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able attorneys' fees against the unsuccessful party (with certain exceptions not presently material). This provision, of course, was designed to prevent strike suits. It is a very wise provision. It does not force the court to require an undertaking or to assess costs and attorneys' fees. Inasmuch as this would be entirely in the court's discretion, it is inconceivable that the court would ever do so in a meritorious case apparently brought in good faith. On the other hand, it would prevent the growing menace of suits deliberately brought without proper foundation in order to obtain a consideration for withdrawal.


If this committee shall decide to recommend a bill, it is most sincerely requested to recommend only such a bill as will minimize uncertainties and dangers in corporate trust administration and will not disrupt the country's business by either forcing out of corporate trusts capable and responsible trustees or requiring them to gamble with the funds of their depositors.



(Reprinted from Columbia Law Review vol. XXXVI, No. 8 December 1936) THE SECURITIES AND EXCHANGE COMMISSION AND CORPORATE TRUSTEES

By H. C. McCollom Under date of June 18, 1936, the Securities and Exchange Commission made

1 a report ? to Congress recommending radical enlargement by federal legislation of the duties of corporate trustees. By the term "corporate trustees” as used in this article is meant trustees (whether they be corporations or individuals) under corporate trust indentures—that is, mortgages or deeds of trust, collateral trust agreements, and unsecured debenture agreements. The Report states that such trustees are presently no more than passive stakeholders; and the substance of the recommendations is that they be transformed into "active trustees,” like testamentary or other personal trustees, so that investors will have "an active guardian of their interests throughout the entire life of the security.”' 4 Uniform federal legislation is considered by the Commission to be necessary because its powers are inadequate.5

The Report is stated to have been made pursuant to Section 211 of the Securities Exchange Act of 1934 as an outgrowth of the study and investigation by the Commission of protective and reorganization committees. The theory of the Report appears to be that, in order to afford to investors maximum protection against "exploitation”, it is necessary not only to suggest legislation regulating committee personnel and activities but also to change corporate trustees into guardians of investors as against issuing corporations, underwriters or sellers of securities, and protective and reorganization committees.

1 Herein termed the Commission. 2 Herein termed the Report. The Report is entitled “Trustees under Indentures," and is Part VI of “Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees." The last mentioned report is proposed to be in six parts, of which there have already appeared Part IV dated April 30, 1936, and entitled "Committees for the Holders of Municipal and Quasi-Municipal Obligations." Part III dated June 3, 1936, and entitled “Committees for the Holders of Real Estate Bonds," and Part VI above mentioned. In its letter transmitting Part VI to Congress the Commission states:

“There are in preparation other parts which deal with (1) committees and other agencies for holders of foreign governmental issues; (2) general problems of all reorganization and protective committees; and (3) the various techniques for effecting reorganizations, further recommendations of this Commission for appropriate legislation in the light of the situation which this study and investigation have revealed, and a consideration of the necessary machinery to effectuate these recommendations."

3 The pecularity of corporate trust deeds has long been recognized. Fosdick v. Schall, 99 U. S. 235, 252 (1878); Gilfillan v. Union Canal Co., 109 U. S. 401, 403 (1883). The particular characteristics of corporate mortgages, collateral trust agreements and debentúre agreements are explained in Stetson, Preparation of Corporate Bonds, Mortgages, Collateral Trusts and Debenture Indentures in Some Legal Phases of Corporate Financing, Reorganization, and Regulation (1922) 1; Page and Gates, The Work of Corporate Trust Departments (1926).

Report, at 4, 70, 110, 112.

The Commission states that its control over the listing requirements for securities on national exchanges, and its control over the securities of registered holding companies and subsidiaries, are inadequate for effectuation of its proposed reforms; and Congress is asked (Report, at 110, 111) to adopt uniform legislation, as a part of an integrated program dealing with all phases of the reorganization problem, forbidding the use of mails or other means of interstate transportation for the sale of securities issued under indentures, unless the indentures and the trustees thereunder shall meet the prescribed standards.

6 In addition to the recommendations which have been mentioned, the Report also contains recommendations designed to prevent corporate trustees from occupying positions which are believed to conflict with fiduciary responsibilities. They present a large subject not permitted by limitations of space, nor required by the scope of this article, to be considered herein. The question whether there should be restrictions against the occupation of possibly conflicting positions is not necessarily involved with the question whether the functions of corporate trustees should be revolutionized, although the two questions are closely tied together in the Report (at 71, 110).



