Gray v. Fox

The Chancellor. Very little evidence lias been taken on either side, and some of the material allegations in the bill and answer are not sustained. There is no proof to support the charge that the money was by the consent of ail parties to remain in the hands of Everitt until the death of the widow, when the different persons interested might claim their shares, and it is expressly denied by Fox: on the other hand Fox, the defendant, has failed to show that the transfer of the bond to Boss was without his privity or approbation. There is reason to believe that the Everitt bond was about to be paid off. His administrator had applied for a sale of his real estate to pay debts, as early as October, 1821, and the order was granted in February, 1822, which was before the transfer and loan to J. Britton. The sale, it is true, was not actually made until March, 1823; nor was the money paid to Boss until 1824. The loan to Jonathan Britton was with the knowledge and consent of both administrators, and there is some evidence in relation to the solvency and credit of Jonathan Britton at the time, which will be adverted to hereafter. Two questions present themselves :— 1. Was the conduct of these trustees such as ought, on principles of equity, to subject them to any personal liability, in case the whole or any part of this fund was lost 1 And, 2. If they are affected with such liability, will the proceedings in the orphan’s court relieve them ? There does not appear to be any foundation for the charge in the bill, that the security was changed from any sinister or interested motives on the part of the administrators. I am willing to believe that they honestly thought it advisable and proper to assign the bond to Boss and to loan the money to some other person. If they are liable at all, it is not on the ground of corruption ; it «must be on the ground of negligence—that they have loaned out the money without taking due security, in consequence of which the greater part of it is lost. — 264 — It is a well settled rule in the English chancery, that if trustees loan money without due security, they are liable in case of loss by insolvency. This is a safe rule, and the court has no hesitation in adopting it. The duties of trustees are very important, especially where the rights of infants are concerned, and it will always be the pleasure of the court to protect them, so far as it may be done consistently with safety and sound policy. Safety demands that the conduct of trustees should be watched with scrupulous care. Sound policy requires, that the faithful steward should not be entrapped and ruined with technicalities and forms. The rule above stated, however valuable as a general principle for the government of the court, is not sufficiently definite to be of much practical use. We must go further, and inquire what is due security for monies loaned by a trustee ? Can the court adopt a general rule, or must each case be left to be decided on its own peculiar circumstances ? A review of the cases in England will lead us to the rule adopted on this subject by the court of chancery there, and will aid us in testing the propriety of its adoption here. In the case of Sir Ed. Hale and the Lady Car, in chancery, 1637, referred to in 3 Swans. 64, in notis, the Ld. Keeper says, if a person intrusted with others’ monies, let it out to such as are trusted and esteemed by others to be men of worth and ability, if any loss happen, he shall not bear the loss. In Morley v. Morley, 2 Ch. Ca. 2, (1678,) the defendant being trustee for an infant, was robbed of forty pounds sterling, and also of two hundred pounds of his own money : the court held, he was bound only to keep it as his own, and allowed it to him in the account. And in Jones v. Lewis, 2 Ves. 240, (1750,) Ld. Hardwicke held the same doctrine. These cases (the two last especially) seem to go on the principle that a man will always be careful of his own property; and that if he extends the same degree of care to the property of others in his hands as to his own, he will be in no danger. If all men were prudent in the management of their own affairs, there might be safety in adopting this principle ; but that is not the case, and hence the later authorities have sought to establish one more uniform and stable. In Adye v. Feuilleteau, 1 Cox, 24, (1783,) an executor had — 265 — loaned money on a bond, and it was lost. Ho was held personally liable. Ld. Loughborough (sitting as a commissioner in chancery) said, it was quite a settled point that an infant’s money could not be laid out on personal security, and that no such investment of trust money would be sanctioned by the court: and Baron Hotham, sitting with him, said, the court always disapproved of it. Holmes v. Dring, 2 Cox, i, was a case before Ld. Kenyon at the rolls, in 1787. Two executors lent three hundred pounds on a bond with security. The obligors were in very ample circumstances at the time the money was lent, but afterwards became insolvent. The court said, that no rule