Prudence-Bonds Corp. v. State Street Trust Co.

202 F.2d 555

• Court: Court of Appeals for the Second Circuit
• Decided: March 3, 1953
• Docket: 77, Docket 22138
• Status: Published

Opinions

FRANK, Circuit Judge.

1. We assume, arguendo (1) that, to give the bankruptcy court jurisdiction, it was not necessary that the guaranty (or the proceeds'of its enforcement) be part of the debtor’s assets,¹ and (2) that, in fact, the guaranty constituted part of the mortgaged property.² Even so, we think the court, as a bankruptcy court, lacked jurisdiction on the facts here because (a) that jurisdiction could exist only if the suit were a representative action ³for restoration of the trust fund, and (b) under pertinent N ew York decisions, such a representative action cannot rest upon the indenture, trustee’s breach where that breach consists merely of inaction — here the failure to enforce the guaranty. Those New York decisions control us, although, as we once pointed out, they may lead to most undesirable results.⁴ Our discussions in earlier cases ⁵ render it unnecessary here to canvass in detail Smith v. Continental Bank, 292 N.Y. 275, 54 N.E. 3d 823, and related decisions. Suffice it to say that, if the inaction of the trustee in the Smith case could give rise to personal suits only, i. e., not a representative suit for restoration of the fund, then surely the same must be true of .the trustee’s inaction here. Appellant urges that the Smith case dealt solely with an individual bondholder’s suit at law for his personal loss, and that, for the trustee’s misconduct alleged in that suit, a representative action for restoration of the fund could also have been maintained against the trustee. We do not agree. The New York courts, as we understand them, hold (a) that such inaction does not amount to a “release or surrender” of any mortgaged property, and that, without a “release or surrender,” personal, individual suits only — not a representative suit for “restoration of the fund” — may be maintained; and also (b) that any such individual suits must he brought by those who held bonds at the time of the trustee’s breach, not by subsequent transferees of the bonds (absent express assignments to them of the individual claims against the trustees). We think that (b) results from (a), not vice versa. Accordingly, nothing in the recent New York statute, Personal Property Law, McK.Consol.Laws, c. 41, § 41 (1950), wiping out (b) as to transfers made after September 1, 1950, would affect our decision, even if that statute were retroactive.⁶

2. We agree with the master and the district judge that there is no merit in appellant’s objection to the trustee’s surrender of $10,000 in cash for cancelled bonds. The trust agreement did not require, as a condition of such a surrender, compliance with conditions contained in the agreement but applicable to other types of releases.⁷

Affirmed.

On Rehearing

Before SWAN, Chief Judge, L. HAND and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal by Prudence-Bonds Corporation (which - we shall call the New Company), from the order of a court of bankruptcy in a proceeding under § 77B, Bankr.Act, 11 U.S.C.A. § 207, passing the account of the State Street Trust Company (which we shall call the Trustee), as trustee of three mortgages, pledged to secure the “Tenth Series" of negotiable bonds, issued by the original Prudence-Bonds Corporation , (which we shall call the Debtor). On December 5, 1951, we dismissed the appeal on the ground that we had no jurisdiction over an attempted surcharge by the New Company of the -account of the Trustee; the New Company has asked for a rehearing and the appeal has been reheard both by argument and briefs. Although Judge Inch’s opinion in the District Court, 101 F.Supp. 729 states the facts in detail, it will make o-ur discussion clearer, if we give a renewed outline of them. Prudence Company, Inc. (which we shall call the Guarantor) owned a large number of real estate' mortgages, and sold them to the Debtor in exchange for ten or more “series” of negotiable bonds to be issued by the Debtor. As security for -the tenth of these “series” the Debtor and the Trustee entered into a contract (which we shall call-the Indenture), by which the Debtor assigned to the Trustee three of these mortgages, which with other property constituted a trust res. The Guarantor was not a party to the Indenture, but at the same time it executed a collateral agreement with the Trustee (which we shall call the Primary Guaranty), guaranteeing payment of the “Tenth' Series” bonds, principal and interest, as they fell due. It was one of the Debtor’s covenants in the Indenture that the Guarantor would also de~ posit a guaranty with the Trustee that the principal of any mortgages -assigned to it by the Debtor should be paid by the mortgagors within eighteen months after it fell due, and that the interest should be paid when due. The Indenture, including the Primary Guaranty was executed on May 1, 1927; and on the 27th of July, 1928, the Guarantor deposited with the Trustee a guaranty (which we shall call the Secondary Guaranty) of the payment, - as aforesaid, of any mortgages held as security. The mortgagors in one of the three mortgages that were part of the res, defaulted in the payment of its principal, and the default continued for more than eighteen months, during which period the Guarantor was solvent and could have performed the Secondary Guaranty. The Trustee filed its account in the reorganization proceeding at bar and prayed the court to settle the account and discharge it from further liability. The New Company which had succeeded to all the rights of a reorganization trustee, surcharged the account with the loss on the defaulted mortgage, the Guarantor having itself become insolvent shortly after the Debtor. Two questions arise: (1) Whether the New Company has any standing to enforce the Secondary Guaranty against the Trustee; and (2) if it has, whether its claim against the Trustee is good on the merits. In the decision that we are now rehearing, we assumed that the standing of the New Company to sue upon the claim must be determined under the law of New York, and that the courts of that state had held that, in situations like this, arising out of the neglect of a trustee to protect the res, as contrasted with a surrender or release of it, there arise only individual and separate claims of which the bondholders are severally the obligees, and which a reorganization trustee has no standing to assert. For that reason we dismissed the appeal, and had not occasion to consider the merits of the surcharge.

