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LANDIS TRUST. (06/27/55)

June 27, 1955

LANDIS TRUST.


Appeals, Nos. 70 and 93, Jan. T., 1955, from decree of Court of Common Pleas of Franklin County, Miscellaneous Docket Volume O, page 97, in case of account of First National Bank and Trust Company in Waynesboro Pennsylvania, substituted trustee under instrument created by Frank F. Landis January 20, 1917, as modified. Record remanded.

COUNSEL

Robert T. McCracken, with him Norman von Resenvinge and Edward G. Taulane, Jr., for beneficiary appellant.

Edwin D. Strite, with him E. M. Biddle, Jr., and N. F. Keller, for trustee appellant.

Before Stern, C.j., Stearne, Jones, Bell, Chidsey, Musmanno and Arnold, JJ.

Author: Stern

[ 382 Pa. Page 490]

OPINION BY MR. CHIEF JUSTICE HORACE STERN

These are appeals from an adjudication and final decree rendered by the Court of Common Pleas of Franklin County sur the final account of the First National Bank and Trust Company in Waynesboro, as substituted trustee of certain trusts. The account was filed at the time of the termination of the trust in 1937, and a supplemental account in 1948. The matters involved in the operation and administration of the trust were so complicated, and the litigation seeking their disposition has been so long continued, that it is difficult if not impossible to discuss them in detail within the limited compass of a judicial opinion. They were all carefully analyzed by Judge SHEELY in the court below in a comprehensive and painstaking adjudication.

Frank F. Landis was an industrialist with extremely valuable interests in the Landis Tool Company, the Landis Machine Company, the Landis Engineering & Manufacturing Company, and other corporations located in Waynesboro, Pennsylvania. He had three daughters, Elizabeth L. Hershey, Ida M. L. Smith, Anna L. Sollenberger, and a son, Mark H. Landis. On January 20, 1917, he executed an instrument in writing in which he provided that the stocks which he owned in those corporations should be held by his son as trustee for each of the four children, the trustee to have authority to reinvest the income therefrom in such new investments as would be to the best interest of the beneficiaries, such investments to be approved by the settlor or his wife. There was a direction that the stock should "remain intact" and not be sold unless some emergency or contingency made a sale advisable, and then only with the consent of the beneficiaries and the settlor or his wife. Each of the children, as well as the settlor himself, was to receive 10% to the income from

[ 382 Pa. Page 491]

    the trust assets. The securities were to remain in trust for a period of 20 years, at the expiration of which time they were to be turned over without any restrictions to the four children, their heirs, executors and administrators.

It appears that the stock certificates placed in the trust were in the names of the children individually, and, being delivered to Mark H. Landis as trustee, he continued so to hold them without having them transferred to himself as trustee, so that there was nothing on their face to indicate the existence of the trust. The income received from the trust assets greatly exceeded the amounts thereof paid to the beneficiaries, and the trustee invested the surplus in a number of speculative business enterprises; he also borrowed large sums of money for this same purpose, giving stocks in the trust, both the original and those newly acquired, as collateral security therefor. In addition to loans to himself he borrowed money on individual notes of two of his sisters on the stock certificates issued in their names, but neither sister received the proceeds of such loans. Ultimately his loans at First National Bank and Trust Company in Waynesboro totaled approximately $600,000, as security for which trust assets valued at approximately $1,500,000 were deposited. His total obligations at all banks, secured by trust stocks, exceeded $1,000,000.

Many of the investments made by Mark Landis proved to be wholly worthless and others of little value. The business corporations into which he bought fell into grave financial difficulties. The situation approached a climax in the panic years of 1929 and 1930 when, for the first time, the Waynesboro Bank seems to have learned of the existence of the trust deed and that the stocks which it held as collateral for Mark Landis's loans had been improperly hypothecated by

[ 382 Pa. Page 492]

    him in excess of the powers given him in that instrument. Thereupon, at the instigation of the Bank, agreements were signed in May, 1930, by the settlor and the four children, ratifying all the sales and pledges that had been made by Mark Landis and consenting to sales and pledges that might be made thereafter by him in case contingencies arose that made such sales or pledges advisable. These agreements also empowered the trustee to establish a committee to act with him in an advisory capacity in the management of the trusts, and delegated to him and the advisors the authority to sell and pledge any or all of the trust securities with the intent or purpose of preserving or improving the value of each of the four trusts. Such a committee of five members was appointed in an agreement entered into in June, 1930; one of the appointees so named was Mark Landis himself, and three of the others were officers of the Bank.

