In re the Accounting of Smith — 39 N.Y. St. Rep. 386

Majority

p. 386

In the Matter of the Accounting of George B. Smith et al., as Trustees of the Estate of Gorton P. Cozzens, Dec’d.

(Surrogates Court, Rensselaer County,

Filed July 20, 1891.)

Headnote

1. Trustees—Testamentary—Liability for defaults of co-trustee.

Under a will, A., H. and S. were named executors and trustees, and duly qualified. A. never took upon himself the active duty as executor and trustee, the entire business being transacted by S. and H. The body of the estate was put in trust for the benefit of testator’s son, and after his death to go to his children. H. died before the accounting, insolvent. It appeared that H. & S. had divided the trust funds or securities between

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them, S. retaining the greater part. The hooks of the estate were kept by H. The receipts and disbursements made by S. were reported to H. and placed by him on the books. H. made periodical statements to S. Upon H.’s death a deficit of $2,060.67 was found. Held, that A. and S. were not liable for this amount.

2. Same.

Trustee H. said to his co-trustee S.: “I will take this $900 of the trust funds and give you my note and a $1,000 Troy & Albia Horse Railroad bond as collateral. After the death of H. it appeared' that the bond had been wrongfully taken by H. from its owner when he transferred it to S. The note was unpaid. The T. & A. H. R. Co. brought an action against A. and S. and recovered the bond. Held, that S. was liable to the estate for the amount of rae note, under the rule that a trustee is liable for the defaults of his co-trustee where he is a consenting party to the waste, or neglects some duty consequent upon his knowledge of misapplication intended or in progress.

This is an application to settle the accounts of the trustees of the estate of Gorton P. Cozzens, deceased.

Gorton P. Cozzens died, leaving a will, in which certain persons were named as executors and trustees, of whom Jesse B. Anthony, Theodore B. Haslehurst and George B. Smith qualified. Anthony never took upon himself the active duty as executor and trustee, the entire business being transacted by Smith and Haslehurst. The body of the estate, after the payment of certain debts and legacies, was under the terms of the will put in trust for the benefit of William G. Cozzens, the testator’s only son, who was to receive and use the income during his lifetime, and after his death the fund was to be distrbuted among the children of the said William G. Cozzens, him surviving.

At the time of the filing of the account herein said William G. had one child, named Annie S., an infant, for whom Seymour Van Santvoord was appointed special guardian and appeared. Theodore B. Haslehurst died before the filing of the petition herein, insolvent. It appears that Haslehurst and Smith had divided the funds or securities between them, Smith retaining the greater portion of the securities and collecting the income from the same. The books of the estate were kept by Haslehurst, who kept thereon the entire receipts and disbursements connected with the estate; those made by Smith were reported to Haslehurst and placed by him on the books. From them Haslehurst made periodical statements of the entire income of the estate to Smith. Smith received, and applied the income for the use and benefit of the said William G. Cozzens.

Upon this accounting by the two surviving trustees it appears that there is a deficit in the trust fund of $2,060.67, which the surviving trustees claim was money misappropriated without their knowledge by Theodore B. Haslehurst, their deceased co-trustee, and ask that they be credited with the amount of the loss. By their supplemental account they further ask to be credited with the loss of $900 of money likewise misappropriated by their deceased co-trustee, and to be credited also with the sum of $500 costs and expenses incurred in defending the estate against an action brought by the Troy & Albia Horse R. R. Company for the recovery of a bond which the said Haslehurst

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had wrongfully appropriated to his own use and assigned to his co-trustees as collateral to a note of $900 which he had given to his co-trustees as security for money borrowed by him from the trust fund.

The special guardian objects to the allowance of the credit of the several items, and insists that the several losses have been occasioned by the negligence of the accounting trustees.

Merritt & Ryan, for trustees; Seymour Van Santvoord, guardian ad litem, for infant, Annie S. Cozzens.

