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unless and until they are forced to do so by bondholders, are not common” 64 (italics added), and that “Trustees have even denied any duty to exercise their power to declare maturity of the securities accelerated"65 and that the requirement of percentage request (as well as of indemnity to the trustee) "merely places a liberal top-limit upon the conditions to action which the trustee may impose upon security holders.'?66

These and other statements which appear to criticize trustees for not taking, without the percentage request mentioned in the indenture, such important action as precipitation of principal, throwing the issuer into receivership, or foreclosing the mortgage, seem to be based upon the view that trustees presently have some obligation to take such action but that they avoid the obligation by hiding behind the provisions requiring the request of the stated percentage in order to make the obligation enforceable. Trustees should not be criticized because, without the request, they usually do not precipitate the principal or initiate receivership proceedings or take other action which is likely to be ruinous to the issuer's credit and may be directly contrary to the best interest of the bondholders. This portion of the Report overlooks the very important consideration that indenture provisions contemplating the request of a stated percentage have been. repeatedly recognized by the courts as constituting a contract between the security holders,67 as wise and proper, and as inserted for the benefit of the security holders themselves. 68

The non-recognition of the underlying purpose of provisions requiring the request of the specified percentage in order to compel trustee's action apparently is the reason for the statement in the Report 69 that the “corporate trustee is generally adequately equipped with powers; its inactivity is the product of its own desires coupled with provisions in the indentures which relieve it of any duty to act.” The inactivity referred to cannot properly be said to arise from the “desires” of the trustee when so plainly it arises from the view, recognized by the United States Supreme Court 70 to be sound, that not the trustee but the specified percentage ordinarily should initiate proceedings vitally affecting the holders as a whole.

The Report 71 also criticizes corporate trustees, at least inferentially, because often they will not take action involving them in expense or possible liability without the indemnity to which under the indenture contract they are expressly entitled. Instances undoubtedly occur where indemnity is not necessary and should not be required. As is later stated, trustees frequently impound income or intervene in an existing litigation without indemnity. Where the trustee has an adequate lien upon the trust estate, indemnity is often waived. The reasonableness of a request for indemnity depends upon the circumstances of the particular case. However, a trustee, not otherwise adequately protected, cannot properly be said to have a general obligation to act, and to violate the obligation by not acting, without reasonable indemnity against expenses which it is asked to incur or possible liabilities which it is asked to assume. It should not be forgotten that corporate trustees are banking institutions which owe a duty to their depositors and stockholders.

The Report contains various criticisms of the manner of performance by corporate trustees of obligations (whether or not amounting to legally enforceable duties) which trustees generally would agree that they have. These criticisms in some instances are just and in other instances unjust. Some of them present borderline cases. Opinions of the public or of public bodies may well vary as to the proper method of performing obligations which the trustee has, just as there are sometimes considerable variances of opinion as between intelligent and welladvised trustees themselves. Some of these criticisms appear to be well founded; but, outside of the field of "real estate” mortgages (in respect of which trustee practices have differed radically from those prevailing generally under corporate trusts), the Report, as is later shown, does not support any suggestion of general maladministration. Furthermore, it seems indisputable (although this is neces64 Id. at 43. 65 Id. at 43. 66 Id. at 44. 67 Seibert v. Minneapolis & St. Louis Ry., 52 Minn. 148, 53 N. W. 1134 (1893). 68 See Chicago and Vincennes R. R. v. Fosdick, 106 U. S. 47, 77-78 (1882); Crosthwaite v. Moline Plow Co., 298 Fed. 466, 469 (S. D. N. Y. 1924); Home Mortgage Co. v. Ramsey, 49 F. (20) 738, 743 (C, C. A. 4th, 1931); Rodman v. Richfield Oil Co. of California, 66 F. (20) 244, 249–250 (C. C, A, 9th, 1933). 69 Report, at 42. 70 See Chicago & Vincennes R. R. v. Fosdick (106 U. S. 47, 77–78 (1882)). 11 Report at 43, 52–53.

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sarily a matter of experience and opinion)72 that the very few cases which appear to be correct examples of misperformance of obligations which corporate trustees really have are clearly exceptional, not typical, cases. Of course, it is quite to be expected, and entirely proper, that the Report should use striking examples. However, the Report would be accurate and more fair if, after citing extreme instances, it had stated that such instances are in the small minority.73 It is regrettable that it ends upon such a note as the following: 74

"Such measures would go far toward curbing the exploitation of investors which has occurred either at the hands of the trustee itself or at the hands of the reorganization and management groups with the knowledge, consent, or acquiescence of a complacent and inactive trustee.”

