1. The savings accounts which complainants' grandfather caused his daughter to open in her name in trust for them, the grandfather reserving no rights or control in, to or over the trust funds or their management or investment, constituted irrevocable trusts.
2. It was the duty of the trustee to keep the trust funds on deposit in the savings accounts. She had no right to withdraw moneys from the trust accounts at the request of the grandfather so that he might invest the funds in certain bonds and other securities not authorized by law as legal investments for trustees. Her action in so doing was a breach of her trust, notwithstanding the fact that both she and the grandfather were actuated by a desire to benefit the complainants. The withdrawals rendered both the trustee and the settlor liable to complainants, or for any losses thereby occasioned to them.
3. In order to pay for a home that he was building for his daughter, the trustee, complainants' grandfather sold or borrowed upon bonds which he had purchased for the benefit of the complainants with money from the trust accounts. After his death his estate was unable to restore the trust funds to the trustee. The trustee, having duly been appointed general guardian of the persons and property of her children, the complainants, thereupon executed and delivered to herself as such guardian a bond in the sum of $50,000, secured by a mortgage upon the home in question, the principal amount of the bond and mortgage approximating the sum (as calculated by the trustee) for which she was at that time liable to the children, together with accrued interest. Thereafter, the defendant bank instituted suit against her as endorser on certain notes, and induced her to cancel the said mortgage in return for discontinuing the suit, although it had been informed of all the circumstances concerning the misapplication of the trust funds and the reason for the execution and delivery of the bond and mortgage in question. Four years later, the defendant bank procured a $25,000 mortgage on the home from the trustee and her husband as security for a debt due the bank by her brother and in return for a release of her individual liabilities to the bank. No consideration passed to or for the benefit of complainants in connection with the cancellation of the $50,000 mortgage or the execution of the $25,000 mortgage. Held, the complainant children are entitled to the reinstatement of the $50,000 mortgage or the lien thereof, and the rights and interest of the bank are subordinate to those of the children.
4. The act of the guardian in cancelling the $50,000 mortgage was a breach of her fiduciary obligation to the complainant children. There having been no waiver or ratification by any of the children, nor by anyone having any right so to do on their behalf, their right to reinstatement of the mortgage as against the guardian and her husband is perfectly clear.
5. The defendant bank was not a purchaser for value without notice of the equitable rights of the children in taking the $25,000 mortgage. It gave nothing of value to, or for the benefit of, the children, and it had full and complete knowledge of the rights of the children, and the facts giving rise thereto, at and prior to the time it took its mortgage.
6. There is not the slightest ground for the accusation of fraud in the execution and delivery by the guardian and her husband of the $50,000 bond and mortgage to the complainant children. The proofs are positive, convincing and uncontroverted that the guardian was indebted to the children in the approximate amount of $50,000 for principal and interest, and that her purpose in making the bond and mortgage was to make repayment or give security for the repayment of this indebtedness.
7. Defendant bank's allegation that the guardian was insolvent when she gave the $50,000 mortgage in question, was not established by the proofs. Moreover, even if she had been insolvent at the time of making the bond and mortgage, that fact would not have made the transaction a conveyance in fraud of creditors. An insolvent debtor may prefer certain of his creditors, notwithstanding that other creditors are thereby defeated in whole or in part.
8. The right of an insolvent debtor to make an honest preference to one or more of his creditors was not disturbed by the passage of P.L. 1919 ch. 213 p. 500. The giving of the bond and mortgage was not in contravention of the statute, and was in nowise inequitable.
9. It would be immaterial if the proofs failed to establish that any of the trust funds went into the building of the trustee-guardian's home, either directly or indirectly. Complainants' right to relief does not rest on this fact, but on the fact that the guardian owed them approximately the amount of the bond and mortgage which she made to them, and that she gave that bond and mortgage either intending it as a restitution of the trust res or as security for the repayment of her indebtedness.
10. The fact that the defendant bank was advised by its counsel that the cancellation of the $50,000 mortgage would not be wrongful and that the rights which it acquired under its $25,000 mortgage would not be impaired by any superior rights of the complainants, cannot avail it as against them. Nor is it protected by the fact that counsel for the guardian participated in the actual cancellation of the $50,000 mortgage and the subsequent settlement transaction which include the $25,000 mortgage.
11. Unless and until it be shown that the complainant-beneficiaries have acquiesced and consented, the $50,000 bond and mortgage must be considered security for their trustee's indebtedness, and not payment in discharge.
12. Complainants' bill prayed for a decree against the trustee and the defendant bank for the amount of such deficiency, if any, as may remain after the foreclosure sale under the $50,000 mortgage. This issue need not be determined at the present time. Such a deficiency decree against the mortgagor in the present suit is clearly prohibited by statute ( R.S. 2:65-2), and such a decree against the bank seems equally within both the letter and the spirit of that statutory prohibition.
PER CURIAM.
The decree appealed from will be affirmed, for the reasons stated in the opinion filed in the Court of Chancery by Vice-Chancellor Buchanan.
Following the filing of the conclusions of the Vice-Chancellor a controversy developed between the parties on the application for the settlement of the form and entry of the final decree with respect to the ascertainment and computation of the amount due to the complainant in respect of the $50,000 bond and mortgage. The Vice-Chancellor consequently on April 24th, 1941, filed supplemental conclusions in which he tabulated the figures involved which were the basis of the final decree reinstating the mortgage in the sum of $50,000 and fixing the amounts due the respective parties and the priorities of liens and also fixing counsel fees.
The allowance of counsel fee of $2,500 to complainants is objected to by appellants as being excessive. Under the proofs and circumstances of this case we conclude, after careful consideration, that the counsel fee in question is not excessive.
The decree is affirmed.
For affirmance — THE CHIEF-JUSTICE, CASE, DONGES, PERSKIE, PORTER, COLIE, DEAR, WELLS, WOLFSKEIL, RAFFERTY, HAGUE, THOMPSON, JJ. 12.
For reversal — None.