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JOHN HINKLEY, 215 N. Charles St., Baltimore, Md., Chairman,

CHRISTOPHER L. AVERY, Groton, Conn.,

THOMAS A. JENCKES, Turks Head Bldg., Providence, R. I.,

W. H. H. PIATT, Kansas City, Mo.,

WALTER GEORGE SMITH, 711 Witherspoon Bldg., Philadelphia, Pa.,

A. T. STOVALL, Okolona, Miss.,

SAMUEL WILLISTON, Harvard Law School, Cambridge, Mass.

Copies of this and all other Uniform Acts and other printed matter issued by the Conference may be obtained from

The Act covers situations which arise where one person deals with another person whom he knows to be a fiduciary. Questions relating to actual or constructive notice of the existence of a trust or other fiduciary obligation are not within the scope of the Act; it deals with questions relating to notice of the breach of a fiduciary obligation.

The liabilities of the fiduciary himself are not dealt with, but only the liabilities of the person dealing with the fiduciary.

The general purpose of the Act is to establish uniform and definite rules in place of the diverse and indefinite rules now prevailing as to "constructive notice" of breaches of fiduciary obligations. In some cases there should be no liability in the absence of actual knowledge or bad faith; in others there should be action at peril. In none of the situations here treated is the standard of due care or negligence made the test.

In particular four classes of persons are considered:

1. Persons paying money or transferring other property to fiduciaries. (Section 2.)

2. Corporations, etc., whose securities are registered in the names of fiduciaries. (Section 3.)

3. Persons receiving negotiable instruments.

(a) Negotiable instruments indorsed by a fiduciary. (Section 4.)

(b) Checks and other bills drawn by a fiduciary.

(1) Payable to a third person. (Section 5.)

(2) Payable to the fiduciary. (Section 6.)

4. Depositories of fiduciary funds.

(a) Deposit in the name of the fiduciary as such. (Section 7.)

(b) Deposit in the name of the principal. (Section 8.)

(c) Deposit in the fiduciary's personal account. (Section 9.)

In addition, Section 10 deals with deposits in the name of two or more trustees. This section has no applicability to other classes of fiduciaries than trustees.

The general purpose of the Act is to facilitate the performance by fiduciaries of their obligations, rather than to favor any particular class of persons dealing with fiduciaries. In order to prevent occasional breaches of trust, the courts have sometimes adopted rules which can easily be evaded by a dishonest fiduciary, but which seriously hamper honest fiduciaries in the performance of their obligations. The fact that the English courts have substantially adopted the principles here laid down, and that these principles have worked well in practice, would tend to dissipate any fear that their adoption in this country would result in inadequate protection to beneficiaries.

SECTION 1. The definition of "Bank" is taken from the definition in the Negotiable Instruments Law, Sec. 191.

The definition of "Person" is a combination of definitions in the Negotiable Instruments Law, Sec. 191; Uniform Sales Act, Sec. 76; Uniform Warehouse Receipts Act, Sec. 58; Uniform Bills of Lading Act, Sec. 53; Uniform Stock Transfer Act, Sec. 22; Uniform Partnership Act, Sec. 2.

The definitions of "Fiduciary" and "Principal" are new. It will be noticed that two classes of fiduciaries are included:

1. Those who hold property in their own names as fiduciaries.

2. Those who deal with property held in the name of their principals.

Different provisions are necessarily made in some of the following sections in regard to these two classes of fiduciaries.

The definition of "Good Faith" is taken verbatim from the Uniform Sales Act, Sec. 76; Uniform Warehouse Receipts Act, Sec. 58; Uniform Bills of Lading Act, Sec. 53; Uniform Stock Transfer Act, Sec. 22. There is no definition of good faith in the Negotiable Instruments Law.

In the First Tentative Draft the section ended with the words "And a thing is done 'in bad faith' when it is in fact done dishonestly." These words are now omitted in accordance with the vote of the Conference (Stenographic Record, p. 120).

The N. I. L. uses the term "bad faith" (see particularly Sec. 56) but does not define it. The courts have held, however, that the test of good faith is the subjective test of honesty, and not the objective test of due care. See Brannan, N. I. L., pp. 187 et seq. Although there was a dispute at common law, the weight of authority was to the same effect.

SECTION 2. This section is based upon statutes existing in England and in about a third of the states viz.: Alabama, California, Delaware, Kansas, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New York, North Dakota, Ohio, Rhode Island, South Dakota, and Wisconsin.

It applies to all fiduciaries and not merely to trustees, and to all transfers and not merely to payments of money.

It applies only when the fiduciary is "authorized to receive" the money or other property transferred.

SECTION 3. This section is based upon a Massachusetts statute (St. 1918, c. 68, s. 3). There are somewhat similar provisions in Delaware (Rev. Code, 1915, s. 3396), Kentucky (Stats. 1909, s. 4169), Pennsylvania (Purdon's Dig. 13 ed. 4850, s. 7). Since the Conference last met a similar statute has been passed in Illinois.

