Zimmerman v. Fraley

McSherry, J., delivered the opinion of the Court. Mcholas Holtz by his will bequeathed a share of his estate to John Zimmerman of John and his heirs in — 566 — trust, “to he by him invested for the separate use of” Mary A. Eraley, in such manner as the trustee might deem advisable, and in further trust to pay over the income to her during her life. The testator directed the trust estate, upon Mrs. Fraley’s death, “to be paid to” her “heirs entitled by law to the same.” Zimmerman accepted the trust and some years after-wards died. Thereupon his executors filed a petition on the equity side of the Circuit Court for Frederick County asking the appointment of a new trustee, and on the second day of Sejatember, eighteen hxmdred and sixty-three, a decree was passed appointing Joshua J. Zimmerman. On the twenty-second day of December of the same year, the new trustee made a report of the trust estate which had come into his hand's. This report showed that he had received from the executors of his predecessor certificates for two hundred shares of the capital stock of the Frederick County Bank, a promissory note of the cestui que trust, Mary A. Fraley for two hundred and fifty-eight • dollars, dated in April, 1851, and seventy-five cents in cash. He represented to the Court in this report that he had “an opportunity of investing the sum of $3000 of said trust funds with undoubted and safe landed security,” and he then asked for authority to sell the Bank stock for the purpose of making that investment. On the same day the Court passed an order empowering the trustee to sell the stock, directing him “to invest’the proceeds of sale in good landed security,” and requiring him to “ report his proceedings to and bring the investment into * * * Court for its action thereon.” In the latter part of 1868 and early in 1869, Zimmerman sold the Bank stock. The proceeds of these sales, aggregating $3615.00, he paid in November, 1868, and January, 1869, to one Daniel Culler in part payment for a farm-of about one hundred acres, which Mrs. Fraley, — 567 — through her son, Francis M. Fraley, had purchased. To secure the balance of the purchase money, Zimmerman gave to Culler a mortgage upon his, Zimmerman’s, personal property; and on January 19th, 18V8, when that balance had been paid out of the proceeds of the sale of real estate owned by Mary A. Fraley, Culler conveyed the farm to Zimmerman, whom he described in the deed as “trustee of Mary Ann Fraley under the will of H. Holtz.” The trustee made no report of this transaction to the Court. Shortly after the execution of this deed Mrs. Fraley died leaving surviving her a son, Francis M. Fraley, a daughter Ellen Stone and a granddaughter, the child of a deceased son. On the 12th of'February, 18V9, John W. Hargate, to whom Francis M. Fraley had assigned his interest in the trust estate, filed a bill against Zimmerman calling on him for an account of the trust, and praying for a decree compelling him to pay over the one-third of the trust estate which had been originally received by him. The case was not brought to a final hearing until September, 1888, more than nine and a half years after the bill had been filed. In the meantime Hargate assigned the interest he acquired from Fraley to Fraley’s wife; Zimmerman’s own property was sold under mortgages and Zimmerman himself died. His heirs were made parties and from the decree holding his estate liable for the whole of the trust funds and directing the surplus in the hands of the trustee who made, sale of Zimmerman’s property under the mortgages alluded to, to be applied in replacing the trust money invested in the farm and in the promissory note referred to, they have appealed to this Court. It is of the most vital inrportance that trustees be held to a strict and rigid accountability ; and however serious may be the consequences which in particular — 568 — cases the application of this rule may entail upon the individuals affected, or upon their heirs or sureties, insensibility to those consequences is a stern and an imperative mandate of judicial duty. It is infinitely better, even in exceptional cases of manifest hardship, that a trustee should suffer 'the results of his own errors and mistakes of judgment, than that the settled and established principles which have uniformly governed Courts of equity in protecting the interests of the .cestui que trust, against the trustee, should be relaxed or strained in the slightest degree for his acquittal or relief. His duty requires of him the exercise of high diligence and absolute good faith ; and whilst the law affords him ample protection if he seeks the aid and follows the direction of the Courts having-jurisdiction over the subject, it generally fixes upon him the responsibility for all losses which may result from' unprofitable or unfortunate investments made upon his own discretion and judgment. Wayman vs. Jones, 4 Md. Ch. Dec., 500. There can he no question as to his liability when the trust estate has been wasted by his own breach of trust, although he may have acted with the best intentions. Ringgold vs. Ringgold, 1 H. & G., 11; unless the