Dabney v. Chase Nat. Bank of City of New York

• Decision Date: 30 April 1952
• Docket Number: Docket 22129.,No. 115,115
• Citation: 196 F.2d 668
• Parties: DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.
• Court: U.S. Court of Appeals — Second Circuit

196 F.2d 668 (1952)

DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.

No. 115, Docket 22129.

United States Court of Appeals Second Circuit.

Argued February 4, 1952.

Decided April 30, 1952.

Lewis M. Dabney, Jr., New York City, John A. Anderson, New York City, of counsel, for appellant.

Milbank, Tweed, Hope & Hadley, New York City, A. Donald MacKinnon, New York City, Eugene H. Nickerson, S. A. Lourie, New York City, of counsel, for appellee.

Before SWAN, Chief Judge, and L. HAND and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

The careful and extended opinion in the district court is reported in 98 F.Supp. 807, and, when read with our opinion upon the earlier appeal, Clarke v. Chase Nat. Bank, 2 Cir., 137 F.2d 797, states the conflicting positions of the parties and the facts as they were developed at the trial with enough detail to allow us to proceed without more to a discussion of the questions involved. The controlling issue is how far the corporate trustee of two series of unsecured bonds is bound to abstain from transactions with the debtor which may give it an advantage over the bondholders, its beneficiaries. More particularly, it is what doubts of the continued solvency of the debtor should bar such a trustee from collecting a personal claim against the debtor. The judge adopted the same standard that charges the creditor of an insolvent debtor with a preference under the Bankruptcy Act; and the first question is whether his findings must stand except so far as they are "clearly erroneous." We shall first address ourselves to the "Second Cause of Action": i. e. the bank's collection in 1932 of its loan of $4,000,000, reserving for the time being the "Fourth Cause of Action": i. e. the exchange of securities in August, 1934. The finding that the debtor, "Ageco," was insolvent in 1932 is one of fact, and certainly not "clearly erroneous," although, as will appear, that turns out to have been irrelevant, as we view the law. (Incidentally, the finding of insolvency in 1934 was a fortiori not "clearly erroneous.") The information which the bank in fact had when the loan was paid is not in dispute, and we shall assume for argument that the judge was right in concluding that it was not enough to charge a creditor in bankruptcy with a preference under § 60, sub. a of the Act, 11 U.S.C.A. § 96, sub. a, although that too we deem irrelevant. There remain two questions: (1), whether a lesser degree of notice will serve to charge the bank than would charge a creditor; and (2), whether, if so, the bank had notice enough to charge it in this case. The finding on the first question we may reverse, if we disagree with it, as we do, even though our disagreement is not so positive that we think it "clearly erroneous."¹ The duty of a creditor to take no more than his aliquot share of the assets of an insolvent debtor is imposed by law; the duty of a trustee, not to profit at the possible expense of his beneficiary, is the most fundamental of the duties which he accepts when he becomes a trustee. It is a part of his obligation to give his beneficiary his unidvided loyalty, free from any conflicting personal interest; an obligation that has been nowhere more jealously and rigidly enforced than in New York where these indentures were executed.² "The most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty * * * In some relations the fiduciary element is more intense than in others; it is peculiarly intense in the case of a trust."³ We should be even disposed to say that without this duty there could be no trust at all.

The defendant seeks to distinguish York v. Guaranty Trust Co., 2 Cir., 143 F.2d 503, 514 and Dudley v. Mealey, 2 Cir., 147 F.2d 268, 272, where we decided that the failure of a corporate trustee to use a power would make him liable, if his decision were induced in any degree by self interest; but the principle in those cases was precisely the same as here: i. e. whether the circumstances under which a trustee exercises a power are such that his decision may be influenced by his own interest to the possible detriment of his beneficiaries. The only difference between the cases cited and that at bar is that here, although the trustee had an express power: i. e. to lend money to "Ageco" (a power which did indeed imply a power to collect the loan), and exercised it, while there the trustees who also had express powers did not exercise them. That is unimportant; all that counts is that the trustee's decision — whether to exercise, or not to exercise, the power — shall be free from conflicting personal motives. Matter of Durston's Will, 297 N.Y. 64, 74 N.E.2d 310, 313, is an example of how far the courts of New York have gone to search for such a possible conflict. The testator had given the trustees power "to hold, care for, manage and control" the property which he devised or bequeathed, and "to sell * * * any part or all thereof * * * to invest or reinvest the same * * * in such interest bearing or income producing securities" as they thought best. Part of the assets had been shares in the bank which he made one of the trustees, and these shares the bank held until they had greatly fallen in value. The bank was held for the loss because its decision to retain the shares might have been influenced by its desire not to have them put upon the market; and indeed even the individual trustee was held, although he had merely approved the bank's retention of the shares.

