Pinkston v. Brewster, Solomon & Co.

CHILTON, J. 1. The deed by which the relation of trustee and cestuis que trust is created between the parties, contemplates the payment pro rata, among the several creditors, of the amounts which may come to the hands of the trustees, provided the means should be insufficient to pay them the full amount of their demands, and we cannot readily perceive how a trustee can be said to be acting in the “ good faith” required by the law, who makes a distinction between creditors by the application of all the trust funds in his hands to the payment of one creditor, leaving the remainder of the creditors wholly unpaid. If trustees take it upon themselves thus to apply the funds, they do it at their peril, and especially should this be so in this case, since the deed in no equivocal terms points out their duty, and designates the payments to be made. But were it otherwise, the courts of chancery are ready to aid and direct the trustee for his pro [319] tection in the application of the trust funds. The preferred creditors occupying the same relation with respect to the fund, had each a right to an equal participation in it, and they cannot be divested of that right by the misapplication of the funds by the trustees. “ Equality is equity,” in such cases. See McLane and wife v. Hosea et al. at the present term. If the trustee had acted without due caution, and has paid a large demand to one of the creditors, leaving the others wholly unpaid, he, and not the cestui que trusts, must sutler. See Greene v. Winter, 1 Johns. Ch. R. 40; also, McKinley v. Irvine, at the last term. 2. The statute of limitations of six years is urged as a de-fence; and it is insisted that the statute should date from the misapplication of the funds by the trustees. We do not agree with the counsel in this position, as applicable to the case before us, and a brief review of the authorities cited by him, will suffice to show the position cannot be maintained. In Wood v. Wood, 3 Ala. Rep. 756, it is held that in cases where the remedy at law and in equity is concurrent, the statute of limitations applies alike in both forums. That was a bill filed by a legatee against an exeeutor to have an account of the residuum; and because the statute gave the concurrent action of account at law, to which the statute of limitations of six years would perfect a bar, it was held the statute equally applied to the relief in chancery. But the-court say, they do not wish to be understood as intimating-an opinion that the same length of time could be urged as a> reason why a settlement should not be coerced in the orphans’ court. This case but affirmed the decision previously made in Maury’s administrators v. Mason’s administrators, 8: Porter, 222, in which last case it was also stated as a general-principle, “ that the only trusts not within the operation of the statute, are those which are peculiarly and exclusively the subjects of equity jurisdiction; and that a subsisting, recognized and acknowledged trust, as between the trustee and cestui que trust, is not barred by the statute.” In Johnson v. Johnson, 5 Ala. Rep. 90, which was a bill by a distributee against the administrator for his distributive share, and to set aside a sale made by the complainant to the administrator, who occupied also the relation of guardian, it [320] was held, after a review of many of the English as well as American authorities, that the laches of complainant in not seeking to avoid the settlement until after the lapse of eleven years, was a bar to his relief. In this case, however, the general rule is admitted, that the statute of limitations will not ran against a subsisting continuing trust. In Greene v. Johnson et al. 3 Gill & Johns. 389, it is said that as soon as a trust ceases to be a continuing subsisting trust, or expires by its own limitation, or is put an end to by the act of the parties, if it be a fit subject for a suit at law, a cause of action arises, and the statute of limitations begins to ran. This case, as well as Kerns v. Schoonmaker, 4 Ohio Rep. 331; Howell v. Young, 2 C. & P. 238; Wilcox v. Ex. of Plumer, 4 Peters’s Rep. 172, and Governor, use, &c. v. Stonum, 11 Ala. Rep. 679, were actions at law, and in which, it was very properly ruled the statute of limitations commenced running from the time the cause of action became complete. It is manifest that none of these cases are decisive of the case at bar, adverse to the defendants in error. In this case, the deed vests in the trustees the title to the property, in trust to pay various debts specified in the schedule annexed to it. It creates a .direct trust, the enforcement of which by the cestui que trust, is peculiarly and exclusively cognizable in a court of equity. A large class of creditors are provided for, and even had Whitesides, the trustee, after having made the misapplication of the trust funds, repudiated the trust, the record furnishes no evidence that he communicated his determination to the defendants in error. They had therefore the right to consider him as still acting, and the trust as sub-sisling. It has been held, that in cases