By the Report attention is focused upon views which, while they may have been held by some persons for a long time past, have found concrete expression only recently. The losses of New York investors in real estate securities led to a resolution adopted by the New York Legislature on April 16, 1935, for the appointment of a Joint Legislative Committee to investigate real estate committees, trustees and fiduciaries, and to study related matters with a view to devising remedial legislation. This Committee with Mr. Streit as chairman after holding various hearings, made a report ? to the Legislature discussing instances of improper real estate financing, of failure to protect investors, of too close relations between underwriters or others and mortgage trustees; and it recommended, among other things, that trustees be required to assume additional activities prior to default and to become active trustees after default. These recommendations were adopted in large part by the law known as the Streit Law 8 which became effective on June 8, 1936, and, in addition to providing against conflicting positions of trustees, prescribes that no trustee shall accept a trust under any so-called “real estate” indenture unless the instrument creating the trust shall impose upon the trustee specified duties which, prior to default, are of a servicing nature (such as to collect the payments required to be made under the indenture) and, after default, include the duties—without any indication of the bondholders' wishes but "with due diligence, prudence and care and in his discretion”—to obtain the income by having a receiver appointed or otherwise, to declare the principal amount of the debt to be forthwith due and payable, to commence foreclosure, to apply in specified ways moneys collected by it or turned over to it by the receiver, to render annual accounts to the bondholders, and to bid for the property at the sale the minimum price fixed by the court.

While the Streit Law makes very substantial changes in the duties of New York corporate trustees, it is not comparable in scope to the recommendations made by the Commission, because the Law applies only to "real estate" indentures and thus relates to far more restricted subject matter than would be involved if similar duties were to be imposed, for example, upon the trustee under a railroad mortgage. Also, the Law is much more limited, in respect to the nature of the required duties, than are the recommendations.

After the Streit Committee had made its report to the Legislature and after legislation had been introduced to carry out its recommendations, the opinion in the Hazzard case 10 was rendered by Mr. Justice Rosenman. In that case the suit was brought by debenture holders to compel the corporate trustee to replace collateral securities which it had surrendered in substitution for other securities, or in lieu thereof to pay damages to the plaintiffs. It appeared that under the indenture there had been deposited with the trustee stock of certain operating utility companies; that the indenture provided that “the company shall be entitled to withdraw, and the trustee shall deliver to the company”, the deposited securities upon the delivery to the trustee of the substituted collateral and of specified documents containing a specified showing as to the earnings (but not the value) of the collateral which, after the substitution, the trustee would hold; that the trustee received the substituted collateral and the specified documents containing the specified showing and delivered the original collateral; that the substituted collateral was the stock of a holding company; and that the substituted collateral eventually proved to be worthless, while the original collateral retained substantial value. The indenture provided that the trustee should not be liable except ior “gross negligence or bad faith.” The court was of the opinion that officers of the bank in departments other than its trust department knew of the highly speculative nature of the substituted collateral; that such knowledge was imputable to the trustee; that the trustee, if judged by the standards of care imposed upon a common-law trustee, was negligent; that it was not acting, and was not paid to act, as a common-law trustee; that it had complied "with every detail of its contractual duty”; that the indenture contract relieved it from liability except for gross negligence or had faith, neither of which had been proved; and that the case should be dismissed. With this part of the opinion we are only generally conto live up to the responsibility which nearly every purchaser assumes it has, and which it represents to the public as having undertaken, in a sense, by the very advertisement of the designation 'trustee' "; and that the entire system "should be changed by legislation, so as to provide more adequate compensation to the trustee, and the imposition of a duty of active vigilance akin to that placed upon ordinary fiduciaries.11

erned; but the court went on to state that a corporate trustee “should be made 7 Report of the Joint Legislative Committee to Investigate Bondholders' Committees, Stockholders' Committees, Creditors' Committees, Certificate Holders' Committees, Corporations, Trustees and Fiduciaries, Legislative Document (1936), No. 66.

