On appeal from Essex County Court, Probate Division.
For modification -- Chief Justice Vanderbilt, and Justices Heher, Wachenfeld, Burling and Ackerson. Opposed -- None. The opinion of the court was delivered by Burling, J.
[6 NJ Page 430] This case involves an appeal by the plaintiff and cross-appeals by the defendants-respondents from a judgment
of the Essex County Court, Probate Division, entered on August 2, 1950, confirming the plaintiff trustee's second intermediate account, surcharging the trustee in the amount of $6,802.67 together with interest thereon in the sum of $4,857.84, and allowing counsel fees. The appeals are addressed to the Appellate Division of the Superior Court but have been certified by the Supreme Court on its own motion.
Oliver S. Carter died testate on June 28, 1901, a resident of New Jersey. His will which was dated July 20, 1900, and admitted to probate by the Surrogate of Essex County, New Jersey, designated The Mercantile Trust Company, a corporation of the State of New York and doing business in the City of New York, as trustee thereunder. The Mercantile Trust Company filed an account of its stewardship as trustee for the period ending August 30, 1907, which account was allowed by decree of the Essex County Orphans' Court on November 16, 1907. On August 10, 1911, The Mercantile Trust Company merged with the plaintiff, Bankers Trust Company, also a corporation of the State of New York, and the merged corporation continued its existence under the name of Bankers Trust Company.
On July 17, 1947, the plaintiff filed its second intermediate account with the Surrogate of Essex County, New Jersey, covering the period from August 30, 1907, to September 10, 1946. The guardian ad litem for the three infant remaindermen under the trust filed 26 exceptions to the account, and one of the two life tenants filed nine exceptions thereto. No exceptions were filed by the adult remaindermen or the other life tenant. On October 14, 1947, the accounting was referred by the Orphans' Court of Essex County to an advisory master whose conclusions were filed with the Essex County Court on May 26, 1950. Judgment was entered in the Essex County Court, Probate Division, on August 2, 1950, in accordance with the advisory master's conclusions in which ten of the exceptions of the guardian ad litem which included two of the exceptions of the life tenant, were allowed and the remaining exceptions were dismissed. The present appeals are from parts of the judgment so entered. The plaintiff has appealed from
the surcharge against it for omitting to take deficiency proceedings in respect to three mortgage investments, hereinafter referred to as investments Nos. 3, 5 and 10, and from the allowance of counsel fees to the defendants-respondents. The defendants-respondents have collectively appealed from the propriety of the dismissal of exceptions relating to the investments hereinafter referred to as investments Nos. 2, 3, 4, 5, 7, 8, 9, 10, 11 and 12 excepting to the extent that the exceptions were allowed with respect to investments Nos. 3, 5, 10 and 12. The defendants-respondents also appeal from the assessment against the trust estate of the counsel fee allowed to the plaintiff.
The questions raised by the appeals are directed primarily to the nature of investments and their management by the trustee and the liability of the trustee for losses sustained by the trust on such investments. The investments under attack have been referred to by the court below by numbers, from 1 to 12, conforming to the first 12 exceptions of the guardian ad litem. The parties on appeal have followed the same manner of designation of the investments and the same method of reference is continued herein.
I -- THE APPLICABLE LAW TO THE INVESTMENTS MADE BY THE TRUSTEE.
The question of which law governs the investment of testamentary trust funds and the administration of trust estates, as distinguished from the validity and construction of the trust instrument, where elements of the trust, such as the testator's domicile, the trustee's domicile, the place of probate of the will, the situs of the trust property, the place where the trust is to be administered, etc., are not all located within the same state, is one which has resulted in some confusion, but the generally accepted rule to be extracted from the authorities is that a testamentary trust of personalty is to be administered by the trustee in accordance with the law of the state of the testator's domicile at the time of his death unless the will shows a manifest intention that the trust [6 NJ Page 433] should be administered according to the law of another state. See In re Johnston, 127 N.J. Eq. 576 (Prerog. 1940); affirmed, 129 N.J. Eq. 104 (E. & A. 1941); Wilmington Trust Co. v. Wilmington Trust Co., 24 A.2d 309, 139 A.L.R. 1117, 1126 (Sup. Ct. Del. 1942); 115 A.L.R. 802; Restatement of the Law, Conflict of Laws, 380, § 298; Land, Trusts in the Conflict of Laws (1940) 203 et seq., §§ 36, 36.1, 36.2, 36.3, 40.1; Goodrich, Conflict of Laws (3 rd ed. 1949) 490 et seq., § 159. The testator's will in the instant case expressly authorized and empowered the trustee to invest in "safe income-bearing securities under the provisions of the statutes of New York regulating the investment of trust monies * * *." The will contained no other authorization of investments. Additionally, it is noted that the testator designated a New York bank as trustee, and it appears from Macy v. Mercantile Trust Co., 68 N.J. Eq. 235 (Ch. 1904), in which the identical will was considered, that the testator himself had been "for a long time president of one of the leading banks" in New York. Under such circumstances we are in accord with the conclusions of the advisory master herein that the will empowered the trustee to invest in securities under the applicable New York statutes and that such statutes as construed by the courts of the State of New York are applicable to the investments made by the trustee and the administration of the trust estate. We are also in accord with the conclusion of the advisory master herein, that the trustee was empowered by the foregoing quoted provision of the will to invest in securities which were authorized by the New York statutes at the time of making such investment and was not limited to the making of investments in such securities as may have been authorized by the New York statutes in existence at the time the will was made or at the date of testator's death. Such latter conclusion is the only reasonable and practical construction to be placed on the quoted provision of the will. Such a conclusion was reached in Reiner v. Fidelity Union Trust Co., 126 N.J. Eq. 78 (Ch. 1939), reversed on other grounds, 127 N.J. Eq. 377 (E. & A. 1940).
