
    MATTER OF MAXWELL.
    
      Cayuga Surrogate's Court;
    
    
      February, 1889.
    Trustees, liability for banle deposit.] An executor or other trustee holding for investment a fund which he is unable with reasonable diligence to invest, and who, with the assent of the beneficiary deposits the same meanwhile at interest in his official name and separate from his private account in a bank of good repute and credit, should not be held responsible for its loss by the failure of the bank, although he himself was a director and a borrower indebted to the bank, and a member of the committee of directors charged with the duty of examining its affairs, if it appears that he believed in good faith that the bank was in good condition and it is not shown that he was'able to learn the contrary.
    
    Proceeding for the revocation of letters testamentary and the judicial settlement of the accounts of an executor.
    The facts appear in the opinion.
    
      A. H. Searing, for petitioner.
    
      H. V. Howland, for executor and trustee.
    
      C. M. Balter, special guardian for infant parties.
    
      
      
         See Matter of Knight, 21 Abb. N. C. 388, where it was held that a trustee is liable for the loss of money deposited with a bank which afterwards fails, although he was appointed in place of executors after the money was on deposit, there being no such recurring demands to be made upon the trustee as required such an investment.
    
   The Surrogate.

This is a proceeding for the revocation, of letters testamentary and the judicial settlement of the account of James Kerr, as testamentary trustee. The will of John Maxwell was admitted to probate in September, 1882. It contains the following provisions: “I give, devise and bequeath unto my executor, hereinafter named, the use of all my real estate and the use of all my personal property (except household furniture) for and during the term of the natural life of my wife, Mary Maxwell, in trust, nevertheless, to rent, from time to time, so much of the real estate as may not be required by my said wife for her use, and to sell and convert the personal property which is not invested in securities, and to invest the proceeds of the same . in some good interest-bearing securities, and to pay the rent derived from said real estate and the interest derived from the investments of said personal property to my wife for the term of her natural life, and in case the income derived from the rents and from the investments of said personal property shall not be sufficient to provide for my said wife in a suitable and proper manner, then my executor is authorized to apply so much of the principal of said investment of the personal property,as may lie necessary, in addition to said income, from my real and personal estate to provide for her in a suitable and proper manner.” At the decease of his wife, the testator gives and devises all his real and personal property to his two daughters and to his grandchildren, Mary E. and Catherine A. Maxwell, share and share alike, the survivor of the grandchildren at the death of his wife, if one should previously die without issue, to take the others share. James Kerr was appointed executor and trustee. The petitioner is the testator’s widow.

On July 81, 1884, the accounts of the executor and trustee were judicially settled in this court.

It was there found and adjudged that there was unexpended of the personal estate in the hands of the said trustee, held by him for the purposes of the trust, the sum of two thousand three hundred and sixty-two dollars and sixty cents, after payment of all debts and the expenses of the accounting.

Of this amount, six hundred dollars was invested in bond and mortgage, the balance was, at the time of the accounting, on deposit in the First National Bank of Auburn, to the credit of the executor, in an account by itself. Eight hundred dollars, the proceeds of certain mortgages held by the executor having been deposited in the spring of 1888, and the., balance having been transferred from other banks in October, 1882. The six hundred dollar mortgage was paid to the executor and trustee in September, 1887, and the proceeds were thereupon deposited by him in the First National Bank of Auburn, and credited upon the same account and in the same manner as the other funds. On January 21, 1888, the First National Bank suspended payment, and went into the hands of a receiver. The executor and trustee was, at the time of making the deposits, and at the time of the failure of the bank, a director thereof, and a part of the time was a member of the committee of the board appointed to examine its affairs. He was a borrower from the bank, both individually, and as a member of a business firm. The individual indebtedness, to the amount of $1,300, is still unpaid. It is alleged and admitted that the executor is insolvent. The deposits of the firm were made in this bank to nearly the time of its failure. But, at the time of the failure, this account was overdrawn to a small .amount, which has since been paid. The evidence shows that the executor believed the bank to be perfectly solvent. The last examination by the committee was.made in October, 1887. The executor was then ill and unable to take part. The examinations made by the committee consisted in looking over the books of the bank, to see whether the dates and the bills received corresponded with the statement of the cashier, and to ascertain whether the amount of cash on hand was correctly stated, and, at the end of every year, an examination was made of the securities.

The reason given by the executor for changing the-deposits of money from other banks to this one is, that it " paid four per cent, on deposits, while the others paid only three per cent. It appears that- the change was made with the consent of the petitioner, who was entitled to the income of the property, and who has had the interest upon the-deposits; and that other parties in interest were consulted in regard to the deposits.

