Macy v. Mercantile Trust Co.

Emery, V. C. . At the hearing of the cause three points were raised — first, whether the trust company as residuary legatee under the will could be obliged, against its consent, to accept any securities for investments made by the executors, instead of cash, in payment or satisfaction of the legacy; and if so, then, second, whether the mortgages were investments authorized to.be made by the executors; and third, whether, if so authorized, they were sufficient securities for the loans made on them. Being satisfied that the objection to tire sufficiency of the securities was made in good faith, argument upon the first two points was directed, decision upon the question of the sufficiency of the mortgages being reserved for further hearing and order. On the first point — the right of the residuary legatee to receive cash instead of securities — counsel for the trust company raise the preliminary question whether the right to turn over anything except cash is not concluded .against the executors by the decree of the orphans court on the final accounting finding a balance in money due from them. Under the statute, Orphans Court Revision, 1898, § 127 ; P. L. of 1898, p. 761, this decree is conclusive upon all parties. By this decree a balance of $2,151,966.22 was decreed to be in complainants’ hands, to be disposed of according to law, after deducting the expenses of administration. The fifth rule of the orphans court requires executors who hold funds by virtue of the direction of a will to state the securities in which the estate is invested, and if this statement of the securities in dispute has been annexed to the final account, the question of the right of the executors to make them may, in some cases, be regularly adjudicated by the orphans court on an exception to their allowance. In Tucker v. Tucker, 33 N. J. Eq. (6 Stew.) 235 (Runyon, Ordinary, 1880), an investment of estate funds in city bonds and bank stock, made by an executor on his own judgment and without authority of a competent court, was disallowed on the settlement of the final account. But in this case no construction of the powers of investment under the will was involved, and where the right to turn over or appropriate securities for the payment 243 of a legacy depends upon the construction of a will, the jurisdiction of the orphans court to decide the question must depend on the act of 1872 (P. L. 1872 p. 47), incorporated in the general statutes (p. 2891) as section 151 of the Orphans Court act, and now section 173 of the Orphans Court act (Revision of 1898; P. L. of 1898 p. 781), authorizing distribution in accordance with the will. This power of the orphans court to construe wills for the purpose of distribution was affirmed by Chancellor Runyon, in Hill v. Bloom, 41 N. J. Eq. (14 Stew.) 216 (1886), but no question as to tire constitutionality of the statute appears to have been raised, and subsequent decisions hold this question to be still an open one. Adams v. Adams, 46 N. J. Eq. (1 Dick.) 298 (Court of Errors and Appeals, 1889); Stevens v. Dewey, 55 N. J. Eq. (10 Dick.) 232 (Vice-Chancellor Pitney, 1897). These later cases further hold that a decree settling the balance due on final accounts, on the usual notice, is not an exercise of this jurisdiction to construe the will on application for distribution, but that this question must be settled upon a proceeding for that purpose, with actual notice to all parties interested. The decree of the orphans court settling the balance in the executors’ hands did not therefore decide that this balance, under the will, must be paid in cash, and the will must now be construed on this point. In the absence of any directions in a will as to the time or manner of the payment of the residuary legacies, tire general rule is that the residuary legatee has a right to insist that before the end of the first year after testator’s death the executors shall, if possible, convert all the assets into money, pay the debts, funeral and testamentary expenses, and hand over the clear residue to the residuary legatee. 2 Wms. Ex. *1454- The legatee, residuary or other, may, however, in satisfaction of his legacy, consent to accept securities from the executors, whether held by them for conversion under the general rule for settlement or under special directions of the will. Such acceptance by the legatee is considered as practically a conversion and sale by the executor and a distribution of the proceeds by the executor. In re Beverly, 1 Ch. Cas. 681, 684 (1901). These general rules as to the right of the residuary legatee to require conversion of securities by the executors and payment 244 in cash are controlled, however, by the directions of the will. In this case they have been so modified, and the question is whether, upon a construction of the whole will, it was intended by the testator that their own investments, of the proceeds of conversion of the estate might be turned over by the executors to the residuary legatee as part of the residue, if the executors did not convert them for distribution, or whether the executors were required to- reconvert for distribution. The powers expressly given to the executors for the conversion and investment of the estate pending distribution are here very, large. By- the fourth clause they are directed to convert the entire estate for the purpose of paying the legacies and carrying out the provisions of his will; by the tenth clause they are directed