Jones v. Jones — 19 N.Y. St. Rep. 436

Majority

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In the Matter of the Accounting of Oliver L. Jones et al., as Trustees, etc. Oliver L. Jones et al., App’lts, v. Lilian L. Jones, Resp’t.

(Supreme Court, General Term, First Department,

Filed November 14, 1888.)

Headnote

1. Trustee and cestui que trust—Vigilance and prudence in theipACTION RELATIVE TO THE TRUST IS DEMANDED—LIMIT' OP DEMAND.

The investment of funds of a. testator by trustees, and the retention by them of securities, purchased by the testator and held by him at the time of his death, affect the trustees in different ways. In the latter case the investment is an independent act of the testator, for which the trustees are in no wise responsible, and they are not liable for Josses in retaining such securities, unless it is affirmatively shown that they acted in an unreasonable manner in so doing, and that their failure to sell was unjustifiable. Though the obligation is imposed on trustees to be vigilant and prudent in relation to the subject of their trust, yet only such vigilance and prudence is demanded of them as may be developed by men ordinarily gifted.

2. Same—When not chargeable with losses to trust estate.

Where property sold under judgment of foreclosure and sale, in an action to foreclose a mortgage taken by the testator, is bought in by trustees under his will in the exercise of sound judgment, and solely for the benefit of the estate, they are not chargeable with consequent loss to the-estate.

8. Same—Acts op cestui que trust during infancy cannot operate as-RATIFICATION—MAY DEMAND ACCOUNTING AT HER MAJORITY.

No acts of a cestui que trust, during her infancy, although in full knowledge of her rights, can he construed as a ratification of the acts off her trustee, and no such acts estop her from demanding an accounting on arriving at her majority.

4. Same—What necessary to constitute the acts of cestui que trust-A RATIFICATION OP THE ACTS OF THE TRUSTEE—MUST ACT IN FULL-KNOWLEDGE OF ALL PARTICULARS AND OF HER RIGHTS.

In order to constitute the acts of a cestui que trust after her majority, a ratification of the acts of her former trustee, she must have acted, in full knowledge of all material particulars and circumstances of the trustee’s acts and must he fully apprised of her legal rights in the matter.

5. Same—Trustee must pay simple interest on all funds negligently ALLOWED TO LIE IDLE.

Where a trustee negligently suffers trust monies to lie idle he is chargeable only with simple interest thereon, and not with compound. The payment of the latter is imposed as a penalty only where he has wrongfully diverted the trust funds to his own use.

Appeal from decree of the surrogate on exceptions.

Oliver H. Jones left him surviving Louisa L. Jones, his-widow, and five children, to wit: Oliver L. Jones, Elizabeth Coralie Gardiner, Rosalie Adele Jones (now Oakley). Liban L. Jones and Martha Louise Jones (nowRutherford).

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In and by his will, Oliver H. Jones, among other things, provided as follows:

“ Fourth. I give, devise and bequeath to my executors hereinafter named, the sum of twenty-five thousand dollars for each of my children who shall be living at my decease, to have and to hold the same in trust for the benefit of my said children severally and respectively, such child to have the benefit of one of said sums of twenty-five thousand dollars. And the trust upon which my said executors are to hold the same, is as follows, namely, to invest the said several sums, in such property or securities, real or personal, as they in their discretion may deem most advantageous, and to sell and reinvest the same and change the securities from time to time as they shall think fit, and to receive the income of the said several sums and to apply the same to the use and benefit of such children severally during their respective minorities, and as soon as each child shall become of age, then and thereafter to pay over to such child the income of his or ’her share, in quarterly payments for and during his or her natural life, the income of the shares of my daughters to be paid to them free from the control of any husband.”

By a further provision of this will, the residue of the estate remaining after the payment of his debts, a provision for his wife, and the establishment of the foregoing trusts, was directed by the testator to be divided between his children, share and share alike.

By this will and a codicil, Oliver H. Jones appointed his wife, Louisa L. Jones, and these appellants, Oliver L. Jones and J. Lyon Gardiner to be the executors of his will.

