Springfield Safe Deposit & Trust Co. v. First Unitarian Soc.

• Citation: 200 N.E. 541,293 Mass. 480
• Court: United States State Supreme Judicial Court of Massachusetts
• Decision Date: 27 February 1936
• Parties: SPRINGFIELD SAFE DEPOSIT & TRUST CO. v. FIRST UNITARIAN SOC. et al.

293 Mass. 480

200 N.E. 541

SPRINGFIELD SAFE DEPOSIT & TRUST CO.

v.FIRST UNITARIAN SOC. et al.

Supreme Judicial Court of Massachusetts, Hampden.

Feb. 27, 1936.

Report from Probate Court, Hampden County; Davenport, Judge.

Petition by the Springfield Safe Deposit & Trust Company for the allowance of certain accounts as trustee under a declaration of trust for the benefit of the First Unitarian Society, otherwise known as the Unitarian Society of Chicopee, and others, under and subject to the provisions of the will of Sarah E. Spaulding, deceased, wherein objections were filed. On report from the probate court.

Decree allowing each account.Homans Robinson, of Springfield, and Clifford S. Lyon, of Holyoke, for petitioner.

Herman Ritter, of Chicopee, for respondents.

F. D. Bonner and T. Gregory Sullivan, both of Boston, for commissioner of banks amici curiae.

C. M. Rogerson and R. W. Hardy, both of Boston, for Boston Safe Deposit & Trust Co. amici curiae.

B. E. Eames and R. Gaynor Wellings, both of Boston, for New England Trust Co. amici curiae.

R. Chapin, of Springfield, amicus curiae.

RUGG, Chief Justice.

This is a petition for the allowance of accounts of the petitioner as trustee of a fund for the benefit of the First Unitarian Society, otherwise known as Unitarian Society of Chicopee, and others under and subject to the provisions of the will of Sarah E. Spaulding. The totla of this fund was $6,000. The period covered by the accounts begins with April, 1909, and ends with October, 1933. The disputed items relate to an investment of $2,000 by the trustee in a ‘participating interest’ in a note and mortgage of William M. Young and losses incurred with respect to that investment, and a reinvestment in a ‘participating interest’ in the Okun note and mortgage of $1,507.72, received as a result of sale upon foreclosure of the real estate covered by the Young mortgage. The objections to these items are (1) that the investment in the participating interest in the Young mortgage was prohibited by the Spaulding will, (2) that the Young mortgage was not proper as a trust investment, and (3) that an investment of trust funds in a participating interest in a mortgage is not warranted as matter of law.

The case was heard upon an agreed statement of facts. The trial judge found the facts thus stated to be true and reported the case upon them as the facts and the evidence and reserved the questions of law involved for the consideration of this court and the entry of appropriate decrees.

