Trust, Accounting by trustee, Trustee's duties as to preservation of trust property, Liability of co-trustee. Equity Jurisdiction, For an accounting, Plaintiff must have "clean hands." Evidence, Presumptions and burden of proof.
In a suit in equity by a beneficiary under an express trust against the trustee for an accounting, the burden is upon the defendant to show that in the discharge of his duties he has exercised reasonable skill, prudence and judgment.
A suit in equity by the beneficiaries of a real estate trust against the trustee for an accounting was referred to a master, who found the following facts: The trust property consisted of a hotel which for a number of years had been leased to a tenant who, about six years before the commencement of the suit, had become $20,000 in arrears in his rent. About a year later, the tenant being still in arrears about $19,000, the trustee dispossessed him. Shortly thereafter the tenant died insolvent. The trustee then placed a manager in the hotel to run it on behalf of the trust. In doing so, certain furniture which had been used by the tenant was taken possession of by the trustee. A liquor license under which the tenant had operated the hotel had been issued in the name of his wife. Of $60,000 worth of furniture which he had used in the hotel, $56,000 worth had been purchased by him subject to a right of the vendor to resume possession on non-payment of the purchase price, of which the tenant owed $12,000 at the time of his death. The widow of the tenant claimed title to the rest of the furniture, and, "on advice of able and competent counsel," the trustee settled her claim by paying her $4,000. At the hearing before the master the trustee gave no other explanation of his action. Held, that upon the findings of the master it did not appear that the settlement with the tenant's widow was so injudicious or unwarranted that the trustee should be charged personally with the amount he paid her.
A suit in equity by the beneficiaries of a real estate trust against the trustee for an accounting was referred to a master, who found the following facts: The trust property consisted of a hotel which about six years before the commencement of the suit was held by a tenant who was $19,000 in arrears in his rent. Friends of the tenant then took charge of the hotel and ran it with the tenant as manager until he died, hopelessly insolvent, when the trustee placed a manager in charge and ran it for the trust. In doing so, he took possession of certain supplies which belonged to the tenant's friends. The friends owed the trust for rent $3,933, and, upon their making claim upon the trustee for the supplies of which he had taken possession, he settled with them by paying to them $2,810. The entry in the trustee's cash book was "Supplies and equity all that" the tenant's friends "owned, $2,810." What the value of the supplies was did not appear. The only explanation given by the trustee of his action was that he acted in accordance with the advice of able and competent counsel. Held, that upon the findings of the master it did not appear that the settlement with the tenant's friends was so injudicious or unwarranted that the trustee should be charged personally with the amount he paid them.
A suit in equity in the Superior Court by the beneficiaries of a real estate trust against two, who were the trustees, for an accounting was referred to a master who found the following facts: The trust property consisted of a hotel in Boston worth about $500,000. Under the trust instrument shares were issued to the beneficiaries to represent their interests in the trust. The owner of a majority of the shares, one P, who was not a party to the suit, had procured the appointment as one of the two trustees of his confidential secretary and bookkeeper, who did not appear to have been possessed of any knowledge as to the duties of a trustee or to have had any experience in the management of real estate, and who "must have regarded this service only as one of the many which he was employed to render to" P "and for which he looked to" P "for compensation." He became the managing trustee. The other trustee was old and partially blind. Neither trustee had any other interest in the trust than as trustee. Five years before the commencement of the suit the trustees had dispossessed a tenant who had been in possession of the hotel for many years and who was $19,000 in arrears in rent, and, being unable to find a new tenant, had placed a manager in charge to run the hotel for the trust. In doing so they had taken possession of the furniture which had been used by the tenant. All but $4,000 worth of this the tenant had procured at a price of $56,000, subject to a right of the vendor to resume possession on non-payment of the purchase price, on which he had paid $44,000. For failure of the tenant to pay the entire purchase price the vendor then took possession of the furniture and claimed title to it. The managing trustee was absent from the Commonwealth on P's business and the master found that "The furniture matter was, as might have been expected, handled by P." The remaining $4,000 worth of furniture was claimed by the tenant's widow, and, under advice of competent counsel, the trustees paid her that amount. They then conveyed that furniture to P for $5,000. He purchased the other furniture from the vendor for $12,000. At a later date, when the trustees had found a tenant, P sold the furniture to the tenant for $9,000 and made a claim upon the trustees for the $8,000 actual loss on his advances and for $400 a month for thirteen months during which the trustees had used the furniture in the hotel under their own management. The trustees paid the amount demanded, and later signed a paper, antedated to correspond with the date of the transaction and purporting to be a vote by them to make the payment in accordance with a previous oral contract under which the new tenant was procured and "to reimburse" P "for his loss sustained in behalf of the" trust property "in the sale of the furniture, and for the use of the same." The master found that the payment of $8,000 to P to reimburse him for cash lost in the transaction was warranted, but that the payment of $400 a month for the use of the furniture was unwarranted, five per cent on the amount invested being sufficient. The defendants excepted to the master's findings. The judge of the Superior Court overruled the exceptions, and the defendants appealed. Held, that the trustees should be charged in accordance with the master's report.
