
    In the Matter of the Judicial Settlement of the Fifth Account of Michael E. Bannin and Harry W. Martin, as Testamentary Trustees under the Last Will and Testament of Thomas H. Cullen, Deceased. Michael E. Bannin and Harry W. Martin, Individually and as Trustees under the Will of Thomas H. Cullen, Deceased, and Others, Appellants; Hattie Morrison Davison and Others, Respondents.
    First Department,
    January 20, 1911.
    Trust — investment of funds in partnership — direction to continue existing investments — when trustee should withdraw funds, .from partnership — accounting — res adjudicata —=■ loss hy unauthorized investments.
    Although a portion of a trust estate as left by a testator was invested in a general mercantile partnership, the trustees should not continue the investment without precise directions in the will.
    Moreover, although the testator, having invested his property in a partnership, authorized his trustees to retain the trust property'in the form in which it existed at the time of his death whether Or no the investments were those permitted by the ordinary rules of law, and, although the testator during his l'ife- . time had agreed to an extension of the time set for the continuation-of the partnership, it is the duty of "the trustees on the expiration of the extended term to withdraw the funds from that investment". They have no right to continue the investment by making further extensions of the partnership term. -
    Although the accounts of the testamentary trustees showing such investment had been passed without objection, the decree merely approved the accounts as rendered and, there being no specific ruling on the validity of the investment, the matter is not res adjudicata so as to preclude the court from disapproving of the continuation thereof. The decree is effective -only to bar inquiry as to past transactions.
    Where the accounts of trustees showing an investment not permitted by law havebeen judicially approved without objection, the propriety of the original investment is res adjudicata and they are not chargeable with a loss resulting from the continuation of the investment.
    Appeal by Michael E. Bannin and .another, individually and as trustees, etc., and others, from parts of a decree of tlie Surrogate’s Court of. the county of New York, entered in said Surrogate’s Court on the 20th day of April, 1910, upon the- judicial accounting of the testamentary trustees.
    
      
      William B. Ellison of counsel [Duncan A. MacIntyre with him on the brief], Ellison, MacIntyre & Davis, attorneys, for the appellants.
    
      Harry W. Mack, special guardian for the respondents Agnes Feigenbaum and others.
    
      William H. Hanford, for the respondents Hattie Morrison Davison and Frederick J. Davison, general guardian of Harriet Muriel Davison.
   Clarke, J.:

For many years prior to January 2, 1899, Thomas H. Cullen had been a member of a firm conducting a dry goods commission business under the name of Converse, Stanton & Cullen. On account of continued ill-health Mr. Cullen withdrew from active business, and on said day articles of copartnership were entered into between Edmund W. Converse, Andrew B. Cobb, both of Newton, Mass., Thomas H. Cullen, Eva C. Stanton and Michael E. Bannin, of New York, Frederick S.. Converse; of Brookline, Mass., Margaret 0. Allen, of said Newton, and Charlotte C. Pierce, of Philadelphiá. The said articles provided : “ Said parties hereby form a partnership under the name of Converse, Stantorj, & Company, for the transaction of a dry-goods commission business in the Cities of Boston and New York, of which said Edmund W. Converse, Andrew B. Cobb and Michael E. Bannin shall be tl'ie general partners, and the others shall be. the special partners. * * . * Said parties shall be and continue partners in said business during the term of one year from the date hereof, and have contributed to the capital stock in the following amounts : Edmund W. Converse, One hundred thousand dollars; Andrew B. Cobb, Seventy-five thousand dollars; Michael E. Bannin, Thirty thousand dollars; and the following as special partners: Thomas H. Cullen, One hundred thousand dollars; Eva C. Stanton, One hundred thousand dollars; Frederick S. Converse, Eighty thousand dollars; Margaret C. Allen, Sixty thousand dollars; Charlotte C. Peirce, Thirty thousand dollars, which sums respectively shall stand to theh -credit on the books of the firm, and each general partner is to be credited with such further sum, if any, as he may hereafter contribute to the capital or which may accrue to him. in the prosecution of the business. * * * Sixth: Each of said special partners shall be entitled to receive as compensation for the use of the capital by him or her contributed ,as aforesaid interest thereon at the rate of six per cent per annum, arid it is further agreed that the partnership shall repay to each of said special partners any sum or sums of money which may be assessed to him or her individually for or on account of the capital by him or her ' contributed to the partnership, and the general partners shall share the net gains and profits. * * * It is agreed that no withdrawal of capital or distribution of the profits shall be made before the termination of this partnership, except by mutual consent. * * *