The statement last quoted, particularly because it is a part of the concluding paragraph of the Report, leaves a strong impression that corporate trustees in general are considered by the Commission so likely to be dishonest or incompetent as to render necessary the adoption of legislation to protect investors against 'exploitation” by or with the consent of their own trustees. While it is scarcely believable that such an impression could have been intended, the real possibility that the Report does leave this impression should be eliminated in some way if there is to be any fair presentation of the matter to Congress.

If we disregard, for the moment, the administration of "real estate” indentures, the Report completely fails to show any general situation of maladministration. In spite of the great number of corporate trustee administrations which are taking place, the entire Report refers to approximately six modern instances (outside of

real estate" indenture administration) as to which it is asserted that corporate trustee administration-as distinguished from the practices of others or from the weakness of various indenture provisions—has been improper.

Of course, the instances to which the Report refers are cited as illustrations and do not purport to include all cases which may have come to the attention of the Commission; but nevertheless if it was intended to show even that maladministration is occurring in a substantial number of cases, an attempt should have been made adequately to support such a charge. The Report cites hardly any decisions in which corporate trustee administrations have been held to be improper. Naturally, when so great a number of administrations by such trustees has occurred there are such decisions; but they are extremely few in number. If it could be said that in a publication dealing with corporate trustees generally, including the most reputable banking institutions in the United States, the Commission was justified in mixing the discussion of corporate trustee practices generally with the practices of trustees under "real estate” indentures, there might be a little more reason for general suggestions of maladministration. However, the securities issued under such indentures form only a trivial part of the securities issued under corporate indentures administered by responsible institutions.75

Even in the case of “real estate” indentures, the Report does not assert that cited instances of alleged maladministration are in any way typical of the practice of responsible banks or trust companies. Such banks and trust companies do act as trustees under those indentures; but the Report does not appear to contain a single instance where maladministration thereunder by such banks or trust companies under those indentures is asserted. Many cases are mentioned in the Report of the selection of individuals, as trustees under “real estate”

72 Expressions regarding so large a subject as whether particular practices are usual or unusual necessarily rest upon the particular experience of the writer. The author's experience of some twenty-five years has been in representing various New York trustees. However, the practices of experienced New York trustees may be regarded as fairly typical of the accepted practice in other large cities. Although no statistics are believed to be available, New York companies are believed to be the trustees under a very large majority, as to amounts involved, of all indentures in the United States. Of course, in New York or elsewhere, there may be found instances of incompetent administration, just as in the case of testamentary trustees or in any kind of business. All opinions expressed in this article are the personal opinions of the writer.

73 See Posner supra note 14, at 248: “To the credit of these institutions, it must be said that, in practice, their standards of administration have been so much higher than the express requirements of the corporate indenture that comparatively few instances have invoked criticism in the past half century.'

74 Report, at 112.

73 Replies to inquiries made to banks and trust companies acting as trustees for more than a majority in amount of all outstanding securities of Railroads, Utilities and Industrials indicate that "real estate" securities for which they are trustees do not aggregate over approximately 2% of all securities for which they act.

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indentures, who were closely connected with the issuing house.76

Such cases have nothing whatever to do with the usual administration of corporate trusts by reputable institutions. Nevertheless, the Report in several places 77 illustrates its criticisms of corporate trustees by referring to the practices of such individual trustees. Since it deals with corporate trusts as a whole, it is difficult to see why references to administration by the last-mentioned trustees should have been included at all.

In spite of the fact that the concluding paragraph of the Report emphasizes "exploitation” by trustees, the bulk of the Report is devoted to the insistence that corporate trustees be required to undertake much more responsible duties than they presently have. Similarly, in the report made by the Streit Committee 78 with reference to "real estate” indentures, it is stated 79 that if conflicting positions were eliminated and the trustees were compelled to assumed the obligations of active trustees there would be practically no need for bondholders' committees.” While the desire, expressed by the Report, to have trustees assume more duties is qualified by the recommendation that they be separated from positions which are considered to involve possible conflicts of interest, the paramount fact in this connection is that the Commission desires the trustees to act as "guardians” for investors. Since the trustees would still be the same institutions, this would seem to indicate that language concerning “exploitation” was not intended to give the impression which it does.