In England it is provided that no notice of a trust shall be entered on the company's register. (Companies Consolidation Act (1908), s. 17.) In the absence of such statute a similar provision is sometimes made in the charter of the corporation. See Simpson vs. Molsons' Bank. [1895] A. C. 270 (Canada).

In the United States a similar provision is sometimes inserted in the trust instrument.

Sometimes trustees register stock in their own names without disclosing the trust, or have them registered in the names of their brokers, in order to facilitate transfers. This is clearly an undesirable practice.

It is to be noticed that Section 3 applies only when the stock or other security is registered in the name of the fiduciary. It has no applicability where the security is registered in the name of the principal; nor where it is registered in the name of a decedent and the executor or administrator desires to transfer it into his own name, or into the name of a third person. It does not therefore interfere with provisions as to inheritance taxes.

In some cases it may be desired to make the transfer of securities less easy. This may be desirable in order to reduce the amount of the fiduciary's bond. In that event all that is necessary is to give notice to the corporation that the stock shall be transferable only upon proof of certain facts, or only upon an order of court. After receiving such notice the corporation would be liable if it should improperly register the transfer.

The words following the last comma were added in accordance with a suggestion made by Mr. Terry at the meeting of the Conference in 1921, and accepted by the Committee on Commercial Law. (Stenographic Record, p. 134.)

SECTION 6. Sections 4, 5 and 6 deal with holders of negotiable paper drawn or indorsed by fiduciaries.

The Negotiable Instruments Law, Sec. 56, provides:

"To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."

Where it appears on the face of the instrument that it is drawn, made or indorsed by a fiduciary the courts have usually ignored the Negotiable Instruments Law, and have simply said that the payee or indorsee is bound to make inquiry as to the authority of the fiduciary, and is negligent if he fails to make such inquiry. And yet it is well settled that where there is nothing on the face of the instrument to indicate any equity, one may be a holder in due course whether negligent or not unless he acts in bad faith. In cases where the fiduciary relation appears on the face of the instrument it seems that the courts unconsciously substitute the objective test of negligence for the subjective test laid down by the N. I. L.

The effect of these sections is to bring cases involving fiduciaries into harmony with the principle intended to be laid down in the Negotiable Instruments Law, Sec. 56. They supplement but do not in any way contradict the Negotiable Instruments Law.

Sections 4-6 cover two situations requiring different rules:

1. Where the instrument is not given in a transaction known by the taker to be for the personal benefit of the fiduciary.

Here the taker should not be bound to make inquiry. The presumption should be that the transaction is proper and the presumption should be rebutted only by proof of actual knowledge that it is improper, or proof of bad faith. The taker should be liable not only where he has actual knowledge that the fiduciary is acting improperly but also where he acts in bad faith, as for example, where he suspects that the fiduciary is acting improperly and deliberately refrains from investigating in order that he may avoid knowledge that the fiduciary is acting improperly. The test however should not be the objective test of negligence but the subjective test of bad faith.

2. Where the instrument is given in a transaction known to be for the personal benefit of the fiduciary a distinction is made between

(1) Cases where an instrument payable to the principal or to the fiduciary as such, is indorsed and transferred in payment of or as security for a personal debt of the fiduciary (Section 4), and also

(2) Cases where an instrument is drawn or made by the fiduciary on behalf of the principal or is drawn by the fiduciary as such, and payable to a personal creditor of the fiduciary and delivered to the creditor in payment of or as security for a personal debt of the fiduciary (Section 5) on the one hand; and

(3) Cases where an instrument is drawn by the fiduciary on behalf of the principal or by the fiduciary as such, payable to the fiduciary personally and indorsed by him to his personal creditor. (Section 6.)

In cases (1) and (2) there is a strong presumption that the fiduciary is acting improperly. In (3) however it may very well be that the fiduciary was entitled to receive payment out of his principal's funds as where the principal is indebted to him for salary, commissions, reimbursements for expenses, dividends, or the like. It is therefore provided in case (3) that the creditor should not be liable unless he has actual knowledge that the fiduciary was acting improperly, or acts in bad faith. But in (1) and (2) the holder is liable unless the fiduciary was in fact acting properly. This distinction is drawn in the Massachusetts cases cited in 34 Harvard Law Review 454, note 26.

Section 4 is a consolidation of Sections 4 and 5 of the First Tentative Draft, as suggested at the meeting of the Conference in 1921. The language as to bad faith has been amended so as to conform to the language of Section 56 of the N. I. L., as suggested by Mr. Terry.

Section 5 is a consolidation of Sections 6 and 7 of the First Tentative Draft with changes similar to those made in Section 4.