Incase of the dissolution of said partnership by decease of any of the partners, the survivors shall continue the business of said firm foi* the joint account of .themselves and the legal representatives of deceased until the expiration of the term thereof, and the affairs of said firm shall then-be-finally adjusted and closed, and the executors or administrators of. such deceased party shall have the same interest, right, power and authority in and over the property, business and affairs and the books, papers, accounts and other documents relating thereto of said partnership'which deceased party would have had if living,”

On December 13, 1,899, by an instrument in writing, the parties extended the-aforesaid"original agreement upon the same terms, conditions and provisions for the period for two years from January 2, 1900. * ■

On March 18, 1901, the said partnership, under the said renewal, having still some nine months to run, Thomas. H. Cullen executed his last will and testament in which, after certain specific bequests, he gave, devised and bequeathed all the rest, residue and remainder of his estate in trust to his trustees therein named, to pay over and apply the whole net annual income thereof to his wife, Harriet A. Cullen, for and during her natural' life, with remainder over in various pro portions-and on varying terms to certain children and grandchildren. He appointed his friends William A. Hoe, Michael E. Bannin, who was his partner, and his son-in-law, Harry Wallace Martin, the executors and trustees under the will, and among other things provided: “ And I will and direct, that the •trustees or trustee' of the said trusts hereby created shall b,e authorized to retain in the form in which they shall exist at the time of my death, any investments by me made, whether or not the same are invested in subjects- or investments permitted to trustees by the ordinary rules of law, and that the said trustees or trustee shall be authorized to invest the trust funds as well in the purchase of real estate to be held for account of the trust as in personal property, and shall be authorized to call in and change the investments from time to time 'in their discretion and to convert the real estate into personal and personal into real, as they may from time to time deem expedient.” Testator died July 27,1901, and his will was duly admitted to probate in the county of New York September 4, 1901. Mr. Hoe duly renounced, but the other executors and trustees qualified and entered on the performance of their duties.

On January 1, 1902, by an instrument in writing, the agreement of copartnership of Converse, Stanton & Co., was extended for the period of two years from the 1st day of January, 1902, upon the same terms, conditions and provisions. This instrument -was signed by Michael E. Bannin and Harry W. Martin, executors of the last will of Thomas H. Cullen, deceased.

'On January 1, 1904, a third extension for two years of said articles of copartnership was executed and signed by Bannin and Martin, trustees of the estate of Thomas H. Cullen, upon the same térms, conditions and provisions in every particular, except the time for the termination thereof, and except that F. S. Converse is allowed to withdraw $10,000 (Ten thousand dollars) of the capital contributed by him, receiving interest on the remaining capital as provided in the original agreement.”

A fourth extension was executed for two years from the 1st of January, 1906 ; a fifth extension on January 1, 1908, for two years, upon the same terms and conditions, except that it was provided that Frederick S. Converse should retire from said partnership and withdraw the entire amount of capital theretofore contributed by him, to wit, $70,000, and that Ellen M. Cobb should become a special and limited partner in said copartnership and contribute the sum of $40,000.