& Laws of 1936, c. 900, adding a new Article 4-A (consisting of g$124 to 129, 130 (a) to 130 (j) inclusive) to the Real Property Law.

By the term “real estate” indenture, as used herein, is meant an indenture secured primarily by real estate, for example, a hotel or an office building. Almost all corporate mortgages cover some real estate; but where the ownership and management of such real estate is not the principal business of the issuer but is merely incidental thereto, the mortgage would not be a so-called “real estate” indenture. The securities and indentures to which the Streit Law applies are defined in $8124 and 125 of Article 4-A of the Real Property Law.

10 Hazzard v. Chase National Bank, 159 Misc. 57, 287 N. Y. Supp. 541 (Sup. Ct. 1936).

The extent, if any, to which these expressions in the Hazzard opinion influenced the adoption of the Streit Law does not appear. However, it does appear, from the references to the opinion in its Report that the Commission was much affected by it. Thus, the recommendations made by the Report as to legislative changes in the duties of corporate trustees have some degree of support in the expressions of one of our ablest judges; but, of course, the court was not a forum in which could be presented or considered the arguments for and against such changes. The view expressed in the Hazzard case, as to misunderstanding by investors of the duties of corporate trustees, has been recently repeated by two other judges. 12

The recommendations made by the Report cannot be considered by Congress until its session beginning in January 1937. In the meantime, however, suggestions as to legislation of so revolutionary a character should be carefully weighed. If action is to be sought from Congress, it should be sought in an atmosphere free from misunderstanding as to what the present duties of corporate trustees really are and as to the services which they now render, and free from criticisms of the existing situation which are based upon such misunderstanding or are otherwise unjust. Only in such an atmosphere can fair and reasoned consideration be given to the paramount question whether, in view of the admittedly limited nature of the present duties of corporate trustees, it is necessary, practicable, and in the public interest that such duties should be enlarged as suggested. Before examining the recommendations made by the Report, attention should be paid to the true nature of the present duties of corporate trustees, to the services which they perform, and to the criticisms from which the recommendations contained in the Report have arisen.

Therefore we discuss: 1. The duties of corporate trustees and the services rendered by them; 2. Criticisms of the existing situation; and 3. Recommendations to Congress as to changes in corporate trustee duties.



The history of corporate trusts has been set forth in text books and legal periodicals. 13

The duties and liabilities of corporate trustees have been considered extensively.14 It is far beyond the possibility of reasonsable dispute that corporate trustees have never intended to accept, and there is no reason why any informed person should suppose that they do accept, fully active duties, for example, the management of the trust estate.

Personal trustees assume active management. Personal trusts were introduced into England shortly after the Norman conquest, having their origin either in the ancient German or the ancient Roman law.15 Those who accept such trusts do 11 159 Misc., at 85, 287 N. Y. Supp. at 571-572. The full text of the opinion in this connection is as follows so in the light of the long established rule that such trustees are “bound to employ such diligence and such prudence in the care and management, as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs." 16 A personal trustee has the direct control of the trust property. For example, usually it decides whether and when any part of the property is to be sold, selects investments for trust moneys, and manages realty when realty is a part of the trust.

It would be far better for the bondholders to pay a much larger compensation to the trustee, and be able to insist upon the usual vigilance of a fiduciary. The trustee need not become an insurer any more than, for example, a testamentary trustee. But the trustee should be made to live up to the responsibility which nearly every purchaser assumes it has, and which it represents to the public as having undertaken, in a sense, by the very advertisement of the designation “trustee.'

“Such change can come in this State only through action by the Legislature. Trustees have accepted duties under these indentures, slight as they are, relying upon judicial precedents absolving them from exercising ordinary care, and permitting them to insert practically unlimited exculpatory clauses. The rules which have been laid down by the courts can obviously not be altered now by the courts in justice to trust agreements which have been made in reliance upon them. The entire system, however, should be changed hy legislation so as to provide more adequate compensation to the trustee, and the imposition of a duty of active vigilance akin to that placed upon ordinary fiduciaries. Legislation to such end, applicable only to real estate trust mortgages, however, is now pending before the Legislature. (Assem. Intro. No. 1880, Print. No. 2779, by Mr. Streit.) Particularly, the right of release or substitution of collateral should be carefully circumscribed. If the trustee itself is not required to assume any duty of vigilance with respect thereto, certificates should be required of disinterested appraisal experts, not oniy as to earnings but as to value, and, indeed, as to every other item which banking experts consider important in measuring the desirability of collateral."