in a court, of •equity was so well established, as that a trustee cannot lend an infant’s money on private security. It should be rung in the ears of every person who acts in the character of trustee. In Lowson v. Copeland, 2 B. C. C. 156, (1787,) Ld. Thurlow held an executor chargeable with an outstanding bond debt, because he bad not called it in, though the defendant., in his answer, stated that he supposed it was bis own properly as a part of the residuum of the estate, and that he bad been so advised. In Orr v. Newton, 2 Cox, 274, (1791,) Ld. Camden disapproved this case, and considered it too strict; but it appears to be sustained by subsequent decisions. Wilks v. Steward, Coop. Eq. Rep. 6, (1801,) is a very strong and decided case, and shows the determination of the court to abide by some safe and general principle; rather than trust to the judgment of trustees in every case. Testator directed his executors to lay out a legacy in the funds, or “on such other good security as they could procure and think safe.” Sir William Grant, master of the rolls, was clearly of opinion that the executors had no power, even under this direction, to place out the money on personal security. This was followed by a still more rigorous case: Powell v. Evans, 5 Ves. jr. 844, (1801.) Testator died in 1792. Part of his estate was out on real, and part on personal security. Three hundred pounds was loaned by the testator himself to one Price, and Roberts as Iris surety. The debts were paid, there were no legacies due, and there existed no necessity for calling in the money; and the interest being regularly paid up to 1795, the executor permitted the money to remain where it had been placed by the testator and where he — 266 — found it. In April, 1796, Price, the principal, proved bankrupt, and the security was unable to pay. The master of the rolls held, that where infants are concerned, trustees are not to permit money to remain on personal security ; and they were charged with the loss. This was folio wed by the case of Vigrass v. Binfield, decided by the vice-chancellor in 1818, 3 Mad. 40; in which it was expressly ruled to be improper for an executor to loan money on a promissory note ; and it was ordered to be paid into court. Tn opposition to these very decided authorities, there is but one express decision that I have met with, and that is the old case of Harden v. Parsons, 1 Eden, 145 ; in which Ld. Worthington says, that lending trust money on a note is not a breach of trust, without other circumstances crassce ncgligcntiee. In support of his opinion he cites the case of Ryder v. Bickerton, in 1743 ; but when that case is examined, as given in 3 Swans. 80, in nolis, it does not sustain his position. This decision of Ld. Worthington has long been repudiated ; and in the late case of Walker v. Symonds, 3 Swans. 1, (1818,) Ld. Eldon disapproved it in marked terms, and said it was different from the doctrines on which the court was accustomed to proceed. The principle to be extracted from these authorities is, that the loaning of trust money, and especially where infants are concerned, on private security, is not a compliance with the rule that requires due security to be taken, and of course, that such loans arc made at the risk of the trustee. The decisions for the last half century have been uniform on this point, and the law, therefore, may be considered as settled at Wcsminstcr Hall. And it appears to me that the rule is a safe one, not only as it regards the cestui que trust, but the trustee also. There is a risk to the cestui quo Bust, even when investments are the most carefully and securely made in the stocks or on landed security. Stocks are liable to great depression. The abundance or scarcity of the circulating medium in a community, and the prospects of peace or war, to say nothing of the agitations caused by the spirit of restless and unprincipled speculation, are constantly causing a fluctuation in the stocks. So, in like manner, lands are liable to depreciate from similar causes, though not in so great a degree. Losses occasioned by a fall of stocks arc to be home, it has been — 267 — decided, by the cestui que trust; and Í presume the same rule would be applied to a loss growing out of a depreciation of real property, where the investments had been originally made with due and proper caution. But the risk is greatly increased when trustees are permitted to loan out money on personal security, and to be free from responsibility in ail cases where the borrower was at the time a man in good credit. No person is exempt from misfortune. The man who is to-day solvent, and even in affluence, may by some sudden and desolating visitation, be in poverty tomorrow ; and if not so, he has, in consequence of there being no lien on his property, the power of disposing of it to answer sudden emergencies and pressing calls. And how often docs it happen that the integrity of a man fails in tire hour of temptation, and he is induced to make dispositions of his property which neither