Mortgage-Trustee Clauses Annotated

Preliminary. Forms of mortgage-trusts must necessarily differ in order to express the intention of the parties under the varying circumstances under which they are made. In the larger proportion of these changing provisions, the trustee is not greatly interested. It should know, however, that where legislation' has provided for the rights and duties incident to trusteeship, these need not be stated in the trust-deed.2 It will therefore read a proposed trust, in the light of such legislation, and the general implied duties spoken of in section 56 of this book. It will not rely upon all its obligations being expressed within the four corners of the instrument.

For its protection against excessive liabilities, and to govern its compensation, conduct, resignation, removal, etc., certain covenants, which, for convenience, may be termed "trustee clauses," are usually inserted. Examples of such clauses, with notes covering their judicial construction, are given below:

1. For citation of statutes of several states prescribing the rights and duties of the mortgagees of railroads, see Jones on Corporate Bonds and Mortgages, Sec. 316. An example of legislative provision for the construction to be placed upon particular covenants is found in Sec. 254 of the New York Real Property Law.

2. Mercantile Trust Co. v. Portland & Ogdensbury R. (1882), 10 Fed. 604.

General Exemption of Liability Except for Willful Default.

"The Trustee shall not be liable except for its own willful and intentional breaches of the said

trust."

Such a clause was held in Black v. Wiedersheim3 to exonerate a mortgage trustee from liability for alleged breaches of trust whereby the value of plaintiff's bonds had been completely lost. The judge said that with the above provision in mind, "he had read the testimony with care, and I find no evidence that should have been submitted to the jury of a 'willful and intentional breach of trust.' The defendant may perhaps have made mistakes, or may have misconceived his obligations, but to call the omissions to act of which the plaintiff complains 'willful and intentional breaches' of his trust seems to . me to be impossible."

In Tuttle v. Gilmore' it appears that the above clause was inserted in a conventional trust deed. Though its general effectiveness was recognized in the opinion, it did not prevent the trustee from being held liable for losses arising from his having made sales or investments without instituting proper inquiries. The Court said: "In my judgment it is clear both from principle and authority, that the liability imposed on and accepted by a trustee may be limited by the terms of the instrument creating the trust. If there is such a clause of limitation the rule for measuring the trustee's liability is to be sought in that clause properly construed. In construing such a clause, the meaning to be attributed to it should be consistent with the purpose and object of the trust, and a strict rule of construction should be applied

3. (1906), 143 Fed. 359.

4. (1883), 36 N. J. Eq. 617.

as against the claim of restriction. But if, when so construed, a limitation on the liability of the trustee was clearly intended, the trustee is entitled to the benefit of it."

A similar clause was likewise considered in Hollister v. Stewart et al' in fixing the liability of mortgage trustees. It was there held that as the acts complained of were done in good faith, judgment should run against "the trustees as such and not personally.'

The New York Court of Appeals has said: “The law requires the exercise of good faith and no matter how strong the provisions to shield from liability may be, there is no protection unless good faith is observed." Certifying the Bonds.

"The bonds secured hereby shall not be valid until the certificate has been indorsed thereon by the trustee."

Interest coupons detached from the bonds under a mortgage containing the above provision prior to the certification of the bonds by the trustee do not entitle the holder to payment. "The security of the mortgage inured only to the bondholders, as such, and to the extent only of the debt and accrued interest as represented by the bonds when certified by the trustee, since not until that act was performed did the bonds come under the lien of the mortgage."

So where bonds were stolen before the trustee's certificate was attached, there could be no claim under

5. (1889), 111 N. Y. 644, 19 N. E. 782. See also Hunsberger v. Guaranty Trust Co. (1914), 150 N. Y. Supp. 190, and Partridge v. American Trust Co. (1912), 211 Mass. 194, 97 N. E. 925.

6. Industrial & General Trust, Ltd. v. Tod (1905), 180 N. Y. 215, N. E. 7. Holland Trust Co. v. Thomson-Houston El. Co. (1902), 170 N. Y. 68, 62 N. E. 1090, affirming 62 N. Y. App. Div. 299, 71 N. Y. Supp. 51.

them, as they were void. The court said: "The act of the trustee, when performed, was only to authenticate, that is, 'to determine as real and true;' until performed the bonds rested in 'supposition'; when performed its effect was to render them obligatory, and pronounce them genuine. As it has not been performed, the bonds were not complete or perfect and have not become the contracts of the railroad company."

Indemnity and Written Request to Act.

"The Trustee shall not be under any obligation to take any action toward the execution or enforcement of the trust hereby created, which, in its opinion, shall be liable to involve it in expense or liability, unless one or more of the holders of bonds hereby secured shall as often as required by the Trustee furnish a reasonable indemnity against such expense or liability; nor shall the Trustee be required to take any action in respect of any default unless requested to take action in respect thereof by a writing signed by the holders of not less than twenty-five per cent in amount of the bonds hereby secured, then outstanding and tendered reasonable indemnity as aforesaid, anything herein contained to the contrary notwithstanding. But neither any such notice or request, nor this provision therefor, shall affect any discretion herein given to the Trustee to determine whether it shall take action in respect of such default, or to take action without such request."

No Duty to Record.

"It shall be no part of the duty of the Trustee to see to the filing, refiling, or recording of this mortgage."

8. Maas et al. v. Mo., Kan. & Tex. Ry. Co. et al. (1880), 83 N. Y.

Insertion of the above clause or one of similar import is an essential protection in the light of a decision of the Circuit Court of Appeals in the second Circuit that a mortgage trustee, under a deed which contained no specific direction as to the trustee's duty to record, "is chargeable with any loss resulting from his neglect to record the trust deed." The claim of negligence by the trustee in this case, however, was held to be barred by laches and the New York statute of limitation. Such a clause does not prevent a trust company from making a special independent contract with a purchaser of bonds to record the mortgage and rendering itself liable for failure to do so.10

Exempting Trustee From Liability to See to Application of Funds.

"Nothing herein contained shall be so construed as requiring the said trustee to inquire into the application of the funds, or of the bonds, which it may deliver over on receipt of such orders or requests as aforesaid."

The above clause was held not to apply in defense of a trust company, when the claim against it was based upon its alleged obligation to exact from the mortgagor a statement showing the purposes for which each issue of bonds was to be used."

Application of Sinking Fund.

"The sinking fund shall be applied by the trus

9. Miles v. Vivian et al. (1897), 79 Fed. 848.

10. McCauley v. Ridgewood Trust Co. (1911), N. J. 79 Atl. 327. 11. Rhinelander v. Farmers' Loan & Trust Co. (1902), 172 N. Y. 519, 1. c. 529.