Ignorance on the part of a trustee of an express trust as to the scope of his duties or as to the legal requirements of his office does not free him from liability for losses sustained by the trust by reason of a breach of such duties on his part or a failure to fulfil the requirements of his office.
A suit in equity by the beneficiaries of a real estate trust against two, who were the trustees, for an accounting was referred to a master who found the following facts: The trust property consisted of a hotel in Boston worth about $500,000. Under the trust instrument shares were issued to the beneficiaries to represent their interests in the trust. The owner of a majority of the shares, one P, who was not a party to the suit, had procured the appointment as one of the two trustees of his confidential secretary and bookkeeper, who did not appear to have been possessed of any knowledge as to the duties of a trustee or to have had any experience in the management of real estate, and who "must have regarded this service only as one of the many which he was employed to render to" P "and for which he looked to" P "for compensation." He became the managing trustee. The other trustee was old and partially blind. Neither trustee had any other interest in the trust than as trustee. The trust property was subject to a first mortgage for $250,000 and a second mortgage for $50,000. The second mortgage had been held by a former trustee. It came due about the time that P procured the election as trustee of his nominee. The managing trustee "did not realize that" the mortgage "ought to be paid," and no effort was made to renew it. The original mortgagee having died, the mortgage had been assigned by his son, who had succeeded to the mortgage title, to a stranger to the trust without the knowledge of the trustees and the assignment was not recorded for some years. After it had been overdue for about five years a financial panic occurred and the assignee demanded payment. Both the trustees and P and the original mortgagee's son sought funds with which to save the property from a sale. The mortgagee's son found one who offered to lend the necessary amount although he demanded a bonus of $5,000 and twelve per cent interest per year. This offer was communicated to both trustees. The managing trustee and P and their personal counsel considered what should be done without consulting with the other trustee and, without informing him, decided to attend the sale, to bid the property up to about $80,000 above the first mortgage, and then to let it go. They did so and the property was sold for $77,250 above the first mortgage. In the transaction, the managing trustee not only "kept" his co-trustee "in the dark, but . . . actually misled" him. The property was worth $100,000 more than it was sold for. Held, that both trustees were personally chargeable for the $100,000 thus lost.
Although one of two trustees of a real estate trust is not responsible for acts or misconduct of a co-trustee, who is the managing trustee, in which he has not joined or to which he does not consent or which he has not aided or made possible by his own neglect, he is chargeable for losses resulting from his failure to inform himself of business transactions involved in the execution of the trust even if he is deceived and purposely kept uninformed by the managing trustee, because he cannot properly discharge his duty by surrendering the substantial or entire control of the trust to the managing trustee, and this is especially true where with the co-trustee's knowledge the managing trustee is entirely under the control of the owner of a majority of the interest of the beneficiaries and is used by such owner to further his own ends at the expense of the trust.
In a suit in equity by several of the beneficiaries of a real estate trust against the trustees for an accounting, in which the defendants were held to be liable for a loss sustained by the trust by reason of a sale during a financial panic of the property of the trust in foreclosure of a second mortgage which should not have been allowed by the trustees to become overdue, it appeared that about ten years before the sale the mortgage had been held by a former trustee of the trust and that shortly thereafter the mortgagee had died and the mortgage had become overdue. Both trustees thought that the mortgage continued to be held by one of two sons of the original mortgagor, who had succeeded to his father's title, and checks to pay interest had been sent to the son. About five years before the foreclosure, the mortgage had been assigned by the son to a stranger to the trust. The trustees had not been informed of the assignment and it was not recorded for some years. One of the plaintiffs was a corporation, shares in which were owned or controlled equally by the two sons of the original mortgagor. Held, that the corporation was not estopped from sharing in the distribution of the amount recovered in the suit because of the action of the owner of one half of the shares of its capital stock.