We have concluded that we were mistaken in assuming that the New Company had no such standing. The bondholders did of course have a direct claim against the Debtor by virtue of its promise to pay their bonds, just as they had a claim against the Guarantor upon the Primary Guaranty; but on this appeal we are concerned with neither. In addition they had claims against the Trustee under the Indenture; but these were only as beneficiaries of the trust, except as the Trustee made any express covenants in addition to its obligation as trustee. The Secondary Guaranty was a part of the res, as we shall show when we come to consider the merits; it was in substance an insurance by the Guarantor of performance of their promises by the mortgagors of the three mortgages — a sort of credit insurance. When the Trustee after notice of default upon one of these three mortgages — with which alone this appeal is concerned— failed to take any steps to enforce the Secondary Guaranty of which it was the obligee, it defaulted in its duty as trustee and became liable to the bondholders for any loss that resulted, except as the exculpatory clauses of the Indenture excused it; and, since the result turns upon the meaning of those clauses, our jurisdiction depends upon whether the New Corporation has any standing to press the claims of the bondholders for this breach. The Trustee says that the New Company has no such standing because by the law of New York, which controls the rights of the parties, the breach was at most a failure properly to protect a part of the res — i. e., to compel the Guarantor to perform the Secondary Guaranty — and not a “surrender or release.” We agree that it was not. The Trustee next argues that the Court of Appeals of New York has several times decided that at the time of the events here in suit a bondholder’s claim for such a breach did not pass with a transfer of the bond, but remained with the transferrer; and, further, that the claim even of those bondholders, who may not have bought their bonds after the breach, is personal to them severally, on which they must sue as primary obligees and which a trustee in reorganization under § 77B of the Bankruptcy Act may not assert on their behalf. Hence the District Court was without jurisdiction over the New Company’s surcharge.

There can be no doubt that, until it was changed by statute, it was the settled doctrine of New York that in such situations a claim against a trustee for breach of his duty to protect the res, did not pass by transfer of the bond but remained the property of the transferrer;¹ and the same doctrine was applied to transfers of “participation certificates” which did not secure a debt, but were direct and beneficial interests in the res.2 We held in Manufacturers Trust Co. v. Kelby, 2 Cir., 125 F.2d 650 that this doctrine did not apply to a breach that was a “surrender” or “release” of any part of the res; and so far the parties are apparently on common ground. At any rate we will not reconsider that decision. Two questions therefore arise: (1) whether those bondholders who bought their bonds after the first breach here in suit have any claim against the Trustee; and, assuming that they have none, (2) whether the New Company has any standing to surcharge the Trustee’s account on behalf of bondholders who bought their bonds before the breach. The New Company argues that the New York doctrine does not apply at all, because the Trustee was a Massachusetts corporation, because it accepted the Indenture in Boston where the bonds were payable, and because the New York doctrine is contrary to the law of Massachusetts. The Trustee answers that the law of the two states is the same; and that, if it were not, the suit does not concern the interpretation of the Indenture or its performance, as to which alone the law of' Massachusetts would control; but that it concerns the effect of a transfer of the bonds, and what standing the New Company has to represent any of them— that last being a question of remedy which the lex fori controls.