—We shall consider, first, the propriety of the allowance of the credit of the sum of $2,060.67 upon this accounting. It will be necessary briefly to consider the facts connected with the .alleged loss of the funds, in order to make a proper application of the law. But little, if anything, is known in regard to the actual facts connected with the loss, save what appears in the books kept by the deceased trustee Haslehurst, which were not examined until after his death. From those books it appears that a mortgage upon property in the city of Troy was given by one Golden, for the sum of $2,000, September 10, 1884. That it was paid on the 10th day of September, 1886, in full. The mortgage was satisfied by Haslehurst alone, and the money never came into the hands of the trustee Smith or Anthony, and they had no knowledge of its payment at the time it was paid. On the books kept by Haslehurst the amount due on the mortgage, after it was received, was figured as cash in the hands of Cipperly, Cole & Haslehurst, bankers and brokers, at Troy, N. Y, of which firm Haslehurst was a member. Haslehurst paid interest thereon December 1, 1886, at 4 per cent, and subsequently entered in his book January 1, 1887, that he had a balance on hand belonging to the estate of $3,060, including the $2,000 above stated. This amount he entered on the books as being on special deposit with Cipperly, Cole & Haslehurst ($3,000), and credited interest thereon for four months at 4 per cent. On November 1, 1887, Haslehurst changes again the entry on the book by crediting interest from Cipperly, Cole & Haslehurst on $1,000 at 4 per cent, and on $2,000 for six months at 5 per cent.

It appears from the books that this $2,000 was simply Haslehurst’s individual note, which never has been found, and probably was never made. The proceeds of the Golden mortgage never, so far as it appears, went to the firm of Cipperly, Cole & Haslehurst, but was used by Haslehurst individually, which amount constitutes a part of the shortage of this estate. Haslehurst credits himself with interest on this note up to the last interest day preceding his death. Anthony was never consulted about the Golden mortgage and never knew it was paid, or even of its existence, until he made an examination of the books after the death of Haslehurst.

Smith knew of the existence of the Golden mortgage, but had no knowledge, until after the death of Haslehurst, that it had been paid. The loan appears to have been made by Haslehurst alone. Smith only knew of it, as interest was brought to him purporting

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to be interest received from the Golden mortgage. .Under these facts the question arises, are Anthony and Smith, or either of them, liable for the loss which has occurred to the trust fund ? In regard to Anthony, we think there is no serious question as to his liability. He appears to have been a consulting trustee only; he had no charge of the funds, no knowledge of the investments; indeed there was a tacit understanding, as he alleges, between himself and the remaining trustees, that they would assume the active care and management of the estate.

In regard to Smith, the case is somewhat different. He knew of the investment and had active charge, in connection with Haslehurst, of the trust, and held a large portion of the securities in his ■own hand, and collected the interest and income from the securities and disbursed the income from the entire estate to and for the benefit of the beneficiary. He was a butcher, actively engaged in his business, unaccustomed to keep books of account save a simple blotter, and relied upon Haslehurst as a skilled accountant and one peculiarly qualified for the purpose of keeping the accounts and transactions of the estate.

Doubtless he had access to the books of the estate kept by Haslehurst, but he did not in fact examine them; it inferentially appears that he would have known but little of them had he examined them, and really the only question, it seems to me, so far as this item is concerned, is : Was be and his co-trustee, or either of them, guilty of negligence in not examining the books of the ■estate kept by Haslehurst or causing them to be examined, to learn, as it has been learned since Haslehurst’s death, and might have been before, that Haslehurst was using the funds of the estate in his own business or the business of the concern of which he was a member?

The general rule in regard to the liability of executors and trustees is well settled. Co-executors and trustees may act either separately or in conjunction. They are jointly liable for joint .acts and each is separately liable for his separate acts and defaults. Bruen v. Gillet, 115 N. Y., 10 ; 23 N. Y. State Rep., 780; Croft v. Williams, 88 id., 384; Adair v. Brimmer, 74 id., 539.

In Croft v. Williams, Judge Finch, speaking for the court remarks that “ The general rule is, that an executor is responsible for his own acts and not for those of his associates, so that if he receives and misapplies the money, or does any act by which it gets into the hands of the other who diverts or wastes it, and but for which act the latter would not have had it, a liability to make good the loss results." * * * “ If an executor is merely passive and simply does not obstruct the collection or receipt of ■assets, he is not liable for the latter’s waste, but where he knows and assents to such misapplication or negligently suffers his co-executor to receive and waste the estate when he has the means of preventing it by proper care, he becomes liable for the resulting loss." * * * “Mere assent to the executor’s receipt of the funds is not enough." * * * “ Ordinarily in the collection of assets the rights of each are alike and one has not control or supremacy over the other. One, therefore, may sit passive and see the

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other receive funds of the estate and making no objections, be deemed to assent, but that does not make him responsible for what has been received. He must in some manner know and assent to the misapplication, he must be a consenting party to the waste, or neglect some duty consequent upon his knowledge of the misapplication intended or in progress. A wrong done or duty omitted must lie at the foundation of his liability.”

