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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."

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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."

THE PAYMENT OF COUPONS.

As agent for the payment of coupons, either in connection with a bond trusteeship or independently thereof, the trust company receives in advance a remittance equal to the total amount of the coupons due and payable at the next interest period. At and after maturity it pays the coupons as presented, preferably by check, though they are paid in cash when necessary.

Although coupons are payable to bearer, record is made of the names of the persons who present them at the counter, and of the names of the banks who present them through the clearing-house. Separate accounts are kept of the coupons of each interest period, and a record is kept of the numbers of the bonds from which the coupons are cut. The paid coupons are cancelled by the punching of holes in them, and are filed away by bond numbers. At stated intervals-sometimes once a monththese cancelled coupons are returned to the issuing corporation, which receipts for them. Statements of the accounts are sent at suitable intervals. Often the coupons are payable at the office of the trustee of the bond issue and also at the office of a fiscal agency in New York, Chicago or other large center. Ordinarily the duties and liabilities are clearly defined, but the default of the issuing corporation may involve the trustee in perplexing problems. One of these, which is as yet not fully decided by the courts, is whether funds remitted for the payment of coupons are to be considered a trust fund for the coupon holders, or as a part of the general assets of the corporation. The question does not, of course, affect coupon funds derived from particular sources whose revenues have been set aside for the payment of coupons. Other problems which may arise are the question of priority between coupons and principal when a mortgage is foreclosed, the question as to whether defaulted coupons should bear interest, and the question of missing coupons when the corporation wishes to have the mortgage discharged.

The work of paying interest on registered bonds differs from that of paying coupons chiefly in that the interest is remitted to the security holders instead of being held subject to their call. The fiscal agent is supplied with the necessary funds, and, unless it is itself the registrar of the bonds, with a list of the registered bondholders, their holdings and addresses. A check for the amount of his interest is mailed to each registered bondholder.

The

Trust companies act in a number of other capacities as fiscal agent for corporations, either receiving or disbursing funds, or both. exact duties involved are of course as varied as the kinds of agency, but are usually pretty well defined by the contracts; while the liabilities are determined by the ordinary laws of agency.

Proceedings Trust Company Section 1905, pp. 7-9. Report of Executive Com

mittee.

"Trust Companies" magazine, Vol. I, pp. 279-282, article by William J. Field. "Trust Companies" magazine, Vol. II. pp. 634-635, article by John H. Connellan. The "Banking Law Journal," Vol. XXI, p. 841, Decision New York Supreme Court.

ESCROWS.

In its simplest and most common form an escrow is a deed placed by the grantor in the hands of a third party, to be delivered to the grantee upon the fulfillment by the latter of certain specified conditions. Instruments other than deeds may be placed in escrow; as, for example, a mortgage or a note, but it must be an obligatory instrument or an instrument under seal. In addition to escrows in the strict legal sense, however, trust companies are often made depositaries of various things of value which are to be held for delivery under conditions such that they may be considered informal kinds of escrows.

To be strictly an escrow the delivery of the instrument by the grantor to the third party must be absolute, beyond power of recall, and its delivery to the grantee conditioned only upon the performance by him of his part of the contract. Having performed the conditions, the grantee may if necessary compel the delivery of the instrument; and the death of either party will not void the contract or prevent delivery. In fact, it is held that an escrow, upon performance of the conditions, becomes an absolute conveyance or grant even if the instrument itself is not delivered by the holder. Hence if A leaves with a trust company a deed with instructions that it is to be held and later to be turned over to B upon A's order, the instrument is not an escrow, for its delivery is not dependent upon conditions to be fulfilled by B, and the company is not acting as the holder of an escrow, but merely as the agent of A.

The duty of the holder of an escrow is to deliver the instrument to the grantee upon his performance of his part of the contract, or to withhold the instrument if the contract be not fulfilled; the one obligation being as important as the other. The holder's liability is measured by the degree of his faithfulness to such duty. If he wrongfully deliver the instrument when the conditions are unfulfilled, he may be liable to the grantor; while upon fulfillment of the conditions, the grantee may compel delivery. It is evident, therefore, that a trust company in undertaking the holding of an escrow should be sure that the contract is clear and definite and is thoroughly understood by both parties. While an oral contract may in some cases be legal, the only safe rule is to have the contract in writing and signed by both parties. Particular care should be taken by the trust company to avoid accepting an escrow whose conditions are so vague that question may arise as to whether they have been fulfilled, putting the holder in the position of an arbiter of a question whose decision might be a matter of doubt. The holder might then find himself in a very unenviable position, liable to prosecution by either party; or, if not legally liable, at least incurring the ill-will of one or both of the parties.

DEPOSITARY UNDER PLANS OF REORGANIZATION.

A common function of trust companies, especially in the larger cities, is that of acting as depositary of securities when a corporation is to be

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