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Other more specific criticisms of performance of the present corporate trustee functions appear to be incorrect. The Report states that in certain instances wherein mortgagors were required to submit periodical financial statements, trustees have accepted such statements without examination, other than a "cursory” one, as to whether or not they complied with the indenture, or without protest where they did not comply; and, with reference to these practices, that "there is ample evidence that they reflect the attitude and practice of corporate trustees generally.”80 It may be true that some trustees accept such statements without scrutiny or without calling for proper statements; but this attitude and practice most certainly is not the attitude and practice of corporate trustees generally.81

The testimony of a witness before the Commission is quoted to the effect that under the usual indenture provision the trustee may assume that the company is not in default until notified in writing by the holders of a stated percentage in amount of the bonds; and it is stated that “the trustee can shut its eyes to the existence of a default” unless so notified, and that the “language of these clauses is broad enough to relieve the trustee from the necessity of becoming conscious of default even if it controls the issuer and has actual notice of the default.'82 These statements are too broad if taken as implying that trustees do ignore defaults within their knowledge unless notified by the specified percentage, or if taken as meaning that trustees would be fully protected in thus ignoring defaults.

After knowledge of default, no trustee conversant with its functions would comply with the request of the issuer for action permitted by the indenture only "until default”; and it is extremely doubtful that a trustee would be protected in so doing.83 This part of the Report may be limited to its context which criticizes trustees because sometimes they do not notify the issuer or the security holders of defaults of which they know but of which they have not been formally advised by the specified percentage. It is true that, with respect to affirmative action

76 After citing the very unusual case of a trust company, an 80% interest in which was owned by an under writing house, the Report, at 103, states:

“These affiliations have been even more conspicuous in the real estate bond field. As we indicated in our report on Committees for the Holders of Real Estate Bonds it was the common practice for the trustee under the bond indenture to be an officer, director, or affiliated bank of the house of issue. As we stated in that report:

" "Thus in case of 84 Straus issues, secured by properties located in California and in the Pacific northwest and outstanding on February 27, 1931, Straus executive officers were acting as trustees for 77 issues, while trustees for only 7 issues had no apparent connection with the underwriter. ... The extent of the underwriter's control over the trustee is indicated by an examination of 137 defaulted issues underwritten by S. W. Straus & Co. of New York. In all of these issues we find that a Straus official or the Straus Na. tional Bank & Trust Co. (of New York) acted as either the original or successor trustee.'

77 E. J., Report, at 32-33.
78 See supra note 7.
79 See Streit Report, supra note 7, at 47.
80 Report, at 35, 37, 68.

81 Inquiry made upon this specific subject to New York corporate trustees, including those having in the aggregate far more than a majority in amount of the corporate trust business in the United States, has produced, without exception, the reply that the trustees, although having no legally enforceable duty to do so, in all cases scrutinize carefully financial statements required by the indentures and call for proper statements if those furnished do not comply with the indentures.

82 Report, at 37, 38.

83 Such compliance would involve a lack of power, in which case the trustee is not protected. See supra note 42.

such as giving notice, trustees exercise their descretion under all of the circumstances. Often, where the taking of such action might have a seriously detrimental effect upon the security, they await the instructions of the specified percentage. There may be forceful arguments on both sides of the question whether they should give such notice. The giving of notice may adversely affect the issuer and through it the security holders; it may lead to application for receivership, or to the institution of reorganization or other proceedings in bankruptcy, when such proceedings are unwise. On the other hand, the failure to give notice may result in the non-institution of such proceedings when they should have been instituted. No general rule can properly be stated, nor does the Report attempt to do so.84

The Report criticizes the employment by some trustees of counsel who also are counsel for interests conflicting with the trust or are counsel for a group of the bondholders, such as a bondholders' committee; and indicates that such employment is not unusual.85 In the author's experience the employment of the counsel for conflicting interests is decidedly rare. Various instances might be cited wherein trustees have declined to employ their regular counsel, whom naturally they would prefer to employ, because such counsel appeared to have a possibly conflicting representation. The experience of the writer is that when trustees are considering the employment of counsel they rarely fail to require, as a necessary condition of the employment, that counsel do not represent conflicting interests. It is a fact that the same trustee is sometimes the trustee under different indentures of the same corporation and that prior to default the same counsel normally would act for the trustee in different capacities.

