5.-Terminal Trust Deeds are where the trust property consists of a terminal, such as a railroad terminal or water-line terminal. 6.-Debenture Trust Deeds.-In the case of debenture mortgages, no specific property is pledged but a general lien on the property of the grantor corporation is provided.

7.-Income Trust Deeds.-An income mortgage against which income bonds are issued is of the same nature as a debenture mortgage in that the general property of the corporation is pledged. It is further provided in the case of an income bond that the interest may be required to be paid only if earned. The advantage that an income bond has over a preferred stock is that the income bondholder would have a prior claim to the assets of the corporation in case of liquidation.

Summary of Duties of Trustee for Bondholders. A brief statement of the duties of the trustee under a corporate deed of trust may be given as follows:

1.-Duties before accepting the trust.-This includes a careful investigation of the condition of the contemplated trust property, its value, the legality of the proposed trust deed including authority of the corporation and its officers to enter into such an agreement, assurance that the proceeds of the bond issue will not be used in a way which will jeopardize the interests of the bondholders.

2.-Duties incident to the distribution of the bonds.-This includes mainly the duty of protecting the bondholders from fraudulent overissue of the securities. As a rule the trust company accomplishes this precaution by itself accepting the agency function of authenticating the bonds as they are issued, or certifying each bond as being identified with the trust deed by stamping upon the face of the bond a certification to that effect.

3.-Duties during the life of the trust deed.—As a rule a carefully drawn corporate trust deed defines fairly exactly the safeguards which will be required of the grantor corporation during the life of the trust deed, and so long as the corporation does not violate the agreement there is ment is vested in the trust company and the trust company leases the equipment to the railroad. In this way the railroad is able to finance equip ment purchases by paying only from 10% to 25% before receipt of the equipment. A brief but very adequate description of the equipment trust is contained in an article by Wm. G. Littleton, “Duties of Trust Companies as Trustee under Equipment Trusts," Trust Companies, Vol. 32 (April, 1921), pp. 391-2. Cf. also the real estate trust deed, infra, pp. 98–101.

nothing of an active nature for the trustee to do, although it should be always alert for the interests of the beneficiaries. In some cases the trust deed provides for a sinking fund and the trustee is made the manager of the fund. The function here exercised by the trust company is an agency function, the fund being held virtually in escrow. 4.-Duties upon payment of bonds or refunding with new issue.The duties performed by the trustee for bondholders incident to retirement of old issues and issuing of new bonds, are of an agency character. In case the bonds are to be paid off the grantor corporation will pay the funds over to the trust company which will in turn pay the maturing bonds. The bonds will then be destroyed by fire in the presence of officials of the trust company and of the grantor corporation. In case of refunding into a new issue, the procedure would be the same except that instead of paying cash against the old bonds, new bonds would be issued; and a new trust deed would be begun.

5.-Duties in case of default.-If the borrowing corporation fails to observe the provisions of the trust deed it is the duty of the trustee to undertake to have the property sold for the benefit of creditors according to the priority of their claims under the law of bankruptcy. In modern times, with large corporate enterprises, particularly those of the nature of railways, public utilities and others, whose continued operation is essential to the public, things never get as far as a foreclosure; because a reorganization is accomplished through committees of the various creditors involved. These committees work out a plan to put the embarrassed corporation upon a sound financial basis.

Other Trust Services for Corporations. There are other trust services which are performed for corporations by trust companies, such as receiverships, reorganizations, assignments, etc., but inasmuch as these services may also be performed for individuals or partnerships they will be discussed in the chapter on "Trust Services for Corporations or Individuals" following. Also, it has been said that in some cases trust companies act as trustee for a voting trust, but the normal practice when this device is used is to make a group of the large stockholders joint trustees and the rôle played by the trust company is an agency one, being merely that of an escrow holder of the securities.1 Discussion of the voting trust will therefore be left to be included under the agency functions of trust companies.

1 Cushing, Harry A., Voting Trusts, p. 2. See Chapter VII, infra, pp. 149-50.

CHAPTER VI

TRUST SERVICES FOR INDIVIDUALS OR

CORPORATIONS

Trust services performed by trust companies particularly for individuals, and those which by their nature are undertaken mainly for corporations, have been described. It remains to describe those which may be performed either for individuals or corporations. These are: (1) assignments and receiverships, (2) real estate trusts, (3) community trusts, and (4) investment trusts. It is possible to have other types develop and for that reason the outline of trust services at the end of Chapter II includes "trusts for any lawful purpose"; but the four types of trust named above are the only common ones at the present time among those performed for both corporations and individuals.