The agreement was in full force and effect at the time of the accounting here under consideration. Notwithstanding the language of the articles of copartnership, the use of the terms general and special partners, and the differentiation in duties, responsibilities, pecuniary returns and arrangements between themselves, the referee found as a matter of fact, “ That no attempt at any time since the formation of the said copartnership on the 2d day of January, 1899, was ever made hy the decedent or by the said firm of Converse, Stanton & Co., or by the trustees herein, to conform to the laws of the State of New York as to special partners; ” and as a conclusion of law, “ That the copartnership known as • Converse, Stanton & Company is a general partnership under the laws of the State of New York,” and that “all the members of the firm -of Converse, Stanton & Company were at the time of the death of the testator subject to all the liabilities of general partners in the State of New York.”' . '

So that the $100,000 which the decedent had contributed to the capital of the firm and which continued therein to the time of his death on July 27, 1901, and which, under the 9th clause of the original articles,.was to continue in the business until the expiration of the term thereof, which by the first extension executed by the decedent was to. expire on the 2d day of January, 1902, was not only allowed to remain as part of the capital of the copartnership until said date, but the trustees, one of whom was a general partner in the concern, have by repeated, instruments in writing continued the .estate as a general partner notwithstanding changed conditions under which, first, one of the so-called special partners was permitted to withdraw $10,000 of his contribution to capital; and, second, the same partner was permitted to retire entirely, withdrawing his contribution of $70,000, and Mrs. Cobb was substituted in liis place with a contribution of only $40,000.

In the absence of precise directions in the will, it is too clear to require argument that it would be a breach of duty on the part of the trustee of such a trust to subject the corpus thereof to the' chances and liabilities of a genei'al partnership' in a mercantile business.

The contention of the appellants is, first, that the will directly authorized their conduct in the provision: “ That the trustees or ■ trustee of the said trusts hereby created -shall be authorized to retain in the form in which they shall exist at the time of my death, any investments by me made, whether or not'the same are invested in subjects or investments permitted to trustees by the ordinary rules of law ; ” and it is pointed out that this will was made by the testatoi after he had executed the articles of copartnership which provided that in case of the dissolution of said partnership, by decease of any of the partners the survivors shall continue the business of said'firm for the joint account of themselves and the legal representatives of the deceased until the expiration of the term thereof, and that he had himself executed one extension of said articles for a term of two years which expired on the 2d of January, 1902, and that his will must be read in the light of those facts, and should be interpreted as indicating that one of the investments contemplated by him when he authorized his trustees to retain his investments in the form they should exist at the time of his death, whether permitted by the ordinary rulés of law or not, was his contribution to the capital of this firm.

. If it should be conceded that such interpretation was reasonable, we are of the opinion that it should be confined to the term fixed-by the articles of copartnershijp existing at the time of the testator’s death. The first term was but for a year, evidently for the purpose of affording a short period in which to determine whether the new arrangement was successful and permitting a quick readjustment if found necessary. Evidently it was successful, for the arrangement was renewed, but again not indefinitely but for a period of two years. It would be, we think, a violent assumption to conclude that the testator intended to confer power upon his trustees to create his estate a general partner in a mercantile firm to continue indefinitely and subject to change in personnel and in contribution of capital by its different members from time to time.

We are persuaded that no such conclusion is required and that it was the duty of the trustees, at least at the conclusion of the term ending on the 2d of January, 1902, to have withdrawn that $100,000 from the capital of the copartnership and to have invested it in the manner required by law.

The second contention is that the matter is res adjudicata,' that the executors duly accounted as such ; that all persons then having an interest, either as life tenant or as remainderman, in the estate were duly cited ; that the accounts were passed without objection ; that thereupon the executors turned over the estate to themselves as trustees ; that they have had, as trustees, four prior accountings, and that .the effect thereof is not only a justification of their, past transactions and the legality of the investment, but a bar to ques- ■ tioriing the continuance thereof.

In the trustees’ first accounting appeared in Schedule H this item : The interest of the deceased in the firm of Converse, Stanton & Co., $100y000. Ho settlement.” The item appeared in the same form on their second accounting in Schedule Gr. In their third accounting, in Schedule II, it appears as follows : “ Thé interest of the deceased in the firm of Converse, Stanton & Co., $100,000. Ho settlement yet had with surviving partners.” And it appears in the same form in the fourth accounting.

