Real Estate Trust Co. of Philadelphia v. Union Trust Co.

McSherry, C. J., delivered the opinion of the Court. There are three appeals in this record which comes before us from the Circuit Court of Baltimore City. The facts which it is necessary at the threshold to state as a basis for the consideration of the questions presented, are briefly as follows: The Arling-Brooke Real Estate Company was duly incorporated under the laws of the State of New York, and in 1901 acquired title to a tract of land in the western portion of Baltimore City. In June of the same year it executed a mortgage to the Union Trust Company of Maryland, trustee, to secure an issue of six hundred thousand dollars of bonds, each bond being of the denomination of one thousand dollars. ⁴⁴ The bonds were to bear interest which was to be payable semi-annually on the first days of June and December in each year.

The bonds were not in fact issued, but in their stead certificates convertible into bonds were delivered. The interest due on December 1st, 1901, was paid on a portion of the certificates. In June, 1902, the mortgagor corporation defaulted on the interest due on the first day of that month, and the Union Trust Company, trustee, filed its bill of complaint in the Circuit Court of Baltimore City praying for a foreclosure of the mortgage and a sale of the mortgaged property. The trustee, the Union Trust Company, sold the property to John V. Ward, who represented the bondholders and purchased for them, but the sale was excepted to, and upon a hearing of the exceptions it was set aside.

An appeal was taken to this Court, where the action of the lower Court in this behalf was affirmed. Union Trust Co. v. Ward, 100 Md. 98 . During the pendency of the contestation and before a second sale was had, the Western Maryland Railroad Company inaugurated condemnation proceedings against the Arling-Brooke Real Estate Company to acquire a portion of the latter’s property for the road bed of the railway, and the sum of $62,500 after some negotiation, was finally awarded as damages for the land so taken”. This sum was paid into Court on December 14th, 1903, and on December 23rd, upon the petition of the Union Trust Company was turned over to it as trustee.

The latter being a banking company deposited in its own name as trustee under the mortgage, with itself, as banker, the above mentioned sum. On January 18th, 1904, it caused an expense account to be stated, and on June 29th, 1904, an audit was made out distributing the net proceeds of the fund. To that audit sundry exceptions were filed and the action of the Court upon those exceptions and its rulings with respect to the admissibility of certain evidence taken before the auditor are the subjects with which we have to deal on these appeals. Of those exceptions some were filed by the Real Estate Trust Company of Philadelphia, others by the Union Trust Company, trustee; and ⁴⁵ the remainder by James L. McLane and others, constituting a committee of the certificate holders.

As some of the except-ants duplicated the objections filed by others, it will be more convenient in considering them, to deal with them without reference to the particular party by whom they were interposed. They will be taken up in the order in which the questioned items appear in the auditor’s account. First. Was the Circuit Court right in overruling the exceptions to the allowance to the Union Trust Company, as trustee, of the sum of $2,548.50 as expenses of the first sale which was later set aside, as heretofore stated?

The sole ground upon which the effort to hold the trustee liable for those expenses, is that the sale in respect of which they were incurred was set aside because of the failure of the trustee to give a bond as required by the Act of 1900, ch. 114, sec. 205A, Art. 16 of the Code. If the omission to give a bond was due to the' negligence or carelessness of the trustee, then clearly the expenses alluded to ought not to be charged against the trust fund, but should be paid by the delinquent trustee. But if, on the contrary, the trustee acted with appropriate prudence it will not be held liable for an error into which it fell in consequence of following the advice given it by reputable counsel, even though it subsequently turned out that the advice so given and acted on was wrong. - It was said by the Supreme Court of Pennsylvania in Bradley's Appeal, 89 Pa. St. 514, “Acting in good faith and in the strict line of their duty, they (the trustees) sought the advice of respectable and experienced counsel.

It would be harsh as well as unjust to hold them responsible for his error of judgment, and the law does not require us to do so.” It comes down then to a mere question of fact as to whether the items of expenses embraced in the exception now being considered ought to be paid out of the trust fund or by the trustee. It is abundantly and clearly proved that the President of the Union Trust Company consulted Mr. T. Wallis Blakistone, Messrs. Slingluff and Slingluff and Mr. Ruxton M, Ridgely, all reputable and experienced members of the bar, and ob ⁴⁶ tained their opinion to the effect that before making the sale under the mortgage from .the Arling-Brooke Real Estate Company, it was not necessary for the trustee — the Union Trust Company — to file a bond under the Act of 1900. Upon that opinion the company acted; and that opinion was doubtless based upon the twelfth section of the Company’s charter— the Act of 1898, ch. 456.

The section just indicated provides “That when any Court shall appoint the said company as receiver, trustee, administrator, executor, assignee, guardian, or committee * * * the capital stock as paid in shall be taken and considered as the security required by law for the faithful performance of their duties.” When default in the payment of interest by the Arling-Brooke Company occurred the trustee, the Union Trust Company, filed a bill in the Circuit Court of Baltimore City asking the appointment of a receiver to hold the real estate covered by the mortgage until a sale could’be made under the direction of the Court. The Court assumed jurisdiction of the trust, appointed receivers, and in due course passed an order authorizing the Union Trust Company,, as trustee under the mortgage, to sell the mortgaged property in accordance with the terms of the mortgage and to report the sale to the Court for its ratification. It was under these conditions that the counsel who were consulted by the Union Trust Company gave the opinion that no bond was required. The Act of 1900 embodied in sec. 205A, Art. 16 of the Code- had not then been interpreted by the Courts and it was not until the case of Union 7rust Co. v. Ward, supra, arose, that the statute was judicially held to be applicable to the Union Trust Company.