to postpone payment of any of his estate (except the monthly payments to his wife) until two years after his death, and to add the income up to that period to the-capital of the residue. A direction for accumulation of interest has been held to imply a .direction to invest for that purpose. Fowler v. Colt, N. J. Eq. (10 C. E. Gr.) 202, 206 (Chancellor Runyon, 1874). But the twelfth clause, after authorizing the conversion and sale of his entire estate, or any part thereof, real and personal, to be in such manner as the executors deem advantageous, gives them express authority to reinvest the proceeds of sale in their discretion. Being thus directed or authorized to convert the entire estate, to invest the proceeds of sale at their discretion, and to accumulate the income for two 3ears, they are directed by the ninth clause, after reserving sufficient to pay the legacies and the one-sixth of the residue given to the wife, to divide the residue, “oí whatsoever name or nature, into five equal parts,” and “as soon as practicable after my decease to turn over and pay the said five equal parts of my residuary estate to the Mercantile Trust Company,” in trust. The intention that the executors might divide securities as well as money expressly appears in the fourth clause, which authorizes the retention and division of the investments made by the testator, and the words “turn over,” which certainly include these investments, also naturally apply to and would include as well authorized investments made b3r the executors. The authority to divide securities and pass them over to the trustee, given by 245 these words "turn over,” although specially applicable to the securities held by the testator, cannot be confined to them, in the absence of any indication that the testator so restricted their application. I think it was the intention of the testator, gathered from the whole will, that the investments authorized to be made by the executors, pending distribution, might be divided by them as comprising part of the residue and turned over to the residuary legatee. The trust company contend that the legacy of the residue to them was not postponed for two years, but that it was payable as soon as practicable, Under the ninth clause; that the conversion of the estate made immediate payment practicable, and therefore, as to them, no reinvestment by the executors was authorized. But the tenth clause, directing that none of the testator’s estate (except the. gifts which áre directed to be earlier paid to his wife) shall be paid to the persons entitled thereto until after the expiration of two years from the dato of his death, apparently applies to all payments of the estate, including the payments to the trust company as residuary legatee. Taken in connection with the other provision of this clause that the executors (not the trust company) are to receive the income in the meantime for the accumulation of capital for the residuary estate, and with the further fact that by the fifth clause the balance of the wife’s share (one-sixth) of the residue is not in any event payable until after two years, and then only if practicable, I think the tenth clause must be held to qualify the previous independent direction for payment to the trust company as soon as practicable, and that construing all the provisions together the direction is to divide and pay over the residue as soon as practicable after testator’s death, but not until after two years, and that in the meantime the executors must accumulate the income to form part of the residue to be divided at the 'end of two years, if practicable, between the widow and the trust company. The executors were further expressly authorized by the twelfth clause to sell and convert' all testator’s 'estate and to invest the proceeds at 'their discretion, and it is not possible, I think, to reconcile these express powers of investment of proceeds of sale, in connection with the direction of the ninth clause, to accumulate the income for two years as part of the capital of 246 the residuary estate, with the contention now made by the trust company that the deferred payments in the tenth clause referred only to the legatees beneficially interested, and that the payments to it as residuary legatee under the ninth clause were to be made as soon as practicable after testator’s decease, and before the expiration of the two years, and were not to be held at all for investment by the executors. Upon the first point I conclude, therefore, that on the scope of the whole will the executors, for the purposes of conversion and accumulation, were to hold the entire estate for at least two1 years, and that they were then to divide the residue if practicable. They also had power to invest tire proceeds of all the estate for accumulation of capital during that time, and in dividing the residue they had the right to divide and turn over, in satisfaction of tire residuary legacy, authorized investments made within the two years, and were not required to convert all their reinvestments into cash for the purposes of division. The second question is whether the investments in New York City mortgages were investments of an authorized character. The investments being first mortgages on real estate (and for present purposes being considered as safe and sufficient security for trust investments), the question is whether the investment is illegal and unauthorized merely because the lands are not situated in this state. No statute or decision of our courts has yet established this hard and fast rule. In McCullough v. McCullough, 44 N. J. Eq. (17 Stew.) 313 (Chancellor McGill. 