On certification to the Chancery Division of the Superior Court.
For modification -- Chief Justice Vanderbilt, and Justices Heher, Oliphant, Wachenfeld, Burling, Jacobs and Brennan. Opposed -- None. The opinion of the court was delivered by Vanderbilt, C.J.
The Fidelity Union Trust Company, individually and in a fiduciary capacity, instituted this action in the Chancery Division of the Superior Court seeking a declaratory judgment as to the constitutionality and general application of the so-called Prudent Man Investment Statute (N.J.S. 3 A:15-18 et seq.) and its application to four specific trusts created prior to its passage. On the petition of the plaintiff trust company and the cross-petitions of certain defendant beneficiaries under three of the trusts we granted certification to review the judgment of the Chancery Division.
THE PRUDENT MAN INVESTMENT STATUTE
The principles incorporated in the Prudent Man Investment Statute are not novel. The prudent man rule with respect to investments by a fiduciary was first enunciated in Harvard College v. Amory, 9 Pick. 446 (Sup. Jud. Ct. Mass. 1830):
"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." (at p. 461)
That case, in which the trustees were not surcharged for losses incurred through investing in common stock, found little acceptance elsewhere. In New Jersey in the case of
Gray v. Fox, 1 N.J. Eq. 259 (Ch. 1831), Chancellor Vroom, after reviewing the English authorities, held:
"The principle to be extracted from these authorities is, that the loaning of trust money * * * on private security, is not a compliance with the rule that requires due security, and of course, that such loans are made at the risk of the trustee." (at p. 266)
"In this country, the amount of public or government stock is very small, and in an inland state like our own, there are few opportunities for investing in that kind of security. The stock of private companies is not considered safe, and investment in that species of stock would scarcely be encouraged by a court of equity. There is, then, no other but landed security that would come within the rule." (at p. 268)
This restricted view of a trustee's investment opportunities was followed in New Jersey, Shepherd v. Newkirk, 21 N.J.L. 302 (Sup. Ct. 1848); Vreeland v. Vreeland's Admn'r., 16 N.J. Eq. 512 (Prerog. 1863); Tucker v. Tucker, 33 N.J. Eq. 235 (Prerog. 1880), affirmed 34 N.J. Eq. 292 (E. & A. 1881), and was in accord with the rule prevalent elsewhere. The decision in King v. Talbot, 40 N.Y. 76 (Ct. App. 1869), surcharging trustees for investing in equities of reputable corporations, prompted the New York Legislature to create a so-called legal list and was an important factor in inducing several states to adopt constitutional prohibitions against their legislatures giving trustees the power to invest in stocks of business corporations, see Shattuck, The Massachusetts Rule of Trust Investments, 82 Trusts and Estates 23 (1945).
Until recent years the majority of states have followed the New York rule and enacted statutes listing investments, or categories of investments, approved for fiduciaries, see The Prudent Investment Theory in Trust Administration, 1 Rutgers L. Rev. 130, 131 (1947). As a result, however, of increasing dissatisfaction with the investment limitations thus imposed, in 1942 a committee of the Trust Division of the American Bankers Association prepared a model statute following the Massachusetts prudent man investment rule. The model statute found considerable favor with the various
legislatures, and in the past ten years some 23 states, including New Jersey, have adopted it either in whole or in part or with minor variations. With some seven states adhering to the prudent man investment rule by court decision, it is readily apparent that the rule laid down in Harvard College v. Amory, supra, once generally rejected because it permitted trustees to invest in common stocks, now prevails in a majority of states.
The past century and a quarter has seen a gradual but continuous expansion of the investment powers of trustees in New Jersey. At the time of the decision in Gray v. Fox, supra, the only way executors, guardians and trustees could act with safety in making investment of infant's funds was to obtain instructions from the Orphans' Court pursuant to the then existing statute (Rev. L. 1820, p. 799, § 11) and follow these instructions. Thus, in Gray v. Fox, supra, the court said:
"In cases coming under the act, trustees may take the responsibility of loss upon themselves, or they may throw it on the court. If the latter course be pursued, the directions of the statute are plain. They must obtain leave and direction for the purpose of putting out the money; not put out the money first, and at some future day, when difficulties are foreseen or loss apprehended, go to the court and obtain a decree of confirmation." (at p. 272)
Subsequently this rule applicable to infants' funds was extended by the Legislature to all funds in the hands of executors, administrators, trustees and guardians (Rev. S. 1847, p. 209). It was almost 20 years, however, before the first definitive statute relating to fiduciary investments was enacted making it lawful to invest trust moneys "in any of the bonds issued by this state," provided the deed of trust, the will or the court did not specially direct the manner of investment (L. 1865, p. 737). Thereafter the statutory legal list evolved as the result of piecemeal additions over the years, see Large, Trustees' Investments in New Jersey, 59 N.J.L.J. 349 (1936), until in 1951 prior to the enactment of the Prudent Man Investment Statute it was comprised
of a variety of securities, including bonds, preferred stocks and shares of savings and loan associations (R.S. 3:16-1 et seq.).
The New Jersey Prudent Man Investment Statute as enacted (L. 1951, c. 47; N.J.S. 3 A:15-18 et seq.) constitutes an addition to and not a repeal of the existing statutes regulating fiduciary investments. Section 1 (N.J.S. 3 A:15-18) includes several key definitions:
"(d) 'investments' includes property of every nature, real, personal and mixed, tangible and intangible, which persons of ordinary prudence and reasonable discretion acquire for the purpose of preserving their capital and of realizing income; and specifically includes, solely by way of description and not by way of limitation, bonds, debentures and other corporate obligations, capital stocks, common stocks, preferred stocks, and shares of any open-end or closed-end management type ...