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Behrman v. Egan

Decided: February 9, 1953.

HARRY BEHRMAN, JOHN J. HALL, ALOYSIUS J. O'BRIEN, AMOS H. RADCLIFFE AND CHARLES H. ROEMER, TRUSTEES UNDER A TRUST AGREEMENT DATED DECEMBER 26, 1934, BETWEEN THEM AND THE FRANKLIN TRUST COMPANY OF PATERSON, PLAINTIFFS,
v.
JOHN J. EGAN AND GEORGE LENDRIM, AS REPRESENTATIVES OF THE HOLDERS OF CLASS "A" CERTIFICATES; AND WILLIAM E. BROWNE AND MOSES I. FULD, AS REPRESENTATIVES OF THE HOLDERS OF CLASS "B" CERTIFICATES, DEFENDANTS



Grimshaw, J.s.c.

Grimshaw

In a prior opinion filed in this cause, Behrman v. Egan , 17 N.J. Super. 598 (Ch. Div. 1951), I reviewed at length the facts and circumstances leading up to the present litigation. A repetition of that recital would serve no useful purpose.

After a study of the record then before me, I expressed the view that the charge of fraud in connection with the procurement of the 1946 decree of the former Court of Chancery had not been sustained. I still hold that opinion. In its decree the Court of Chancery approved the transfer of the bank building from the trust to the Franklin Trust Company for the sum of $75,000. It also gave its sanction to an increase in the capital of the bank.

It may be conceded that the certificate holders were not given sufficient notice of the 1946 proceeding. However, I am inclined to the view that the failure to give such notice was due more to ignorance than to design. In any event, because of the lack of notice the exceptants were afforded an opportunity to present further testimony on the subject.

After a full disclosure of all of the facts I find no reason to alter the conclusions heretofore expressed.

The hearings were reopened for the purpose of affording the trustees an opportunity to explain and justify the administration of the trust, particularly with reference to certain phases of that administration to which reference has heretofore been made. A great volume of testimony was taken. A large part of that testimony was unsatisfactory and vague. However, such as it was, it is the record upon which the trustees must be judged.

It is necessary to keep in mind that in this State trustees are held to the highest standards of conduct in their dealings with the trust. Our courts have repeatedly quoted with approval the rule of conduct laid down by Mr. Justice Cardozo, then a Judge of the New York Court of Appeals, in Neinhard v. Salmon , 249 N.Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1 (Ct. App. 1928):

"Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court."

Taylor v. Errion , 137 N.J. Eq. 221 (Ch. 1945), affirmed 140 N.J. Eq. 495 (E. & A. 1947); Bankers Trust Co. v. Bacot , 6 N.J. 426 (1951); In re Koretzky , 8 N.J. 506 (1951).

It is urged on behalf of the trustees that the trust agreement relieves them from all responsibility for actions other than those which were the result of conscious wrongdoing. In support of this contention they cite Article III, paragraph 9 of the trust agreement which is as follows:

"9. No Trustee, nor any member of the Board of Trustees, shall be responsible for any act, omission or default of any other Trustee or of any agent, employee or attorney employed by them or any of them, nor for any mistake, or error of judgment; nor shall he incur any liability except for his individual malfeasance."

In my opinion, the contention that the exculpatory clause saves the trustees from any penalty for conduct other than that which would, in effect, constitute an indictable offense, is untenable. Discussing exculpatory clauses in trust agreements, the Supreme Court in Blauvelt v. Citizens Trust Company , 3 N.J. 545 (1950), had this to say:

"While consideration is given to such exculpatory provisions the courts construe them strictly and there appears to be a tendency to view such provisions with a searching scrutiny of the relation existing between the parties and the circumstances of the insertion of such a clause in a trust instrument. See Scott on Trusts, Vol. 2, Par. 222, pp. 1174 et seq. for a full discussion of the subject. Our courts have applied a strict construction to such exculpatory clauses. Tuttle v. Gilmore , 36 N.J. Eq. 617 (E. & A. 1883); Conover v. Guarantee Trust Co. , 88 N.J. Eq. 450 (Ch. 1917) affirmed 89 N.J. Eq. 584 (E. & A. 1918); and have said that they do not relieve a trustee of liability where a loss results from negligence in the administration of the trust. Liberty Title & Trust Co. v. Plews , 142 N.J. Eq. 493 (Ch. 1948); Dickerson v. Camden Trust Co. , 140 N.J. Eq. 34 (Ch. 1947) affirmed 1 N.J. 459 (Sup. Ct. 1949). The conduct of the trustee then is to be measured by the principle that a trustee owes an obligation to the cestuis and a duty to exercise that degree of care, prudence, circumspection and foresight, that an ordinary prudent person would employ in like matters of his own. See In re Griggs , 125 N.J. Eq. 73 (Prerog. Ct. 1939) affirmed sub nom In re Paterson National Bank , 127 N.J. Eq. 362 (E. & A. 1940); In re Buckelew's Estate , 128 N.J. Eq. 81 (Prerog. Ct. 1940); In re Ebert , 136 N.J. Eq. 123 (Prerog. Ct. 1945); Braman v. Central Hanover Bank & Trust Co. , 138 N.J. Eq. 165 (Ch. 1946); Dickerson v. Camden Trust Co., supra. Also cf. R.S. 3:16-12 N.J.S.A. "

And, in Conover v. Guarantee Trust Co. , 88 N.J. Eq. 450 (Ch. 1917), affirmed 89 N.J. Eq. 584 (E. & A. 1918), it was held that:

"Trustees are bound to observe the limits placed upon their powers, either by law or by the trust ...


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