Assignments and Receiverships. A trust company acts in a trustee capacity for corporations as trustee under plans for reorganization, where the corporation intrusts its property to the trust company while a new financial plan is effected. In such event the trust company is an assignee. An individual or partnership, likewise, may need its finances reorganized or may be in bankruptcy and voluntarily assign property to a trust company to be administered for the creditors of the individual or the partnership as the case may be. Here also the trust company would be designated assignee. However, such services are not commonly performed for corporations because different methods have been evolved for handling such situations.1 But where a trust company is trustee under a corporate trust deed, it virtually becomes assignee in

1 E. g., the voting trust, or simply by committees, such as stockholders' committee, bondholders' committee, general creditors' committee, etc. Where committees work out a plan of reorganization, the trust company is usually made agent to handle certain details. See discussion of agency services for corporations, infra, pp. 147-9.

case foreclosure proceedings become necessary; except that in such capacity it acts primarily in the interests of the bondholders whereas an assignee is not thus prejudiced. But even under foreclosure proceedings it is customary for the protective committee of the bondholders to invite the stockholders to partake in the reorganization, where such reorganization is contemplated rather than liquidation. The stockholders are required usually to pay an assessment in order to participate.1

Under involuntary liquidations, or where the court appoints a trustee to take over the property of embarrassed corporations, partnerships or individuals, for the benefit of creditors, the appointee is called a receiver. During the past twentyfive years there has been an increasing tendency in some parts of the country for the courts to appoint trust companies as receivers, except for railroad and for bank receiverships.2 A receivership may result (1) where an enterprise is solvent and transacting profitable business, but quarreling among the members of the firm in the case of partnership, or among large stockholders in the case of a corporation, or some other cause creates danger of a breakdown in efficiency of management; or (2) where the enterprise is insolvent, and doing an unprofitable business, and is unable to pay its debts. Under either circumstance there is grave danger of a wasting of the assets involved through errors of management or greedy and thoughtless creditors, and a disinterested party is needed to act in a fiduciary capacity in order to safeguard the interests of all. The advantages of the trust company as receiver have been summarized as follows: (a) Reliability-officials of the trust company are experienced both in that they handle numerous

1 The very interesting development of the legal control of this situation is presented in an article by Sunderland, F. S. S., "New Landmark in Corporate Mortgage Foreclosure Decrees and Reorganizations-Fair Offer to Unsecured Creditors," Trust Companies, Vol. 35 (July, 1922), pp. 29-33.

2 Trust Companies, Vol. 3 (August, 1906), p. 541. Also Abbott, Wm. T., "Services Rendered by Trust Companies under Receivership Appointments," Trust Companies, Vol. 15 (Jan., 1913), pp. 3-8; Stone, Ralph, "Trust Companies versus State Officials as Receivers of Banks," Trust Companies, Vol. 10 (March, 1910), pp. 160-2.

receiverships and in that there are usually tried business men on the board of directors of trust companies, (b) Financial responsibility of the trust company, (c) Immortality of the trust company, (d) Impartiality of the trust company in dealing with the various creditors interested and as between creditors and the debtor, (e) Promptness of action made possible by proper organization of the trust company for the purpose, (f) Accessibility of the trust company-an individual who has been appointed as receiver may be hard to find at crucial times whereas the trust company has an office open during all business hours, (g) Economy of the administration of such a trust by trust companies.1

The functions performed by assignee and receiver are similar, the only difference being the manner of appointment. The former is a voluntary trust and the latter is a court trust. The office and the duties and liabilities connected with it are analogous to those of executor of a will or administrator of an estate. Indeed it frequently happens that an executor or administrator of the estate of a deceased person finds a business enterprise on his hands to liquidate, or even to operate.2 In each case it is a matter of administering an estate for the benefit of beneficiaries recognized by the court to have just claims upon the estate.

The receiver's first duty is to assemble the assets of the estate or business and analyze all legitimate claims against it. Where it is desirable or necessary to continue operations either because the business is of a public nature or because only by so continuing the business can important assets be made marketable, it is the duty of the receiver to do so. The nature of some of the problems thus involved have been aptly described as follows: 3

1 Stone, Ralph, "The Trust Company as Receiver," Trust Companies, Vol. 6 (March, 1908), pp. 171-5. Cf. Herrick, Clay, "Reform in Receiverships," Bankers' Magazine (New York), Vol. 79 (Oct., 1909), p. 534; and Abbot, Wm. T., "Services Rendered by Trust Companies under Receivership Appointments," Trust Companies, Vol. 15 (January, 1913), pp. 3-8. 2 Hayes, William, "Can a Trust Company Successfully Administer a Great Newspaper?" Bankers' Magazine (New York), Vol. 111, November, 1925, pp. 709-13.

Stone, Ralph, "The Trust Company as Receiver," op. cit., pp. 174-5.