There is the same distinction in a federal decision in regard to statute of limitations in which the same mortgage deed was involved.20

While these cases distinguish between express and implied covenants, so far as the statute of limitations is concerned, they nevertheless show the active duties imposed on a trust company undertaking this kind of a trust. The objection as to the statute of limitations easily might be avoided by making other covenants, than the one to foreclose on default, express covenants.

§ 55. Details in Form of Mortgage Deeds of Trust. The form of a mortgage-deed of trust as perfected after much litigation may be referred to as somewhat typical in its nature. It conveys the fee to the trustee; provides for grantor remaining in possession until default; that grantor will pay the bonds and coupons secured, they being described in serial numbers: that grantor may sell old material free from the mortgage-deed of trust; sometimes providing for trustee releasing portions of the property upon condition that proceeds are turned over to trustee or reinvested in other property; that grantor shall pay all taxes and liens and maintain the property in repair; that principal shall be declared due upon default in interest, either upon initiative of the trustee or by a certain proportion of the bondholders. If it is provided that the bonds shall become due after thirty days from default in payment of coupons, this is self-executing;" that the trustee may enter upon default; that the trustee be vested with power

20. Frishmuth v. Farmers' Loan & Trust Co. (1899), 95 Fed. 5; affirmed (1901), 107 Fed. 169.

21. Rumsey v. People's Ry. (1900), 154 Mo. 215, 55 S. W. 615; New Jersey Paper Board & Wall Paper Mfg. Co. v. Security Trust & SafeDeposit Co. (1899), 57 N. J. Eq. 603, 42 Atl. 746.

of sale. This, however, is regarded as an alternative and not an exclusive remedy." A provision is generally inserted exempting the trustee from any and all liability except for willful misconduct or gross negligence. Also the instrument should provide for the appointment of a new trustee in case of resignation or removal.

This is the ordinary frame of a mortgage-deed of trust. There may be other provisions agreed upon by the parties, and so far as bonds and coupons are secured, it is provided also that the trustee shall certify on the bond that it is one of the issue referred to as being secured by the mortgage-deed it purports to come under. Examples of various "trustee clauses" and judicial construction thereof are contained in the appendix to this book.

§ 56. Nature and Extent of Implied Duties. Mortgage trustees "are regulated by the general rules of law which affect all trustees."23 In the absence of express limitations, they should "exercise the care and diligence which would naturally be expected of an intelligent person acting in like circumstances to protect his own mortgage." Such a person would naturally examine the title and the security. He would ascertain that the instrument was legal in form and authorized by law and by the corporation, and was properly signed. He would see that the mortgage was recorded. He would examine the property at intervals to ascertain whether its value was depreciating. He would ascer

22. Dow v. Memphis & L. R. R. (1884), 20 Fed. 260; Morgans L. & T., etc., Co. v. Texas, etc., Ry. (1890), 137 U. S. 172, 34 L. Ed. 625; McFadden v. Mays Landing, etc., R. R. (1891), 49 N. J. Eq. 176, 22 Atl.

932.

23. First Nat. Ins. Co. v. Salisbury (1881), 130 Mass. 303.

24. Patterson v. Guardian Trust Co. (1911), 144 N. Y. App. Div. 863, 129 N. Y. Supp. 807.

tain that adequate insurance was maintained and that taxes were paid. Upon default in payment of interest or principal he would bring foreclosure proceedings. And he would be prepared to bid the property in, so as to prevent its disposal at a price that would not protect the mortgage loan. Mortgage trustees, however, do not usually care to assume such responsibilities, and to protect themselves therefrom, limitations and specific powers are inserted in the trust deed.

25

It appears to be necessary to negative most of the duties just enumerated to prevent their assumption by the mortgage trustee. And though it would appear that such a trustee has the implied power to bid at a foreclosure sale in order to protect the bondholders,' it is the usual and safer practice to specifically provide for this contingency.