12 Cropsey, J. in Starr v. Chase National Bank, N. Y. L. J., Sept. 21, 1936, at 771 (Sup. Ct.); Cuff. J., in Fay v. New York Trust Company, N. Y. L. J., Oct. 30, 1936, at 1455 (Sup. Ct.).

13 See, for example, Smith, A Forgotten Chapter in the Early History of the Corporate Trust Deed (1927) 61 AM. L. RE7.900; Draper, A Historical Introduction to the Corporate Morgtgage (1930) 2 ROCKY MT. L. REV. 71. See, also, 7 FLETCHER, CYCLOPEDIA CORPORATIONS (Perm. Ed. 1931) $3070; 2 BOGERT, TRUSTS AND TRUSTEES (1935) $246.

14 See, e. 9. Posner, Liability of the Trustee under the Corporate Indenture (1928) 42 HARV.L. REV. 198; Note, Immunity Clauses in Corporate Trust Indentures (1933) 33 COLUMBIA LAW REV. 97. See also “Selected Bibliography," annexed as Appendix G to the Report which is under consideration in the present article.

18 1 BOGERT, TRUSTS AND TRUSTEES (1935) 9; Matter of Coutts, 140 Misc. 93, 98, 249 N. Y. Supp. 788, 793 (Sup. Ct. 1931).

It has been stated that while there were isolated instances of corporate trusts in the early 1830's, they had their real beginning in the decade from 1840 to 1850; that in the earliest cases, the documents were in the nature of certificates of deposit or escrow agreements, although as early as 1839 a trust company acted as trustee under an indenture which was substantially a mortgage; and that these instruments have grown “from the unpretentious real estate mortgage, without recitals or covenants, to the largest of all legal documents."17 Since the early days the great increase in the scope and complexity of corporate trust transactions has led in most cases to corporations superseding individuals as trustees, 18 and to a great expansion in the provisions of these instruments, including those which relate to the corporate trustee. As the complexity of the indenture provisions has grown, so have grown the provisions attempting to clarify the duties which the trustee assumes and those which he does not.

It is still true, however, that corporate trusteeships do not involve general active management. This is necessarily so because, until default, the management and control of the trust estate is in the obligor corporation, not in the trustee.19 For example, such a trustee, until default, usually cannot sell any part of the property, or select investments for trust moneys, or deal with the realty.20 Nor has it any function to supervise the management of the trust estate. After default, the trustee's duties become more active; 21 but even then the trustee's action is largely guided by the views of the security holders and when, as the normal consequence of default, the property has come into court, it is the court which manages and controls the trust estate.

To the extent that a corporate trustee accepts active duties, and if the indenture is properly drawn to carry out the intention of the parties, those duties are specified, not generalized, there is a clear statement of the authority upon which the trustee may act, and it is agreed that the trustee is not to have certain duties, such as the duty to attend to the recording of the indenture or to the application of the proceeds of the issue.22 Judicial opinions differ as to whether a corporate trustee also has implied duties. However, aside from the duties, seldom expressed, to exercise good faith and to refrain from gross negligence, the weight of authority, at least in New York where the question has been most frequently considered, supports the view that no duties will be implied which would conflict with the terms of the indenture.23 The limited nature of the duties of corporate trustees as compared with those of personal trustees has been recognized frequently by the courts and should be thoroughly understood, although apparently it is not.24

16 King v. Talbot, 40 N. Y. 76, 85-86 (1869).
17 Draper, supra, note 13, at 79, 85, 86, 94.
10 See 7 Fletcher, Cyclopedia Corporations (Perm. Ed. 1931) § 3127.

20 A trustee under a corporate mortgage is without authority, before default, to change or compromise the security, unless so authorized in express terms, or by necessary implication. Guaranty Trust Co. of New York v. Minneapolis & St. Louis R. R., 36 F. (20) 747 (C. Č. A. 8th, 1929). See also Colorado & Southern Ry. V. Blair, 214 N. Y. 497, 108 N. E. 840 (1915).