We do not find it necessary to decide what was the effect of a transfer of any of the bonds in New York: i. e., whether the claim of the transferrer remained his or passed to the transferee; we shall assume arguendo that the ordinary doctrine applies to such transfers: i. e., that the law of the place of transfer determines what passes by the transaction,³ although the lex loci contractus determines whether a chose in action may be transferred at all.⁴ We can avoid any decision as to what law governed any transfer, because, as will appear, we think that on the merits the Trustee must win, and we are now concerned only with our jurisdiction to decide the merits. We do assume, as we have warrant for doing, that there were some at least of the bondholders on July 29, 1934, 'when the petition herein was filed, who had bought their bonds before May 28, 1930, when the mortgagor of the mortgage in question first defaulted in the payment of interest. (There was indeed a default in the payment of principal a year earlier, but the Secondary Guaranty imposed no duty upon the Guarantor for such a default until it had continued for eighteen months.) In the absence of any proof to the contrary we hold that there was ground for a finding that some of the bonds in suit were bought before May 28, 1930.

However, the fact that there were some such bonds does not answer the other question: i.e., whether the New Company may represent these bondholders in asserting their rights against the Trustee. That is not, as the Trustee argues, a question of remedy and on that account one to be determined by the lex fori; on the contrary, it is a question as to whether the New Company was a proper party to represent these bondholders upon the Trustee’s accounting; and it depends upon Rule 17 of the Rules of Civil Procedure, 28 U.S.C.A., which General Order XXXVII, 11 U.S.C. A. following section 53, made applicable to proceedings in Bankruptcy, “as nearly as may be.” Subdivision a of that rule declares among other -things that “a party .authorized by statute may sue in his own name without joining with him the party for whose benefit the action is brought”. An order of the District Court entered on July 12, 1939, upon our mandate entered upon our opinion in Central Hanover Bank & Trust Co. v. President and Director of Manhattan Co., 2 Cir., 105 F.2d 130, provided as follows: “any objections * * * of the new Prudence Bonds Corporation to the accounts filed herein by the Corporate Trustees ■ * * * shall be deemed and constituted to be made on its own behalf and on behalf of all holders * * * of the respective Series of Bonds to which any such objections * * * relate.” We think that this provision was authorized by subdivisions f and h of § 77B which upon confirmation of a plan by a judge, gave to “the debtor and other corporation * * * organized * * * for the purpose of carrying out the plan * * * full power * * * shall put into effect and carry out the plan and the orders of the judge * * thereto”. These provisions were amplified by subdivisions (13) and (14) of § 216 of Chapter X, 11 U.S.C.A. § 616, so as to leave no doubt of the broad implementary powers of a judge when a plan is confirmed; and, although Chapter X appears never to have been extended to the reorganization here at bar, we regard the later provisions as no more than a clarification of subdivisions f and h of § 77B. Therefore, we hold that the order of July 12, 1939, issued as it was under the authority of the act, made the New Company a “party authorized by statute” to “sue in his own name” under Rule 17(a); and, our jurisdiction being established, we may .proceed to the merits.

As we have already said, we regard the Secondary Guaranty as part of the res. It was executed more than a year after the Indenture, although it bore the same date, and the fact that it was not in existence at the time may well account for the failure to recite it as part of the mortgaged property in §§ 1 and 2, Article I. In § 1 of Article III the Debtor made a number of covenants “exclusively for the benefit of the Trustee and the holders of Prudence-Bonds, Tenth Series,” among which subdivision f read: “That it will deposit with the Trustee a guarantee of The Prudence Company guaranteeing payment of interest semi-annually when due, and of principal within eighteen months after the same becomes due, according to the terms of each bond, mortgage or other security in the Trust Fund.” The Secondary Guaranty when made conformed to this covenant, and the Debtor deposited it with the Trustee in performance of it. Whether the Primary Guaranty was also a part of the res is another question, and we need not answer it, for it was a promise to the bondholders to pay the Debtor’s obligations, and had nothing to do with the res. But by the Secondary Guaranty the Guarantor became a surety for the performance of the mortgagors, just as the mortgages were a surety for the same performance. The only difference between them was that in one case the security was the promise of a third person and in the other it was a lien upon property. The promise was a part of the res in precisely the same sense that the promises were in the policies of fire and title insurance, mentioned in Article I, § 2. As we have said, it was in effect the equivalent of a policy of credit insurance of the mortgagors.