honour nor conscience can justify. The rule is also a safe one for the trustee. It cannot be misunderstood ; and being uniform and general, renders the path of his duty plain. It would efttimes relieve him from the importunity of those who may wish to be obliged, and who may suppose they have personal claims upon him, but cannot give the proper security. But though the principle appears to be so firmly settled in England, I do not find that it has been adopted to the same extent in this country. In Smith v. Smith, 4 Johns. C. 281, the question came up incidentally before Chancellor Kent. As the case appeared before him lie was not called on to decide it, but lie gave his sanction to the doctrine, that a trustee loaning money must require adequate real security or resort to the public funds, so far as to express himself satisfied that it was a wise and excellent general rule. In 1824, the case of The Administrators of Richard I. Cooper v. The Executors of Isaac Cooper, was decided in New-York by Chancellor Sanford : Hop. 233. It appeared that Isaac Cooper held two notes of one thousand two hundred and fifty dollars each, given by the Union Cotton Manufactory to Richard I. Cooper. He held them in trust for the representatives of Richard, and afterwards invested them in stock of the Otsego Cotton Manufactory, which became insolvent. The defendant alleged — 268 — that the investment was made in good faith, and was considered by all to be advantageous at the time. The case came up on the bill and answer, and the court decided the trustee was not chargeable. This case does not appear to have received much attention from the counsel or the court. The executor found the investment in one company ; he changed it to another; and it appears by the very short opinion of the chancellor, that this change was considered by all to be advantageous. This may be taken as tantamount to an agreement on the part of those concerned ; though it does not appear that the court put itself on that ground, but rather on the principle of good faith in the trustee. I am not able to ascertain that the English rule has ever been adopted in this court, and I should feel some hesitancy in adopting it to the extent to which it is carried in their courts. The situation of the two countries differs very materially in many respects, and especially as it regards the facility of investments ; and what may be a prudent rule of policy in one country, may not be in another. In England, property can always be invested in the funds. These are recognised by their courts as safe and permanent securities, and it is the policy of every branch of the government to consider them so. In this country, the amount of public or government stock is very small, and in an inland state like our own, there are few opportunities for investing in that kind of security. The stock of private companies is not considered safe, and investments in that species of stock would scarcely be encouraged by a court of equity. There is, then, no other but landed security that would come within the rule. This can most generally be attained, and the court would advise it to be taken in all cases where public stock cannot be procured. It is safe to all parties, and is in accordance with the policy of the act directing the mode in which the money of infants in the hands of trustees may be put out to interest. But while I take this opportunity of commending the safety of the English rule, and of warning trustees how they deal with the property of infants without securing it on real estate or in the funds, I do not feel myself called on, in this case, to adopt it in its rigour. For, admitting that these trustees had right to-loan this money on persona! security, still, an examination of the — 269 — case has led me to the conclusion, that in making this loan, they did not exercise that degree of care and circumspection which will free them from liability in case of loss. It appears, in the first place, that the loan was made to Jonathan Britton on his simple bond, without even any personal security. At this time Jonathan Britton was a trading man ; he was engaged in the lumber business, and was about to engage in mercantile pursuits, of all others, perhaps, the most hazardous, especially to the inexperienced. This should have induced great caution on the part of the trustees. They should have hesitated long, before they committed to his hands, at that time, and under those circumstances, so large a sum of money : and it is to be considered, also, that this loan was not temporary, for sixty or ninety days, but was intended as a permanent investment. Secondly, They neglected to avail themselves of the privilege granted them by law, of putting out this money under the sanction of the orphan’s court. I do not mean to say that when trustees omit to avail themselves of that protection, they are always to be held liable: I am not called on now to affirm or deny that principle. I only mean to say, that tire omission to procure such direction, is a species of