21 Sturges v. Knapp, 31 Vt. 1,54 (1858); Northampton Trust Co. v. Northampton Traction Co., 270 Pa. 199, 112 Atl. 871 (1921); Colorado & Southern Ry. v. Blair, 214 N. Y. 497, 108 N. E. 840 (1915).

22 As to whether the trustee can avail itself of an exculpatory clause for failure to record, see Bell v. Title Trust & Guarantee Co., 292 Pa. 228, 140 Atl. 900 (1928), where there was no covenant to record, and Benton v. Safe Deposit Bank, 255 N. Y. 260, 174 N. E. 648 (1931) (the New York court applying Pennsylvania law), where there was an exculpatory clause, and an express provision to the effect that the trustee was under no duty to record. Both cases relieved the trustee of liability. But see the dictum in Green y. Title Guarantee & Trust Co., 223 App. Div. 12, 227 N. Y. Supp. 252 (1st Dep't 1928), aff'd without opinion, 248 N. Y. 627, 162 N. E. 552

(1928) to the effect that an exculpatory clause could not excuse the trustee from filing a chattel mortgage because it was the only one who could file it. In McCauley v. Ridgewood Trust Co., 81 N. J. L. 86, 92, 79 Atl. 327, 329 (1911), the court said the exemption clause was waived when the trustee obligated itself by special contract to record the mortgage. Where there was no provision relieving the trustee, it has been stated that the trustee had the duty to record. Miles v. Vivian, 79 Fed. 848, 851 (C. C. A. 20, 1897). However modern indentures in practically all cases provide against the duty.

Normally the trustee has no duties in connection with the application of the proceeds of the bonds by the mortgagor, but the trust deed may impose duties with respect to the proceeds. 2 Jones, Bonds and Bond Securities (4th Ed. 1935) $ 1052; 7 Fletcher, Cyclopedia Corporations (Perm. Ed. 1931) § 3188, reser. ring to Dillon v. Barnard, Fed. Cas. No. 3915 (D. Mass. 1874), aff'd, 21 Wall. (U. S.) 430 (1874); Frishmuth v. Farmers' Loan & Trust Co., 95 Fed. 5 (C. C. S. D. N. Y. 1899), aff'd, 107 Fed. 169 (C. C. A. 2d, 1901); and Patterson v. Guardian Trust Co., 144 App. Div. 863, 129 N. Y. Supp. 807 (3d Dep't 1911). But com. pare Industrial & Realty Financial Corp. v. Continental Bank & Trust Co., 242 App. Div. 598, 276 N. Y. Supp. 49 (1st Dep’t 1934). Modern indentures almost always provide that the trustee has no duty to see to the application of the proceeds,

The difference between the duties of personal trustees and those of corporate trustees is taken into account by the differing bases of compensation. While it is not suggested that the fees of personal trustees are large, they receive generally a commission based upon the amounts handled.25 Before default corporate trustees are compensated by separate fees for acceptance of the trust, for authenticating bonds, and for acting as agents for the payment of interest in cases where they do so. They may be specially compensated for other special services. However, aside from the more or less standardized fees above mentioned for special services, their only compensation for general ordinary services is the annual so-called "maintenance fee.” In New York this is usually based upon the “Schedule of Fees” originally adopted about 1922, and since revised from time to time, by the Corporate Fiduciaries Association of New York City. This fee is very moderate, 26 and it has been said that the liabilities which a corporate trustee would assume, if it had active supervision of the trust, “would be altogether out of proportion to the compensation which mortgagors are able or willing to pay:

1 27 After default, the activities and responsibilities of the trustee are considerably increased and its compensation becomes greater, but ordinarily only to the extent allowed by the court in which is pending the equity receivership, foreclosure suit, bankruptcy, or reorganization proceeding, in which the remedies for default are usually pursued. There is no fixed standard of compensation for such services; often trustees are not paid for their services, or reimbursed for their expenses, until long after substantial services have been performed and substantial expenses have been disbursed; and the courts are not inclined to be over-liberal in the compensation allowed. 28

Although the legally enforceable duties of a corporate trustee are limited, it would be a mistake to assert that such duties are only perfunctory and that in practice it is a mere stakeholder. Before default, the more important functions (some being legally enforceable duties and others being useful services rendered) which competent trustees perform under usual indentures are the following:

