Chapter House Circle of King's Daughters v. Hartford Nat. Bank & Trust Co.

• Decision Date: 10 July 1936
• Citation: 186 A. 543,121 Conn. 558
• Parties: CHAPTER HOUSE CIRCLE OF THE KING'S DAUGHTERS v. HARTFORD NAT. BANK & TRUST CO.
• Court: Connecticut Supreme Court

186 A. 543

121 Conn. 558

CHAPTER HOUSE CIRCLE OF THE KING'S DAUGHTERS v. HARTFORD NAT. BANK & TRUST CO.

Supreme Court of Errors of Connecticut.

July 10, 1936

Appeal from Superior Court, Hartford County; Earnest C. Simpson Judge.

Action by the Chapter House Circle of the King's Daughters against the Hartford National Bank & Trust Company to recover damages for an alleged breach of trust. From judgment for the plaintiff after trial to the court, defendant appeals.

Error as to damages only.

Charles Wells Gross and Wallace W. Brown, both of Hartford for appellant.

Arthur E. Howard, Jr., of Hartford, for appellee.

Edward J. Daly, Atty. Gen., Charles J. McLaughlin, Deputy Atty Gen., and Lucius F. Robinson, Francis W. Cole, Edward M. Day, and Lawrence A. Howard, all of Hartford, Frederick H. Wiggin, J. Dwight Dana, Harrison Hewitt, and William B. Gumbart, all of New Haven, and William J. Galvin, Jr., A. S. Albrecht, and Milton H. Richman, all of Hartford, amici curiæ .

Argued before MALTBIE, C.J., and HINMAN, BANKS, AVERY, and BROWN, JJ.

MALTBIE, Chief Justice.

On June 30, 1924, the plaintiff delivered to the United States Security Trust Company, to which the defendant has succeeded, a certain note and mortgage and certain cash to be held by the trust company as financial agent for the plaintiff, with authority to make investments at the discretion of its officers unless and until otherwise instructed by the plaintiff's representatives. The cash received by the trust company was invested and reinvested from time to time in notes secured by real estate mortgages, in accordance with a preference expressed by the representatives of the plaintiff. Sometimes the investment was in an entire mortgage and at others in an undivided interest in a mortgage. In either case the note and mortgage were taken in the name of the trust company individually, but in all cases it executed a declaration of trust, stating that the mortgage or a portion of it was held as financial agent for the plaintiff. The trust company from time to time made exchanges of investments between the fund it held for the plaintiff and other funds held by it in a fiduciary capacity, canceling the declaration of trust representing the investment taken from the fund held for the plaintiff and substituting a declaration representing the new investment. On October 31, 1928, such an exchange was made, the new investment being an entire note for $6,500 secured by a mortgage on real property in Hartford. The note and mortgage, which were dated March 19, 1923, were in the individual name of the Security Trust Company. The defendant on making this change entered on the books of its trust department, and placed in the file representing the plaintiff's fund, a declaration of trust to the effect that it held the note and mortgage as agent for the plaintiff, describing them by their date, the location of the property, the names of the makers, and the volume and page of record in the land records.

On October 31, 1928, when the mortgage was placed in the plaintiff's account, it fulfilled the requirements for a proper investment of the trust funds, and any loss resulting from default in it was due to general conditions and would have resulted had the note and mortgage been taken by the defendant in its fiduciary capacity. Thereafter the defendant or its predecessor received interest on the mortgage and transmitted it to the plaintiff until March 19, 1932, but since that date the defendant has received no net operating income from the note or property after paying charges, and consequently the plaintiff has received no return from the investment. The plaintiff received quarterly statements of the account, copied from ledger sheets of the trust company, which set forth all the transactions with respect to the account as regards principal as well as income, but none of these statements showed that the mortgage was held in the name of the trust company individually, although they did show that mortgages from time to time had been taken out of the account, for which, as the plaintiff must have known, no releases were executed by it, and that others had been substituted. A representative of the plaintiff's finance committee, which had made the original deposit with the trust company, in many instances when accounts were received, discussed them with representatives of the trust company and made extensive inquiries, which were fully answered, and there was no concealment of facts on the part of the defendant; but so far as the officials of the bank are aware, the representative never was informed before October, 1932, that the mortgage and note were held by the defendant in its own name individually, and never saw the mortgage and note.

