Isham v. Post — 54 N.Y. St. Rep. 232

Majority

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Henry H. Isham, Trustee, Resp’t, v. Mary E. Post, Adm’rx, App’lt. Mary E. Post, Adm’rx, App’lt, v. Henry H. Isham, Trustee, et al., Resp’ts.

(Supreme Court, General Term, Second Department,

Filed July 28, 1893.)

Headnote

1. Trusts—Investment of assets—Notice to third persons.

The word “ trustee ” added to the signature to a check is notice that the funds were not the property of the maker individually, hut not that the trust is of such a character that the trustee is limited solely to what are called “legal investments.”

2. Same—Negligence of person making loan.

Where a person who makes a loan for a trustee takes as security eer tificates of stock without verifying their genuineness by inquiry at the office of the company issuing or the trust company which registered them’ When both are accessible, but relying on the standing of the firm with which the loan was made, he is guilty of negligence, and responsible for the loss in case of their turning out to be forgeries.

Appeal from judgment in favor of plaintiff in the first entitled action, and from judgment dismissing the complaint in the second.

The first action was brought to recover the sum of $25,000 belonging to a trust estate, which defendant’s intestate had loaned for the plaintiff, the securities for which loan proved to be forgeries. The second action was brought against the trustee and the cestui que trusts to procure a determination that said sum was not chargeable in the hands of the intestate or the plaintiff, as administratrix, with any trust whatever, or that the investment was a proper one, or that if not, the loss should in equity be borne by the trustee, and for an injunction against the continuance of the first action.

On the 13th day of November, 1890, Henry H. Isham, having in his hands the sum of $25,000 of moneys belonging to the Trumbull estate, of which he was the trustee, employed the defendant’s intestate, Augustus T. Post, a banker, to loan these moneys upon securities sufficient for its repayment.

Upon this day Mr. Post received a check for $25,000 from Mr. Isham, signed Henry H. Isham, trustee, deposited it to his own credit in his bank, and loaned $25,000 by his own check and in his own name to Mills, Eobeson & Smith, stock brokers, upon stock collaterals, largely of a speculative character, some of which had been forged by Albert H. Smith, one of the borrowers, by altering or raising the number of shares which the certificates purported to represent, but such forgery was not discovered until after the failure of the firm.

On the 15th day of November, two days after the loan, Mills, Eobeson & Smith, who were, in fact, insolvent when the loan was

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made, failed, and made an assignment, and on thl 19th of November, six days after the loan was made, Mr. Post first announced to Mr. Isham the fact of the forgery, and the consequent loss.

Before that date Mr. Post had not reported to the plaintiff what disposition or investment he had made of the trust moneys in question, nor upon what security or terms he had loaned them, or to whom they had been loaned. Nor had the plaintiff any knowledge of or information respecting the loan.

The following is the opinion of the court below:

Even though the plaintiff were a party to the wrong, if the defendant’s intestate was guilty of a spoliation of the trust estate, the plaintiff in his .representative character can maintain this action. But I do not think that the loan Mr. Post assumed to make was per se a misuse of trust funds, for which he would-be responsible. The word “trustee” in the check gave notice to the banker that the funds were not or might not be the property of the plaintiff individually. Jaudon v. Nat. City Bank, 8 Blatchford, 430 ; Shaw v. Spencer, 100 Mass., 382 ; Baker v. Bliss, 39 N. Y., 70 .

Therefore, if the transaction was prima facie a waste or spoliation of the trust estate, or if the trustee apparently was using the trust funds for his personal benefit, the banker participating in the matter and receiving the funds would be liable. But I think that this transaction was not of that character. I find as a fact that Post had no knowledge or notice that that money belonged to the particular trust estate of which it now seems to be the property. The transaction was not dishonest or hazardous. The plaintiff himself had no thought that he was wrongdoing. Loans on collateral to brokers are made by banks, bankers and trust companies. To declare the defendant liable on the theory that the loan as it was intended to be made was illegal and a waste of trust funds, it is necessary to hold not only that the word “ trustee ” put the receiver of the check on notice not only that the plaintiff did not hold the moneys in his own right, but that the trust was of such a character that the trustee was limited solely to what are called “ legal investments.” I think that would be carrying the doctrine of implied notice too far. In this very case the trustee could, with the assent of the beneficiaries, invest in any class of securities. It is a matter of common knowledge that many of the bank accounts in the name of a person simply as trustee require no such strictness in investments. I am not disposed, therefore, to hold the defendant liable on this ground.

The question then arises as to the responsibility for receiving the forged or altered certificates of stock. I have searched in vain for precedent in this respect. Two cases arising from stock transactions are to be found in the reports which approach the case in hand, but still are to be distinguished from it. In Lambert v. Heath, 15 M. & W., 484, the stock broker was held not liable for the invalidity of certain Kentish Coast R R. scrip purchased by him for his principal, on the ground that he bought the thing-he was ordered to buy, that is, the scrip that was selling in the

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market. In Peckham, v. Ketchum, 5 Bosworth, 506, the stock-delivered by the broker to his principal was a genuine certificate, but was alleged to be invalid because of an over-issue of stock by the officers of the N. Y. & N. H. R. R Co. Here also the broker was held not liable. But here the loan was concededly to have been made on the faith of the collaterals and the securities on which it was made, spurious securities were not the securities contemplated by the parties nor did the banker take any precautions to verify the genuineness of the securities and guard against forgery. There were accessible to the banker both the office and the company issuing the stock and the office of the trust company which registered the certificates. An inquiry at either office would have disclosed the forgery and prevented the loss. It is true that the banker did not take this precaution in the case of his own loan. But this does not determine the question of care. He undoubtedly relied on the standing of the firm to whom he made the loan. But this confidence was his own; the plaintiff did not know the parties. This is a hard case for either party on whom ultimately the liability is adjudged.to rest. But where so simple a precaution as that already stated would have exposed the fraud, I think that the liability should rest on the party who neglected to avail himself of it. There will, therefore, be judgment for plaintiff, with costs.

Alfred Ely, for app’lt; Frederic A. Ward, for resp’t, Isham; Dixon, Williams & Ashley, for other resp’ts.

This decision disposes of the cross-suit of Post v. Isham, in which the complaint will be dismissed, without costs.

The opinion at special term sufficiently discusses the law and facts.

' Judgment affirmed, with costs.

Barnard, P. J., and Dykman, J., concur.