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Every trustee hereunder may at any time resign from the trust by mailing, at least sixty days before such resignation shall take effect, a duly addressed notice in writing to that effect to the company, and to all bondholders who may be known to the trustee to be such, and whose addresses shall likewise be known to it."

The form of the trustee's certificate should likewise be worded with care to avoid the incidental assumption of responsibility which the trustee does not intend to assume. For example, it has been held that the statement in the certificate that the bond is "secured" by the mortgage therein referred to may commit the trustee to a guaranty that the bond actually is secured. The committee already referred to suggests the following form for the trustee's certificate:

"It is hereby certified that this bond is one of the series of bonds mentioned and described in the mortgage or deed of trust herein referred to.

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The provisions for the delivery of the bonds after certification vary greatly. Sometimes all of the bonds are to be delivered to the issuing corporation at once upon the recording of the mortgage; often some of them are to be withheld to take care of underlying bonds, or, as in the case of a railroad construction mortgage, the bonds are to be delivered in installments as the work progresses. Occasionally the entire issue is to be held in the custody of the trustee until the completion of certain work, or the fulfillment of certain conditions. When any conditions are attached to the delivery of the bonds, the mortgage should be absolutely clear as to the conditions, and should specify the evidence to be required that such conditions have been fulfilled. The responsibility of the evidence is ordinarily put upon the issuing corporation, the trustee being liable only for the exercise of good faith.

After delivery of the bonds the trustee may be called upon to perform various duties, depending upon the terms of the mortgage and the character of the property. If provision is made for the accumulation of a sinking fund, the trustee may have divers duties in that connection. The trustee's powers may include that of releasing portions of the property from the lien of the mortgage. In the case of collateral trust bondswhich are practically long-time collateral notes-the mortgaged property consists of bonds and stocks, and the trustee may be called up to pass upon securities offered in substitution. Outside of its regular duties as trustee, the trust company may perform various services as fiscal agent.

The management of a sinking fund involves varying degrees of responsibility. Often the funds received are to be used for the retirement of a certain number of the outstanding bonds each year, according to the provisions contained in the mortgage which secures the bonds. Sometimes the particular bonds to be retired are selected by lot, and the result is advertised in the daily papers. Whether they are presented

for redemption or not, they cease to draw interest at the period advertised. The bonds thus redeemed are often not cancelled, but are held by the trustee under the mortgage, and interest on them is added to the sinking fund for the further purchase of bonds. In the absence of provision for the retirement of bonds as above stated, they are some times to be purchased in the open market from the sinking fund. Occasionally the sinking fund is to be invested in other securities, either according to stipulated conditions or at the discretion of the trustee or the directors of the corporation.

In case of default by the issuing corporation the trustee may find it necessary to foreclose the mortgage and sell the property. Not infrequently various interests among the bondholders institute proceedings which of necessity involve the trustee and add to its duties; and in any case the trustee is obligated, within the limits which should be carefully laid down in the mortgage, to protect the interests of all bondholders alike. If a receiver for the corporation is appointed, and application made for the issue of receiver's certificates to be prior in lien to the bonds, the trustee for those bonds should, through its attorney, appear in court and look after the interests of the bondholders, either favoring or opposing the issue of receivers' certificates as the welfare of the holders of the bonds may dictate. For all special services the trustee is of course entitled to reasonable compensation, the fees agreed upon at the start covering only the routine duties, of which the chief is the certification of the bonds.

Regarding the liability incurred in the certification of bonds there are some differences of opinion, which concern chiefly the moral rather than the legal responsibility of the trustee. So far as the trustee is concerned the certification is intended for no more than the identification of the bonds as being the particular bonds referred to in the mortgage or deed of trust to which reference is made in said bonds. The trustee does not undertake to guarantee anything regarding the value of the property alleged to be behind the issue, regarding the title to the property, or regarding the regularity of issue, validity or priority of lien of the mortgage. It merely certifies that it has in its possession as trustee a mortgage issued by the corporation whose name appears therein, that the bond upon which its certificate appears is genuine, is one of the bonds referred to in the mortgage, and that the number of such bonds certified by it is not greater than the number called for in the mortgage. In other words, the certificate intends only to identify the bonds and to prevent an overissue of them.

Notwithstanding this very limited legal liability undertaken by the trustee, the company which accepts such trusts without a reasonably careful investigation runs the risk of having its reputation, and incidentally its business, seriously injured; and most companies recognize that their moral responsibility to the public requires care lest their names be allowed to appear in any connection with enterprises regarding the legitimacy and good faith of which there appears to be any question. There

is of course no obligation on the part of the trustee to feel assured that the enterprise will be successful; that is a risk which the investor must take for himself, and besides, it may well be that enterprises which do not look promising to the trustee may meet with great success and be exceedingly profitable to the investors. But if an undertaking proves to have been from its very inception a “fake,” the trust company whose name appears upon the bonds as trustee is very certain to suffer in public estimation, no matter how innocent of wrong intention it may have been.