This was particularly true as to old railroad mortgages, such as those of the Missouri, Kansas & Texas Railway Company, and of the Chicago and Northwestern Railway Company,86 usually covering branches of a large system. In recent years it is much more likely to be the case that there are different trustees under different indentures of the same corporation. However, in some cases the same trustee does act under the different indentures. The listing requirements of the New York Stock Exchange do not prevent a trustee from so acting, provided that it shall file with the Stock Exchange an agreement to resign from any conflicting position which shall thus develop.87 It may be very desirable, from the viewpoint of expense, familiarity with the property and other practical considerations, that the same trustee should act under different indentures of the same company. The likelihood of any conflict before default is very small; and the employment of the same counsel under several indentures presents a situation only of remote possible future conflict, not of actual conflict with which this portion of the Report is concerned. Where, however, hy reason of default or otherwise, the possibility of substantial conflict has become real, the trustee and its counsel usually resign under one cr the other of the indentures; and this has long been true, as in the Missouri, Kansas and Texas case and the Chicago and North Western case,88 entirely without consideration of Stock Exchange requirements.

While the employment of the counsel for conflicting interests is very unusual, it has been less uncommon in the past for the trustee to employ counsel who also act for the bondholders' committee.89 In some cases this works well and saves expense; but, because the trustee represents all bondholders, the better view would seem to be that it should not retain counsel who also represent a particular group; and in one case such practice has been judicially disapproved.90 As the Report

74 The Report states, at 42: “Our conclusion is that to relieve the trustee of all obligation to give notice of defaults is undersirable. Rather it should have the affirmative obligation to take such steps toward advising security holders impending or actual defaults as are, in view of all the circumstances, reasonable and necessary for their protection. To publicize transient and technical defaults might do irreparable damage to security holders and issuer alike. No rigid and inflexible rule can be prescribed. What is needed is a standard of conduct prescribed by law which requires the trustee to take the same action it would take were it the investor."

This, with its context, amounts to a suggestion not that trustees be required to give notice in all cases, but that they be compelled to exercise their discretion honestly and intelligently, which, beyond any ques tion, they presently do in the great majority of cases.

85 Report, at 60. 86 See printed record, Central Trust Co. v. Missouri, Kansas & Teras Ry. (E. D. Mo. 1933–1936), Vol. I, 287, 463, 695; printed record, In the Matter of Chicago and North Western Ry. (N. D. III, 1935–1936), Vol. I, 151, 259.

87 Stock Listing Requirements, New York Stock Exchange, C. C. H. Stock Exchange Regulation Service Supp., f 11617, provides after making certain “recommendations”: “Each mortgage, indenture, or deed of trust should be represented by a separate trustee" (italics added). The Exchange interprets (although not in published form) this language as a general recommendation; and, where no likelihood of harm appears, it will list securities, although the same trustee is acting under the different indentures, upon the agreement of the trustee to resign in case that conflict shall appear.

88 See printed record, Central Trust Co. v. Missouri, Kansas & Texas Ry. (E. D. Mo. 1933-1936), Vol. I, 390: printed record, In the Matter of Chicago and North Western Ry. (N. D. III., 1935–1936), Vol. 1,'475.

29 The Report states, at 80, that in 16% of the cases investigated counsel to the committee was counsel to the trustee.

90 See U.S. & Mexican Trust Co. v. U. S. & Mexican Trust Co. as Trustee, 250 Fed. 377, 382 (C. C. A. 8th, 1918).

states,91 there is "respectable authority among trust companies and their counsel that the employment by the trustee of counsel to the committee is undesirable.' On the other hand, some trustees feel that they best serve the interests of security holders by avoiding the expense of duplicating counsel, where no real conflict between the committee and the nondepositors is at all probable. 92