See also Wilmerding v. McKesson, 103 N. Y., 329 ; 3 N. Y. State Rep., 108; Ormiston v. Olcott, 84 id., 339 .

In applying the rule above laid down to the facts relating to this item, it seems to me that Smith, whose liability is more especially insisted upon, is not guilty of such negligence as renders him responsible for this loss. He certainly had no knowledge of the intended misappropriation or of its progress and had no reason to suspect Mr. Haslehurst’s integrity either from his standing in the community or from his own dealings with him. Neither does the rule, that the knowledge of one co-nxecutor or trustee, must be imputed to the other, laid down in the case of the Troy & Albia R. R. Company v. George B. Smith, ex’r, 33 N. Y. State Rep., 203, apply here; otherwise in every case the actual non-consenting and innocent co-executor would always be bound for the wrongful acts of a recusant executor, because he would always under that rule, have implied knowledge or notice of his co-executors’ defaults intended or in progress.

The serious question is, was knowledge of the facts embraced in the books of the estate kept by Haslehurst, legally imputable to Smith and Anthony or either of them ? We are not disposed to adopt so stringent a rule. There was no suspicion of wrong doing, nothing to put the accounting executors on inquiry ; and under such circumstances it can hardly be said that they were guilty of neglect in not looking into the books kept by the co-executors or inquiring into the condition of the portion of the estate controlled by him, when they had every reason to believe that the duties which had been assumed by their co-executor were being properly performed. We don’t think the case of Earl v. Earl, which holds where executors or administrators who permit a third person to manage and control the estate, and. adopt him as their agent, are held responsible for his conduct and are liable for losses incurred by his improper and negligent management of the affairs of the estate, applies here.

In the case at bar Haslehurst was but performing his own duties as executor in what he did in keeping the books, and the fact that the remaining executors or trustees trusted to his honesty in keeping them correctly and did not inquire into every transaction which was or might have been on his books, does not as a matter of law or fact require the conclusion that they were guilty of negligence, and we shall hold for the purpose of this accounting that the trustees should have credit- for the sum of $2,060.67, lost through the misconduct of their associate trustee without their fault'

The remaining question as to the credit claimed by the executors for the loss of $900 and the costs of a suit respecting

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the same, presents a far different question. Said $900 was a portion of the funds of the estate which had been received by the said Haslehurst, and also misappropriated by him. The facts in regard to that item are in short as follows: Haslehurst had received the money which belonged to the estate; and to use the language of Mr. Smith, trustee, in his testimony, Haslehurst said: I (Haslehurst) will take that money and give you my note and a Troy & Albia bond as collateral, that is $900. That is the only transaction he consulted me about He said I’ll give you my note and attach a bond of the Troy & Albia Horse Railroad to it as collateral security.

It appeared after the death of Haslehurst that the $1,000 bond attached to the note as collateral had been wrongfully taken by Haslehurst from its owner when he transferred the same to Smith. The note is unpaid by reason of Haslehurst’s insolvency. An action was subsequently brought by the Troy & Albia Horse Railroad Company against the present trustees to recover the bond, and recovery was had, the court holding that the remaining executors or trustees were not bona fide holders of the bond, and that the knowledge of Haslehurst was imputable to them. Troy & Albia H. R. R. Co. v. Smith, supra.

Credit upon account of this loss is claimed upon the ground that Haslehurst, at the time of the acceptance of this note by Smith, his co-executor had the money in his possession, and had the right to its control and use, and that Smith did nothing that caused the loss; and further, that Smith neither put it in Haslehurst’s possession, nor had he the power to deprive him of its possession or control; and that at the time of the alleged loan, he held it as trustee and was entitled to its control without consent of his co-trustee; and beyond that, that the trustee Smith acted in entire good faith in making the loan and accepting the bond of the Troy & Albia Railroad Company, which, it is alleged, was ample security for the loan; and except for the defect in title of the bond of which Smith, it is conceded, had, in fact, no knowledge, the loan would have been amply secured. We are of the opinion that this position is unsound. True, Haslehurst had the funds in his possession, but, for the occasion, he laid aside his character of co-executor or trustee, and went to his co-executor as a borrower. He said in substance: “I need a loan of money for a brief period. I will give you my note and a $1,000 bond of the Troy & Albia H. R. R. Co. as collateral security for the loan.” In my judgment the case would not be different had Haslehurst applied in behalf of a third party engaged in like business to his own, and Smith had consented, under the same circumstances, to have made the loan, and that Haslehurst might turn over the money to him upon his furnishing his note and the bond, or any other of like".character as collateral. Such a transaction would be utterly indefensible in my opinion; and the court of appeals say, in the case of Deobold v. Oppermann, 111 N. Y., 538 ; 20 N. Y. State Rep., 81, per Ruger, Ch. J.: The employment and use of trust fund by the trustee in his trade or business, or as loans to persons engaged in such business, or the prosecution of commercial