The degree of care exercised and the particular matters investigated before accepting an appointment of this kind of course vary with different companies. Some do no more than satisfy themselves that the undertaking is legitimate and that the men behind it are acting in good faith. They argue that for the meagre compensation received they can afford to do no more, that they are living up to the full measure of their contract; and further, that their doing more would tend to mislead the public. Those who go to the other extreme take pains to verify the correctness of everything leading up to the bond issue, though not admitting legal responsibility for such verification. They satisfy themselves that the issuing corporation actually owns property which may be mortgaged (but do not attempt to pass upon the value of such property); that the title to the property is good; that the company has been properly incorporated and that its acts leading up to the bond issue have been legal; that the mortgage is properly drawn, contains no glaring faults and actually covers the property which it purports to mortgage. If it is stated in the bonds that the mortgage is a first mortgage, they take pains to ascertain that such is the fact. An instance of extreme care in this matter is found in the following list of papers required, prepared by Frederick Vierling, Trust Officer of The Mississippi Valley Trust Co., St. Louis, for the guidance of his company:

"List of papers to be furnished Trustee in re Bonds to be issued; all papers to be certified under seal of Company. Copies of official documents need not be certified by State officials, if Company certifies under seal that same are true copies of official documents and certificates

thereto.

1. Articles of Association.

2. Certificate of Incorporation.

3. All amendments to either of above, and minutes and documents in re changes of capital stock, or, if there have been no amendments, certificate to that effect.

4. By-laws of Company.

5. Minutes of stockholders electing present directors, with all exhibits. Attach certified list of stockholders with number of shares each. 6. Minutes of directors electing present officers, with all exhibits. 7. Certificate containing specimen signatures of officers who will sign mortgage, bonds and coupons.

8. Minutes of stockholders authorizing mortgage, bonds and coupons, with all exhibits.

9. Minutes of directors approving action of stockholders in authorizing mortgage and bonds, with all exhibits attached.

10. Opinion of attorney of Company as to its legal incorporation and existence and that proceedings authorizing mortgage, etc., were duly had according to law, also that form of mortgage, bonds and coupons are valid in form and when duly executed will be legal and binding obligations of Company.

11. Certificate of title of regular abstractors showing that mortgage has been duly filed for record and is first lien on all property; or in lieu, an abstract of title with opinion of attorney based thereon to like effect.

12. Affidavit of President and two Directors of Company showing that property mortgaged at fair and reasonable value is at least as much as amount of bonds forthwith to be issued.

13. General inventory of tangible and intangible property, each separate.

14. Financial statement of Company, showing assets and liabilities. Also, statement of earnings and expenses per year for past five years.

15. Agreement of Company at least annually on demand of trustee hereafter to send statement as in No. 14 and to furnish additional inventories, as in No. 13 on demand of trustee.

16. If principal owners of Company are not known to trustee, letters from responsible persons who are known, identifying owners.

17. Letter from banker of Company as to its reputation for financial responsibility, etc.

18. Certificate showing fact that each bond signed by officers of company and the seal attached is signed in genuine handwriting of officers purporting to have signed same and that seal affixed is the corporate seal of the company.

19. Copies of all existing franchises of company with certificate showing that all payments thereunder required have been made and that ether conditions thereby required of company to be kept have been performed.

20. If mortgage has no specific provisions for delivery of bonds by trustee after authentication, resolution of directors authorizing certain officer or officers of company to receive bonds with specified coupons and give proper receipt.

21. Copy of underlying mortgages with certificates as to outstanding bonds issued thereunder."

Between the extremes there are companies which assume varying degrees of moral responsibility. Those who incline to put considerable stress upon the matter of the moral responsibility point to the fact that, however unjustified it may be in so doing, the public does actually attach

a great deal of importance to the trustee's certificate, and that the certificate of a reputable trustee is a prerequisite to the satisfactory financing of a bond issue. It is a frequent occurrence for the bond seller to clinch his argument with the statement that the Blank Trust Company, a reputable concern, is trustee for the issue. Some companies, in their advertisements for this kind of business, point to the advantages, other than the identification of the bonds, gained by their trusteeship. For example, a large Eastern company says in a circular, "It adds very largely to the value of bonds issued by any corporation, that the proposed purchaser knows that the trustee named in the mortgage, which secures the payment of the bond he intends to buy, is a responsible corporation, which before assuming to act has through its counsel investigated the forms of the bond and mortgage and determined the validity of the proceedings of the corporation which issued them. This relieves him from the necessity and expense of making such an investigation himself, and he is only obliged to determine in regard to the business value of the security itself."

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While opinions differ greatly, as already stated, the tendency appears to be towards greater care in accepting appointments as trustee under a bond issue. "In recent years the trust companies have shown a tendency, when acting as mortgage trustees, to recognize a greater moral responsibility than they at first were willing to bear. A trust company which should now allow the issue of unsecured bonds because of some glaring defect in the language of the mortgage, would no longer be morally excused by financial opinion, though perhaps held technically innocent."89

It would seem to be to the interest of all concerned that the trustee's compensation be made large enough to enable it, not to guarantee the validity of the mortgage, but to be responsible for ordinary care in ascertaining that the mortgage has been regularly issued by a properly incorporated company, is a lien on property to which that company holds clear title, and contains reasonable provisions for the protection of bondholders-in short, perform for the bondholders the services which the careful investor might expect of his lawyer, leaving to the bondholders the risk as to the business success of the undertaking, together, of course, with the risk of legal defects in the instruments which ordinary care on the part of the trustee has not detected. Such a course would not only be a protection to the investor, but would add more than its cost to the value of the bonds, and would compensate the trustee for the taking of a moral risk for which under present conditions it certainly is not paid, but the taking of which many think it cannot wholly avoid.90

89 Thomas L. Greene, "Corporation Finance," pp. 59, 60. 90 For detailed discussions of this subject, see

Proceedings Trust Company Section 1896-1903, pp. 17-25, Paper by Francis S. Bangs; pp. 44-46, Paper by William A. Carr; pp. 221-227, Paper by Andrew Squire. Proceedings Trust Company Section 1904 pp. 73-88, passim. Discussion of topic "Fees for Trust Company Work."

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