The executor testifies that he endeavored to find an: investment of this fund, upon bond and mortgage, and consulted an attorney and others in regard to' it, and did not-find any, and that the savings banks were making loans at five per cent. The attorney also testifies that he endeavored to procure a mortgage for the executor, but was unable to-do so.

' It appears that some of the leading business men of the city deposited money in this bank, up to the time of the failure, and that other directors, who had the same opportunity to know the condition of the bank, had large deposits-there at the time of the failure, and believed the bank to be perfectly solvent. It is proven that the amount of the-deposits in the bank, when it closed, was- from six to eight hundred thousand dollars. A dividend of twenty-five percent. has been paid to creditors by the receiver. It does-not appear what the cause of the failure was. The accountant employed by the receiver, and who has since succeeded him as receiver of the bank, testified in the proceeding that he had no knowledge, from the books of the bank, as to its-solvency at any date prior to its closing, and that it would take from ten to twenty days for anybody to arrive at any information. There is nothing to show whether the failure-is due to the defalcation of any officer of the bank, or whether the books showed the real condition of the bank, or whether the assets were valueless to any considerable extent. It does appear that the cashier, in whom much confidence had been placed, absconded, at the close of the last banking day, before the bank discontinued business.

It is claimed on the part of the contestants, that the executor and trustee, not having invested the trust funds in real estate securities or government bonds, or deposited the same with trust companies approved by the court and designated by them as proper depositories, is chargeable with the-amount of the estate and interest.

The principal authority cited to sustain this proposition is the case of King v. Talbot (40 N. Y. 76). This case-involved the question of the liability of a trustee who had invested funds held by him, in canal, railroad and bank stocks, in violation of the obligation of his trust. It was held that to place the principal of a fund in a condition in which it is necessarily exposed to the hazard of loss or gain, according to the success or failure of the enterprise, in ^ which it is embarked, and in which by the very terms of the investment the principal is not to be returned at all, was a violation of the trust, and that the eestuis que trust wras not obliged to accept the investments, and might call upon the executors to pay over the whole amount of their legacies,, and interest thereupon. The court says: “The just and true rule is, that the trustee is bound to employ such diligence and prudence in the care and management, as in general prudent men of discretion and intelligence in such matters employ in their own like affairs. This necessarily excludes-all speculation, all investments for an uncertain and doubtful rise in the market.....The preservation of the fund, and the procurement of a just income therefrom, are-the primary objects of the creation of the trust itself, and are to be primarily regarded.” The same principle was asserted in the case of Leitch v. Wells (48 N. Y. 585).

In Higgins v. Whitson (20 Barb. 141) a trustee had loaned money on a second mortgage security, The first mortgage was $4,000, and the real estate was worth $16,000. The trustee had consulted the cestui que trust in-regard to the investment. The court says: “It cannot be ■expected from trustees that they are to act upon principles different from those which actuate cautious and prudent men in the transaction of their own affairs. Otherwise, the office of trustee would be of such hazardous responsibility that no prudent or competent man would ever accept it.”

It was said by the court, in Litchfield v. White (7 W. Y. 438, 443), speaking of the liability of an assignee under a voluntary assignment for the benefit of creditors: “Every trustee must be presumed by the court, before whom his .account is taken, to use in his own concerns such diligence as is commonly used by all prudent men. The diligence of a provident man, therefore, is the measure of a trustee’s duty.” The same rule is stated in Willis on Trustees, page 125.

It was said by Chancellor Kent, in the case of Smith v. Smith (4 Johns. Ch. 281, 284), after quoting the English authorities, holding that an executor must not rest on personal security:

“Personal security is always more or less precarious, particularly when the credit is given for a considerable length of time, or when the borrower or his surety is engaged in mercantile or other hazardous pursuits. ... I have no doubt that it is a wise and excellent general' rule, that a ■trustee loaning money must require adequate real security or resort to the public funds.”

In the case of Thompson v. Brown (4 Johns. Oh. 619, 628), the Chancellor quotes, with approval, the opinion of Lord Habdwioke. in Knight v. Lord Plimouth (3 Atk. 480), in which it was held that a receiver, who had deposited money With a banker of good credit, who afterwards failed, .as the receiver was not chargeable with any wilful default or fraud, was not responsible for the loss. The views of the ■chancellor, as to the exact rule to be adopted in fixing the responsiblity of trustees, are not very definitely expressed.

In Massachusetts, the courts require of a trustee only that he shall exercise such sound discretion as a prudent man would be'expected to use in his individual investments, having regard to tiie safety of the fund. Investments in stock of insurance, banking and railroad corporations have-been allowed (Bowker v. Pierce, 130 Mass. 262; Brown v. French, 125 Id. 410 ; Harvard College v. Amory, 9 Pick[Mass.] 446).

