Litchfield v. White & Leonard — 5 N.Y. Super. Ct. 545

Majority

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Litchfield and others v. White and Leonard.

Headnote

In general, a trustee is bound to manage and employ the trust property for the benefit of the beneficiary, with the care and diligence of a provident owner.

Ho will not be exempted from responsibility for losses occasioned by his negligence, on the ground that he was equally improvident in his own affairs.

Gross negligence, in the ordinary use of language, signifies negligence of an aggravated character, as distinguished from that which is merely careless or not palpably culpable.

When the negligent act is such, that, at first blush, it strikes the mind as manifestly culpable or aggravated, it is gross negligence.

A stipulation limiting the liability of a trustee to his own gross negligence or wilful misconduct, exonerates him from a great portion of the responsibility which the law attaches to his office.

Such a stipulation, in a general assignment to a trustee, for the benefit of creditors, is evidence of an intent to hinder, delay, and defraud creditors, and it renders the assignment void as against them.

The courts of this state have never held an assignment to be void on its face, which ■ simply vested the debtor’s estate in trustees, and directed them to convert it into money, and apply it absolutely, and, without reserve, to the payment of his debts, whether equally or with preferences. The invalidity of such assignments, as have been adjudged void per se, has arisen from the insertion of clauses beyond or varying the necessary provisions for transferring the debtor’s property, and appropriating it to the payment of his debts.

(Before Oakdey, Ch. L, and Sandford and Paine, J.J.)

Jan. 8 ;

April 20, 1850.

The suit was commenced in September, 1848, by E. Darwin Litchfield, Edwin 0. Litchfield, and Thomas H. Hubbard, against Robert H. White and William H. Leonard. The complaint set forth the recovery of a judgment by the plaintiffs against White for $2057 56, in the supreme court, on the first of May, 1848, the issuing of an execution against White’s property, and the return of the same wholly unsatisfied. That previous to the sixteenth day of December, 1847, several suits for the collection of debts had been commenced against White, and he had, for several days, concealed himself, to avoid the service of process in other suits about to he commenced against him. That he then executed an assignment, in these words, viz.

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u This Indenture, made the sixteenth day of December, one thousand, eight hundred and forty-seven, between Robert H, White, of the City of Hew York, merchant, of the first part, and W. H. Leonard, of the said City, Counsellor at Law, party of the second part—

Whereas, the said party of the first part is indebted unto divers persons, in large and considerable sums of money, which he is unable at present to pay in cash, but is desirous of providing for the payment thereof as far forth as his property and effects will enable him to do. How, therefore, this indenture witnesseth, that the said party of the first part, in consideration of the premises, and of the sum of one dollar, lawful money of the United States of America, to him in hand paid by the said party of the second part, at and before the ensealing and delivering hereof, the receipt whereof is hereby acknowledged, hath granted, bargained, sold, assigned, transferred and set over, and by these presents'doth grant, bargain, sell, assign, transfer and set over unto the said party of the second part, all the goods, wares and merchandise of the said party of the first part, and all promissory notes, drafts, bills of exchange and securities belonging to the said party of the first part, and all hooks, debts, claims and demands owing to the said party of the first part, from any and all persons whomsoever, and all hooks of account, vouchers and securities belonging to the said party of the first part, and generally all property and effects of every nature, kind and description' belonging to the said party of the first part, excepting such as is by law exempt from execution; to have and to hold the same unto the said party of the second part, in trust, for the use and propose following, that is to say, to sell and dispose of the said hereby assigned property, and to convert the same into cash, and to collect the moneys due and to grow due upon the promissory notes, drafts, bills of exchange, securities, book debts, claims and demands hereby assigned or so much thereof as shall he found collectible, and after deducting and retaining out of the proceeds of such sales and collections all expenses that he shall be put to in.making the same, and reasonable compensation for his services in execution of the trust hereby reposed, to distribute and divide the net proceeds of such

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sales and collections unto and among all the creditors of the said party of the first part, ratably and proportionably to them several and respective claims and demands against him. And the said party of the first part doth hereby make, constitute and appoint, irrevocably, the said party of the second part, his true and lawful attorney, to take and use all due and lawful ways and means, in the name of the said party of the first part, or otherwise, to collect and recover the outstanding debts, claims and demands hereby assigned. And the said party of the second part doth hereby accept the trust so reposed in him as aforesaid, and covenant and agree to and with the said party of the first part, to execute the same to the best of his ability. And it is hereby mutually agreed, by and between the parties hereto, that the said party of the second part shall not he liable or accountable for any loss that may he sustained by said trust property, or the proceeds thereof, unless the same shall happen by reason of his own gross negligence or wilful misfeasance.”

The assignee, Mr. Leonard, also signed and sealed the assignment.