Letters testamentary were issued to Louisa L. Jones and J. Lyon Gardiner, March 25, 1871, and to Oliver L. Jones, May 24, 1871.

The respondent, Lilian L. Jones, became of age March 17, 1881. Louisa L. Jones died in the spring of 1876.

Among the assets of the estate of Oliver H. Jones were five second mortgages, made by one Reeder, each covering one of five adjoining houses on East Thirty-fourth street, in this city, four being for $4,000 each, and one for $5,000. These mortgages were purchased by the testator before his death, he considered them good investments, and, on the testator’s advice as well as on his own judgment, the appellant; Gardiner, at the same time, purchased a similar mortgage on an adjoining house.

On the 10th May, 1871, the executors of Oliver H. Jones made a division in kind of the assets of the estate among those entitled, setting apart certain of the securities to each of the several trusts.

In this division the valuation of the different stocks was taken from a printed list of sales at the stock board, the dif

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ferent mortgages were taken for the most part at their face value and interest, and one of the Reeder mortgages was set apart and apportioned to each of the five trusts established for his children by the testator including that for the benefit of the petitioner.

In September, 1871, an action was commenced to foreclose four of these five mortgages for non-payment of interest, and in each case the property was bought in by the trustees, including that covered by the mortgage assigned the petitioner, and a judgment for a deficiency taken against the mortgagor. The premises were subject, however, to a prior mortgage of $5,000, and this was assumed by the appellants and subsequently a new mortgage was executed by them for that amount. After this purchase, during her life-time, Mrs. Louisa L. Jones collected the rents of this property, and after her death, and until June, 1881, the rents were collected by the appellant, Gardiner, and subsequently by the respondent herself.

Besides the Reeder mortgage there was set apart from the •assets of the estate to the trust in favor of the petitioner, among other things, twenty-eight shares of stock in tlm Phoenix Bank; twenty shares of stock in the Nassau Bank;” twenty shares of stock in the Merchants’ Exchange Bank, and ten shares of stock in the Marine Bank.

There was afterwards a loss on this stock aggregating $678.86.

On this accounting the referee' held First. That the terms of the will did not empower the trustees to set apart to or accept for the trust fund, or to invest the trust moneys in any securities other than those ordinarily required by law for the investment of trust funds.

Second. That the investments in the Reeder mortgage and in tire above mentioned- bank stocks were not proper investments for the trust, and that the losses therein should hot be charged against the trust fund, but that the same should be borne by the appellants.

Third. That the purchase of the property, covered-by the Reeder mortgage at the foreclosure sale, was improper, and that the trustees are chargeable with the loss of income that resulted.

Fourth. That the trustees are not entitled to credit for the expenses of the foreclosure of the Reeder mortgage, nor for the taxes and expenses paid upon the property subsequent to its purchase, nor for the interest paid by them on the first mortgage.

The referee also held that certain checks produced and proved and amounting to $4,430, which had been paid the petitioner, were given not in payment on account of the trust, but as rent of certain real estate which the petitioner owned, and disallowed the payment of $884.52, which was claimed to have been made on account of the trust, estate;

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The appellants present exceptions covering these various findings.

S. Jones and J. Langdon Ward, for app’lts; John S. Davertport, for resp’t.

The study of this case has not been an easy but a difficult one. The referee, in an elaborate and learned opinion, has expressed, and in the main, sustained his views, and they have again been adopted by the learned surrogate upon due consideration with one exception. The difficulty of review arises from the multitude of facts, figures and circumstances in which the record abounds examined with reference to the numerous findings and the various exceptions taken and presented for consideration, and the involved method in which they were submitted by the appellant.

If, upon such an examination, results differing from those arrived at in the court below shall be proclaimed, it may be that errors will be made, but the duty of review is imposed and must be performed. The case is certainly on© in which the ceremonies of the trial must be more impressive and more valuable upon the facts, at least, in some respects than the review, from the great advantage of hearing the witnesses and gathering and grouping the facts as they were stated.