In a suit by several beneficiaries of a real estate trust against the trustees for an accounting, it appeared that shares were issued to the beneficiaries in proportion to their investments therein, and that the trust had suffered losses by reason of neglect and mismanagement on the part of the trustees which were participated in and in the main caused by one P, the owner of two thirds of the shares of the trust. Held, that the defendants should pay to each of the plaintiffs such a portion of the loss sustained by the trust as his shares bore to the total of the shares issued; but that the trustees should not be charged with the proportion of the loss represented by shares formerly owned by P.
BRALEY, J.
The defendants are trustees under an express trust, and in accounting for their administration of the property which they admit that they have received, the burden is on them to show that in the discharge of their duties they have exercised reasonable skill, prudence and judgment. Andrews v. Tuttle-Smith Co. 191 Mass. 461. Pine v. White, 175 Mass. 585. Little v. Phipps, 208 Mass. 331. If we examine the allegations of the bill, they are charged with having failed to protect the property from foreclosure of a second mortgage whereby the equity of redemption was lost, and generally that they grossly neglected their duties, entailing great pecuniary loss to the plaintiffs in common with other beneficiaries and shareholders. But in the report of the master to whom the case was referred, the transactions which the plaintiffs contended were imprudent and unjustifiable are specifically stated and reviewed. The trust estate when conveyed consisted of the Copley Square Hotel, with the appurtenant land, upon which were mortgages for $300,000. The equity of redemption, valued and capitalized at the nominal sum of $200,000, was divided into shares which if possible were not to be less than $100 each, for which certificates were issued in accordance with the provisions of the declaration or instrument of trust. By the death of one trustee and the resignation of another, only the defendant Frederic Pope of the original trustees remained, and at the request of Albert A. Pope, who had become the owner of two thirds of the shares, the defendant Winkley, with the consent of some of the other principal shareholders, was appointed to one of the vacancies, while the other vacancy remained unfilled. It was during the incumbency of Winkley that the transactions took place on which the plaintiffs rely as proof of a flagrant mismanagement of the estate. The evidence is not reported, and the master's findings as to Winkley's personal relations to Albert A. Pope, and the reasons for his appointment, and Pope's control of Winkley, and through Winkley of the management of the trust are not only important, but should not be reversed unless clearly wrong. It is only when these relations are understood, that the unfortunate conduct of the trustees becomes intelligible. The report states, that this defendant was his confidential secretary and bookkeeper and became trustee because of the large interest which his employer had acquired while the defendant Frederic Pope was the cousin of Albert A. Pope, to whom he was beholden for financial assistance at various times. The master concludes, that in administrative capacity the trustees, and especially Winkley, were not well qualified to administer the trust, and that his double employment "goes far to explain many things which happened later." It appears that from Winkley's accession to the day of the foreclosure the influence of Albert A. Pope was dominant in all important business affairs with which the trustees dealt.
The very full statements relating to the defendants' first and third exceptions need not be reviewed. The master reports the facts, but does not decide the question of liability. If when the defendants took possession of the premises for the purpose of terminating the lease of their tenant one Risteen, or the occupancy of his successor, the Copley Square Hotel Company, and while seeking for a new tenant carried on the business, they also took and used supplies which were in the hotel, and furniture belonging to the tenant's wife, they were accountable to the owners for their value. The settlements arranged with them upon the advice of competent counsel do not appear to have been so injudicious and unwarranted that the defendants should be personally charged with the amounts paid. Pine v. White, supra.