As soon as the plaintiff received information that the mortgage was held in the name of the defendant individually, it disavowed the investment for that reason and made demand upon the defendant for the payment of the amount invested in the mortgage, with interest. On or about November 17, 1932, the mortgage note being in default, the defendant started foreclosure proceedings in its own name individually, and on December 23, 1932, took title to the premises. On that day it executed a declaration of trust reciting that it had held the mortgage as agent for the plaintiff and that it had become necessary to foreclose it, and declaring that the trust company held the real estate not for itself but as agent of the plaintiff. Thereafter the defendant offered to execute and deliver to the plaintiff a deed to the premises, but the plaintiff declined to accept it.

The loan represented by the mortgage was originally made from funds held by the trust company in one or more trust estates, and at no time has the bank had any individual financial interest in it, but it has always held it exclusively in a ? ciary capacity. In making the transfer to the account of the plaintiff, the defendant acted solely in a fiduciary capacity for the buyer and seller and no commission fee, or other profit was collected or charged by the defendant, and the transfer was made at par with accrued interest. The method of making the transfer was in accordance with a practice, extending back at least thirty-five years, of the defendant and other corporate trustees to take notes and the mortgages securing them in the name of the corporation individually and issue declarations of trust in separate certificates identifying the loans or an undivided part of them as the property of particular trusts. All investments of the defendant held in a fiduciary capacity are in a distinct department under the care and management of separate officials from those in its banking department, are kept in separate vaults and safes apart from those of the bank, and are never mingled with the property of the bank. Each investment in a mortgage loan is evidenced by a separate declaration of trust executed by the defendant in its fiduciary capacity, and is recorded on the books of account of the trust department as the property of the particular trust in question; these books being entirely separate and distinct from the books of the banking department.

The case has been argued before us upon the basis that the defendant was holding the fund as a trust. The claim of the plaintiff is that the defendant by investing the fund in a note and mortgage in which it was named payee and grantee in its individual capacity, instead of in its capacity as financial agent for the plaintiff, committed a breach of trust such that the plaintiff might disavow the transaction, and, having done so, recover of the defendant the amount invested in that note and mortgage, with interest. We do not approach the issues in an effort to search out mere technical breaches of trust; that there may be some practical advantages growing out of the investment of trust funds by a corporate trustee in its individual name may be conceded; and a practice which is found by the trial court to have been followed by trust companies of the highest standing, as undoubtedly is the defendant and others whose counsel have appeared before us as amici curiæ, for at least thirty-five years, is certainly not lightly to be held illegal. Unless there is some substantial breach of legal requirements, as they are to be interpreted in the light of present day conditions, or some real substantial danger of loss or threat to security of funds held by trust companies, by reason of such investments, we should not hold them to be contrary to law.

On the other hand, we cannot forget that if the defendant and these other banks and trust companies, well managed and thoroughly conscious of their duties as fiduciaries, may invest in mortgage loans taken in their individual names, so may other banks and trust companies not so well managed or so zealous for the welfare of those entitled to the benefit of the trusts thus held. Also it is to be remembered that the controlling principle must be held applicable to state as well as national banks and trust companies. The practice which the defendant bank seeks to have us sanction has no basis in any decision of this court or any statute of this State, but it has been adopted by the banks and trust companies upon their own responsibility, unchecked by the bank commissioners of the state or the national bank examiners. If there should be substance to the fear expressed by the Attorney General as to the effect of holding that practice to be illegal, that is no sufficient reason for our giving our sanction to it, if it be contrary to law.

It is ancient but still sound law, as applied, at least, to an individual trustee, that in investing the trust fund or any part thereof in a note or mortgage he should not take the...