Beginning with the finding in regard to the Reeder mortgage, it is thought that the referee was not justified in. charging the appellants with the loss attendant upon its presence as an asset. It was not selected by them, but formed a part of the estate which was divided, and without unnecessary expense, as we have seen.

The testator , had made the investment in these mortgages and they must either have been sold or divided and set apart to the trusts for which they were sufficient in number.

Without reference, therefore, to the power given the trustees to invest in such property or securities as they, in their discretion, might deem most advantageous, and without, therefore, invoking it for their benefit, the appellants were not chargeable with the loss on the Reeder mortgage unless the circumstances show affirmatively that they acted in an unreasonable manner in retaining it, and that the failure to sell was unjustifiable. McRae v. McRae, 3 Bradf., 199 . Here it must be borne in mind that the cestui que trusts were treated all alike, and none benefited at the expense of the others, five mortgages of like character having been found as part of the estate and appropriated in making the division. What would have happened as to the pecuniary result, had the mortgages been sold, does not appear,

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whether for,example it would have been more advantageous to have sold than to have retained them. There is a great difference betweeu an investment by the trustees of moneys forming a part of the estate and the retention of securities purchased by the testator and held by him at the time of his decease. In the one case the investment, whether wise •'or unwise, is the independent, uncontrollable act of the owner, and in the other it is the act of the trustees, whose discretion is limited and whose duties are prescribed, and each is to be subjected, therefore, to wholly different rules, if, indeed, the act of the owner is subject to any rule whatever.

The referee places his conclusions upon King v. Talbot, 40 N. Y., 76 ; Adair v. Brimmer, 74 id., 539; Hun v. Cary, 82 id., 65, and Ormiston v. Olcott, 84 id., 343.

In all these cases except the last, the investment was made by the trustees, and the last has no application, except so far as it recognizes the rule established in the first, which requires, it would seem, investment when made by the trustees to be made in federal or state securities or in bonds and mortgages within the state. We are not dealing with facts, therefore, that make the principles of these cases applicable. The liability of the appellants Vests upon different principles, as already suggested, involving unreasonable conduct in failing to sell or to act. 'Was the conduct of the appellants such as to warrant such á conclusion?

In the spring of 1871, March and May, letters testamentary were issued to them. In February, 1872, upon the Reeder mortgage, assigned to the respondent a judgment of foreclosure was obtained, but in an action commenced on 'September, 1871, for the non-payment of interest, and the property conveyed by it purchased. This was less than 'one year after the letters were issued. It is true that interest was due upon it at the time the letters were issued, 'but the mortgage was allowed to remain on the constant promise of the payment of interest and settlement which it 'was hoped and believed, it would seem, would take place. 'This course of conduct is often adopted by prudent men, 'and especially if the security be of doubtful value. It does not, therefore, follow that it was unreasonable, unjustifi'able conduct in failing to foreclose at an earlier date under these circumstances from the mere delay which occurred. Something more than this should be shown to warrant such a finding. Even trustees, although circumvented by stringent rules, are not expected to be guarantors against ' any misfortune in the management of their trust. They must, it is true, be vigilant and prudent, but in the sense

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in which these qualities are developed by human beings ordinarily gifted.

In the Matter of Gray, decided in this department ( 27 Hun, 455 ), the time allowed within which to sell securities, was declared on authority to be one year, although that rule was not universal, and cases were cited in which, a more, extended period was allowed. In that case stock which was part of the estate, was held on a falling market, in hope of improvement which came, but not to the extent anticipated, and the executors held it for further advance.

This was unfortunate, for the shares fell considerably in value, but the court held that it could not be said that they had acted improperly, for their conduct was such as prudent, cautious and intelligent business men would have deemed to have been proper, if they had been managing their own affairs.

The purchase of the property herein made was made, no doubt, with intent to avert loss, and was such an act as prudent and cautious men would commit. The object in view was a good one, and was founded upon an investment made by the testator, who not only believed in the security, but as already suggested, induced the appellant Gardiner to make a similar one. There is no pretense that the appellant, derived any benefit whatever from it; not the slightest upon the record.

