Matter of Lincoln Rochester Trust Co.

• Decision Date: 27 February 1952
• Citation: 201 Misc. 1008
• Parties: In the Matter of the Accounting of Lincoln Rochester Trust Company, as Trustee of Its Discretionary Common Trust Fund 1.
• Court: New York Surrogate Court

201 Misc. 1008

In the Matter of the Accounting of Lincoln Rochester Trust Company, as Trustee of Its Discretionary Common Trust Fund 1.

February 27, 1952.

Raymond F. Allen and Alfred W. Dunbar for trustee, petitioner.

Joseph M. Feely, special guardian for parties interested in the income of the common trust fund and participating trusts, respondent.

Edward M. Ogden, special guardian for parties interested in the principal of the common trust fund and participating trusts, respondent.

WITMER, S.

Petitioner has filed its first account as trustee of its Discretionary Common Trust Fund No. 1, established on February 1, 1950, under section 100-c of the Banking Law, and seeks approval thereof. The special guardian of persons interested in the income involved has reported his approval of the account insofar as the income is concerned, and he recommends that it be settled as filed. The special guardian of persons interested in the principal has filed extensive objections to the account directed to the constitutionality of the statute under which the fund was created, and directed to the plan of operation filed by petitioner upon creating the fund under the statute, the acts of the trustee in administering the fund, and the documents filed and omitted to be filed by petitioner in connection with this proceeding; and the objections have been fully briefed. The objections were filed in two instruments, one supplementing the first; they are grouped under headings, and are numbered from "1" under each heading. For convenience of reference the court has renumbered the objections by placing new numbers in the margin thereof beginning with the second group to make consecutive numbers throughout, and the references herein to objection numbers are to the objections as thus renumbered.

The objections (6, 20, 21, 23-25 & 27) to the constitutionality of the statute (Banking Law, § 100-c) under which the common trust fund was created will first be considered. It is contended that because subdivision 9 of said section does not require that notice of intention to invest moneys of prospective participating trusts in the common trust fund be given to infants and incompetents and to other persons whose names and addresses have not come to the knowledge of the trustee, it amounts as to such persons to an authorization of a taking of property without due process of law; and that it also amounts to authorization of such a taking as to all other persons, because the notice is only required "at the time of making the first investment" instead of at a reasonable time before making such investment, and no opportunity to be heard is granted in respect thereof. It is claimed (objection 20) that the right to commingle the underlying trust moneys in the common trust fund "as if the absolute owner thereof" and the delays permitted with respect to withdrawal thereof (subd. 8), and the three-year periods (subd. 10) between accountings after the first one, amount to an authorization of self-dealing and of taking property without due process of law; that (objection 21) the statute authorizes the corporate trustee to deprive the cotrustees of the right to participate in the decisions as to whether the funds shall be invested in the common trust fund, and deprives them of the free exercise of discretion in the investment of the trust funds and (objection 27) in the withdrawal of trust principal for the use of beneficiaries in the cases, being a majority, wherein such discretion is granted to the trustees. It is further asserted (objection 25) that as to trusts created prior to the effective date of the law authorizing common trust funds, it is unconstitutional because it amounts to an impairment of established contract rights.

The special guardian of principal views with alarm the liberality of the statute with respect to its authorization of commingling and management of trust funds and the provisions for accounting therefor, and urges that the law has broken loose from established moorings and safeguards respecting trust funds. Of course, the courts cannot concern themselves with the policy or wisdom of the statute, but only, in this connection, with its constitutionality; although as a preface to an earlier decision respecting this statute prior to its amendment, this court found it advisable to indicate its approval of the principle of common trust funds. (Matter of Security Trust Co. of Rochester, 189 Misc. 748, 752, affd. 277 App. Div. 837.)