We think, where no objections were interposed ’ and no specific ruling had thereon by the court, and the decree upon the accounting merely approved the accounts as rendered and fixed the amounts in the hands' of the trustees, that this, while sufficient to bar inquiry as to past transactions, was not such an approval of the mode of investment as to preclude the court upon a subsequent accounting from disapproving óf the continued contribution to the capital of a going concern.

Bowditch v. Ayrault (138 N. Y. 222) was an action for the construction of a clause in a will. There had been several distributions of portions of the residuum of the estate made by the trustee under the interpretation of the will adopted by him, but there remained a sum to be distributed. While the Court of Appeals construed the will otherwise than that adopted, it said: “The part payments made by the trustees upon the several past accountings made by them, must remain unaffected by o.ur decision herein. Those accountings have been approved by the surrogate and must be regarded as conclusive upon all past transactions and payments covered by them. They form no bar, however, to the proper decision of the question now presented as to the distribution of the jiroperty now in the hands ofy the trustee.” To. the same effect, Jlatter of Hoyt (160 N. Y. 607) and Matter of Elting (93 App. Div. 516).

As it does not appear that this matter was specifically passed upon on the former accountings, as no attempt is made to charge the trustees with any funds distributed or paid out by tliem which had been approved upon the former accounting, as the fund remains in their hands and under their control, and as, even if there was an approval of the original transaction, the membership and capital of the copartnership has materially changed since the last accounting, we discover no bar to the present consideration of the question whether this trust fund should remain subject to the hazards of a general partnership in a mercantile concern. We unhesitatingly say that it should not, and so much of the decree appealed from as charges the trustees with the amount of the investment in Converse, Stanton & Co. of $100,000, as cash in their hands, is affirmed.

The trustees on October 23,1902, bought ten shares of the capital stock of the Merchants’ Trust Company, for which they paid $3,850. This item appeared in their first accounting. This was an investment made by them and not of the character permitted by law, but it appeared clearly in the accounts, it was not objected to, and a decree approving the accounts was made. Therefore, so far as the propriety of the original investment is concerned, it must be taken as res adjudioata. On the second and third accountings this item appears as of the value of $2,000, and on the fourth accounting it appears as doubtful.

On the 4th of December 1904, the trustees bought 500 shares of the American Investment Securities Company, for which they paid $6,750, and on January .12, 1905, they bought 200 further" shares of said company, for which they paid $2,700. These items appear in the third accounting. On the fourth, the 700 shares of said stock are valued at $7,000. On the present accounting tins stock is entered as of the same value as upon 'the fourth accounting, $7,000.

The learned surrogate, in" respect to the foregoing two items, said: “ The investment in the stock of the Merchants’ Trust Company and the American Investment Securities Company was unauthorized, and while the same was scheduled in the prior accounts and passed without objection, the failure to dispose of the same within a reasonable time since January 9, 1908, the date of the last decree, renders the trustees liable for the amount at which these securities were then valued.”

We are of the opinion that the effect of the prior decrees was an approval of the transactions. The trustees still hold in their hands the stock, the purchase of which had been approved. We think ■ they are not properly chargeable because after such approval by the court they did not dispose of the same, although it may have decreased in value. We think these two items are disposed of by the. doctrine of res adjudicaba. The decree, therefore, appealed from is reversed in so far as it charges the trustees with the amount of these two items, as shown by the last accounting.

The decree is remitted to the Surrogate’s Court for action in accordance with this opinion, with costs to all parties appearing,-and filing a brief on this appeal, to be paid out of the estate in the hands of the trustees. ■ ■

Ingraham, P. J.,;. Laughlin, Scott and Hiller, JJ, concurred.

Decree reversed and case remitted to surrogate, with costs to all parties out of the estate, as stated in opinion.  