erty. Of course he would want to have an opportunity of searching the title to ascertain that he was going to get a marketable title as provided in the contract. At the same time the seller might feel that he wanted to be sure that when the purchaser was satisfied as to the title, he, the seller, would get his money. He therefore would insist that the purchase price be deposited with some disinterested person, bank, or trust company, preferably either of the latter two because of their financial responsibility. An agreement of this kind would have to provide that when the bank had been satisfied by reason of a title company's certificate that the title was in accordance with the contract, the money deposited with it be turned over to the seller. In many instances the conditions to be fulfilled are much more complicated, and the bank is called upon from time to time to watch the happening of many events.

It should be the policy of all banks and trust companies to insist that any escrow agreements be very carefully drawn with respect to defining the duties of the depositary. No bank or trust company or other depositary should be called upon to assume any responsibility other than the responsibility to turn over the property held in escrow when the specific conditions have been fulfilled. In order that there be no doubt as to when the conditions have been fulfilled, it should be clearly defined in the agreement what instrument or certificate is to prove to the depositary the fulfilment of the conditions. It should also be clearly stated what shall constitute a default and what is to be done with the property held in escrow if a default should occur.

§ 513. Depositaries Under Voting Trust Agreements

A bank or a trust company may also act as depositary under a voting trust agreement. This is an agreement entered into between the stockholders holding the majority of the outstanding stock of a corporation. It provides for the appointment

of certain named persons, usually stockholders, as voting trustees. The agreement usually runs for a number of years. This method of handling the affairs of a corporation is adopted where it is desired to continue a definite business policy over a period of time. If the policies of a corporation are subject to the changes that are likely to occur when the directorate is changed, it is sometimes harmful to business success. By creating a voting trusteeship this danger is eliminated.

An agreement of this character provides for the deposit by its stockholders of their stock with a bank or a trust company designated in the agreement. The depositary is instructed to issue voting trust certificates or deposit receipts. These may be and are bought and sold just as the stock certificates are. The depositary keeps records of all stock certificates deposited and of all transfers of the voting trust certificates or deposit receipts and acts as the transfer agent of them.

Whenever a voting trust certificate is presented for transfer from one owner to a new owner, the stock represented by such voting trust certificate must also be transferred. If the transfer agent of the stock is a different bank or trust company, as often occurs, then the depositary must send the stock to the transfer agent and have it transferred into the name of the new owner. Then the depositary will issue new voting trust certificates to the new owner or owners. The arrangement has the same facility of transfer of title as stock certificates. The new owner without the necessity of physically signing the voting trust agreement automatically agrees to the terms thereof. In this way any change of policy is avoided without hindering any stockholder from disposing of his stock if he can find a purchaser.

§ 514. General Duties of a Depositary

Acting as depositary for bondholders' committees, reorganization committees, and the various other protective com

into

mittees which spring up the minute a corporation gets financial difficulties, the duties of the bank or trust company are essentially merely to receive the bonds, notes, stock, or other obligations and to issue receipts therefor. The object of depositing the bonds, notes, stock, or other obligations is, of course, to put them under the control of the particular committee so that they may have the strength of many instead of the few. Again, as in the case of the voting trust certificates, these deposit receipts may be traded in if one can find a purchaser, which of course is rather difficult because of the financial condition of the corporation.

Often the duties of the depositary are much more difficult and numerous than as outlined above. Among other things, the depositary is frequently called upon to advance money to defray the expenses of the committee, in which case the depositary insists upon being given a prior lien on the particular securities deposited with it, or to take an active part in devising the reorganization plan.

If the plan is finally adopted, the depositary has the duty of carrying it out. These plans often are complicated and vary with the innumerable circumstances of the different cases. Sometimes the depositor gets back some bonds, some preferred stock, and some common stock. Then he may be called upon to pay an assessment. The holder of a first mortgage bond usually fares the best, although the holder of an equipment trust obligation or a bond issued under a mortgage on a terminal or a particular piece of property, is in an advantageous position. The holder of stock, especially common stock, usually fares the worst. He is the one most likely to be assessed.

Banks and trust companies are best able to act in any of these capacities because they are trained to the work and because of their accessibility and financial responsibility. It is not easy to see how such work could be handled otherwise than by a bank or trust company.

REVIEW QUESTIONS

1. What fiduciary capacities in which a financial institution may act are mentioned in this chapter?

2. What is a custodian? What kind of property do banks and trust companies take charge of? May an individual executor employ a custodian of this kind?

3. To what extent may a bank or a trust company act as an agent? What gives it this power and what limits it? What is the advantage of such an arrangement? What character of duties is delegated to banks and trust companies in this way? What kind of information will such agent secure? How are travelers served? To what extent will such an agent care for real property?

4. What is a fiscal agent? What is a paying agent? Why is a bank or a trust company peculiarly fitted for such duties?

5. What is a depositary? Does a bank or a trust company assume more responsibility than an individual bailee?

6. What is an escrow agreement? Why should escrow agreements be drawn with great care?

7. What is a voting trust agreement? What does the depositary under such agreements have to do? How is stock under such an agreement transferred?

8. What are the general duties of a depositary? If the depositary advances money, how does it protect itself? Why are the duties of a depositary sometimes very difficult?

CHAPTER LX

A BANK OR TRUST COMPANY AS CORPORATE TRUSTEE FOR BONDHOLDERS

§ 515. Corporate Trustee

A corporate trustee is a trustee acting under an agreement between a corporation and the purchasers of its obligations. Generally speaking, the corporate trustee has the same legal obligations that any other trustee has. The obligations of the corporate trustee are defined by the instrument which creates the trust just as in the case of a personal trustee.

The corporate trustee is charged with the legal title to property of which some individual or corporation has the equitable title. The trustee does not always have the immediate custody of the property, as for example, where the corporate trustee is the trustee under a mortgage. In such case, it would hold the mortgage agreement showing that, as trustee, it had the legal title to certain property belonging to the corporation. In some cases it would have the property in its possession, where personal property such as the securities of another corporation were the subject of a trust; but if the property were equipment, such as cars or locomotives, obviously it could not have physical possession. In this case, the cars or locomotives or whatever the object of the trust might be, would have painted thereon words showing that the property was the property of the trustee. The legend would probably be somewhat as follows: "First National Bank, Trustee and Owner."

The corporate trustee must see that the terms of the agreement are carried out. It must, in certain cases explained fur