The same latitude is allowed by the courts of New Hampshire and Vermont (French v. Currier, 47 N. H. 88; Barney v. Parsons, 54 Vt. 623).

In many of the southern States the same rule is observed^ and even legislative enactments have been adopted authorizing trustees to invest upon personal securities.

The courts in Pennsylvania and New Jersey incline to-look with disfavor upon investments in stock corporations, approving only real estate mortgages and government securities (Halstead v. Meeker, 3 C. E. Green, [N. J.] 136 ; Ihmsen’s Appeal, 43 Penn. St. R. 431).

The supreme court of the United States, in the case of Lamar v. Micou (112 U. S. 452), 'said: “ The general rule iueverywhere recognized that a guardian or trustee, whei investing property in his hands, is bound to act honestly and faithfully, and to exercise a sound discretion, such as-men of ordinary prudence and intelligence use in their own affairs.”

In England it has been held by the court of chancery that a trustee who lends money upon personal promise of repayment, if without security, does so at his own risk.

In regard to the liability of trustees for money deposited-in bank, it has been decided in England, that personal representatives are not, in the absence of all want of due care and watch fulnesss, to be held responsible for the loss-of money belonging to an estate, which is deposited in a bank of good repute, and in the official name of such representatives (Swinfen v. Swinfen, 29 Beavan, 211). But an administrator will be held liable if he keeps money in a1 bank an unreasonable length of time or where it is his duty to invest the fund in safe securities (Moyle v. Moyle, 2 R. & M. 710 ; Johnson v. Newton, 11 Hire, 169) ; or to pay it over to newly appointed trustees, or to pay it into court; or, if having no occasion to keep a balance on hand for the purposes of the trust, he lends the money to the bank on interest upon personal security, not sanctioned by the court (Darke v. Martyn, 1 Beavan, 525).

In the State of California it has been held that a guardian is not responsible for the loss of funds occurring by reason of his depositing them for safe keeping in a bank, except when it was known that such bank was unsafe (Minor’s Estate, 1 Myrick [Prob.] R. 250). The same case holds that, if a guardian loans trust funds imprudently, and without security, he must make good the loss.

The court of appeals of this State decided, in the case of People ex rel. Nash v. Faulkner, Executor, etc. (107 N. Y. 477) that a surrogate, into whose hands surplus money arising .on foreclosure sale of land belonging to an intestate’s estate was paid, and by whom it was deposited in good faith with a pi’ivate banker in good standing and credit, pending proceedings to determine the rights of claimants thereto, Avas not liable for loss arising from the failure of the banker; that he is only responsible for good faith and reasonable diligence. The court says : “ The surrogate was not a public officer, appointed to receive and disburse public money ; . . . . he was to hold the same for distribution. . . . There is nothing in the statute which makes him an absolute debtor for it.” The court also says: “If he had been a trustee, and had deposited this money in good faith, and without any negligence on his part, in this bank, its loss, by the failure of the banker, would have been a good defence. It is conceded that if the administrators had deposited the money of their estate in this bank in good faith, and without negligence, they would not have been responsible for loss” (2 Williams on Executors [5th Am. ed.] 164; 3 Redfield on Wills, 394).

From these authorities, observing particularly the expressions of the courts of this . State, the propositions are deducible, that a trustee who is directed to invest money upon interest-bearing securities, could only accept real estate ■securities or government bonds ; that' they should be held personally liable for any loss which is incurred in the purchase of stock of corporations with trust funds, or from loans made without security ; that they are bound to exercise that care in the management of trust property which prudent and intelligent men use in similar private matters; that moneys, held by them, uninvested, may properly be deposited in a bank of good repute and ere'dit; that such deposit .should be in the name of the trustee, with his official title, and be kept separate from his private account; that, the deposit should not be continued an unreasonable time, and should be subject to demand.

The case at bar is difficult to determine, on account of the relations of the executor to the bank in question, and the opportunities he had to examine the books, and the fact that the trust funds were kept so long a time in the bank. From the evidence, however, I am satisfied that the executor believed the bank to be in sound condition, and the fact of his having been able to learn the contrary is left in much doubt. The evidence is undisputed to show that he •endeavored to obtain proper investment, and that the deposit in the bank was with the assent of the parties in interest, so far as it could be given.

It is, therefore, decided that the executor, as trustee, is not personally liable for the money deposited in the First National Bank, and his account will be settled accordingly. He will be discharged upon turning over to his successor or into court his claim as trustee against the bank. The other questions, raised in the accounting, are not necessary to be mentioned here.  