26

In addition to the duties implied by the acceptance of such a trust, the very terms of the deed will necessarily raise implications in the sense referred to in an early case," where it was said that:

"All contracts are, more or less, subject to implications, constructive additions, and implied limitations. These are the powers by which courts, in matters of contract, are enabled to make a brief memorandum, which does not express one-tenth part of what is intended, speak truly, and fully the mind of the parties. * * But upon no subject is there so much demand for the exercise of construction, and of judicial implications, as in regard to trusts, and especially trusts of

25. See Appendix, page 460.

26. Nay Aug Lumber Co. v. Scranton Trust Co. (1913), 240 Pa. St. 500, 87 Atl. 843, 35 Am. & Eng. Anno. Cas. 235.

27. Sturges v. Knapp (1858), 31 Vt. 52.

this complicated and public character," i. e., mortgage trusts given to secure the issuance of bonds.

§ 57. Liability of Trustee for Damages for Breach of Trust.-Parties. Failure to properly fulfill an express or implied duty under the trust deed imposes liability to suit for damages. 28 This liability runs only to the mortgagor and to the bondholders. "Strangers to the trust deed" cannot hold the trustee responsible for performance or non-performance of the trust. The question of a single bondholder suing in his own behalf was thus commented upon in a New York case:30

29

"The cause of action, if any, for neglect of duty on the part of the trustee and for an accounting, was in the corporation or in the bondholders, or both, and could not be enforced by a single bondholder in his own right, but only by an action by all the bondholders or by a representative action in their behalf, or by an action by the corporation for them, or by both the bondholders. and the corporation. The liability of the respondent is limited, and it runs to all of the bondholders, and the amount of its liability to them constitutes a fund in which they are all interested."

§ 58. Liability for Misrepresentations as to Quality and Extent of the Security. The trustee is not responsible for the accuracy of statements indorsed upon the bond or contained in the trust deed as to the

28. See note on "Liability for Negligence of Trustee in Corporate Mortgage to Bondholder," 35 Am. & Eng. Anno. Cas. 239-241 (1915-A).

29. Kaulbach v. Knickerbocker Trust Co. (1911), 148 N. Y. App. Div. 331, 132 N. Y. Supp. 350.

30. Knickerbocker Trust Co. v. Condon (1911), 147 N. Y. App. Div. 871, 133 N. Y. Supp. 95, affirmed without opinion (1914), 212 N. Y. 613.

quality and extent of the security." An extra precaution, however, against claims of this character is provided by inserting a specific clause to that effect in the trust deed. 32

The duties of the trustee are ordinarily so far removed in this regard that it has no presumptive authority to make representation to a proposed purchaser as to the value of bonds or the relative priority of the mortgage. But a fraudulent statement by a trust company, made by duly authorized officer or employe, will, of course, render it liable for the damage caused thereby.

33

34

§ 59. Instructions of Mortgagor and Bondholders as Protection to Trustee-Majority Rule. A trustee is protected from liability to a bondholder, whose coupons are excepted from payment, where it so acts. under instructions from the mortgagor, for, in respect to payment of interest it was acting as the agent of the debtor corporation. But with relation to its duties as trustee, the trust company is acting for the bondholders. Instructions or acquiescence by them should be sought, if there is doubt as to what should be done in their behalf, or advice of the court should be secured in the manner set forth in the next section of this book.

35

The bondholders who sanction acts or omissions of

31. Tschetinian v. City Trust Co. (1906), 186 N. Y. 432 N. E.; Dreifus v. Union Savings Bank & Trust Co. (1913), 38 Ohio Cir. Ct. R. 46; Byers v. Union Trust Co. (1896), 175 Pa. St. 318, 34 Atl. 629; Hunsberger v. Guaranty Trust Co. (1914), 150 N. Y. Supp. 190.

32. See Appendix, page 468.

33. Davidge v. Guardian Trust Co., 203 N. Y. 331, 96 N. E. 751, reversing 136 N. Y. App. Div. 78.

34. Nash v. Minnesota Title Ins. & Trust Co. (1893), 159 Mass. 437, 34 N. E. 625.

35. New England Water Co. v. Farmers' L. & T. Co. (1900), 54 N. Y. App. Div. 309, 66 N. Y. Supp. 811.