Section 6 is Section 8 of the First Tentative Draft with the language as to bad faith amended so as to conform to the language of Section 56 of the N. I. L.

SECTION 9. Sections 7, 8 and 9 deal with depositories of fiduciary funds.

By the weight of authority a depository of fiduciary funds is not bound to inquire into the authority of the fiduciary to make the deposit even where the deposit is made in the personal account of the fiduciary.

And when the fiduciary makes withdrawals by check the depository is not bound to inquire for what purpose the withdrawals are made, whether the checks are made payable to the fiduciary personally, or as fiduciary, or to third persons.

But when the check is payable to the depository bank and delivered in payment of or as security for a personal debt of the fiduciary, the bank is put upon inquiry.

There are, however, certain exceptions to or limitations upon these principles which it is the purpose of these sections to abolish.

1. There is some question whether the cases exempting the bank from liability for receiving deposits of trust funds to the credit of the fiduciary's personal account rest upon the fact that the fiduciary is authorized to make such deposits or whether they rest upon the absence of a duty of the bank to make inquiry.

2. In New York it is held that the bank is liable where it credits the personal account of a corporate officer with funds of the corporation. It is still doubtful what the rule is as to trustees or under the Surrogate Act as to executors or administrators.

3. In Mississippi and Tennessee at least there seems to be a duty on the part of the bank to make inquiry in any case where fiduciary funds are deposited in the fiduciary's personal account.

4. In New York the bank may be liable for allowing withdrawals although it acts in good faith. Fidelity etc. Co. vs. Queen's etc. Co.

5. Where the fiduciary makes a deposit in his personal account and subsequently pays a personal debt to the bank by a check drawn on that account, the bank is bound to inquire how far the payment is made out of trust funds; in other words it must ascertain the amount of the (a) trust funds deposited (b) personal funds deposited (c) trust funds withdrawn and (d) personal funds withdrawn. This means that the bank must ascertain what is done with all funds withdrawn from the bank.

6. It has been held in New York that where the bank has once received payment of a personal debt of the fiduciary to it by a check drawn on the fiduciary's personal account, in which fiduciary funds have been deposited, the bank is bound to inquire into the purpose of all subsequent checks drawn upon the account.

The purpose of sections 7, 8 and 9 is to lay down a definite rule, making the bank, where it acts solely as a depository, liable only if it has actual knowledge of the fiduciary's breach of duty or if it acts in bad faith; and where the bank acts as creditor, making it liable to the same extent as other creditors are made liable.

In Section 7, the words after the last comma in the first sentence were added in accordance with the suggestion of Mr. Terry at the meeting of the Conference in 1921, and accepted by the Committee on Commercial Law. (Stenographer's Report, p. 198.)

In Sections 8 and 9, similar changes were made. (Stenographer's Report, pp. 188, 199.)

SECTION 10. One trustee cannot bind his co-trustees unless expressly authorized by them (the rule is different as to executors). This applies to the drawing of checks. But trustees must not delegate their duties even to their co-trustees except as to merely ministerial acts. Query, is the drawing of checks a ministerial act? Probably yes to principal, no as to income. Loring, Trustee's Handbook, p. 87. The bank should not be found to inquire whether authorization involves improper delegation. Nor should the payee or other holder of checks.

The words following the last comma were added in accordance with a vote of the Conference in 1921. (Stenographic Record, p. 212.)

Be it enacted

SECTION 1. [Definition of Terms.]

(1) In this act unless the context of subject-matter otherwise requires:

"Bank" includes any person or association of persons, whether incorporated or not, carrying on the business of banking.

"Fiduciary" includes a trustee under any trust, expressed, implied, resulting or constructive, executor, administrator, guardian, conservator, curator, receiver, trustee in bankruptcy, assignee for the benefit of creditors, partner, agent, officer of a corporation, public or private, public officer, or any other person acting in a fiduciary capacity for any person, trust or estate.

"Person" includes a corporation, partnership, or other association, or two or more persons having a joint or common interest.

"Principal" includes any person to whom a fiduciary as such owes an obligation.

(2) A thing is done "in good faith" within the meaning of this act, when it is in fact done honestly, whether it be done negligently or not.

SECTION 2. [Application of Payments Made to Fiduciaries.] A person who in good faith pays or transfers to a fiduciary any money or other property which the fiduciary as such is authorized to receive, is not responsible for the proper application thereof by the fiduciary; and any right or title acquired from the fiduciary in consideration of such payment or transfer is not invalid in consequence of a misapplication by the fiduciary.

SECTION 3. [Registration of Transfer of Securities Held by Fiduciaries.] If a fiduciary in whose name are registered any shares of stock, bonds or other securities of any corporation, public or private, or company or other association, or of any trust, transfers the same, such corporation or company or other association, or any of the managers of the trust, or its or their transfer agent, is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in making the transfer, or to see to the performance of the fiduciary obligation, and is liable for registering such transfer only where registration of the transfer is made with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in making the transfer, or with knowledge of such facts that the action in registering the transfer amounts to bad faith.