In Hogan v. DePeyster ( 20 Barb., 117 ), it was said of the security there considered: “This is not a new investment. The case of Ackerman v. Emott ( 4 Barb., 626 ), shows the distinction between the two cases, and that an executor is liable for an unauthorized investment in bank stock, but admits that he is not liable for permitting such investments made by his testator to continue.”

In Thompson v. Brown ( 4 Johns. Ch. Rep., 619 ), the administrators permitted the business to be carried on as they found it, and it was held not to be a new and distinct original trading with the assets, voluntarily entered into by them entailing personal responsibility. And in Brown v. Campbell (Hopkins, 233), the Chancellor sustained the exchange of the notes of the Union Cotton Manufactory, for the stock of the Otsego Cotton Manufactory, the investment not having been made by the personal representatives.

These cases illustrate in connection with the others cited the distinction between existing and new investments, and sustain the proposition that the retention of the former even by a change in the form of them will not entail a personal responsibility unless the conduct of the trustees is unreasonable and unjustifiable. It must be borne in mind also that after the foreclosure and purchase,Mrs. Jones who

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had been appointed the guardian of the petitioner collected the rent of the property purchased.

The original investment it cannot be denied was injudicious, but this was the act of the testator and a similar one was made by the appellant Gardiner under his advice.

It is insisted on behalf of the appellants further that assuming the Reeder mortgage to be an investment it was authorized by the trust which vested a discretion in them, and that it was ratified by the petitioner. It is not deemed necessary to consider either of these propositions at great length. It may be enough to say of them generally that the referee has shown satisfactorily that the assumed ratification cannot be sustained on the facts nor upon the law'. When the division was made in 1871 the petitioner was a child and what she said or did during her minority even if it were based upon a full knowledge of her rights and the acts of the appellants, would not estop her from demanding an accounting.

Upon her arriving at maturity she took possession of the property purchased upon the foreclosure, but it does not appear that she had been advised of the facts relative to its acquisition and know nothing of the character of the Reeder mortgage or the mortgage subsequently given by the trustees as a result of the purchase. It is true that in 1881 in which year, and on the seventeenth of March she became of age, she began proceedings against the appellants for an accounting as executors and that they filed an account in September of that year. And further that these proceedings were amicably settled in December following, when she was given some if not all of the securities mentioned in the account as having been set apart for her when the division took place during her minority in 1871.

The account does not disclose all the facts. There is nothing in it to show the condition and value of the assignment of the Reeder mortgage and the changes made by its foreclosure and the sale and purchase of the property covered by it. She had then lately received a memorandum from the appellant Gardiner stating that the mortgage held for her trust was $25,000, and thus an indication upon which she could rely, that the amount to be set apart for her was intact. She was evidently then in ignorance of the facts in regard to the Reeder mortgage, and was not estopped, therefore, from asserting any right in regard to it. Actual and full knowledge is indispensable and after that, the act invoked must be clear and unequivocal fairly indicating an intent to affirm the transaction.

Pomeroy’s Eq., § 809; Boerum v. Schenck, 41 N. Y., 182 , 190. The knowledge must be of all the material particulars and circumstances, and the cestui que trust must be fully apprised of the acts ratified, and of her legal rights in the matter. Adair v. Brimmer, 74 N. Y., 554 .

Indeed it is said in that case “All that is implied in the

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act of ratification when set up in equity by a trustee against his cestui que trust, must be proved and will not be assumed.”

These views were expressed by the referee and are. adapted as conclusive upon the question considered.

In the conclusion arrived at, however, in regard to the liability incurred by the appellants as to the Reeder mortgage, these questions as to them are not so material.' That relating to the assumed ratification is considered, nevertheless, in detail, although the other is not as it is thought to be unnecessary in order to assert that herein the appellants are relieved only for the reason that the original investment was made by the testator, and the consequences resulting from that incident did not impose responsibility upon them under all the circumstances of the case.

These observations apply as well to the bank stock which was kept, and upon which a loss occurred. They were part of the assets, and were divided and held in the trust.