1888), an application was made by trustees for instructions as to investing on lands in Minnesota. Such investment was disapproved, but the disapproval by the court was based on consideration* of all the circumstances of the case and of the security of all the parties interested. It was not refused because it was in itself and in any event illegal or unauthorized. No later or other decision in New Jersey has been referred to. Ormiston v. Olcott, 84 N. Y. 339 (1881), which was referred to with approval in the McCullough Case as to the objections to such investments, expressly declines to hold that such investments are necessarily illegal (at p. 343), and goes no further than to declare the general rule to be that investments beyond the juris-' 247 diction of the court should not be sustained unless in rare and exceptional cases, and under very unusual and peculiar circumstances. This rule, it is further said, should not be made arbitrary and inflexible, and so rigid as to admit of no possible exceptions, for it is merely an outgrowth or consequence of the broader rule that a trustee, in making investments, is to employ such diligence and such prudence as in general prudent men of discretion and intelligence in such matters employ in their own like affairs. The statute relating to investments by executors and trustees expressly recognizes the general rule that loans on real estate by trustees should be such as a reasonable and prudent investor, dealing with his own funds, under the like circumstances, would require. P. L. of 1902 ch. 240 p. 700. There are exceptional circumstances in this case, which should make the court hesitate to conclude that mortgages on lands in New York City are unauthorized investments. The estate was very large. In the fair discretion of the executors some of the investments must probably be large, and unless mortgages were excluded altogether such loans were not readily procurable except in a large city. The testator (a New York banker), for a long time president of one of the leading banks, contemplated New York investments of his property as one of the methods of permanent investment, and expressly authorized the permanent trustee to malee them. It cannot be said, therefore, that New York City mortgages were not contemplated for some portion of the permanent investment. The executors made these investments for the purpose of turning them over to the New York trustee, to hold as part of the permanent investment, and while the executors were not, as was the trustee, specially authorized by the will to make them, and therefore cannot take any addition to their powers by1' the powers given to a trustee specially selected and authorized to make New York investments, yet this fact that the trustee was authorized to hold such securities, if they were sufficient, and the further fact that the character- of the investment to be made by the executors pending division was expressly left to their discretion, are entitled to very great weight in determining the legality of the investment. I cannot sayr, under these exceptional circumstances, that the executors com 248 mitted a breach of trust by investing at all in New York City mortgages, and that they must at their own charges convert the mortgages into cash or be responsible for the deficiency. Where ’the security taken is unauthorized, the trustee incurs this liability to make good the fund as a necessary consequence. Tucker v. Tucker, supra; In re Salmon, 42 Ch. Div. 351 (C. A., 1889), Lord Justice Cotton (at p. 367). But where the security, although authorized, is insufficient, the situation is different, and the rights and liabilities of the executors and the residuary legatee in trust'depend on additional considerations. The executors now hold the securities to turn over for a permanent trust fund-for the benefit of life tenants and remaindermen, some of whom are infants or not yet in being, and apply to the court for directions as to turning them over. The trustee who is to receive the securities for this purpose alleges that the securities, 'even if authorized, are not sufficient, and in view of this objection the court should not direct that the investments be turned over to the trustee without further inquiry, but should inquire into and determine their sufficiency as investments of the trust funds. The question of sufficiency is a very important one, for the division of the residue into five equal parts, turning over to each part its proportion of mortgages, is to be made by the executors, or, they having failed to malee the division, by the court. This division is the final appropriation for each share, as the trust compairy, under the will, only allots the shares after receipt and keeps them separate. The loss on any mortgage turned over in part payment of a share will therefore be a loss on this share alone. The cause is not ready for final disposition in this respect and it will therefore stand over for further hearing and directions after declaration that investments made before the expiration of the two years in New York City mortgages were not of an unauthorized character. I will also hear counsel as to the decree to be made in reference to investments made after the expiration of the two years, as this point was not specially referred to either in the arguments or briefs.