CHAPTER L A TRUSTEE'S LIABILITIES § 432. General Liability of Trustees A trustee is liable to the cestui que trust for any damage arising from the trustee's bad faith or negligence. may be summarized as follows: 1. Liability for damage from positive bad faith: (b) Mingling trust funds with his own funds (d) Investing trust funds in his own business These (e) Refusing to pay over trust funds to those entitled to them 2. Liability for negligence: (a) Leaving funds idle (b) Failing to change investments when they become unsafe (c) Not keeping trust property safe A trustee is held to the usual practice of a careful, prudent business man. When he comes short of this, by reason either of bad faith or of carelessness, he becomes liable for any resulting loss or damage. If he leaves the funds idle, he may be made to pay the interest or income that otherwise might have been earned. (See § 411.) $433. Breach of Trust A breach of trust is any act or omission of a trustee that violates his duty to care for the trust funds or to pay over the income or the principal to the beneficiaries. It is used loosely to designate anything from arrant knavery and theft to lack of care in selling securities that were depreciating. If a trustee embezzles the trust funds, it is a breach of trust and is also a criminal offense. If he leaves the trust funds to a partnership of which he is a member, it is a breach of trust and he is liable for any damage, but it is not a criminal offense. If a trustee having discretion as to payments refuses, without adequate reason, to make payments at all, it is a breach of trust. If he does not make sure that his co-trustee deposits receipts and loss ensues, it is a breach. A trustee is liable to the beneficiary for all loss resulting from the trustee's breach of trust. § 434. Making Bad Investments It is the duty of trustees to invest trust funds according to the directions of the trust instrument, if there is any, or to the statutes or rules or orders of court, or, failing these, they must invest in good faith and with sound discretion. When trustees depart from these general rules and loss ensues, they are liable to make the losses good. (See § 435.) There are a good many rules as to investments a trustee should not make: 1. He should not invest funds beyond the jurisdiction of the court. 2. He must not invest in personal securities. 3. He must not invest in trade, business, manufactories, or any speculative enterprises. 4. He must not invest in new and experimental enterprises. 5. He must not loan money on second mortgages. 6. He should not invest in first mortgages in excess of 50 to 60 per cent of the value of the property. 7. He should diversify his investments and not put too much into any one security. 8. He should change investments only to guard against depreciation, or to change unprofitable securities into profitable ones or unlawful enterprises into those legally proper. Generally, trustees must exercise the care and prudence of a reasonable man. They must investigate as to the safety of investments and must thereafter watch, and, if any investments become unsafe, must sell them forthwith. § 435. Negligence in Investing Funds A trustee is liable not only for positive mismanagement, such as investments in speculative securities or in some ordinary business, or for a breach of trust, as where he lends trust funds to a friend or uses them in his own business, but he is also liable when loss occurs on account of his failure to use the prudence that a careful business man would use in handling his own funds. If a trustee is negligent and fails to invest the principal, or if a fund is to accumulate and he fails to collect the income when due or to invest the income as soon as it is sufficient in amount, he is liable to the cestui que trust for the loss of interest or income caused by his negligence. Executors have been allowed to leave funds in a bank for a year after the death of the testator, but this is not a general rule. They should proceed with reasonable diligence in each case. Three months has been held a reasonable time. Trustees and guardians are held more strictly to account for interest than executors, for it is supposed that they take funds ready for investment and do not have to collect them as a preliminary. The consequence of mismanagement or failure to exercise due care is a liability for all resulting loss or damage. If the trustee has given bond, he and his sureties are both liable, and his surety will have a claim against the trustee for whatever amount the surety has to pay. The liability in case of negligence is only for the amount of interest lost by reason of the delay in making the investments. § 436. Theft or Robbery A trustee is not responsible for thefts or robbery by a stranger if he has taken all the precautions that a careful business man takes in guarding his own property. Neither is he held responsible for thefts and embezzlements by agents, brokers, or attorneys, where he is justified in acting through others and in placing the funds in their hands and has exercised proper care in their selection. In case the trustee puts the funds into the hands of others when it is not necessary, he is responsible if anything is lost by theft or robbery. In any case under this head the liability would be for the entire amount lost. § 437. Accident A trustee is not responsible for a loss by accident if he is acting strictly in the line of his duty. The loss will be that of the beneficiary. If, however, he has departed from the rules laid down for trustees in caring for trust property, and some accident or disaster occurs and the property is injured or destroyed, he will have to make it good. If it were a case where the property should have been insured and the trustee had neglected to insure, he would be liable. § 438. Fault of Co-trustee The general rule is that a trustee is not liable for losses caused by the default or negligence of a co-trustee, unless he has co-operated with the trustee who is at fault, or has known of his misconduct and has not taken any steps to prevent. If the matter was one in which each trustee should have interested himself, no one would be guiltless even though he did nothing himself. A trustee is not a surety, however, for his co-trustee, and in any case the question of liability will depend on all the circumstances. If one trustee were to take charge of the funds for investment, it would be the duty of his co-trustee to see that the proper investment was made. In all these cases the question is: Has the trustee employed such prudence and diligence in the discharge of his duties as, in general, men of average prudence and discretion would, under like circumstances, employ in their own affairs? Where several trustees are concerned in the management of a trust, it is usual to apportion the duties, and in such case, where there is nothing to cause suspicion there is no liability for one another's defaults. Where the trust funds are in the hands of one trustee for a proper business purpose, the others are not responsible for his misconduct. This would not hold if the funds were held by the defaulting trustee longer than the circumstances justified, or if the defaulting trustee were of bad character and credit, or if the matters were not looked after by the other trustees and the facts ascertained. In such cases or in any case where the trustee who committed a breach of trust was enabled to do so by the negligence, ignorance, or acquiescence of a fellow trustee, both would be liable to the beneficiary. Executors can act separately in regard to the trust property, but trustees should all act together. If co-trustees cannot agree on any necessary action, they must apply to the court for instructions. For instance, if suit were brought affecting the trust property it would be necessary for all the trustees to employ the same counsel in order that they might defend together. If they did not do this and extra cost resulted, they might be compelled to pay personally. All trustees must join in transferring securities, conveying or mort |