The Trustee invokes three clauses of the Indenture to excuse its failure to enforce this Guaranty: (1) § S of Article I; (2) § 1(d) of Article IV; and (3) § 1 of Article V. These we will consider in that order. Section 5 of Article I begins by declaring that the Guarantor or the Debtor may collect “the securities constituting the trust fund” and may enforce any “agreements” that they “contain.” Next it declares that, if the Debtor asks the Trustee in writing to do so and indemnifies it, it “shall enforce * * * any and all of the covenants and agreements contained in said securities or any or either of them for the benefit of the holders of Prudence bonds, issued and outstanding hereunder or” (for the benefit?) “of the Corporation” (the Debtor) “or of the Prudence Company Inc.” (the Guarantor). This sentence would excuse the Trustee only in case the Secondary Guaranty was- an “agreement” “contained” in some of the “securities” “constituting the trust fund”; and, if we are right in holding, as we just have done, that the guaranty was a part of the trust res, the words cover it, again as much as-they cover a fire, or title, insurance policy. It seems to us quite unwarranted to distinguish between the “trust fund” and the trust res. On the other hand, the New Company argues that in any event the section means no more than that the Trustee shall be indemnified, if the Debtor should ask it to sue upon any such “agreements,” and that it did not excuse a failure by the Trustee to seek indemnity for pressing its claim against the Guarantor upon its default; in short, it did not excuse complete inaction by the Trustee. If this section stood alone, we might hesitate to say that it created an excuse. However, when read in conjunction with § 1 of Article V, it confirms our conclusion, depending upon, that section, that the Trustee meant to obtain a general immunity from any liability for nonfeasance.

Next is the second whole paragraph of § 1 of Article IV, which concludes by declaring that “no rights or remedies under this Article shall or may be exercised by the Trustee * * * unless and until The Prudence Company Inc. shall have failed to fulfill some obligation in said guarantee contained.” Not only does the preceding, language of this section show that the “said guarantee” could only mean the Primary Guaranty, but, it would have been. brutum fulmén for the Trustee to enforce the Secondary Guaranty after the Guarantor had defaulted on the Primary. Besides, the definition of “events of default”' does not include a default on the Secondary Guaranty, and the section touches only-such defaults. We agree, therefore, that this section did not excuse the Trustee.

Article V of the Indenture was entitled: “Concerning the Trustee”; and § 1 was entitled: “Trust Conditions.” It begins-by declaring that the Trustee need not “enforce any of the provisions contained in any of the securities deposited in the Trust Fund, or towards the execution or enforcement of the trust hereby created,” unless it gets indemnity. So far, as in the case of § 5 of Article I, it would be possible to construe this language as intended to do no more than give the Trustee the privilege of insisting upon indemnity before it undertook any “execution or enforcement of the trust”; but not as excusing it from nonfeasance. The following language, however, unequivocally does excuse the Trustee from any initiative, until it gets notice of some default or “event of default” from at least twenty-five per cent of the bondholders. The words are: “nor shall the Trustee be required to take notice of any default, or ‘event of default,’ hereunder, and it may, for all purposes conclusively assume that there has been no default, or ‘event of default,’ hereunder, * * * nor shall the Trustee take any action in respect to any default or ‘event of default’ unless requested to take action” by the bondholders, and unless indemnified by them. A breach of the Secondary Guaranty is not, as we have said, an “event of default”; and therefore the excuse does depend upon the meaning of “default * * * hereunder,” when used in contrast with “event of default.” We think that such “defaults” included a breach of the Secondary Guaranty. In the first-place it is noteworthy that in describing the occasions on which the Trustee might demand indemnity, the words were: “provisions contained in any of the securities deposited in the Trust Fund, or towards the execution or enforcement of the trust.” That is of course a different locution from “default or ‘event of default’ ”; but to construe the second as less comprehensive would mean that there were some duties of the Trustee in enforcing the trust, that, although they were conditional upon being indemnified, it was bound to initiate sua sponte if it learned of them, except in cases where they were a “default or ‘event of default’ hereunder,” when it need not stir unless the bondholders requested it to do so. Conceivably there could have been some basis for such an apparently meaningless distinction; but if in fact it was intended we cannot believe that it would have been expressed in such nebulous fashion. Be that as it may, the language of the excuse appears to us explicit. The contrast between “default” and “event of default” shows that the first term added something to the second; and, had it not been for the suffix "hereunder” which applied to both, we can see no ground to doubt that it covered any kind of failure in the security for the res. If, as we hold, the Secondary Guarantor was a part of the res, the only verbal difficulty in reading a breach of it as a “default * * * hereunder” is that it was not physically comprehended in the Indenture. But it was comprehended by § 1(f) of Article III, for that, as we have seen, was a promise of the Debtor to “deposit” it with the Trustee. The objection comes therefore to no more than this: that a breach of it could not be a default “under” the Indenture, because, although the Indenture had provided for it, and although it was as much a part of the security for the bonds as the mortgages and fire and title insurance policies, it was not in existence at the time, and could be included “thereunder” only by a promise in futuro. Unless there is some reason which compels us deliberately to defeat what would be the unavoidable construction of the words in any other document, we cannot accept this argument.