negligence that must always have its weight. But, Thirdly, The defendants have failed to show that Jonathan Britton was, at the time of the loan, a man of such property and substance as would justify the loan : nay, I think the contrary is plainly to be inferred from the evidence. The testimony is not as full on this subject as it might have been. One of the witnesses, William Robertson, says, that about the time Britton got the money, “ his credit was very fair as to his ability to meet his engagements.” It may all be true, that he was reputed to be able to meet his engagements ; yet the safe inquiry for the trustees to make, was, what is his property, and what are his means of securing a repayment? We find from the testimony of this witness, that his credit soon began to fail. Tn 1822, he commenced store-keeping, in the fall. In 1823, he removed to another stand ; and in the former part of that year, he did a good deal of business, and was in good credit; but be — 270 — fore the end of the year his credit began to decline, and people became doubtful of him. And when we look at the exhibition made of his concerns by the sheriff of the county, soon after, it is not surprising. It is proved that in 1823, he was prosecuted by the New-Hope Delaware Bridge Company, and that in October of the same year, a judgment in their favour was entered against him for one thousand four hundred and thirty-two dollars and fifteen cents, on which an execution issued and was placed in the hands of the sheriff. In February, 1824, another judgment was entered against him, in favour of Peter I. Nevius, for two hundred and sixty-three dollars and thirty-seven cents. His real estate appears to have been mortgaged for more than its value. A suit was brought on the mortgage, and in October, 1824, an execution issued out of this court, against the property, for one thousand two hundred and eighteen dollars and ten cents. The mortgaged premises, when sold, brought but eight hundred dollars ; while the amount realised by the sheriff from all the rest of his property, when sold, was less than two hundred dollars. There is nothing to induce the belief that in the years 1822 and 1823, he parted with any valuable property, nor is his speedy insolvency in any way accounted for. I think the manifest inference from these facts is, that Jonathan Britton, at the time the loan was made, was not a man of substantial property ; and that a little inquiry would have satisfied the trustees of the real stale of his affairs. These inquiries were not, made: they trusted simply to the credit of the person with whom they were dealing, and in so doing, acted with a degree of carelessness and negligence which this court cannot overlook. It does appear to me, that under these circumstances, the trustees can have no reason to complain, if they are held responsible for the loss. The administrators, then, are to be charged, unless they are protected by the proceedings of the orphan's court; and this brings me to the remaining question in the cause. The answer states, that after the loan to Jonathan Britton, Edmund .Smith, who is guardian for a number of the infant heirs of Arthur Gray, was dissatisfied, and employed counsel to make application to the orphan’s court to have the money better — 271 — secured: that Britton, one of the administrators, hearing of the proposed application, attended the court in October, 1822, and, being called on to have the said money secured by such sufficient security as the court should approve, offered to give a mortgage to his co-administrator to secure the payment of Jonathan Britton’s bond : that the application was postponed to a special term of the court in December, at which time Britton again attended, and prayed the direction of the court in the premises. The court thereupon made the following order, substantially, stating it to be “ on the application of the administrators of Arthur Gray.” It appearing to the court that the trust money had been loaned by the administrators to Jonathan Britton, on his bond ; and the said John Britton (the administrator) now offering to give a mortgage to his co-administrator, on certain property, to secure the payment of the said money, and pray ing the approbation oí the court thereupon; the court, on consideration, approve the said security, and order that the said money remain on interest on the security of the said bond and mortgage, until otherwise disposed of, agreeably to the act of the legislature. This order of the orphan’s court, is set up by the defendant as a bar to all claims of the plaintiffs. The orphan’s courts are authorized to require executors and trustees to give security to persons interested, and also to one another, in certain cases specified in the act, and they are also authorized to give leave and direction to them to put out their minors’ money to interest, upon security such as they shall allow of : Rev. Laws, 778-9. From the history of this proceeding in the orphan’s court, given by the complainant,, and from the decree entered