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or manufacturing enterprises, or speculative adventures, have been" uniformly considered as illegal and as constituting a devastavit of the estate * * * authorizing the removal of the trustee. See, also, Wilmerding v. McKesson, supra.

The rule above cited condemns the knowing employment of a trust fund by the trustee in business enterprises without special consideration of the character or quality of the security taken. In this case it was a loan upon personal security, a promissory note; such a loan requires no citation of authorities for its cohdemnation. The fact that a railroad bond was given as collateral we don’t think changes the character of the transaction; even if a railroad bond might under some circumstances be a justifiable-investment for a trust fund, it does not belong to the class of which the courts approve, and the burden of showing the value and sufficiency of the security is upon the trustee before the question of its acceptance its entitled to the slightest consideration.

The bond of a horse railroad company, secured by a mortgage-upon its tracks, is not such a real estate security as will authorize trustees to invest trust funds thereon. Judd v. Warner, 2 Dem., 104 ; King v. Talbot, 40 N. Y., 90 .

But we prefer to place our disallowance of the credit upon the-ground that the trustee, Smith, distinctly assented to the making of a temporary loan presumptively for business purposes, which brings-the case within the rule that a trustee is liable for the defaults of his co-trustefe, where he is a consenting party to the waste or neglects some duty consequent upon his knowledge of misapplication intended or in progress. Croft v. Williams, supra; see, also, Wilmerding v. McKesson, supra.

It plainly appears that the trustee Smith knew and understood that this loan was made for a temporary purpose to a person engaged in business, and was in fact for business purposes. If he-might consent to the loan of $1,000 to Haslehurst, secured by his note and collaterals of whatever character they were, he might have loaned him the entire estate and placed the trust fund at hazard, not only of the business of Haslehurst, but also of various-other enterprises represented by the collaterals.

Such investment in the language of the court cited, undoubtedly constituted a devastavit that authorizes the prompt removal of the-trustee guilty of the wrongful act. But it is claimed that as Smith did not actually have the fund in his possession, he did not give Haslehurst control of the fund, and so was not guilty of any wrongful act. But he had notice of and consented and participated in the wrongful misappropriation of this fund by Haslehurst, and under all the authorities he would be guilty if he took no steps with such knowledge to prevent the consummation of the intended wrongful act It is no answer to say that if he did not-consent Haslehurst would have probably taken the funds without his consent It is sufficient to say that he did a wrongful act in consenting to an improper investment of the trust fund, and non constat had he refused his consent and insisted upon a proper investment of the fund that it would not have been made. At any rate his refusal would have gone far towards his exoneration,

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although under the law as it now stands, he would have been authorized to apply to the court for a direction as to the disposition of the fund upon his refusal to accede to his request Wood v. Brown, 34 N. Y., 337 ; Code of Civ. Pro., § 2602.

The examination of this account has satisfied me that this fund has been managed with great laxity and disregard of the law with respect to its investment. I find from the account that loans have been made not only, to Haslehurst, with the consent of Smith, but Smith has taken loans himself, whether with Haslehurst’s consent or not does not appear, until at the date of this account, January 1, 1890, said loans to Smith have increased to $6,000; in addition, as we understand the account, the trustee holds a note of George B. Smith & Son for $1,500. It is stated in the account that the $6,000 loan has collateral security. Such investment of the fund is unlawful and utterly without excuse and demands the severest condemnation, and I direct that the said trustee (Smith) immediately invest said fund in lawful securities and make a report to me of the investment so made within five days ; in default thereof show cause why he should not be removed from his office.

Let a decree be drawn in pursuance of this opinion.