The Report suggests 93 that trustees should promptly intervene in receivership or bankruptcy proceedings of the issuer and should move expeditiously to impound rents and profits. Combined with subsequent references to general intertia" of corporate trustees and the statement that trustees “normally will not act” unless requested by the specified percentage, 94 the suggestion apparently implies that trustees usually do not intervene or impound income without such request. The author's observation of railroad reorganizations under Section 77, such as the proceedings involving the Missouri Pacific Railroad Company, The New York, New Haven and Hartford Railroad Company, and the Chicago and North Western Railway Company,95 leads to the belief that it is now the usual practice for trustees, without request or indemnity, to intervene and make demand for the income. In these cases, almost all of the trustees have intervened in the court proceedings, and also before the Interstate Commerce Commission when a reorganization plan has been presented. The court records of reorganization proceedings under Section 77B generally show that the practice is also prevalent therein.96

The characterizations by the Report of present trustee duties are not accurate. For example, it states that the trustee is presently nothing more than “a stakeholder and an amanuensis of the group which happens to be dominant." 97 The preceding portion of this article will demonstrate that trustees, even prior to default, undertake very serious responsibilities and perform very substantial services, and that a trustee is not properly described as a mere stakeholder. One court has stated that such a trustee "would seem to occupy middle ground between a mere stakeholder or depositary, on the one hand, and a testamentary trustee, on the other." 98 This is a fair characterization. Nor is the trustee merely an amanuensis of the dominant group. It is true that in most cases the trustee will follow the views of the holders of a majority of the bonds. Certainly there is no impropriety in so doing, even where the indenture does not provide, as frequently it does, that the trustee is bound by the instructions of the majority. A general statement, however, that trustees follow as a matter of course the instructions of the majority, would not be correct. It is not the practice of competent trustees to accept blindly the suggestions or requests of the majority where improperly prejudicial, by reason of illegality or otherwise, to the minority.99 The respect in which the interest of the majority most frequently conflicts with that of the minority is with reference to the upset price to be fixed by the court in the decree of sale, the upset price being the minimum bid which the court will consider. 100 As a rule, the courts themselves look throughly into the propriety of the proposed upset price; and trustees also give careful consideration 91 Report, at 78.

92 The Report also comments, at 80, upon the fact that in 36% of the cases investigated by the Commission the trustee was represented directly on the committee, and states that the trustee is thus prevented from being an effective representative of all security holders. It has been held that there is no impropriety in the trustee being represented on, or being the depositary for, the bondholders committee (Fidelity Trust Co. v. Washington-Oregon Corp., 217 Fed. 588, 600-601 (W. D. Wash., 1914); Guaranty Trust Co. of New York v. Chicago, M. & St. P. Ry., 15 F. (2d) 434, 440, 441 (N. D. Ill., 1925 and 1926); Palmer v. Bankers Trust Co., 12 F. (20) 747, 753 (C. C. A. 8th, 1926)] although minority hondholders were permitted to intervene in a case in which the president of the trustees was chairman of the comunittee, the same counsel acted both for the trustee and for the committee, the trustee institution was also the depositary for the committee, and (this being probably the controlling fact) an actual conflict of interest between the committee and the minority had developed after the formation of the committee. Central Trust Company of New York v. Chicago, Rock Island and Pacific R. R. 218 Fed. 336 (C. C. A. 2d, 1914). The mere fact that one of the members of the committee is an officer of the trustee does not mean that the committee will dominate the trustee. The depositary is merely a mechanical agency.

93 Report, at 47. 94 Id. at 61.

05 See printed records, In the Matter of Missouri Pacific R. R. (E. D. Mo. 1933–1936) 269, 1129, 165, 2063, 2221, 3259, 3357, 3401; In the Matter of New York, New Haven & Hartford R. R. (D. Conn. 1935–1936) 35, 89, 95, 111, 1113, 47, 141, 227, 315; In the Matter of Chicago and North Western Ry. (N. D. III. 1935-1936) 151, 259, 775, 783, 835, 841, 935, 991, 431, 511. 96 See, generally, Israels, op. cit. supra note 45, at 411, 97 Report, at 70. 98 See Marshall & Ilsley Bank v. Guaranty Investment Co., 213 Wis. 415, 422, 250 N. W. 862, 864 (1933). 99 Corporate trustees are thoroughly familiar with the rule stated in Hollister v. Stewart, 111 N. Y. 644; 19 N. E. 782 (1899) that they are “not at liberty to follow the advice or wishes of the majority” without also being responsible to the “minority'' for "faithful administration."

100 See Weiner, Conflicting Functions of the Upset Price in a Corporate Reorganization (1927) 27 Columbia Law Rev. 132.

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