SECTION 4. [Transfer of Negotiable Instrument by Fiduciary.] If any negotiable instrument payable or indorsed to a fiduciary as such is indorsed by the fiduciary, or if any negotiable instrument payable or indorsed to his principal is indorsed by a fiduciary empowered to indorse such instrument on behalf of his principal, the indorsee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in indorsing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith. If, however, such instrument is transferred by the fiduciary in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is transferred in any transaction known by the transferee to be for the personal benefit of the fiduciary, the creditor or other transferee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in transferring the instrument.

SECTION 5. [Check Drawn by Fiduciary Payable to Third Person.] If a check or other bill of exchange is drawn by a fiduciary as such, or in the name of his principal by a fiduciary empowered to draw such instrument in the name of his principal, the payee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in drawing or delivering the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith. If, however, such instrument is payable to a personal creditor of the fiduciary and delivered to the creditor in payment of or as security for a personal debt of the fiduciary to the actual knowledge of the creditor, or is drawn and delivered in any transaction known by the payee to be for the personal benefit of the fiduciary, the creditor or other payee is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the instrument.

SECTION 6. [Check Drawn by and Payable to Fiduciary.] If a check or other bill of exchange is drawn by a fiduciary as such or in the name of his principal by a fiduciary empowered to draw in the name of his principal by a fiduciary empowered to draw such instrument in the name of his principal, payable to the fiduciary personally, or payable to a third person and by him transferred to the fiduciary, and is thereafter transferred by the fiduciary, whether in payment of a personal debt of the fiduciary or otherwise, the transferee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in transferring the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith.

SECTION 7. [Deposit in Name of Fiduciary as Such.] If a deposit is made in a bank to the credit of a fiduciary as such, the bank is authorized to pay the amount of the deposit or any part thereof upon the check of the fiduciary, signed with the name in which such deposit is entered, without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing the check or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the check.

SECTION 8. [Deposit in Name of Principal.] If a check is drawn upon the account of his principal in a bank by a fiduciary who is empowered to draw checks upon his principal's account, the bank is authorized to pay such check without being liable to the principal, unless the bank pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in drawing such check, or with knowledge of such facts that its action in paying the check amounts to bad faith. If, however, such a check is payable to the drawee bank and is delivered to it in payment of or as security for a personal debt of the fiduciary to it, the bank is liable to the principal if the fiduciary in fact commits a breach of his obligation as fiduciary in drawing or delivering the check.

SECTION 9. [Deposit in Fiduciary's Personal Account.] If a fiduciary makes a deposit in a bank to his personal credit of checks drawn by him upon an account in his own name as fiduciary, or of checks payable to him as fiduciary, or of checks drawn by him upon an account in the name of his principal if he is empowered to draw checks thereon, or of checks payable to his principal and indorsed by him, if he is empowered to indorse such checks, or if he otherwise makes a deposit of funds held by him as fiduciary, the bank receiving such deposit is not bound to inquire whether the fiduciary is committing thereby a breach of his obligation as fiduciary; and the bank is authorized to pay the amount of the deposit or any part thereof upon the personal check of the fiduciary without being liable to the principal, unless the bank receives the deposit or pays the check with actual knowledge that the fiduciary is committing a breach of his obligation as fiduciary in making such deposit or in drawing such check, or with knowledge of such facts that its action in receiving the deposit or paying the check amounts to bad faith.

SECTION 10. [Deposit in Names of Two or More Trustees.] When a deposit is made in a bank in the name of two or more persons as trustees and a check is drawn upon the trust account by any trustee or trustees authorized by the other trustee or trustees to draw checks upon the trust account, neither the payee nor other holder nor the bank is bound to inquire whether it is a breach of trust to authorize such trustee or trustees to draw checks upon the trust account, and is not liable unless the circumstances be such that the action of the payee or other holder or the bank amounts to bad faith.

SECTION 11. [Act not Retroactive.] The provisions of this act shall not apply to transactions taking place prior to the time when it takes effect.

SECTION 12. [Cases not Provided for in Act.] In any case not provided for in this act the rules of law and equity, including the law merchant and those rules of law and equity relating to trusts, agency, negotiable instruments and banking, shall continue to apply.

SECTION 13. [Uniformity of Interpretation.] This act shall be so interpreted and construed as to effectuate its general purpose to make uniform the law of those states which enact it.

SECTION 14. [Short Title.] This act may be cited as the Uniform Fiduciaries Act.

SECTION 15. [Inconsistent Laws Repealed.] All acts or parts of acts inconsistent with this act are hereby repealed.

SECTION 16. [Time of Taking Effect.] This Act shall take effect [              &n bsp; ].