cestui que ¿rest with full knowledge of the facts, and of his rights in the premises, and being under no legal disability, sanctions or acquiesces in the wrong. Hill on Trustees, mar. pg. 382 & 525, and cases there cited. Joshua J. Zimmerman was a substituted trustee who derived his authority from the decree by which he had been appointed. That decree whilst imposing upon him the duty of executing the trusts created by the will of Holtz with respect to the fund in question, did not clothe him with the discretion which the testator had reposed in the person selected by himself. With powers thus defined he was authorized in 1863 to sell — 569 — the Bank stock, solely for the purpose of investing the proceeds in “landed security,” — he then having, so he stated in his petition, an opportunity to make such an investment. He suffered five years to elapse before making sale, or even attempting to make sale, of the stock ; and when he did sell, instead of doing the only thing which the order of the Court had empowered him to do, he applied the trust funds in partial payment for land bought by Mrs. Fraley, the cestui que trust for life. He neglected, as we have said, to make any report of this to the Court, and he did not afterwards exercise any supervision or control over the land. Even if he supposed he had authority to do what he did, as seems to be the fact, his act was none the less an unequivocal breach of trust. The order only permitted him to invest in landed securities and the purchase of land was not such an investment. A trustee cannot convert by purchasing land with the trust moneys. Ringgold vs. Ringgold, 1 H. & G., 11; Bonsall’s Appeal, 1 Rawle, 273; Royer’s Appeal, 11 Pa. St., 36. The case of Gray vs. Lynch & McDonald, 8 Gill, 403, relied on by the appellants, is clearly distinguishable from the one at bar. There the trustees, in the exercise of a fair discretion and in perfect good faith, made an investment which would have been ratified by the Court upon application; and the Court of Appeals, perhaps influenced by the particular circumstances, exonerated the trustees when loss ensued, though no such ratification had been procured. We are unwilling to go beyond the exact limits of that decision, orto apply the principle it establishes in this particular to a case not precisely similar in all respects. Here, however, the trustee was not left to his own judgment to make an investment. He found the funds already invested and under the case of Gray vs. Lynch & Mc — 570 — Donald, lie had no right to sell the stock and invest in other securities without express authority. He did obtain authority to sell for a specific purpose, and he was expressly directed what he should do with the proceeds of that sale. Instead of obeying that direction and making the investment ordered by the Court, he disregarded it and made a totally different investment. There is, consequently, no ground for presuming that had this state of facts been reported to the Court, the Court would have sanctioned and approved an act done so long after the date of its order and in palpable violation of it — done, too, when the conditions existing at the time the authority was procured had materially and radically changed. Without questioning or inquiring into the motives ivhich influenced the trustee, we are constrained, upon principle and authority, to hold that he committed a clear breach of his duty in using these funds in the purchase of land. As a consequence of this, his estate and his sureties are obliged to restore to the cestuis que trust in money, if they demand it, the whole amount so misapplied, unless the cestuis que trust participated in the misappropriation in such a Avayas’ to be binding on them; or, being legally capable of doing so, acquiesced in or sanctioned the act noAV complained of. This brings us to the consideration of the defence chiefly relied on. There can be no doubt that a cestiti que trust Avho has participated in a breach of trust, or who knowing all the facts and being apprised of his legal rights, and being under no disability to assert them, has acquiesced in the wrongful act of the trustee, will not, upon the plainest principles of justice, be alloAved, in a Court of equity, to recover for the losses Avhich have resulted from investments that he himself has influenced or knowingly sanctioned or assented to. But the proof — 571 — of this defence rests on the trustee. Lord Chancellor Brougham observed in Bennett vs. Colley, 2 Mylne & Keen, 232, “it can never he maintained that the acquiescence of a party, under ignorance of his rights, operates as a waiver of any claim, or as a confirmation of any thing done against him. Neither can it be seriously contended that the proof of ignorance, or want of notice, lies on the party against whom such acquiescence is alleged.” Evidence of acquiescence in cases like this must be full and satisfactory. The same strictness is required as in the proof of other dealings between the trustee and cestui que trust. Dorsey vs. Banks, ante page 508, clearly lays down the measure of sirch proof. It is unnecessary to advert to the testimony hearing upon the alleged