Opinion
October 4, 1938.
December 5, 1938.
Trusts and trustees — Due care — Common skill and prudence — Liability — Retrospection.
1. A trustee is liable for supine negligence or wilful default, but he will not be surcharged for a loss which has occurred in case he has exercised common skill, common prudence and common caution. [587]
2. In the determination of what is business judgment or whether the trustee used due care, too much stress must not be laid on retrospection. [587]
Argued October 4, 1938.
Before KEPHART, C. J., SCHAFFER, MAXEY, DREW, LINN, STERN and BARNES, JJ.
Appeals, Nos. 143-145, March T., 1938, from decrees of O. C. Allegheny Co., Feb. T., 1935, No. 197, in Estate of James Renwick Smith, deceased. Decree affirmed in each appeal.
Audit of account of trustee. Before TRIMBLE, P. J.
Adjudication filed dismissing exceptions to account of trustee. Exceptions to decree nisi dismissed, before TRIMBLE, P. J., MITCHELL and CHALFANT, JJ., opinion per curiam, in part as follows:
"James Renwick Smith created a trust inter vivos in writing for the benefit of himself and others, and designated the Fidelity Title and Trust Company (now Fidelity Trust Company) as trustee to execute his purposes. He died on November 13, 1934, whereupon his trust terminated, and Bessie S. Sands, Annie Smith Rice, Nellie S. McElroy, and Thomas S. Smith, children of James Renwick Smith, all of whom were living and of full age, came into possession of interests which were vested by the Deed of Trust.
"Three of the said children, Bessie S. Sands, Nellie S. McElroy, and Thomas S. Smith, are the exceptants. Mrs. Rice did not join as an exceptant. Her husband George is a real estate appraiser employed by the Fidelity Trust Company.
"The settlement which James Renwick Smith made for himself and his children is dated December 28, 1922, when he was over eighty years old. This trust continued during the remaining twelve years of his life. The settlor was introduced to the trust officer of the Fidelity Title and Trust Company (now Fidelity Trust Company) by his son-in-law Mr. Rice. He stated that he was getting older and was bothered about the handling of his real estate and wanted to be relieved of the worry and care of it. He wanted the Fidelity Title and Trust Company to have charge of it, so that upon his death it would go to his four children.
"The settlor conveyed to the trustor for the consideration of one dollar the following real estate . . .
"He divested himself of all interest in said real estate, together with easements, appurtenances, and improvements relating thereto or connected therewith, and gave his trustee the following powers of management, control, and disposition: . . .
"4. To pay to the settlor from net rents interest, income and profits (not subject to his control or engagements) such sums as the trustee shall deem proper for his liberal and comfortable support and for any family or establishment he may have or should support and to reinvest and accumulate the remainder.
"5. To convey and assign upon the death of the settlor the whole of the corpus with its accumulations to the settlor's children, share and share alike, with the right of representation in their children. . . .
"The sixth exception to the account raised the question whether a payment to John A. Sharp, the purchaser of the trustor's real estate situated at Corry Street, was proper. Mr. Sharp did not buy this property for his own purposes, but he represented others. The testimony does not show that the trustee knew that he was purchasing the real estate for the Baltimore and Ohio Railroad. The payment was made to Mr. Sharp for services which he rendered to the trustee for selling the real estate. The trustee was not concerned about Mr. Sharp's employment by the vendee. It was interested in getting a very large price for the property sold. Of course, if the trustee had known that Mr. Sharp represented the Baltimore and Ohio Railroad, and was paid by that corporation, he could not recover any commission from the vendor. All the trustee knew was that the Baltimore and Ohio Railroad was acquiring real estate in the neighborhood. The payment of the commission to Mr. Sharp, in these circumstances, is not objectionable.
"The seventh exception complains about the accountant's commission of $1,428.81, which is 3% on $47,627.00, the amount of the principal designated in the account as receipts. The gross estate is $112,293.90. The remainder of this amount not designated as receipts is $64,666.90, upon which no charge of commissions is made.
"The eighth exception claims that the accountant mismanaged the affairs of the estate, and a surcharge of all compensation is requested.
"The tenth exception would deny commission on the principal of the trust estate invested in accountant's mortgage pool, because it is excessive and premature.
"The twelfth exception complains about the credit of 5% commission or $3,173.21, taken on $63,464.29, of income derived from the principal because exceptants allege this amount was unearned and is in part a double charge.
"These exceptions, seventh, eighth, tenth, and twelfth, will be disposed of together.
"The declaration of trust is silent on the question of commission or compensation of any kind. In these circumstances, this Court has generally allowed 5% of the income and 3% on the principal as compensation for the management of the trust. There would be no reason why this trustee should not have similar payment for services, unless the exceptants' charge of mismanagement can be sustained.
". . . Exceptants believe that nothing commendable was done by the trustee. They give no credit. It is somewhat shortsighted that they do not because it appears plainly, at one point of the case, that the trustee collected, without any cost, the sum of $7,500.00 for damage done to their South Avenue real estate. They, the remaindermen, had constant knowledge of the transaction between the trustor and the trustee, but they did not raise any objection during the administration of the trust. Now, however, they complain of all manner of neglect. Notwithstanding the fact that they knew some of the houses were at least eighty years old, were out of repair, much out of date, and vacant; that they needed constant watching, but were continually invaded by vagabonds who caused much injury and destruction, and admitting some supervision was given (nearly $15,000.00 was spent for repairs), nevertheless they would take away all compensation.