Our conclusion is confirmed, not only by the words of § 1 of Article V which immediately succeed those we have been discussing, but by § l(i) of Article III. The succeeding words were as follows: “The foregoing provisions of this Section are intended only for the protection of the Trustee,” and are not to be taken in derogation of its powers or discretion to act without any demand by the bondholders. Here the intent plainly was to give the Trustee an immunity in all such cases, but nevertheless to leave it the initiative, if it chose to take it. We cannot think it possible with this purpose in mind, that the parties intended to make the Secondary Guaranty a single exception; so that, although the Trustee was to be protected against every other nonfeasance he was not to be protected against this. Since the Trustee was in any event completely protected if it failed to take any action against the mortgagors on their default, if the Guarantor had become insolvent before the mortgagors defaulted, the Trustee need not have taken any action whatever. The Indenture would have protected it as to the mortgagors and the insolvency would have protected it as to the Guarantor. Such a result could scarcely have been intended. Turning next to § l(i) of Article III, it there appears that the Debtor was bound to furnish to the Trustee on the tenth day of each month written statements of— among other facts — the amount of principal collected during the preceding month on any of the mortgages in the Trust Fund. Then followed this sentence: “The Trustee shall be under no duty to take action upon any such statement or to see to the receipt thereof by it”: that is, the Trustee was excused from action upon the information, or from getting it from the Debtor. We cannot see how in the face of this clause the Trustee can be held for non-feasance for any default of the Guarantor on the Secondary Guaranty. It is true that the Debtor was not bound to state what interest had been paid during the preceding month, but that was to be expected, for the Trustee, like any other pledgee, was not entitled to any usufruct from the pledged property — the mortgages — until it took possession of them either under a power reserved, or by a receiver.

For the foregoing reasons we should have no doubt that the Indenture excused the Trustee, if the question arose upon an ordinary contract between it and the bondholders themselves. That, however, was not the case, for the contract bound them only through these words incorporated in each bond: “Reference is hereby made to said Trust Agreement for * * * the rights and remedies of the Trustee and the respective holders of said Prudence-Bonds, the rights of the corporation and the terms and conditions under which said bonds are secured, issued and guaranteed, and the holder hereof is bound thereby.” The duty to care for the res5 and the realization of claims which the trustee ■ holds in trust,⁶ are indeed inherent in the relation; and, although provisions are valid that exculpate a trustee for neglect of such duties, so long as that is not due to “reckless indifference,” they are “strictly construed.”⁷ If that phrase means that nothing may be implied which is not literally expressed, the Indenture did not protect the Trustee, for exculpatory provisions nowhere actually mention the Secondary Guaranty. That is not, however, the meaning of this canon; although they were used of a statute, the often quoted words of Holmes, J. apply with even greater force to a contract: “The major premise of the conclusion expressed in a statute, the change of policy that induces the enactment, may not be set out in terms, but it is not an adequate discharge of duty for courts to say: We see what you are driving at, but you have not said it, and we shall go on as before.⁸ ” It is as impossible to lay down any postulates for “strict construction” as it is for ordinary “construction.” When parties have not explicitly covered the occasion which has arisen, a court will always strive to ascertain whether their disclosed purpose does not demand a more inclusive “intent.” And by their “intent” we can understand nothing else than how they would have disposed of the occasion had they been faced with it at the outset.⁹ There is a hazard about doing that; but it is inevitable if the purpose is not often to be defeated and all courts do it more or less. When we say that we will adopt a “strict construction,” we mean that we will press with unusual persistence the doubts that cannot but inhere in the function anyway, and that we will be satisfied with no extension of the literal meaning unless it satisfies every logical compunction. In the case at bar we have stated as best we can those considerations that have removed any doubt in our minds that the parties meant to give complete immunity to the Trustee for any nonfeasance in suing either the mortgagors or the Guarantor.