where creditors are concerned, an improper application of the funds (though within their knowledge) may be charged upon the trustees after a considerable number of years, and that laches are not imputable to a body of creditors; so that their assent to an act which is justifiable only upon the ground of their express concurrence, can never be implied from a mere temporary forbearance on their part to question it. See Mathews on Pres. Ev. 452; Hardwicke v. Mynde, 1 Anst. 109; Which321 cote v. Lawrence, 3 Ves. 745; York Buildings Co. v. McKenzie, 8 Bro. P. C. 42; Hill on Trustees, 170. We apprehend that no case can be found, where, in a direct trust, as between the trustee and the cestuis que trust who compose a body of creditors, the lapse of six years has been held a bar to their relief. Indeed, it is laid down as a general rule, that as between trustees and the cestui que trust, an express trust, created by the act of the parties themselves, will not be barred by any length of time, the possession of the trustee in such case being deemed the possession of the cestui que trust. Hovenden v. Annesley, 2 Sch. & Lef. 633; Wedderbern v. Wedderbern, 4 M. & Cr. 52. This general rale, however, must be understood as applying to cases where the trust is still subsisting ; for if the trustees have divested themselves of the legal title, with the full knowledge and consent of the cestui que trust, and have settled and obtained a release, the court of chancery would be reluctant in entertaining a claim arising out of the transaction, after such a lapse of time as in ordinary cases would perfect a bar by the statute of limitations. 4 M. & Cr. 52, supra; Portlook v. Gardner, 1 Hare, 594. These authorities, as well as those referred to in the brief of the counsel for the defendants in error, are conclusive to show that the lapse of time which has intervened, under the circumstances shown in evidence in this case, cannot bar the relief sought by the bill, and that the decree of the chancellor disallowing the objection was entirely correct. The creditors who reside in New York, so far from Montgomery, where the business was transacted by the trustees, are not presumed to have knowledge of the misapplication of the funds, and to infer their acquiescence in such misapplication, would violate the well established principles of equity. Hill on Trus. 265, where the authorities are collated. From aught that appears in proof, the beneficiaries under this deed were waiting in the full confidence that the trustees were engaged in efforts to collect the demands assigned for their benefit, and to apply the statute in such cases, would be to hold out inducements to trustees, to conceal from their [322] cestuisque trust the true situation of the assigned estate, until the lapse of six years should deprive them of all right to recover for any breach of duty on the part of the trustees. Such a doctrine cannot be maintained in a court of equity. 3. By the first section of the bankrupt act, it is provided that “all persons residing in any state, district or territory of the United States, owing debts which shall not have been created in consequence of a defalcation as a public officer, or as executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity, may petition,” &c. In our opinion, the liability of the defendant (Whitesides) is not discharged by the decree in bankruptcy. If the trust funds were in his hands, it would be most evident the case would be embraced in the letter of the act. Is the principle varied, because he has wrongfully paid out the funds to another? We think not. Under the English bankrupt act, it has been held, that if the debt created by the breach of trust be ascertained in its amount, so that it may be proved against the bankrupt’s estate, it will be discharged by the certificate. Samuel v. Jones, 2 Hare, 246. But where the extent of the bankrupt’s liability still remains to be determined, and the amount consequently cannot be proved as a debt under the fiat, the certificate will be no answer to a suit by the cestui que trust. See Ex parte Mare, 8 Vesey, 335; Hill on Trustees, 528. In the matter of Tibbetts, 5 Law Reporter, 259, Mr. Justice Story held, as he states, after some hesitation, that fiduciary debts not proved under the proceedings in bankruptcy, were not extinguished by the discharge and certificate under the act, and that a misapplication of fiduciary funds deprived the party of all right to a discharge from them, only, if made before the passage of the act, but if made after the passage, such misapplication deprived him of all right to a discharge from any debts. See also 6 Law Rep. 338. Waiving the consideration of the question whether the defendants in error could have proved their demands in the proceedings in bankruptcy, we think it comes within the spirit and meaning of the exclusion contained in the first and fourth sections of the bankrupt act, as it amounts to a defal [323] cation, whether the trustee keeps the money, or wrongfully pays it to another. We are unable to discover any error in the record, and the decree of the chancellor is consequently affirmed.