In view of - the fact that by an order of the Circuit Court the Union Trust Company was, under the bill filed by it, authorized, as trustee, to sell the mortgaged property; and inasmuch as by the twelfth section of its charter the only security it was obliged to give when appointed trustee was its paid in capital stock, it was not negligence, or an indication of bad faith on the part of the trustee, to act upon the opinion of its advisers to the effect that in such circumstances no bond was required. When the question was finally deter ⁴⁷ mined in this Court and it was decided that the provisions of the charter did not include a sale under a mortgage notwithstanding the prior order of authorization, the opinion upon which the trust company acted in making the sale without a bond was shown to be erroneous. Surely under such circumstances to hold the trustee answerable for the expenses to which it was put in making the sale that was . subsequently vacated, would be harsh as well as unjust. We think the Circuit Court was right in overruling that exception.

The Maryland cases relied on to support the opposite conclusion are distinguishable from the one at bar. Thus in Owings v. Rhodes, 65 Md. 408 , where the observations of Lord Redesdale in Doyle v. Blake, 2 Sch. & Lef. 243, were quoted with approval, it appeared that a trustee paid to a cestui que trust money which had been audited to the latter’s creditors; and it was held that such a mistake, no matter though made honestly, could not relieve the trustee from the obligation to apply the fund according to the direction contained in the ratified audit. So, in Green, trustee, v. Putney and Riddle, 1 Md. Ch. Dec. 262, whilst it was broadly stated that a trustee' who disburses money without competent authority is chargeable, as if the money were in hand, the proposition was qualified and restricted in its application to trustees appointed by decrees to sell property. “The principle,” said the Chancellor, “cannot surely be applied with the same vigor to a trustee acting under a deed giving express authority to pay debts;” and he refused to require the trustee to account for some five thousand dollars paid out in counsel fees.

In Murray et al. v. Finour, 2 Md. Ch. Dec. 418, it was held where a testator gave certain stocks by his will to a trustee for the use and benefit of his daughter and her children, without delegating to any one a power to alter or change the investment, that the trustee, who, having no express authority from some competent tribunal, sold the shares and invested the proceeds in other securities would be required to replace the original stock and to bear the loss occasioned by the improper alteration of the investment. None of these cases touch adversely the conclu ⁴⁸ sion reached on the question raised by the exception now being considered. It may be added that the mortgage in explicit terms provides for deducting from the proceeds of sale “proper allowances for all the expenses thereof,” and the allowance of the items objected to would seem to be strictly within the ruling in Green, trustee, v. Putney and Riddle, supra.

Second. Ought the trustee to be charged with $43.14, being the amount, it is alleged, of the discount which would have been allowed the trustee if it had paid the city taxes for the year 1904 earlier than it did pay them? It appears by an agreement in the record that the taxes in question were paid June 29th, 1904; but we have failed to find any statement as to the time within which a discount could have been claimed, or as to the per centum of the discount allowed if claimed. In the absence of these material matters it cannot be said that the trustee was derelict in not paying the taxes at an earlier date.

The lower Court was, consequently, right in overruling the exception. Ihird. Should the trustee be allowed to retain the sum of two thousand dollars to meet contingent expenses pending the final settlement of the trust estate? The retention of the sum named is not a final disposition of the fund ; and it was largely a matter resting in the sound discretion of the Court under whose supervision the trust is being administered, as to whether it would be judicious or advisable for the trustee to hold the sum named to meet contingencies.

Ultimately the Court must pass upon the disposition made of the money and no one can be injured by its being temporarily withheld from distribution. The property covered by the mortgage consists of unimproved land. Heretofore the trustee has made large, advances to pay taxes and other expenses. It is under no obligation to repeat this ; and as taxes will accrue if they have not already been levied, it is both wise and prudent to leave in the hands of the trustee a fund adequate to meet such demand when it matures, rather than to permit the taxes to run until overdue, and to become augmented by the addition of interest.

We see no reason for disturbing the action of the Circuit Court in overruling this exception. ⁴⁹ Fourth. The auditor’s account allowed a -dividend on the sum of $9,050, being the interest accrued between June 1st, and December 1st, 1901, on certificates Nos. 1 to 360, both inclusive, and on certificates 476 and 492. There were two exceptions to this dividend. One objected to any allowance being made because the coupons had “been already paid, satisfied or disposed of.” The other insisted that the allowance of a mere dividend was erroneous, because the interest should have been allowed in full as a preferred claim.

The Circuit Court sustained the exception first mentioned and refused to allow any portion of the fund to be applied to the interest which had accrued on the above named certificates, between the dates designated. Upon the certificates held by certain parties in Baltimore .the December, 1901, interest was paid. In dealing with this branch of the case the auditor concisely states the situation in the words we are about to quote, and we quote them because they will simplify the discussion of these exceptions. After noting that the interest on some of the certificates had been paid, as above indicated, the auditor in alluding to the certificates upon which no interest was paid, continues “the claim is made that such unpaid interest (of coupons) should be allowed as a preferred claim, s'o as to equalize the payments to all the certificate holders.

There is no evidence that the holders of these certificates ever presented their claim for interest or that it was refused to them. The claims as presented to the auditor, appear to be the case of a party neglecting to present his coupons for payment before the company became insolvent and the foreclosure proceedings were begun. The auditor is of opinion that under the circumstances the claim is not a preferred one but is simply a debt due, of the same dignity and priority as the principal of the mortgage debt.” The question thus raised is presented under three aspects, viz.: Is the unpaid interest