by the court itself, I have been at a loss to ascertain what was the actual intention of the court. The proceeding appears to have originated with some of the heirs, who had fears for the safety of the money, and it is evident that it was originally an adversary proceeding. The defendant says, that Britton attended at the court in October, and being called on lo have the said monies secured by such security as the court should approve, he offered to give a mortgage to the defendant: on the other hand, the decree purports, on the face of it, to be on application of the administrators of Arthur Gray. If made on such application, it — 272 — must have been under Úse eleventh section of the act: Rev. L. 779. This section provides, “ that executors, administrators, trustees or guardians, may, by leave and direction of the orphan’s court, put out their minors’ money to interest, upon such security and for such a length of time, as the said court shall allow of,” &c. It is insisted on by the defendant, that the court acted under this section, and that their order is final and conclusive. 1 he decree of the orphan’s court on a matter over which it has jurisdiction, if fairly obtained, is certainly not to be questioned in a collateral way even in this court. But that court is one of limited power and jurisdiction. If it transcend its jurisdiction, its acts will pass for nothing; and if an order is obtained by fraud or misrepresentation, it may be set aside or considered null. Now, under the eleventh section, the orphan’s court may give leave and direction to trustees, &c. to put out their minors’ money. It does not appear that in this case any leave was obtained, or any direction asked of the court to put out this money. On the contrary, it appears that the investment was made some months before, and without any directions for that purpose either obtained or asked. The administrators assumed the responsibility themselves. This they liad a right to do if they chose: I do not say it was proper for them to do so. In cases coming under the act, trustees may take the responsibility of loss upon themselves, or they may throw it on the court. If the latter course is pursued, the directions of the statute are plain. They must obtain leave and direction for the purpose of putting out the money: not put out the money first, and at some future day, when difficulties are foreseen or loss apprehended, go to the court and obtain a decree of confirmation. No such power is given to that court; nor have the administrators or trustees any authority, under the statute, to make such application. This may appear to be a rigid and harsh construction of the act, and I confess it appears so at first sight; but I think a moment’s reflection will satisfy us of the propriety, if not necessity, of construing the power of the orphan’s court in this respect strictly. It was doubtless the intention of the legislature that the trustee, in putting out minors’ money, should be implicitly governed by the direction of the court. In all such cases, the court derives its information mostly from the representations of the — 273 — trustees themselves, who can or ought to have no possible temptation to impose upon the court. One common motive should govern all—that the minors’ money should bo safely invested. But so construe this statute as that trustees may invest money at their own risk, and at any time afterwards come before the court to seek a confirmation which shall shelter them from all danger, and be conclusive upon the rights of those who are not able to be heard, and who are reposing in the security afforded by the wholesome provisions of the law, and rve place them before the court in a very suspicious attitude. Their object for coming there will be their own safety alone, and not that of the fund. You place them under strong temptations, such as many men arc not able to resist; and any one who is conversant with the ordinary mode of doing business in that court, must be satisfied that the greatest imposition would often be practiced, and the grossest frauds committed. I feel satisfied, therefore, to say that this order is not made in pursuance of any authority vested in the court, and not within its jurisdiction, and therefore is no protection to the administrators. It is true that in this case the court did more than merely confirm the loan—they approved of the security that was offered. This does not alter the principle. Would the court, if the money had been in (he hands of the administrators, have directed a loan to Jonathan Britton at that time, on such security'? I think not: but the money was already loaned, and the court appeared willing to do something to save it. As between the two administrators, Britton and Fox, I see no ground for any distinction. They both concurred in the loan, and the liability is joint. Let an account be taken of the principal and interest due the complainants. The question of costs, and all further equity and directions, are reserved until the coming in of the master’s report.