(1) The examination of the indenture before accepting the trust. Although this examination is principally for the protection of the trustee, the examination has

23 A valuable citation of authorities in support of and opposed to the imposition of implied duties upon the corporate trustee is to be found in Note, Immunity Clauses in Corporate Trust Indentures (1933) 33 Co. lumbia Law Rev. 97. Aster citing this Note and Mr. Posner's article (su pra note 14) and after reviewing the decisions in New York and elsewhere, Rosenman, J., in Hazzard v. Chase National Bank, 159 Misc. 57, 81, 287 N. Y. Supp. 541, 567 (Sup. Ct. 1936), held that in New York, where the terms of the indenture are clear, no obligations or duties in conflict with them will be implied. Not long afterwards Cropsey, J., held that corporate trustees have implied duties as well as those expressed in the trust instrument. Starr v. Chase National Bank of the City of New York, N. Y. L. J., September 21, 1936, 771. It was stated, in the earlier New York litigation upon this subject, that the trustee of a corporate mortgage, in accepting the trust, undertakes to discharge the duty and exercise the care and diligence which would naturally be expected of an intelligent person acting in like circumstances to protect his own mortgage. Patterson v. Guardian Trust Co., 144 App. Div. 863, 129 N. Y. Supp. 807 (3d Dep't 1911), Rosenman, J., in the Hazzard case, found the Patterson case not to have been followed by later authority in New York; and the decisions which he cites support beyond question his conclusion.

24 See cases cited in Hazzard v. Chase National Bank, 159 Misc. 57, 287 N. Y. Supp. 541 (Sup. Ct. 1936). However, in the Ilazzard case and in the cases cited supra note 12, the courts were of the opinion that in: vestors generally still do not understand the limited nature of corporate trustee duties.

25 Compensation is awarded to personal trustees in New York under Civil Practice Act § 1518 (for inter vivos trustees) and the Surrogate's Court Act $ 285 (for testamentary trustees).

26 The latest published schedule is dated November 8, 1933, and states these annual fees as follows:

“For ordinary services as Trustee of unsecured issues-general duties only to be performed by the Trustee the folloiving fees are charged: $100.00 per annum on issues up to $1,000,000, and $30.00 per annum on each million on the next $5,000,000, and $25.00 per annum on each million on the next $4,000,000, and $7.50 per annum on each million on the next $10,000,000, and $2.50 per annum on each million in excess of $50,000 OCO.

“For ordinary services as Trustee of collateral trust, equipment trust indentures, or real estate mortgages, or other forms of secured issues, the following sees are charged: $150.00 per annum on issues up to $1,000,000, and $50.00 per annum on each million on the next $5,000,000, and $25.00 per annum on each million on the next $1,000,000, and $12.50 per annum on each million on the next $10,000,000, and $5.00 per annum on each million on the next $50,000,000, and $2.50 per annum on each million in excess of $100,000,000.” Ascl

ving “Representative Fe Corporate Trustees' in various cities is attached as App lix B to the Commission's Report.

27 See Stetson loc. cit. supra, note 3. See also Hazzard v. Chase National Bank, 159 Misc. 57, 287 N. Y. Supp. 541 (Sup. Ct. 1936). In Benton v. Safe Deposit Bunk, 255 N. Y. 260, 267, 174 N. E. 618, 650 (1931): “In the absence of any gross or wilful negligence there was nothing immoral about this trustee's a greement. Considering its slight financial interest in the transactton, the bank was merely prudent and cautious in limiting its liability and defining its duties. The plaintiff could have ascertained all the facts upon inquiry; nothing was hidden or concealed."

28 The statement by Medill, Fees and Expenses in a Corporate Reorganization Under Section 77B (1936) 34 Mich. L. Rev. 331, 344, indicates the tendency of the courts to limit allowances: In practically every case since the enactment of Section 77B the amount requested as compensation by the various committees, counsel, managers, trustees and others has either been disallowed entirely or reduced in proportions ranging from one-fourth to over three-fourths."

See also Developments in the Lau-Reorganizaiion Under Section 77B of the Bankruptcy Act, 1934-1936 (1936) 19 Harv. L. Rev. 1111, 1199et seq.


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