acquiescence of Mary A. Fraley, the cestui que trust for life, because no mere acts of hers, however clearly established, could be binding on the persons entitled to the remainder. There are three persons entitled to that remainder — an infant, a married woman, and Francis M. Fraley. The rights of the infant and of the married woman are not before us. The testimony of the trustee is the only evidence in the record directly relating to Fraley's alleged acquiescence. Zimmerman, the trustee, swore that Francis M. Fraley distinctly assented to the investment. Fraley, with equal emphasis testified that he did not assent thereto, but protested against what was done. Zimmerman stated that he had conversed several times with Mrs. Stone, one of the cesluis que trust, and with her husband, and that they both sanctioned what he had done. Stone and his wife, in their testimony, expressly and pointedly contradict this assertion. Upon this state of the evidence, notwithstanding the record discloses some very serious charges against Fraley, it would not he possible to hold that the trustee had discharged the onus of proof placed upon him by the law. — 572 — There can he no doubt that Fraley could have invoked the aid of a Court of equity, even during the lifetime of Mary Ann Fraley, to correct this breach of trust. Browne vs. Cross, 14 Beav., 105. If then, with a full knowledge of his rights and possessing the power to assert them, he stood by for more than ten years and did nothing, or received benefits from the wrongful act of the trustee, he cannot be allowed, after the investment has proved to be disastrous, to repudiate his acquiescence and to hold the trustee liable for the losses which have ensued. But if he was misled by the trustee, whether designedly or not is immaterial, he cannot be made to bear the loss occasioned by the breach of trust complained of. Now, Fraley has testified that Zimmerman told him “that he," Zimmerman, “had got an order from the Court to sell the Bank stock and buy land toith it.” This statement is fully verified by Zimmerman himself in his answer to the 128th interrogatory propounded to him. Again, Fraley says Zim*merman told him the trust funds would be replaced by the proceeds of the sale of timber to be cut from the land, and this Zimmerman distinctly corroborates in his answer to the 49th and 57th interrogatories. Fraley further states that he believed what Zimmerman told him and did not discover the contrary until the spring of 1877. Being misled by the trustee and being in ignorance of his rights and the remedies open to him, as he says he was, neither laches nor acquiescence can be imputed to him. A careful examination of the record has failed to convince us that the defence relied on has been established, for all the other acts set up, such as bargaining for the land and cutting and hauling wood therefrom seem, as far as done by Fraley, to have been done by him at the instance of and as the mere agent for his mother, the life tenant, and apparently in accordance with what Zimmerman said was — 573 — the plan adopted to pay for the farm, whilst he, Fraley, was wholly ignorant as to the true state of the facts. We are, therefore, of opinion that so much of the decree as holds Zimmerman liable to the appellee, Margaret, for one-third of the proceeds of the sale of the Bank stock with interest from the date named in tfye decree, less the sums stated in the decree to he due hy Fraley to Zimmerman, is free from any error. We are unable, however, to agree with the learned Judge of the Circuit Court in charging the trustee with the amount of the promissory note heretofore alluded to. The note had been barred hy limitations for more than twelve years when Zimmerman received it. He was unable to get an acknowledgment from the makers, who repudiated it whenever called on for payment. It would have been useless for the trustee to involve the estate in the costs of a suit for collection under such circumstances. The note became valueless hy no act or default of Zimmerman and he ought not to he charged with the amount due upon it. As the hill was filed hy the person owning only one-third of the trust estate and as the prayer for relief was restricted to that interest; the decree which, inadvertently, covers the whole of the trust fund and makes distribution of it to the several cestuis que trust is entirely too broad. It results from what we have said that so much of the decree as holds the trustee liable to the appellee, Margaret, for one-third of the proceeds of the sale of the Bank stock and one-third of the cash with interest from the date of Mary A. Fraley’s death, less the sums due hy Fraley to Zimmerman, as found hy the Court below, must he affirmed, and that the residue of the decree must he reversed, and the cause must he remanded that a decree may he passed in conformity with this opinion. Under the circumstances of this case one-half of the — 574 — costs in this Court and in the Court below, must be paid by the appellee, Margaret, and the other half by the appellants. (Decided 3d May, 1889.) Affirmed in part, and reversed in part, and cause remanded. Robinson, J., dissented.