Steinbeck v. Bon Homme Mining Co.

SANBORN, Circuit Judge, after stating the case as above, delivered the opinion of the court. This suit was instituted to avoid the tax title, the sheriff’s deeds, and the decree which quieted the title in Steinbeck, upon the ground that the latter had obtained these claims of ownership by deceit and fraud. These three sources of title may be considered in their order ; and the first question the case presents is whether Steinbeck was guilty of am- fraud or breach of duty in his procurement and assertion of the title in himself under the tax certificates and deeds. The material facts which condition this issue have been set forth. They not only fail to disclose any indication of deceit, concealment, or misrepresenta — 338 — tion while he was obtaining the tax deeds and subsequently until the company and its stockholders in 1897 failed to accept his offer to .convey the tax title to them for the amount of money which he had expended to procure it and to pay the subsequent taxes upon the property, but they demonstrate the utmost good faith on his part until, by their silence and inaction, the company and its stockholders had exercised their option to decline to share with him the burdens, risks, and possible benefits of his title under the deeds. But counsel for the complainant invoke the general rule that one who occupies a fiduciary relation to another in respect to business or property, and who by the use of the knowledge or interest he obtains through that relation, or by the betrayal of the confidence reposed in him under it, acquires a title in the subject-matter of the transaction antagonistic' to that of his correlate, thereby charges his title or interest with a constructive trust for the benefit of the latter which the cestui que trust may enforce or renounce at his option, and they insist that under this rule Steinbeck’s title was charged with a constructive trust in favor of the company. The rule is wise and salutary, and it should be carefully and rigorously enforced in all cases to which it lawfully applies. But, like every rule and principle of the law, it is founded in a controlling reason which is its life, and, where the reason ceases, the rule is impotent. The reason is that no .one may profit by a betrayal of the confidence of his correlate and by .the use, to the latter’s detriment, of knowledge or interest acquired by means of the fiduciary relation. The test of the existence of a constructive trust of this nature is the fiduciary relation, and the. betrayal of the confidence reposed under it to acquire the property or interest of the correlate, and, in the absence of either of these indispensable elements, no such trust can arise. Trice v. Comstock, 121 Fed. 620, 57 C. C. A. 646, 61 L. R. A. 176. An agent to sell is prohibited from buying the property of his principal at his own sale; but, if he discloses all his information and acts in good faith, he may purchase it directly of his principal or at a judicial sale which he cannot- and does not procure or control. General statements from text-books and many authorities have been cited to the effect that a general agent to care for property, or to pay taxes upon it takes any tax title he acquires in trust for the owner (1 Am. & Eng. Enc. of Law [2d Ed.] p. 1085; Blackwell on Tax Titles, § 598; Bartholemew v. Leech, 7 Watts [Pa.] 472; Bowman v. Officer, 53 Iowa, 640, 6 N. W. 28; McMahon v. McGraw, 26 Wis. 614, 623; Ellsworth v. Cordrey, 63 Iowa, 675, 679, 16 N. W. 211; Gonzalia v. Bartelsman, 32 N. E. 532, 143 Ill. 634; Continental Life Ins. Co. v. Perry & Townsend, 65 Iowa, 709, 22 N. W. 937; Page v. Webb [Ky.] 7 S. W. 308); but these cases are not inconsistent with the reason and the. rule that some betrayal of confidence, some breach of duty, some bad faith, some abuse of the fiduciary relation is indispensable to the creation of such a trust. A constructive trust of this nature is the creation of a court of equity. But such a court never raises it unless the holder of the title has been guilty of some breach of duty; for “a court of equity can act only on the conscience of a party. If he has done nothing that taints it, no demand can — 339 — attach upon it so as to give any jurisdiction.” A purchaser chargeable with such a trust is a trustee ex maleficio or a trustee de son tort, and, if he has been guiltv of no wrong, he is no trustee. Boone v. Chiles, 10 Pet. 177, 200, 9 L. Ed. 388; U. S. v. Detroit Timber & Lumber Co., 131 Fed. 668, 678, 67 C. C. A. 1, 11; U. S. v. Northern Pac. R. Co., 95 Fed. 864, 880, 37 C. C. A. 290, 306; Kinne v. Webb, 54 Fed. 34, 39, 4 C. C. A. 170, 175; U. S. v. Winona & St. Peter R. Co., 67 Fed. 948, 960, 15 C. C. A. 96, 108. If one is employed by the owner of property to pay taxes upon it, and if he accepts the employment and pays them with his own funds, his purchase of a tax title upon the property without notice, or an offer to convey it to the owner, is a breach of his contract and of his duty and a betrayal of the confidence of his principal; and it charges his title with a constructive trust for the latter’s benefit. The cases cited by counsel for the complainant are of that nature. Thus in Bowman v. Officer, 53 Iowa, 640, 6 N. W. 28, the agent accepted a power of attorney “to take charge of, lease, pay taxes, sell and convey by deed of warranty all or any portion” of the lands. He had paid taxes to the amount of hundreds of dollars and charged the account of his principal. He purchased at a tax sale for the taxes of a single year and subsequently continued to collect and expend money on account of the lands for his principal. The court rightly held that the tax title he procured was secured by a betrayal of the confidence reposed in him and a breach of his duty to protect the property of his principal. In cases of this character the principal incurs a personal liability for the money which the agent advances, a liability upon which the agent may maintain an action, and may subject the property itself to its payment. But no case has come to notice in which the principal neither furnished the agent the money nor the means to pay the taxes, nor subjected himself to legal liability to reimburse him for the moneys he might advance to pay them, in which the agent carefully notified the principal of the taxes due, of their delinquency, of his purchase of a title based upon them, and offered to convey it to him for the money he had expended, and the principal exercised his option to refuse the offer, where any court has held the tax title to be charged with a constructive trust for the benefit of the original owner. On the other hand, there is an exception to the general rule that one who occupies a fiduciary relation may not lawfully. purchase the property of his correlate for his own benefit, as well established as the rule itself, ft is that an agent or trustee may lawfully buy the property of his principal or cestui que trust at a judicial sale caused by a third party which he has no part in procuring, and over which he can exercise no control. Allen v. Gillette, 127 U. S. 589, 596, 8 Sup. Ct. 1331, 32 L. Ed. 271; Eckrote v. Myers, 41 Iowa, 324; Twin-Lick Oil Co. v. Marbury, 91 U. S. 591, 23 L. Ed. 328; Prevost v. Gratz, 19 Fed. Cas. 1303, 1309, No. 11,406; Fisk v. Sarber, 6 Watts & S. 18; Chorpenning’s Appeal, 32 Pa. 315, 316, 72 Am. Dec. 789. In Allen v. Gillette, 127 U. S. 589, 596. 8 Sup. Ct. 1331, 32 L. Ed. 271, one of the executors of the will of a decedent purchased the interest of one of the devisees at a trustee’s sale under a trust deed made — 340 — by the devisee to secure the payment of her debt to a third party. She brought suit against the executor to charge the title purchased by him with a constructive trust in her favor and to redeem from it. The Supreme Court held that the executor owed the devisee no duty incompatible with his purchase and dismissed the bill- In Eckrote v. Myers, 41 Iowa, 324, a firm of attorneys was employed to foreclose a mortgage upon real estate. They brought the suit, carried it to a decree, and notified their client that no sale would be made under the decree .until he paid the fees that would accrue in the sale. They had demanded expenses previously made and- fees for prior services, and he had failed to pay them. He paid nothing and the suit remained pending. A year .or two later there was a sale of the mortgaged premises for taxes, and the attorneys bought, notified the client of the purchase, demanded reimbursement of the money expended therefor and the payment of prior advances and fees. The title matured in one of the members of the firm, and the client brought suit to set aside the tax deed and for an accounting. The court held that the attorney had rights as well as the client, that the same rules of honesty and fair dealing govern both, and dismissed the suit. In Chorpenning’s Appeal, 32 Pa. 315, 316, 72 Am. Dec. 789, a guardian purchased the land of his ward at a judicial sale of .it under a judgment against the administrator of the estate of the ward’s father. The guardian had no money of the ward with which to make the purchase and none in expectancy. The court said: "Tbe doctrine that a party will not be allowed to purchase and hold property for his own use and benefit, when he stands in a fiduciary relation to it, if contested by the party entitled as cestui que trust, is indisputable. * * * The relation, however, must be one in which knowledge, by reason of the con- ■ fidence reposed, might be acquired, or power exists to affect injuriously the interests of cestuis que trust, or advance that of the trustee. The reason of the law is its life, and, unless some advantage might be gained by reason of the relation, the principle does not apply." And the court sustained the purchase. Concede that Steinbeck was the agent of the Bon Homme Company to accept service of process upon it, to care fpr the property and its title, to report the taxes upon.it, to do any acts regarding it which the company directed him to perform, and that he was a stockholder and director of the corporation, and the record discloses no more general. agency, nevertheless the compan}'- never authorized him to advance any money to pay its taxes or to subject it or its property to- any legal liability for such advance or .payment, and it never furnished him any funds after December 5, 1890, for this purpose or to reimburse him for any of the moneys he expended in purchasing the certificates or the tax deeds. There was therefore no duty imposed upon him to pay