The complaint charged that the assignment was made by "White with the intent to hinder, delay and defraud creditors of White, of their lawful suits, debts or demands; that the same was fraudulent and void in law, as against creditors of the said White, at the time the same was made.

The complaint then proceeded to charge various acts and badges of fraud, on which it insisted that the assignment was fraudulent; hut which are omitted because they were not considered by the court.

The complaint prayed that the assignment might he adjudged to be fraudulent and void, and that the same might he set aside, and that a receiver of the assigned property and of the property of White, might he appointed, and that he might he ordered to pay out of the proceeds of the assigned property which may come to his hands or under his control, the judgment of the plaintiffs, with interest and the costs of the action. Also for an injunction, and for other relief.

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The defendants answered separately, denying all the fraud alleged, and insisting on the validity of the assignment.

The cause was tried before Sahdfobd, J. in October, 1849, who decided that the assignment was on its face fraudulent and void as against the plaintiffs, and rendered a judgment in conformity to the prayer of the complaint. The defendants appealed to the general term.

L>. Lord, for the defendants.

The clause that the assignee should not be liable, except for gross negligence or wilful default, did not vitiate the assignment.

The assignee is not by law, liable otherwise than for gross neglect or wilful fault.

A trustee is not liable for ordinary negligence. (4 J. C. R. 619, Thompson v. Brown.) It would be unreasonable, if it were otherwise, as he is acting for others. Such neglect as does not befal a man in the ordinary walk of life, is gross negligence. If a trustee exercises the same diligence that such a man does, then his failure is only ordinary negligence ; it is not gross.

In ordinary cases, this exemption would be too broad, yet here the covenant of the assignee, to execute the trust to the best of his ability, qualifies such exemption, and limits it to neglect or fault, happening after the exercise of the assignee’s best ability. If he does not execute the assignment to the best of his ability, he will be guilty of gross negligence, and thus render himself liable as if the clause complained of were omitted.

0. Tracy and E. 0. Litchfield, for the plaintiffs.

The assignment itself, by reason of its express provisions, is fraudulent in law, and void. The clause providing that the assignee “ shall not be liable or accountable for any loss that may be sustained by said trust property, or the proceeds thereof, unless the same shall happen by reason of his own gross negligence, or wilful misfeasance,” is an attempt to exempt the assignee from the liability which the law attaches to the office of

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trustee, and is therefore evidence of an intent to delay creditors, by placing the property beyond their reach, and to defraud them, by depriving them of their legal remedies against the assignee.

I. The provision in question exempts the assignee from the full measure of liability, which the law attaches to the character of trustee. The degree of diligence required of trustees is “ the care and diligence of a provident owner.” (Willis on Trustees, 125, 189, 172; Lewin on Trustees, 299; 2 Kent’s Com. 230, 6th ed., note a; 15 Petersd. Abridg. 143, Title Trustees, note; Hester v. Hester, Dev. Eq. 328.) And assignees have been held by the courts to the exercise of this degree of diligence, and have been made personally responsible for omitting it. ( 15 Ohio Rep. 593 , State of Ohio v. Guilford; 1 Hoffman’s Ch. Rep. 150, Bowman v. Sabbaton; 5 Wharton 530 , Estate of Davis; 4 Pick. 518 , Ward v. Lewis; 18 Pick. 48 , Pingree v. Comstock; 2 Sch. & Lef. 229.)

II. The assignment is not, therefore, such an absolute and unconditional appropriation of the debtor’s property to the payment of his debts, as the law sustains; but it contains a reservation and condition inconsistent with the rights of the creditors, and adequate to defeat them. Its intent was to protect the assignee in a degree of negligence which would inevitably delay and defraud creditors, and might be greatly to the benefit of the debtor. It is therefore void. 1. It is not absolute and unconditional, as required by law. ( 11 Wend. 187 , Grover v. Wakeman.) 2. Assignments made with conditions, the direct tendency of which is to injure creditors, are always held fraudulent; as where the assignee is insolvent. ( 8 Paige 417 , Reed v. Emery; 1 Barb. S. C. R. 211, Connah v. Sedgwick.) The law requires the assignee to be personally liable, and able to respond. If he be exempted from personal liability, the effect is equally injurious to creditors. So where, for any physical reason, the assignee is incapacitated from properly executing the duties of the trust. (1 Sandford’s Ch. Rep. 251, Cram v. Mitchell; 2 Ibid. 353, Currie v. Hart; 1 Ibid. 4, Van Nest v. Yoe.) 3. Adjudged cases have condemned similar provisions in voluntary assignments. ( 10 Paige 223 , 227; 4 Bibb’s Ken. Rep. 446, Pitt's Trustees v. Viley; 1 Sandford’s Chy. Rep. 4, Van Nest v. Yoe.) Another

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class of cases, is where the assignment vests a power in the assignee, which, if he choose to execute it, will tend to injure or defraud creditors. This renders it void. (4 Sand. Ch. R. 552) Barney v. Griffin, S. C. affirmed in court of appeals.) And it does not depend on the consideration whether the assignee does or does not avail himself of the power.