The conduct of the appellants in not selling them was not unreasonable or unjustifiable within the rules of the cases' referred to. It follows that the loss on the bank stock was not properly chargeable against the appellants personally, and should be borne by the trust, and also that the trustees should be credited with the expenses of the foreclosure and the taxes and expenses paid upon the property, except as hereafter stated subsequent to its purchase and as well the interest paid by them on the first mortgage.

In reference to the item of $4,430, disallowed by the surrogate, the referee makes the following statement in his opinion:

“ There is a conflict in the testimony regarding them. It seems that at the time they were paid, Dr. Jones had charge of real estate to one-fifth of the net income of which Miss Jones was entitled. She says she received the checks personally from Oliver L. Jones; that he told her they were for rent of property on Broadway and Fifty-ninth street, and she always understood it so; that when she asked for more money Dr. Jones always said that the Broadway property was not bi’inging more than the amount thus paid her, $200 a month; that that was her income.”

Dr. Jones flatly denies making these statements. The checks were drawn against his private account; the stubs from the check book contain only the bare entry of date, name and amount. He further testified: ‘"I didn’t pay her the rents on the Broadway property specifically at any time. What she has received has been on account. She wanted about $200; that was what she wanted a month, about $200; all that she received was on account generally. By stipulation the real estate account is produced for the purpose of deciding the question only. The petitioner is entitled to one-fifth of the net rents.

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It appears from a tabulation of balances due for rent over expenses, and of checks paid, that Mr. Jones began to give her these checks when there began to be a balance of rents in her.favor, and that his payments by check kept a little behind the net receipts for rent. This corroborates Miss Jones and tends to show that the checks emanated from the real estate and were intended to be on account of it.

It is most striking that after she became of age, and had instituted proceedings against her brother, as executor, and he had -filed an account in short at a time when, she was looking into her affairs, he should have given her the last and largest of these checks October 8, 1881, $680, and that this is within twenty dollars, as I figure it, of the net amount due her on account of these rents.

It looks to me like a payment intended to settle up that account to date. And on the -whole testimony I must conclude that the checks were paid on account of the real estate and -not on account of the trust.

No error seems to have been committed by the referee in treating the $4,430 as an amount of payments made by the appellant Jones to the respondent, on account of her share of the rents of the real estate, and refusing to allow him to charge the same against the trust fund.

A critical examination and analysis of the rent account confirms the substantial accuracy of the tabulation appended, to the points submitted on her behalf.

That tabulation shows that the payments in question began soon after the rent account exhibited a balance in her favor, and continued to be made in instalments, more or less closely representing the amounts due to her thereon, until such time as she assumed the charge of her share of the realty and received the rents with the appellants’ intervention, at which time the latter paid her an unusually large sum, approximating with sufficient closeness to the amount then actually due to her on the rent account to justify the referee’s conclusion that it was made for the purpose of balancing the same.

These circumstances, taken together, raise a strong presumption in favor of the correctness of the referee's reasoning, and this is still further corroborated by the respondent’s testimony that she always understood these payments to have been made on account of rents. The testimony of the appellant Jones in no way tends to rebut this presumption. It is evasive and unsatisfactory and by no means amounts to a denial of the fact that these payments were so made. He says: “I didn’t pay her the rents on the Broadway property specifically at anytime, nor specifically; what she has received has been on account. She wanted about $200; that was about what she wanted a month,

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about $200; • all that she received was- on account generally.”

And this is virtually what the respondent claims. It is nowhere contended that the appellant Jones paid her, at any time before the closing of the account, the specific sum then actually due her, but that from time to time he made payments “ on account generally,” ceasing with the sum before mentioned, apparently the amount then due her after which she collected the rents herself. The fact that these payments were made by his individual checks tends also to confirm this conclusion.

In the most favorable view that can be taken of his testimony, all that can be claimed from it is that the $4,430 was paid on account, to be applied both to the rent account and to the trust fund.

Setting aside any inquiry as to the quéstionable conduct of the appellant Jones, in mingling two entirely distinct and separate accounts, it would seem to be totally unjustifiable for him to charge against the trust fund, a sum which in part at least, upon his own admission, was paid on account of rent.