The facts relating to the original investment now assailed were these in substance: In 1925 the trust department of the petitioner, from uninvested funds held by it in various trusts, lent $65,000 to William M. Young, a man of substantial means and owner of a considerable amount of real estate, on his note payable on demand after three years with interest at five and a half per cent. per annum, payable quarterly and secured by a first mortgage in usual form on real estate in the business section of Springfield. The assessed valuation of the property for purposes of local taxation was $96,600. The annual rental was $9,600, derived from tenants conducting a mortor company, a drug store, a shoe store, and a garage. The officers of the petitioner appraised the land at $100,000 and the buildings at $20,000. The executive committee of the petitioner, consisting of its president and five directors, all men of extensive experience in real estate matters approved the loan as a conservative mortgage and a proper investment for the trust estates contributing thereto. The note and mortgage ran to the petitioner without designation as trustee. This method was for the convenience of the various trust estates interested therein and to enable the petitioner as trustee to hold, administer and deal with the note and mortgage for the best interests of the trusts. This method was in accordance with uniform practice of other similar institutions and was the only practicable way to manage such an investment. The money advanced on this note and mortgage was derived exclusively from various trust funds in the control of the trust department of the petitioner; no portion of it belonged to the commercial department of the petitioner. When the loan was made and the necessary funds contributed by the various trust estates from uninvested capital in the several trust estates, proper entries were promptly and duly made upon the books of the trust department of the petitioner showing the sums respectively advanced from each contributing trust estate, the proportion of each contribution to the amount of the note and mortgage, and the face amount of the participating beneficial interest therein received by each contributing trust estate, which participating beneficial interests were evidence and represented by ‘Certificates of Interest in Real Estate Mortgage,’ so-called, identical in form, which were on the same date duly executed by the petitioner and placed in the portfolios of each contributing trust estate. These certificates showed that the particular trust estate had a participating interest in the mortgage with a face value equal to the amount contributed by it. They described with particularity the mortgage investment. At all times from that date to the present time, the books of the trust department of the petitioner and the records pertaining to the various contributing trust estates have shown clearly and definitely that this note and mortgage were held by the petitioner as trustee for the various contributing trust estates and that each contributing trust estate had a specific and definite participating beneficial interest therein, measured by the amount of its contribution thereto and evidenced by the certificates, and at no time had the note and mortgage been considered, treated or dealt with as individual property of the petitioner. A trust certificate showing the participating interest of the Spaulding trust in this mortgage was filed and has been kept in the portfolio of the Spaulding trust and all appropriate entries to that end have been made on the books of the trust department of the petitioner. In 1932, during the depression, it became necessary to foreclose this mortgage. The property was sold at a loss. A new note and first mortgage were taken by the petitioner covering the same property and a new participating interest certificate issued to represent the share of the Spaulding trust on the same plan as before. This was known as the Okun mortgage. The loss thus suffered by the Spaulding trust was in no respect due to the method of holding the Young mortgage or caused by the fact that it was a participating mortgage. The same loss would have occurred if the mortgage had been held entirely by one trust estate. It is stated in the agreed facts: ‘Investment of trust funds held by corporate fiduciaries in participating interests in mortgages, similar to those hold in this trust, have been made since 1892 and continuously thereafter. The aggregate face value of such participating mortgages held by Massachusetts trust companies in various trusts and estates administered by them is approximately $31,500,000, at the present time, consisting of many mortgages of varying amounts divided into a great many participating interests. They are largely held by many trust companies located in Boston, Worcester, Springfield, Quincy, Cambridge, Pittsfield and elsewhere in the Commonwealth, included among which are the six largest trust companies in Massachusetts. In addition to Massachusetts a similar practice has prevailed for many years in many other states in which corporate fiduciaries have held and now hold billions of dollars of these participating mortgages, such states including New York, New Jersey, California, Pennsylvania, Ohio, Wisconsin, Kentucky, Oklahoma, Louisiana, Mississippi, North Carolina, Tennessee, Georgia, South Carolina, Delaware,Maryland, Illinois and Missouri. Of these states only five have statutes adopted specifically authorizing these investiments.’ ‘Continuously throughout this period and until the present extraordinary depression such investments have been most satisfactory and no losses on account thereof were suffered prior to the depression. * * * The income yield had been high and steady, the rate being between five and six per cent for the most part, and being tax exempt in Massachusetts. The mortgages have matured at early dates. Some mortgages have been upon demand, others for three years and some as long as five years. This has enabled frequent adjustment of interest rates to correspond with current interest rates. The principal value had been steady. Mortgages generally have not been marketable like bonds, stocks or certificates of beneficial interest in trusts, upon payment of a small broker's fee, but have been salable only upon a new examination of title and the payment of a real estate broker's fee, and in many instances were so salable only at a discount. This same rule has applied to mortgages held as in this case.’

Conditions which have led to this form of investment are narrated at some length in the record but need not be here recited. This device was adopted and has grown in favor because of the difficulty which corporate fiduciaries have experienced in obtaining first mortgages upon real estate in the commonwealth in amounts small enough to be held in smaller trusts and to provide the diversification desired in larger trusts. The plain inference from the facts stated is that this form of investment for trust funds has been regarded as safe and conservative by the men charged with the responsibility of managing large and small trusts by trust companies. ‘The participating interests in mortgages taken by corporate fiduciaries were practically never found except in the trusts held and managed by the corporate fiduciaries themselves. None were ever sold to the public generally nor were any available for...