IH. It is no answer to these positions, to say that the assignee might still be held liable in equity for due diligence. Having refused, by the express terms of the assignment, to assume this liability, it is questionable whether it could be enforced against him. And even if it could be, it would still be dilatory and expensive, and would be a hindering and delaying of creditors. (3 Scammon Rep. 417—423, Howell v. Edgar.)

IY. The general rule above claimed, is made more evident by the exceptions; being eases in which the liability of the trustee is limited. 1. Where deeds of trust are executed by the creditors, as well as by the debtor, known as composition deeds, there the consent of the creditors upholds the qualification. 2. Where the creator of the trust exempts the trustee from liability, and the contest is between the trustee and some other party, claiming under the same title, as in the case of executors and legatees. 3. Even in the cases last mentioned, where the question is between the trustee and creditors, no such exemptions by the terms of the deed, will shield the trustee from the ordinary liability of a trustee. There the creditors come in by title paramount. (2 Sch. & Lefroy’s R. 229, Doyle v. Blake ; 4 Rawle’s Rep. 148, McNair's Appeal; 6 Watt’s R. 250, Verner's Estate; 1 P. Wms. 243, Churchill v. Lady Hobson; Prec. in Chy. Gibbs v. Kening, Case 48.)

The plaintiffs therefore claim that the assignment in question is fraudulent and void, and the judgment appealed from should be affirmed with costs.

Among other objections to (che validity of this assignment, the plaintiffs contend that the clause exonerating the assignee from accountability for any loss which might be sustained by the trust fund, unless the same should happen “ by reason of Ms ovm gross negligence or wilful

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misfeasance,” renders it fraudulent in law, and void as against the assignor’s creditors. This clause, it is said, is an attempt to exempt the assignee from the liability which the law attaches to the office of trustee; and therefore shows an intent to delay creditors by placing the property beyond their reach, and to defraud them by depriving them of their legal remedies against the assignee.

Does this provision exempt the assignee from the liability which the law attaches to his office when assumed without any such qualification ? The trust created by an assignment for the benefit of creditors, is an active trust, to be executed by the assignee himself for the advantage of such creditors.

In general, a trustee is bound to manage and employ the trust property for the benefit of the cestui que trust, with the care and diligence of a provident owner. (Willis on Trustees, 125, 169.) Consequently, he is liable for every loss sustained by reason of his negligence, want of caution or mistake, as well as for positive misconduct. (Ibid. 112, 113 ; 2 Kent’s Comm. 230.) The adjudged cases abundantly sustain the treatises on this point, and the rule extends to public trusts and those undertaken without compensation, as well as to those in which the trustee is entitled to receive a commission.

One writer, it is true, says that a trustee is called upon to exert precisely the same care and solicitude in behalf of his cestui que trust, as he would do for himself; and that equity will not exact a greater measure than this. (Lewin on Trusts, 299.) The principle, we think, would have been expressed more in accordance with the spirit of the authorities which the author cites in its support, if he had said, “ the same care and solicitude, that a prudent person, or a man of reasonable or ordinary diligence, would use for himself.” (See Lord Eldon’s observations in Massey v. Banner, 1 Jac. & W. 247, 248.) We do not believe that sound legal policy will permit one who undertakes the office of trustee, to escape responsibility for losses negligently incurred to the trust fund, upon the plea that he was equally negligent and improvident, in the management of his own affairs.

We were referred to Thompson v. Brown, 4 J. C. R. 619, as

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establishing that a trustee is not liable for ordinary negligence. We think, on considering the case, that it does not sustain the defendants’ position. The chancellor there exonerated an administrator from a loss arising from his leaving with the surviving partner of the intestate, the goods of the partnership, to be sold for the joint benefit, it being a continuance in good faith, of the intestate’s confidence in that partner. At the same time, the administrator was charged for other assets of the estate, which he had put into the same partner’s hands, without security,'after they came under his own control.

If a trustee be required by law to exercise the diligence of a man of ordinary prudence in managing his own affairs, or the care of a provident owner; it is very apparent to us, that a stipulation limiting his liability to his own gross negUgenoe or wilfxtH misfeasance, exonerates him from a great portion of his legal responsibility. It is said, the term “ gross negligence” conveys no definite legal idea; and the language of learned judges in some recent cases cited in Angelí on Carriers, (§ 22, 23,168,) appears to sustain the assertion. However that may be, there is no doubt that in the ordinary use of language, and in the popular* sense of the words, it signifies negligence of an aggravated character, as distinguished from that which is merely careless or not palpably culpable. And the language, not being technical, we are bound to construe it in the sense in which it was doubtless understood and used by the parties to the instrument.