Had the fact so been, it would have been easy for him to show in what way, other than by the checks in question, he had accounted to the petitioner for the Broadway rents.

His failure to do that, is to my mind further corroboration of the correctness of the express ruling on this branch of the case.

The effort on the part of the appellant’s counsel to weaken the force of the circumstances surrounding these transactions, fails, it may be said, without disrespect of any purpose beyond that of making “ confusion worse confounded,” if the merits of this appeal are properly appreciated.

The fact that other payments, from other sources were made to the petitioner during the period covered by the checks under consideration, has no bearing upon the question at issue. The Broadway rents were received by the appellant Jones, and it was his duty to account for them to the petitioner individually, and not as trustee, and it is impossible to resist the conclusion upon the whole case, that his individual checks substantially coincident as to amount and coeval in point of time, were given for that purpose, and for that purpose only.

The accounts generally, seem to have been kept with such a lack, not only of method, but of intelligibility, that the appellants have no just cause to complain if they suffer disadvantages from that circumstance.

The case, it must be further said, does not disclose any reason why the interest _ upon the unpaid taxes upon the Reeder property, and which was imposed as a penalty should

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not be borne by the appellants. The money to pay the taxes was accessible either from the estate or could have been obtained in its credit. These items therefore should not be allowed to the appellants but charged against them. In this respect the decree must, with others be modified.

The charge of interest with annual rests does not seem to be warranted. The division of the estate among the several beneficiaries was made by the appellants at an early day, and so far as the record discloses their acts it was done in good faith. The chief errors apparent and of which complaint is made were in holding assets that were not as valuable as supposed, but which were purchased and held by the testator. The principles governing the allowance of such a penalty are not presented here. The facts differ materially from those which influenced the judgment of the court in Cook v. Lowry ( 95 N. Y., 103 ).

The court said there that the case presented by the evidence and by the findings exhibited gross dereliction of duty, the trustee keeping no account of the fund or the-income and using the securities of the trust in his own business, changing them from time to time for his own benefit and rendering no account of his realizations. Here there are as already suggested no such incidents. The learned referee starting from assumed misconduct was naturally led to the conclusion which such an element would warrant perhaps and hence the imposition of the punishment by allowing interest with annual rests.

In Schiefflein v. Stewart ( 1 Johns. Ch.Rep., 620 ), the learned chancellor upon a full consideration of the subject determined as stated in the syllabus of the report, that a trustee was not allowed to make any gain, profit or advantage of the trust funds, or to convert the trust moneys to his own use or employ them in his business. If he did the latter acts or either, he could be subjected to the payment of compound interest. If he negligently suffered the trust monies to be idle, he was chargeable with simple interest only. This case has not been questioned or disturbed and the rule declared has' not been enlarged.

The appellants should have been charged only with simple interest on any of the sums allowed against them where annual rests were declared proper by the referee and granted. The decree must be modified on this subject.

This disposes of all the exceptions which are available to the appellants, although it does not embrace a statement in detail of all those presented for consideration. Many of them result from rulings which have been rejected by the views herein expressed, and some of them after earnest hunts indulged in over and over again for meritorious support have been abandoned as worthless. The details of the record, the double sets of accounts, the numerous exceptions, the series of figures and calculations dotted over the

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appellants brief have led to numerous examinations of the case causing its retention and consideration for a longer period than usually allotted to such controversies, but the delay has arisen from a struggle to fully comprehend all the varied elements and antagonisms assumed by the appellants and gainsayed by the respondents and to dispose of the appeal so that no injustice would be done to either party. Whether this has been accomplished or not, however earnestly desired, remains to be seen from the subsequent history of the case.

The judgment appealed from must be corrected in accordance with these views, and if the parties cannot agree it will be referred back to the referee that he may adjust the liabilities according to the modifications declared to be necessary herein. If this course, however, he one which it is supposed will lead to delays, then the subject may be entertained and disposed of, and a settlement of the order to be entered herein and by me on due notice.

Ordered according to these views.

Van Brunt, Ch. J., and Daniels, J., concur.