One thing further it may be well to mention. The Special Master in passing upon the merits appears to have laid stress upon the fact that, beginning late in 1928, the Trustee and the Debtor carried on a correspondence about the default upon the mortgage here in question — the “Guyon Mortgage.” From this he reasoned, as we understand it, that the parties had put a practical construction upon the Indenture which showed that the Trustee conceded that.it was under some duty to take action upon the Secondary Guaranty. Assuming for argument that there might be -force in this if the Indenture had not provided otherwise, the language, already quoted, from § 1 of Article,V, is in our judgment a complete- answer to the inference. It will be recalled that the exculpatory provisions of that section were stated to be “intended only -for the. protection of the Trustee” but that they "shall not be construed to effect any discretion or-power to determine whether or not it shall take any action in respect of any ..default or ‘event of default.’ ’•’ Since the Trustee was therefore to be free, though expressly not bound, to sue upon the guaranty, we are-quite unable to find .in the correspondence an acknowledgment of liability.

Perhaps it ought not to be permissible to issue bonds, secured by indentures that contain such provisions for immunity. That depends upon- how much care and attention those who buy 'the bonds expect from such trustees. We do not-see how it is possible- to pass .on that question in the abstract; if we were to guess, we should say that they expect’ -very -little, though they do expect no action which will positively impair their interests. Besides, whatever may have been the .proper duties to impose at the outset, so far as we are aware indentures containing such clauses have been uniform up to the present time; and any abuses that they have permitted have neither induced legislatures to intervene, nor courts to make an exception. Save for -the stricter canon which we have mentioned, bondholders, like others who accept a written contract, have been charged with notice of all that it contains, whether they read it or not. It may be that in. time courts will take a more protective view, though obviously there are two sides to the question; but to us it seems that a-custom that has secured such long recognition should be left for correction to legislative inquiry and action. Order affirmed.

1 . Cf. Brooklyn Trust Co. v. Kelby, 2 Cir., 134 F.2d 105, 110-112;

2 . Appellant argues thus: (1) Once the bank, as trustee, obtained the guaranty, that guaranty became part of the mortgaged or trust assets, regardless of niceties of phrasing in the trust agreement. (2) This case is unlike President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465, 478, where the trustee neglected to enforce a covenant to deposit a guaranty.

3 . Brooklyn Trust Co. v. Kelby, 2 Cir., 134 F.2d 105, 110-112; Manufacturers Trust Company v. Kelby, 2 Cir., 125 F.2d 650.

4 . Phelan v. Middle States Oil Corp., 2 Cir., 154 F.2d 978, 999-1001. There we referred particularly to the aspect of the ' New York rule concerning transfers. We said: “According to those decisions, where a trustee . * * * has violated his duties but in such a way as not to involve a release or surrender of any trust assets, the right of action * *' * ' belongs to the persons who owned the bonds at the time of. the commission of the wrong; and such a right, without an express assignment thereof, does not pass to the purchaser of any of the bonds, although the seller had no knowledge whatever of the trustee’s dereliction. * * * We have found no other jurisdiction in which that doctrine prevails, ¿especially where a sale of negotiable instruments is involved. * * * [T]he New York doctrine has this undesirable practical result: The seller of such bonds — ex hypothesi unaware, at the time of the sale, of the wrong done by the trustee — in actual fact can have no notion of retaining any cause of action against the trustee; and the seller of a bearer bond is exceedingly hard to trace. The practical consequence of the New York rule therefore is that'most of. the claims against a trustee for wrong done, especially to holders of bearer bonds, will never be prosecuted unless the trustee has surrendered trust assets. That rule thus often serves, pragmatically, as a convenient means of trustee exculpation.”

5 . See, e. g., President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465, 474-475, 478; York v. Guaranty Trust Co., 2 Cir., 143 F.2d 503, 521; Elias v. Clarke, 2 Cir., 143 F.2d 640, 644; Phelan v. Middle States Oil Corp., 154 F.2d 978, 999-1001; Manufacturers Trust Co. v. Kelby, 2 Cir., 125 F.2d 650, 652-654.