Regarding it in that sense, we cannot doubt that the stipulation in question exonerates the assignee from the consequences of want of caution, and of every degree of negligence except that which at first blush would strike the mind as manifestly culpable or aggravated. We will illustrate this by a reference to two or three decisions.

Thus, to take the case cited by ihe defendants, from 4 Johns. Oh. R., the act of the administrator, in placing assets received by him in the keeping of the surviving partner, does not strike the mind as culpable in itself, certainly not as an aggravated neglect. It was not gross negligence, yet it was negligence for which he was held responsible as a trustee.

There was still less of obvious negligence in Doyle v. Blake,

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2 Sell. & Lef. 230, where an executor, who at first disclaimed to interfere generally, and afterwards renounced, was held liable for the acts of his co-executor. So in Bowman v. Rainetaux, 1 Hoffm. Ch. R. 150, where an assignee was held responsible for the acts of his co-assignee, he having accepted the trust and left its management to the latter.

And in Pingree v. Comstock, 18 Pick. 46 , the omission to recover certain assigned property, for which the assignees were charged, was negligence, which in law amounted to a breach of trust, but which no one would think of designating as gross or aggravated.

It being shown that this assignment seeks to exonerate the trustee from the legal responsibility attached to that office ; our next inquiry is as to its effect upon the validity of the instrument. It was conceded by the learned counsel for the defendants, that creditors coming in under the assignment and claiming the benefit of its provisions, would be bound by the restrictions which it imposes. This is manifestly correct. The assignee has accepted the trust upon certain stipulated terms, and those who claim to enforce a part of those terms, must submit to the residue. He cannot be bound by those favorable to the creditors, and deprived of those favorable to himself.

The effect of the assignment, therefore, is to withdraw the debtor’s property from the reach of creditors pursuing their legal remedies, and to place it in the hands of an assignee, where it may be wasted and lost, unless he choose to exercise a much greater degree of diligence than he has undertaken to bestow upon it. The property is vested in a trustee, who by the debtor’s act, without the assent of the creditors, is exonerated from the principal legal liabilities of trustees. This is the practical operation of the assignment, as expressed upon its face, and to our minds it discloses an intent to hinder and delay creditors. Every provision in an assignment, which exempts the assignee from any liability that he would by law be subjected to as assignee, is of itself a badge of fraud. The insertion of clauses which in their operation may lead to the waste and loss of the property, declares an intention on the part of the insolvent debtor, to devote his property to some purpose other than that

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of the payment of his debts. The assignor is, in law, deemed to have intended all the consequences which may legitimately flow from the provisions of the assignment. We must, therefore, hold that the debtor in this case intended to place his assets in a situation where his creditors could not reach them, and where, through his own sub-agency or otherwise, they would be lost to such creditors. The intent to hinder, delay, and defraud the latter, thus becomes a necessary legal inference from the- provision under consideration.

We were referred to the assignee’s covenant to execute this trust to the best of his ability, and it was said he would be guilty of gross negligence, if he did not. That covenant does not, in our judgment, vary in any respect the liability which attaches to him by the acceptance of the assignment. It is tp be read in connexion with the next clause, which is the mutual covenant .that he shall not be accountable except for his own gross neglect; and the ability for which he contracts, is thus qualified to be the best of his ability not within the limits of gross negligence.

We were also pressed with the fact that this assignment makes no preferences, as indicating its entire freedom from fraud. This is a feature very much in its favor, and we wish we were not compelled to observe a fraudulent intent in one of its other provisions. And we may here say, in reference to the suggestion ■ of the difficulty of drawing a valid assignment and the imputed leaning of our courts of equity against sustaining this class of trusts; that the whole difficulty consists in the insertion of clauses beyond, or varying, the necessary provisions for transferring the debtor’s property and appropriating it to the payment of his debts. We have never heard of a case, nor do we believe there has ever been one decided in this state, in which an assignment has been held fraudulent, which simply vested the debtor’s estate in trustees, and directed them to convert it into money and apply it absolutely, and without reserve, to the'payment of his debts; whether equally among all the creditors, or with preferences.

'But so long as failing debtors will make assignments, containing provisions, directly or indirectly for their own benefit to the

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detriment of their creditors, or vesting in assignees the power of giving preferences, or excluding creditors who will not release the debtor, or exempting the assignee from his proper legal responsibility to those for whom he is to act, or otherwise deviating from the direct appropriation of the assets to the payment of debts, so far as they can be reasonably secured and applied; so long it will be the duty of the courts to pronounce such assignments fraudulent, whenever they are presented for adjudication.

The judgment at the special term must be affirmed.