The plaintiff brought this action under the Declaratory Judgments Act, N.J.S. 2 A:16-50 et seq. , for a judicial determination of the effect of the recent socalled "Prudent Man" Investment Statute, L. 1951, c. 47, N.J.S. 3 A:15-18 et seq. , upon certain trusts under its administration. It asserts that it is willing to invest under the authority of the statute, but doubts have arisen as to its validity respecting trusts created prior to its effective date. Instructions are sought in four specific trust estates. All beneficiaries therein have been joined as defendants; some have filed answers, joining issue on the questions raised. The Attorney-General of the State of New Jersey has been joined because the constitutionality of the statute is drawn into question. The Camden Trust Company, a corporate fiduciary which manages a large number of trust estates, filed a petition and has been admitted to this action as amicus curiae.
This is an appropriate proceeding under the Declaratory Judgments Act. Justiciable controversies for the settlement of and relief from uncertainty and insecurity with respect to rights of the fiduciaries and cestuis under the respective instruments are presented. New Jersey Bankers Ass'n. v. Van Riper , 1 N.J. 193 (1948); New Jersey Turnpike Authority v. Parsons , 3 N.J. 235 (1949); Abelson's,
Inc., v. N.J. State Board of Optometrists , 5 N.J. 412 (1950).
The introductory statement of chapter 47, Laws of 1951, entitled "An Act concerning investments by fiduciaries," declares: "The purpose of this bill is to permit fiduciaries to invest up to 40% of a trust estate in investments other than legal investments, except in cases in which a trust instrument otherwise provides." These are referred to as "limited legal investments" and include "all investments which are not legal investments." N.J.S. 3 A:15-18(f).
The standard of care to be exercised by a fiduciary is prescribed thus:
"In investing and reinvesting money and property of a trust estate and in acquiring, retaining, selling, exchanging and managing investments, a fiduciary shall exercise care and judgment under the circumstances then prevailing, which persons of ordinary prudence and reasonable discretion exercise in the management of their own affairs, considering the probable income as well as the probable safety of their capital." N.J.S. 3 A:15-19.
Subject to the foregoing standard,
"* * * a fiduciary may invest in any investments whatsoever; but no fiduciary shall make any investment for a trust estate in any limited legal investment if, on the valuation date, the aggregate value of all limited legal investments held in such trust estate exceeds, or if the investing in such limited legal investment would cause such aggregate value to exceed, 40% of the aggregate value of all the property which constitutes the principal of such trust estate." N.J.S. 3 A:15-20.
Provisions for determining values are set forth in N.J.S. 3 A:15-21.
N.J.S. 3 A:15-25 prescribes, however, that the trust instrument shall control notwithstanding the Act.
It is provided by N.J.S. 3 A:15-29 that
"This article shall apply to and govern trust estates heretofore and hereafter created, fiduciaries heretofore and hereafter appointed, and trust instruments heretofore and hereafter made."
The standard of care imposed by the statute, N.J.S. 3 A:15-19, was first enunciated as a principle of law by the Supreme Judicial Court of Massachusetts in Harvard College v. Amory , 9 Pick. 446 (1830). Mr. Justice Putnam said:
"All that can be required of a trustee to invest, is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."
This rule has been adopted by decisions in the following states: Maryland, Gray v. Lynch , 8 Gill. 403, 430 (1849); Missouri, Rand v. McKittrick , 346 Mo. 466, 142 S.W. 2 d 29 (1940); North Carolina, Sheets v. J.G. Flynt Tobacco Co. , 195 N.C. 149, 141 S.E. 355 (1928); Rhode Island, Peckham v. Newton , 15 R.I. 321, 4 A. 758 (1886); Vermont, Barney v. Parson's Guardian , 54 Vt. 623 (1882); Virginia, see 34 Va. L. Rev. 102.
However, in New York the rule was laid down in King v. Talbot , 40 N.Y. 76 (Ct. App. 1869), wherein Judge Woodruff said:
"In their private affairs, they (fiduciaries) do, and they lawfully may, put their principal funds at hazard; in the affairs of a trust they may not. The very nature of their relation to it forbids it."
The Legislature of New York enacted statutes which regulated investments of fiduciaries by setting up lists of legal securities. The majority of states, New Jersey among them, followed this principle and adopted legal lists. Bogert, Trusts and Trustees, sec. 614 et seq., page 180; 2 Scott on Trusts, sec. 227.13, page 1224.
In our State, the subject of investment of trust funds was considered as early as 1831, in Gray v. Fox , 1 N.J. Eq. 259 (Ch. 1831). Chancellor Vroom said:
"Stocks are liable to great depression. The abundance or scarcity of the circulating medium in a community, and the prospects of
peace or war, to say nothing of the agitations caused by the spirit of restless and unprincipled speculation, are constantly causing a fluctuation in the stocks. * * * The stock of private companies is not considered safe, and investments in that species of stock would scarcely be encouraged by a court of equity."
In the 30 years preceding this opinion, there had been six depressions, and in the ensuing 120 years there have been at least 17 periods of financial distress of varying duration and severity, which economists distinguish as panics, crises or depressions. In the light of such experience, the Chancellor's observations were not only sagacious, but almost prophetic; they are as relevant and timely today as they were then, notwithstanding the safeguards of governmental agencies and the stability that may ensue from investments in common stocks by large financial institutions and mutual funds.
The first definitive statute in New Jersey governing fiduciary investments was enacted in 1865, L. 1865, page 737. It empowered a fiduciary to invest in bonds of the State. Thereafter, from time to time, the Legislature broadened the field of investments to be made by a fiduciary. In the 1937 revision of the statutes, all previous acts pertaining to investments were consolidated. A list of "legals" in which a fiduciary may invest without special order of the court appears in N.J.S. 3 A:15-1 et seq.
In an appropriate case, the court may authorize trustees to deviate from the statutory list, N.J.S. 3 A:15-1, subd. v, N.J.S. 3 A:15-15. This power was inherent in the Court of Chancery and is now vested in the Superior Court. First National Bank of Jersey City v. Stevens , 9 N.J. Super. 324 (Ch. Div. 1950). It is interesting to note that N.J.S. 3 A:15-15, subd. b , provides that
"* * * the court shall not authorize or direct the purchase of any class of common or preferred stock of any corporation unless the corporation shall have been organized and engaged in the conduct of its business for five calendar years immediately preceding the purchase of the stock of the corporation."
No such qualification is stipulated in connection with the purchase of stocks under the article pertaining to "limited legal investments," N.J.S. 3 A:15-18 et seq. As to the validity of this restriction upon the inherent power of the court, no opinion is ...