vested." I have no doubt that a trust company investing in any kind of spurious bond or security would be held liable for real validity, however honestly deceived it were. I greatly doubt whether an individual trustee always would be held. The courts in the cases refusing to exonerate the trustee held as they did, not because the bonds were of a spurious government, but of a government in rebellion to the United States government.

9930

In Massachusetts there seems to be a difference in the rule as to investment by an individual trustee and that by a trust company in a fiduciary capacity. Thus, if a guardian sells property "in order to place on interest or invest the proceeds, he shall make the investment according to his best judgment, or in pursuance of any order of the court relative thereto."29 But if a trust company is such guardian it may make investments "in authorized loans of the United States or any of New England states, counties, cities or towns. And in Michigan the trustee of an estate appointed by the probate court to invest or distribute it must do so as ordered by the court. But if a trust company is appointed, it may invest trust funds "in bonds secured by mortgages, or notes and mortgages on unincumbered real estate within the State of Michigan * * * or in public stocks and bonds of the United States, or any state of the United States that has not defaulted on its principal or interest within ten years: or of any organized county or township or incorporated city or village, or school district in this state, or in any other such state, duly author

31

29. Mass. R. S. Stats. 1902, p. 1319, Sec. 22. 30. Mass. R. S. Stats. 1902, p. 1115, Sec. 36. 31. Howell's Annos. Stat. 1913, Sec. 12142.

ized to be issued, or in such real or personal securities," they (the directors) may deem proper.

*

1932

Under a New York trust company act, it would be difficult to arrive at the conclusion that a trust company acting in a fiduciary capacity would be exonerated for its mistake in investing in invalid securities. The statute says: "All investments of money ** in either of such (fiduciary) characters shall be at its sole risk and for all losses of such money, the capital stock, property, and effects of the corporation shall be absolutely liable, unless the investments are such as the courts recognize as proper when made by an individual acting as trustee, executor, administrator, guardian, receiver, committee, or depositary, or such as are permitted in and by the instrument or words creating or defining the trust. The statute then goes on to give to fiduciary obligations a preference over other debts in event of dissolution of the trust company.

34

33

Another section of this act authorizes investment by a trust company of fiduciary funds in the discretion of the company in the securities of the kind in which its capital is required to be invested, or in the stocks or bonds of any state of the United State, or in such real or personal securities as it may deem proper. Its capital is required to be invested "in bonds and mortgages on unincumbered real property in this state not exceeding sixty per centum of the value thereof, or in the stocks or bonds of this state, or of the United States, or of any county or incorporated city of this state duly authorized by law to be issued." Therefore there is given to a trust company a wide latitude in the invest

32. Ibid. Sec. 6486.

33. N. Y. Anno. Consol. Laws 1909, Ch. 10, Sec. 190.

34. Ibid. Sec. 193.

ment of fiduciary funds, but their investment has back of it a preference over all other obligations of the trust company.

As to investments by an individual trustee, New York statute provides that he "may invest *** in the same kind of securities as those in which Savings Banks of this state are by law authorized to invest the money deposited therein and the income derived therefrom and in bonds and mortgages on unincumbered real property in this state worth fifty per centum more than the amount loaned thereon."35 Investments by Savings Banks of funds deposited with them include (1) obligations of the United States; (2) obligations of New York; (3) obligations of any other state not having defaulted in ten years; (4) stocks or bonds of any city, county, town, village, school district of New York; 5) stock or bonds of any incorporated city in any other state admitted into the union prior to 1896 under certain conditions; (6) bonds and mortgages on unincumbered real property up to 60 per cent if improved and 40 per cent if unimproved; (7) mortgage bonds of certain railroad companies.36 Here it is perceived there is a wide discretion given to individual trustees. Indeed it would appear to be somewhat wider than to trust companies acting as trustees. There is, however, a difference in what one may invest in and what the other may not invest in.

A New York Court of Appeals opinion (Villard et al. v. Villard, Dec. 28, 1916), holds a trust company liable as a successor trustee for continuing unauthorized investments and speaks of such a company's special

35. Ibid. p. 4187.

36. Ibid. p. 407, Sec. 146.

knowledge of investments being a reason for the executors of the estate not owing a special duty to inform it of the investments made by them as distinguished from those made by the testator.

§36. Liability of a Trust Company for Trust Funds. Herein, I think, consists the prime reason for the preference of a trust company as a fiduciary over that of an individual. According to the general rule, an individual, who is a trustee is personally liable to his cestui que trust for any loss or default in regard to the trust property, but there is no lien or preference given for its payment or security out of the general property of the trustee. It is true he may follow trust property, either in its original or converted form, if he can trace it, but this rule has many limitations, and apart from it the trustee stands as an ordinary debtor.

In all trust company statutes, however, the trust fund creditor is peculiarly favored. Thus in the New York statute and in others of its type he is given a general preference over all other of the creditors of a trust company. When it is considered that the general solvency of trust companies in their banking and other business is aided in strict regulation by state officers, one would have to imagine a most disastrous cataclysm in their affairs that would take away the security from their first preference debts.

Then take a trust company under such a law as in Missouri, it being of the same character as others, and it is seen that every trust company must maintain as a deposit with the proper officer of the state a fund in specified securities and: "The fund so deposited * * * shall be primarily liable for the obligations of such company as guardian, curator, executor, administrator, assignee, receiver, trustee by appointment of court or

39

9937

under will, depositary of money in court, guarantor or surety in or upon any bond required to be given under the laws of this state, or other fiduciary capacity under appointment of any court, and, as well, all bonds, contracts or guarantees of every kind or description, whereby the fidelity of persons holding places of public or private trust is insured or guaranteed.' This fund is seen not to be solely, but "primarily" liable for such obligations, and in addition there is the same right of a trust fund creditor against the trust company and its other assets as a cestui que trust has generally against the estate of an individual trustee, that is to say, he shares pro rata with others.38 This question is well treated in a New Hampshire case where a trust company's assets were being distributed in insolvency. There were three classes of creditors (1) depositors in the savings department, (2) holders of debenture bonds, and (3) unsecured creditors. It was ruled that the first two classes were entitled to share with the unsecured creditors in the distribution of the unpledged assets, as to so much of their claims as were not satisfied by the application of the special funds created for their benefit. The court, in reasoning, said: "All corporations which engage in the banking business have a paid up capital. One purpose of this capital is to create a fund available to pay the claims of all those who have dealings with such companies. * * * * According to the view of the general creditors, their claims must be paid in full out of this fund before any of it is available to pay the claims of depositors in the savings department of such an

37. R. S. Mo. 1909, Sec. 1140.

38. Goff v. Goff (1903), 54 W. Va. 364, 46 S. E. 177.

39. Bank Commrs. v. Security Trust Co. (1908), 75 N. H. 107, 71 Atl. 377.