The excepting defendants collectively contend that the plaintiff trustee should have been surcharged for losses sustained with respect to six specified mortgage investments and that the failure of the court below to so surcharge the plaintiff is error. The six investments involved in this category are referred to by the parties as investments Nos. 2, 7, 8, 10, 11 and 12. All of these investments, excepting No. 8, represented securities purchased by the plaintiff from Title Guarantee & Trust Company through its affiliate, Bond and Mortgage Guarantee Company, and were in the form of bonds and mortgages. Bond and Mortgage Guarantee Company guaranteed payment of the investments and Title Guarantee & Trust Company insured the title to the real estate embraced by the mortgages. Investment No. 8 represented participation in a larger mortgage purchased by the plaintiff through a corporate broker. The advisory master found as a part of his factual findings that the investments referred to as Nos. 2, 10, 11 and 12 were purchased by the trustee, acting through a mortgage investment committee of two persons, one of whom was a director of Title Guarantee & Trust Company and Bond and Mortgage Guarantee Company, and the other of whom had been formerly associated in official capacities with both the Title and Mortgage Companies; that investment No. 7 was purchased by the trustee, acting through a mortgage investment committee of three persons, the two persons above referred to and a third person who was also a director of the Bond and Mortgage Guarantee Company; that the maturity date of mortgage investment No. 2 was extended in 1928 by the trustee acting through a committee of two, one of whom was a director of the guarantor Bond and Mortgage Guarantee Company; that the extended maturity date of such mortgage together with the maturity date of mortgage investment No. 11 were extended by the trustee in 1931 and 1930, respectively, through a committee of three, two of whom were directors of the guarantor; and that the mortgage investment [6 NJ Page 435] No. 8 was purchased through a corporate broker by a committee of two, one of whom was a director of the corporate broker. It is observed that the men who served on the trustee's mortgage committee in the transactions here involved were Macdonald, Downey and Belknap. Macdonald and Downey were directors of the plaintiff and Belknap was a vice-president but not a director of the plaintiff. Additionally, Macdonald and Downey were directors of Bond and Mortgage Guarantee Company, and Macdonald was also a director of Title Guarantee & Trust Company; Belknap was a director of Albert B. Ashforth, Inc., the corporate broker from which mortgage investment No. 8 was purchased. The advisory master concluded that there was no suggestion of actual disloyalty to the trust, that the interest of the trustee's mortgage investment committee in and control over the corporations from which it purchased the above designated securities was so unsubstantial as not to have affected the judgment of the trustee's said committee, and that the trustee should not be surcharged for the losses sustained by the trust on these investments. The advisory master's conclusion is based upon the premise that the members of the trustee's mortgage committee constituted a very small fraction of the directors of the corporation which sold the mortgage securities to the trustee and had no substantial financial interest in the corporations of which they were directors. We do not believe that the inquiry can be resolved solely upon the basis of the extent of the stockholdings of the trustee's mortgage committee personnel in the selling corporations, or the number of members on their board of directors. The vice of the present situation arises from the substantial representation of the selling corporations on the trustee's mortgage committee which in some instances was 50% of the committee and in others, 66 2/3%. The decisions to make mortgage investments of the trust funds were initially made by this committee. The influence of this committee in the ultimate choice of investments cannot be gainsaid. The power of the committee is reflected in the extension of mortgages by the trustee through the committee. Although there was no suggestion
that actual disloyalty existed in this case, the opportunity was present. In approving investments for the trustee the committee was in a position to permit the marketing by the selling corporations to the trustee of investments which may not have been so selective as a trustee should insist upon. Moreover, the committee was in a position where the business opportunities which were afforded to the personnel of the committee and the selling corporations by reason of the dual connections of these men could have been of far more importance to them than any financial benefits which would have come to these men as mere stockholders from the sales of securities to the trustee by the corporations of which they were directors. The trustee and the members of its committee through which it acted in investing the funds of the trust should have been in a position where they could act exclusively in the interest of the trust in pursuance of the duty imposed upon them by law to exercise the utmost fidelity to the trust. Manifestly the trustee's committee was not in such a position. As directors and trustees of the selling corporations they owed an obligation to such corporations to exert every effort to effect the sale of mortgage securities and, since the payment of the mortgages was guaranteed by the Bond and Mortgage Guarantee ...