It has long been held a breach of trust for a trustee to commingle trust funds with his or its own funds (Surrogate's Ct. Act, § 231; 2 Scott on Trusts, § 179.1), and generally it has been held improper for a trustee to commingle funds of one trust with those of another in his charge. (2 Scott on Trusts, § 179.2.) But such rule is a matter of policy, and not of constitutionality, and in appropriate cases commingling of funds of one trust with those of another has been approved by our courts. (Matter of Union Trust Co. [Hoffman Estate], 219 N.Y. 514; Barry v. Lambert, 98 N.Y. 300; Chesterman v. Eyland, 81 N.Y. 398; Matter of Flint, 240 App. Div. 217, affd. 266 N.Y. 607.) Thus the Legislature has the power to authorize commingling of trust funds provided the statute does not provide for the taking of property without due process of law.

The fact that the statute authorizes the trustee to commingle trust funds without notice does not go to its constitutionality. As pointed out in Matter of Security Trust Co. of Rochester (189 Misc. 748, 767-769, supra) the notice was provided as a stated protective device for the trustee to estop the beneficiaries receiving it and the benefits of the investments made in accordance therewith from later objecting to such investments. The statute recognizes that in most cases infants and incompetents and unknowns would be unable to come forward to object after the mailing of the notice, and hence makes no provision for protecting the trustee as against such persons until the judicial settlement of the common trust fund account.

The language of subdivision 8 of the statute, to wit, "as if the absolute owner thereof" is plainly limited to "powers of management" (and see subd. 2), and in no way deprives the cestuis que trustent of their essential equitable rights nor grants to the trustee more than fiduciary rights in the assets.

The claim that the statute permits self-dealing, it seems to the court, goes largely to a matter of policy, not of constitutionality, but at any rate it is unfounded in view of subdivision 4 of the statute and the construction placed thereon in Mullane v. Central Hanover Tr. Co. (339 U. S. 306, 309) to wit, "The trust company must keep fund assets separate from its own, and in its fiduciary capacity may not deal with itself or any affiliate." (And see Matter of Bank of New York, 189 Misc. 459, 463.) The failure to require so-called "documentary" evidence of investments and transfers (objection 7) and of other notices thereof may affect the opportunity for self-dealing but do not amount to authorization thereof. They are regulatory matters only, and do not render the statute unconstitutional. The claim that self-interest will cause the trustee to pour all funds of small trusts into the common trust fund, so far as possible, may be true. Such seems to be the purpose of the statute. Insofar as operating costs are reduced, it is possible that the trustee may gain by a reduction of its own expenses, but the fund will gain also. If the fund produces a better return, the trustee will gain only insofar as it receives commissions on income in the underlying trusts (subd. 4), and reasonably high income upon diversified investments is certainly not to be condemned. The provision for a stated period of time between a decision to withdraw funds from the common trust fund and the time of actual withdrawal is for the protection of the beneficiaries and deprives no one of substantial rights. It is proper, regulatory legislation. (Veix v. Sixth Ward Assn., 310 U. S. 32.) The same is true with respect to the provisions for triennial accountings.

Subdivision 1 of the statute (Banking Law, § 100-c) as reasonably and necessarily construed (see 2 Scott on Trusts, § 194), requires the consent of the cotrustee to the investment of funds of the underlying trust into the common trust fund. He must continue to exercise his proper discretion in all respects concerning the trust, except that as to assets participating in the common trust fund he is deprived of all title, custody, investment and managerial rights and obligations. The shares in the common trust fund evidencing the participation take the place of the invested assets of the underlying trust therein. His investment discretion in respect thereof is limited to deciding whether or not to withdraw the same (subd. 5), within the general provisions of the statute. It is true that this is a departure from previous trust practice, but changing times have indicated the need and wisdom thereof, and none can question the power of the Legislature to make the change. (See Mullane v. Central Hanover Tr. Co., 339 U. S. 306-308, supra and Matter of Prime, 200 Misc. 410, 414.)

Nor can it be said, as argued by said special guardian in his brief, that the statute is unconstitutional as discriminatory because it authorizes only corporate trustees to create common trust funds. Legislation is generally practical, dealing with existing and anticipated needs. There is no evidence that any individual is trustee of many trusts and seeks authority to establish a common trust fund. Indeed, the improbability of individuals becoming trustees of many trusts and seeking this authority, in view of the expense of bonds, the limits on human life and other practical considerations, is sufficient justification for the Legislature to see no need for extending the statute in this respect. The statute is not unconstitutional because it does not apply...