F-1 Trust Declaration, XIII-h. The period is three years in F-1, in some issues five years.

20 F-1 Trust Declaration, VIII-m.

AF-1 Trust Declaration, VIII-0-1.

less the request is accompanied by an offer of indemnity. Instead, the trustee is given an inducement to act, by virtue of the fact that he is granted no fixed compensation. The declaration provides only an upper limit for his compensation, normally one-half of one percent of the face amount of the outstanding certificates, charged against the trust estate. In the larger issues, this upper limit is cut to as low as one-quarter of one percent. This nevertheless permits of a substantial maximum compensation: thus, on the $27,000,000 plus outstanding in F-1, the trustee, at one-fourth of one percent, might get a fee of almost $70,000 a year. This is an upper limit only. The court fixes the fee, and to obtain any fee at all the trustee must demonstrate to the court, at a hearing held on notice. to all certificate holders, that "upon the basis of time, effort and accomplishment" he deserves compensation.22 The net effect of these provisions is to give the trustee a scope for the exercise of initiative and a reward for exercising it. Certain features of this trusteeship are obviously capable of transplantation into other types of trust indentures.

Both individuals and banks have accepted appointment or election as trustees. Among the banks in New York City which have executed such trust declarations are: Brooklyn Trust Co., Continental Bank & Trust Co., City Bank Farmers Trust Co. and Commercial National Bank & Trust Co.

F-1 Trust Declaration, III.

C. STANDARDS FOR INDENTURES AND INDENTURE TRUSTEES ENACTED IN 1936 BY THE NEW YORK STATE LEGISLATURE1

State of New York

Nos. 2197, 2779, 2934, 3023 *Int. 1880

IN ASSEMBLY

March 11, 1936

Introduced by Mr. STREIT-read once and referred to the Committee on Judiciary-committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee-committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee reported reported by the Committee on Rules with amendments, ordered reprinted and placed on special order of second and third reading

AN ACT

To amend the real property law, in relation to certain trust mortgages and interests therein and the appointment, agreements, acts and proceedings of persons administering or holding the same for the protection of the owners and holders thereof

The People of the State of New York, represented in Senate and Assembly, do enact as follows:

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1 Section 1. Chapter fifty-two of the laws of nineteen hundred. nine, entitled "An act relating to real property, constituting chapter fifty of the consolidated laws," is hereby amended by inserting therein a new article, to be article four-a, to read as follows:

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4

3

EXPLANATION.-Matter in italics is new; matter in brackets [ ] is old law to be

omitted.

1L 1936, c. 900, amending L. 1909, c. 52; Real Property Law, Art. 4-A.

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10

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129. Minimum bid of trustee at sale on foreclosure to be

fixed by court.

130. Deposit agreements.

130-a. Restrictions on committees.

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130-b. Managing agents and management companies.

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130-c. Voting trustees and voting trust agreements.

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130-d. Fees and allowances.

130-e. Removal of trustees, committees or depositaries.

130-f. Actions for accounting by minority groups; expenses

thereof.

130-g. Violations and penalties.

130-h. Construction of article.

124. Purpose and application of article. It is the purpose of the legislature, in enacting this article, to provide for the regulation and supervision of the appointment, creation, agreements, acts, conduct, practices and proceedings of trustees, bondholders'