Hazzard v. Chase National Bank, 159 Misc. 57, 287 N.Y.S. 541; Id., 257 App.Div. 950, 14 N.Y.S.2d 147; Id., 282 N.Y. 652, 26 N.E.2d 801, is not to the contrary. With one exception it went no further than to decide that the bank had not been "grossly" negligent in not retaining part of the security; and, so far, it is not relevant here. The exception was a claim that the bank, being itself a creditor, released the security, so that it could be sold and the debtor could use the proceeds to pay the interest on its bonds, and thus avoid a general default to the prejudice of the bank's loan. This claim the judge disposed of by saying, 159 Misc. at page 66, 287 N.Y.S. at page 551, that "the purpose of the withdrawal of these securities, so far as the bank's knowledge has been proven, was in furtherance of an expansion policy and of a geographical realignment of operating and holding companies." Hence no question of a conflict of interest arose. We do not forget that later in his opinion, 159 Misc. at page 84, 287 N.Y.S. at page 570, the judge said that: "The trustee under a corporate indenture * * * has his rights and duties defined, not by the fiduciary relationship, but exclusively by the terms of the agreement. His status is more that of a stakeholder than one of a trustee. * * * Far from refraining from occupying inconsistent positions, corporate trustees have affirmatively and deliberately assumed them to an increasing degree. Corporate trustees have come to act as promoters, underwriters, bankers, financial advisers, bondholders, and creditors of companies whose debenture holders they have been selected to protect." That language we read only as criticism of practices that had grown up, and not as asserting that the courts of New York had given any countenance to the notion that, so far as a corporation sees fit to assume the duties of an indenture trustee, it can shake off the loyalty demanded of every trustee, corporate or individual. We can find no warrant for so supposing; and, indeed, a trust for the benefit of a numerous and changing body of bondholders appears to us to be preeminently an occasion for a scruple even greater than ordinary; for such beneficiaries often have too small a stake to follow the fate of their investment and protect their rights. We do not read Benton v. Safe Deposit Bank, 255 N.Y. 260, 174 N.E. 648, in an opposite sense; it held no more than that an exculpatory covenant limiting the trustee's liability to "gross negligence" was not contrary to "public policy" in New York as well as in Pennsylvania. True, in the course of the opinion Crane, J., said, 225 N.Y. at page 265, 174 N.E. at page 649, that "the duty of the trustee is measured and limited by its agreement"; and we of course agree that within somewhat ill defined limits a trustee may confine his duties. That question is necessarily determined by the trust deed; but it has nothing to do with the trustee's duty to discharge whatever obligations he does assume with absolute singleness of purpose.

Thus we come to the consideration of how far, if at all, the collection of the loan in the spring of 1932 conflicted with the bank's duty to the plaintiff's bondholders. If it did conflict, the power to collect should have yielded to the duty of loyalty, for all powers are to be interpreted as conditional upon observance of that duty. Although the judge found that the bank knew the financial condition of "Ageco" to be "bad," neither in his findings nor in his opinion did he define what that adjective meant, except in so far as that may be inferred by his saying that it did not know that "Ageco's" "condition was `bad' enough * * * to be insolvent or in imminent danger of insolvency." He did indeed hold that it "had notice of facts which would lead a man of ordinary prudence — a bank at least — to make inquiry," but he also found that it had done so, for it "was not obligated to make more than a reasonably diligent inquiry," and a thorough-going inquiry would have been more laborious and expensive than could be "reasonably" demanded. So we shall assume. On the other hand, the record is full of evidence that in the spring of 1932 the bank's officials were most uncertain whether the "System" would be able to refund its long term debts and loans which were very soon to become due. Its lawyers had advised it that the first proposed expedient — an issue of a new "Ageco" series, guaranteed by "Agecorp" — was unlawful and about the...