In August, 1930, came the agreements which carried therein the germs of all the controversies here involved. They were signed by all the parties. They constituted and appointed the First National Bank and Trust Company in Waynesboro as substituted trustee with all the powers of the original trustee. They named again the same five members of the advisory committee who were to be consulted by the trustee in connection with the sale, pledge, or investment of the trust assets and provided for the filling of any vacancy in the committee that might occur. They confirmed the assets and liabilities of the trust as they then existed and authorized the trustee in its discretion to use the pledged securities to pay the indebtedness of the parties including the contingent liabilities of Mark Landis, and to sell or pledge the securities in such manner as best to further the accomplishment of the purpose of the trust. They provided that at the time of the expiration

[ 382 Pa. Page 493]

    of the trust, to wit, January 20, 1937, the assets then on hand should be distributed among the four beneficiaries in equal shares after deducting therefrom the amounts properly chargeable to each of them as set forth in a schedule thereunto attached, the distribution to be made of securities in kind as far as reasonably practicable rather than in cash. This provision evidently was intended to carry out the purpose running throughout the trust and the subsequent agreements that, as far as possible, the corporate stocks were not to be sold but were to "remain intact." An additional agreement provided an elaborate schedule of compensation for the substituted trustee.

On or about August 23, 1930, the assets of the trust were transferred to the Bank which then assumed its duties as substituted trustee and managed the trust not only until its expiration in 1937 but until the final distribution of the assets according to a stipulation of the parties in 1946. It continued during that period to make various loans to some of the individual beneficiaries on the security of their stocks. Meanwhile, on August 13, 1930, Mark Landis had assigned his beneficial interest in the trust to the remaining beneficiaries who subsequently in turn assigned their interests to Elizabeth L. Hershey, so that the latter is now the sole beneficiary. However, the term "beneficiaries" will be used herein throughout in referring to the beneficial interests under the trust whether of herself or of any or all of the settlor's children.

The settlor, Frank F. Landis, died in 1932; his wife had predeceased him in 1926.

On October 27, 1937, the trust having expired by its terms, the Bank filed its account as substituted trustee. Much litigation ensued. Various transactions of the bank as substituted trustee were attacked by the beneficiaries. After many interlocutory proceedings the

[ 382 Pa. Page 494]

    court filed an adjudication of the account and the supplemental account, and entered a final decree on April 26, 1954, imposing certain surcharges upon the Bank and refusing others. The beneficiaries on the one hand, and the Bank on the other, have taken the present appeals, objecting to decision of the court on many of the questions involved.

It must be immediately apparent that all the present controversies between the parties stem largely if not wholly from the fact that the Bank placed itself in an undesirable, difficult, and potentially dangerous position when it accepted a trusteeship most of the assets of which were held by it as collateral for the loans it had made to the beneficiaries, and thereby assumed the role of acting in the dual capacity of trustee and principal creditor of the trust. As trustee it was under a duty to the beneficiaries to administer the trust solely in their interests, and it could not profit at their expense nor, ordinarily, assert any adverse interest in the trust property: Commonwealth Trust Company Case, 331 Pa. 569, 1 A.2d 662; Flagg Estate, 365 Pa. 82, 73 A.2d 411; Steele Estate, 377 Pa. 250, 103 A.2d 409; Restatement, Trusts, ยง 170. But here it must be borne in mind that the Bank's assumption of so ambivalent a position was assented to by all the beneficiaries, and in the agreements between the parties no restrictions were placed upon its rights as creditor; under such circumstances the conflict of interests engendered did not disquality ...


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