"In the ninth exception they seek to be specific in showing negligence and mismanagement. It is true that a mortgage of $5,760.00 on real estate valued at one time at $21,550.00 was foreclosed and the mortgaged premises, which had been a portion of the trust res, was lost. Of course, if the trustee had funds available for the payment of debts, and refused to pay a mortgage on real estate worth more than $21,000.00, the real estate should not have been lost. The trustee's duty was to pay the mortgage, but this is not the objection. The exceptants do not at any time allege that this real estate was worth more than the mortgage. They say that the mortgage should have been paid by the trustee, and because it was not paid, the interest paid thereon should be charged to the trustee.
"The facts as shown in the testimony are these: the mortgage was dated May 31, 1916, and payable, May 31, 1919, and when the Fidelity Trust Company assumed management of the Smith trust estate, the mortgage was in default in that the principal was unpaid. There were times, thereafter, when the trustee had sufficient money on hand to pay the mortgage, and, in fact, did pay other mortgages of the trustor, and invested other monies. Mr. Reed, the trust officer for the trustee, admits that in March or April of 1926, the trustee had money on hand and could have paid the McKelvy mortgage, and this condition continued until the termination of the trust. With money on hand, sufficient to pay the mortgage debt, the trustee found itself like every person else in this period of depression, with an unsalable piece of real estate covered with a mortgage. Mr. Reed testified that it was James Renwick Smith's '. . . policy not to pay that mortgage off. . . . We just continued his policy.' A part of the 'policy' was that it was good business judgment to owe the mortgage because the real estate could be sold more easily with a mortgage on it than if clear.
"Mr. Smith's estate had diminished much in value. It was necessary for the trustee to use the utmost care so that his estate would not be burdened with unproductive real estate. If the trustee had paid the mortgage debt, there would have been practically no income. The appraisement of the McKelvy property did not reflect its value at the time of the mortgage foreclosure. It was the depression, prevalent at that time, which wiped out the appraised value.
"Exception ten denies the right to commission on the investment in a mortgage pool. It is not easy to understand why a trustee is not entitled to compensation when money has been invested in a mortgage pool. The participating interest is before us for distribution and, in so far as the trustee is concerned, its responsibility for the investment is discharged if distribution in kind is made. If we had nothing to consider, other than the exception, we are left to conclude that 5% of the amount invested in the mortgage pool taken as compensation is, at least, excessive, and in any event, to allow it now, is premature.
"It may be that the mortgage pool will not pay out one hundred per cent, but, if this may be used as an argument, then trustees must always wait until they find out whether beneficiaries may receive the full appraised values of the inventories of estates. We are expected to say that the value of the interest in the mortgage pool has a certain fixed value, before any percentage may be allowed as compensation. We believe this is absurd. It can not be fairly said that there was negligence in the management of this estate, nor from any viewpoint, that the compensation credited is excessive to the extent of a penny. On the other hand, since all of these charges have been freely made by these exceptants against a trustee which does not have any reputation for negligence or carelessness in managing estates, it is but fair to say that, in the management of this very difficult trust, the trust officers of the Fidelity Trust Company have been diligent and very poorly paid for their services.
"We have continuously, over objection, and scarcely without exception, made distribution in kind in mortgage pools. The necessity for this is so obvious that it only requires the statement that, since the legislature has authorized mortgage pools as legal investments, it would be financially disastrous to require fiduciaries to pay cash when, without fault, the value of the mortgage pool is uncertain. Equity requires distribution of participating interests so that on the liquidation of the pool they may receive the equal proportionate value of their shares."
Exceptants appealed.
Errors assigned, among others, were dismissal of exceptions.
Harold R. Schmidt, with him W. Denning Stewart, of Stewart Lewis, and William J. Kennedy, for appellants.
Park J. Alexander, for appellee.
Appellants complain that the trustee was not surcharged at the audit of its account. The applicable measure of responsibility was stated in Drueding v. Tradesmens B. T. Co., 319 Pa. 144, 147, that " 'In the determination of what is business judgment, too much stress must not be laid on retrospection. Our after-sight is not to be the sole judge, though it may be useful.' . . . 'It is well settled that a trustee shall not be surcharged by a court of equity for a loss which has occurred, in case he has exercised common skill, common prudence and common caution; but for supine negligence, or wilful default he shall be responsible.' "
The facts found by the learned court below, to which the rule was applied, are supported by evidence, and must therefore be accepted. A number of exceptions originally filed were withdrawn by the exceptants. We have considered the record in the light of the appellants' arguments, some, for the first time presented on appeal. The nature and character of the exceptions heard and disposed of, together with the reason for the action taken, sufficiently appear in the extracts which we have made from the opinion of the learned court below and which are printed in the reporter's statement of the case.
In each appeal the decree is affirmed, costs to be paid by appellants.