But the payment to Albert A. Pope of $5,200 for thirteen months' use of the furniture, stands upon a different footing. If under the circumstances it is assumed, that the trustees had implied authority to buy the furniture, fixtures and household supplies which were in the hotel, but permitted or requested Pope to act for the sole benefit of the trust as apparently he did, the master finds, that he had been fully reimbursed by the trustees for the loss sustained when he sold the property to their new lessee for a less sum than that which he paid. The trustees themselves were doubtful as to the propriety of recognizing his claim for rent. It was after their promissory note had been given in payment for the combined amount, that, acting under the suggestion of counsel, they signed an antedated paper with a preamble, and form of vote containing recitals, that the purpose of the note was, "to reimburse him for his loss sustained in behalf of the Copley Square Hotel property in the sale of the furniture, and for the use of the same." The master fittingly characterized their action as a "posthumous record of an imaginary meeting." It was ineffective as an act of ratification, for the payment was unauthorized, and his disallowance of this item was right and should not be disturbed. Rowland v. Maddock, 183 Mass. 860. Hayes v. Hall, 188 Mass. 510. Andrews v. Tuttis-Smith Co. 191 Mass. 461.
But the principal sum for which the plaintiffs seek to charge the defendants is the loss arising from the foreclosure of the second mortgage. The powers of the defendants are defined by the instrument under which they were appointed. By section 5, they were given discretionary authority to mortgage the estate, either to pay in whole or in part outstanding mortgages, or to renew them, and it is no excuse that they may have been ignorant of the scope of their duties or of the legal requirements connected with their office. Pierce v. Prescott, 128 Mass. 140, 145-147. The second mortgage became due either when Winkley became trustee, or some five years later and remained overdue, but "he made no effort to pay, renew or extend it," and "failed to exercise the care and prudence which the law demands of a trustee in his position." The findings which we have quoted were amply justified by the history of his management set forth at length in the report. Having taken no precautions to provide for a contingency which must occur if the mortgage was not paid, renewed or extended, a foreclosure followed extinguishing the equity of redemption, which the master valued at $100,000. If the foreclosure resulted from improvident management, the master further determined that the property even then could have been saved, if the trustees had acted promptly and judiciously. It would not be profitable, nor is it material, to recount the efforts which finally were put forth, or the participation of Albert A. Pope, who the master reports, "virtually directed the sale." But his findings, that a loan sufficient to have paid the mortgage could have been obtained and was offered to them upon terms which would have saved the property and should have been accepted, is proof of their further delinquency.
If there is no doubt that Winkley must be charged with the full amounts previously stated, the defendant Pope urges that he should be exonerated from all blame. It is well settled, that a trustee is not responsible for the acts or misconduct of a co-trustee in which he has not joined, or to which he does not consent, or has not aided or made possible by his own neglect. Hayes v. Hall, 188 Mass. 510, 514. Pom. Eq. Jur. (3d ed.) §§ 1081, 1082. The defendant was required to inform himself of the various business transactions involved in the execution of the trust. He could not properly discharge his duty by surrendering the substantial or entire control to Winkley, or delegate his authority to him, or to Albert A. Pope, or be indifferent, when the course of affairs was distinctly disadvantageous to the beneficiaries whose interests he had been selected to protect. But even if he is given the benefit of the master's finding, that Winkley misled and deceived him in the final attempt to preserve the property from foreclosure, his previous findings, that with knowledge of the transaction he assented to the payment for the use of the furniture and was responsible with his co-trustee for the loss sustained through their failure to provide for the payment or extension of the second mortgage, having been amply warranted, he cannot escape liability to the shareholders. Stowe v. Bowen, 99 Mass. 194. Hayes v. Hall, 188 Mass. 510. Cunningham v. Pell, 5 Paige, 607.
We may add, that, notwithstanding the defendants' contention that the Sheldon Corporation, which is one of the parties plaintiff, should not be permitted to recover, it is not estopped upon the facts reported from sharing in the distribution of the amounts which the defendants must pay, but, Albert A. Pope having participated in their misconduct, they should not be charged with the proportion of the loss represented by his shares. Andrews v. Tuttle-Smith Co. 191 Mass. 461, 468, and cases cited.
The result is, that the interlocutory decree must be modified by overruling the defendants' second exception to the master's report, and the final decree should charge the defendants with the sum of $100,000 with interest from September 19, 1907, and the additional sum of $4,000 with interest from September 30, 1905, and when so modified the decrees severally are affirmed, and the plaintiffs are respectively entitled to recover the amounts as therein specified.
Ordered accordingly.