6 . Appellant argues that the history of that statute includes our criticism, in the Phelan case, 2 Cir., 154 F.2d 978, 1001, of the New York rule as to the non-passing of individual claims where the trustee has not “surrendered assets.” We based that criticism on the fact that this rule, in practice, meant exculpation of trustee in many cases of gross negligence. True, such exculpation may well still ensue unless the legislation also wiped out the New York decisional rule that a representative suit for restoration of the fund may not be maintained unless the trustee has “surrendered assets,” for few individual suits are ordinarily brought. But in Phelan v. Middle States Oil Corp., supra., we happened not to be concerned with and did not mention that aspect of the New York rule. We think the legislature did not change it. See 1950 Leg.Doc. 65 (D.).

7 . The pertinent provisions read as follows:

“Substitution and Withdrawal of Securities, Btc.

“The Corporation at any time and from time to time may withdraw any bond, mortgage or other securities or certificates of deposit or cash from the trust fund, as follows: (1) By substituting for the item or items withdrawn, any other security or other item enumerated in Section 1 of this Article, equal in amount or value, to the unpaid principal of the bonds, mortgages or other securities or cash withdrawn. (2) By written application of the Corporation to the Trustee, for such withdrawal, at any time when the principal amount of the trust funds may exceed the par value of the Prudence' Bonds then issued and outstanding hereunder.

“In either such case, the Trustee shall deliver to the Corporation the bonds, mortgages or other securities or cash, so to be withdrawn, with any necessary assignments thereof, provided there shall remain in the trust fund after any such withdrawal bonds, mortgages or other securities or cash equalling in amount or value not less than the principal amount of Prudence Bonds then issued and outstanding hereunder, and provided, further, that if and so long as any securities deposited in the trust fund enumerated in paragraphs (a), (b), or (c) of Section 1 of this Article, shall be in default in the payment of principal, the Corporation shall be permitted to withdraw only such securities deposited under said paragraphs (a), (b), or (c) as shall be in default, except that the Corporation may withdraw any of the items enumerated under paragraphs (a), (b) or (c) in connection with the redemption or final payment at maturity, of any such items. The Trustee may accept as conclusive the written statement of any officer of the Corporation as to whether or not any securities deposited in the Trust Fund are in default in the payment of principal.

“Upon the delivery to the Trustee for cancellation of any or all of the Prudence Bonds secured hereunder, with all un-matured coupons attached thereto, or cash equal to such coupons as are not delivered, or in lieu of such bonds and coupons or cash, a certificate by an officer of the Corporation approved by an officer of the Prudence Company, Inc., that certain of such bonds, with the coupons, if any, belonging thereto, matured at a date earlier than six years prior to the date of said certificate, and have not been pre-. sented for payment, the Corporation shall be entitled to withdraw from the trust fund, and the Trustee shall deliver to the Corporation, bonds, mortgages or other securities, or cash, enumerated in Article I, equal in amount and value to the principal amount of Prudence Bonds so delivered for cancellation and/or represented by the certificate above mentioned.” '

The second paragraph relates to the preceding (1) and (2), for it begins, “In either such case * * *" The third paragraph is not similarly restricted by the conditions found in the second paragraph.

1 . Elkind v. Chase National Bank, 284 N.Y. 726, 31 N.E.2d 198; Smith v. Continental Bank & Trust Co., 292 N.Y. 275, 54 N.E.2d 823.

2 . Hendry v. Title Guaranty & Trust Co., 280 N.Y. 740, 21 N.E.2d 515.

3 . Restatement of Conflict of Laws, § 350.

4 . Restatement of Conflict of Laws, § 348.

5 . § 174, Restatement of Trusts.

6 . § 177, Restatement of Trusts.

7 . § 222, Restatement of Trusts.

8 . Johnson v. United States, 1 Cir., 163 F. 30, 32, 18 L.R.A.,N.S., 1194.

9 . A. Leschen & Sons Rope Co. v. Mayflower G. M. & R. Co., 8 Cir., 173 F. 855, 857, 35 L.R.A.,N.S., 1; Sternberg v. Drainage District, 8 Cir., 44 F.2d 560, 562; Rudy-Patrick Seed Co. v. Kokusai etc. Kaisha, 85 F.2d 17, 20; D. H. Prit-chard Inc. v. Nelson, 4 Cir., 147 F.2d 939, 942.