the taxes or to buy the tax titles for the company, and he would have incurred no liability to it if he had_ done neither and the property had been sold to a, stranger. He did not cause, and he could not control, the tax sales. They were, procured by the state, and he was not disqualified by their character from purchasing the property of his principal either at them or under' them. He acquired from his agency no'.knowledge or advantage hr — 341 — making such purchases which strangers and the company itself did not possess. He secured no power by means of his agency to affect injuriously by his purchases the title of his principal. On the other hand, his purchases and his offer in 1897 to convey his title for its cost beneficially affected the title and the rights of his principal. They gave the company an opportunity to acquire the property free from tax titles many months after the time when an absolute title would otherwise have vested in a stranger. The fact that he was a stockholder and director did not disqualify him from securing in good faith and with full notice which he gave to the company, a lawful incumbrance upon, and title to its property. Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 591, 592, 23 L. Ed. 328. The only confidence reposed in him by his agency here which he might have betrayed was that he would give timely notice of the taxes and incumbrances and apply any moneys the company remitted to him to discharge them. If he had betrayed that confidence, if he had silently procured a tax title for his own benefit, and refused to transfer it to the company or to share it with the stockholders for its cost, he might have been chargeable as a trustee; but he notified the company of the taxes of 3890 in April, 1891, sent it the advertisement of the sale in September, 1891, wrote it of the sale to Le Eevre, of his purchase of the certificate, that it “was particularly urgent ■ that the company should take some step to redeem,” of the amount required to do so, and of the taxes of 1891 on January 29, 1892, the day after he bought the certificate, again informed it of the amount required on August 15, 1892, and in December, 1896, and January, 1897, wrote the corporation that he had taken tax deeds of the property and had made a lease of it to Barrett, but offered to convey his title to the company or to the principal stockholders for $500, their proportion of the $650 which he had expended to procure and preserve it, and that he hoped for a speedy acceptance of his proposal. Here was no betrayal of confidence, no breach of duty, no use of his fiduciary relation to secure the title of his principal for his own benefit, but fair dealing, full notice, and the utmost good faith. It is not because Steinbeck failed to discharge his duty, but because the company exercised its option not to take the burden and the risk of this title which he offered it that it does not own it npw. It is contended that by his letters Steinbeck admitted that he held the tax title in trust for the corporation and to secure the payment of the amount he had expended for it, and in support of this argument attention is called to the fact that in some of his letters he wrote that lie had paid the taxes for the years, among others, for which the sales were made, and that in his letter of January 25, 1897, he inquired whether the company would bond and lease the property and wrote that he would like a long lease at a reasonable price. But it is evident that the last remark was induced by the statement of the secretary in his letter of December 24, 1896, that he had arranged to have the New Orleans people pay their share of the Bon Homme taxes, and by Steinbeck’s baseless hope and mistaken belief that his proposition of January 9, 1897, to clear up the title of the property for $500 would be accepted. Elis inquiry was not an admission that — 342 — the company owned the property, but that it would own it if it accepted his proposition to convey it as the secretary had written him he had arranged to do. Nor was his statement that he had paid the taxes an admission that he had not purchased, and did not hold his tax title for his own benefit; nor did it mislead or deceive the company, because he had carefully informed it that he held the tax deeds in his own name, that he had himself leased the property to Barrett, and they knew that he had proposed to convey the title under the tax deeds to it or to the principal stockholders for a fixed consideration, and that he had written them that lawyers whom he had consulted said that they believed that tax titles were good. The acts, letters, and circumstances of these parties must have a rational interpretation. They must be presumed to have intended what men of their intelligence ordinarily mean in similar circumstances. Tax certificates and tax deeds are not indications of loans or of their security. They evidence title accruing or accrued. Even when the title under them is charged with a constructive trust, they result in security for their cost, not because they were so intended, but because equity conditions its relief with the payment of the expense of the title under them on the maxim that he who seeks equity must do equity. Nor is the fact that the holder of a tax title offers to sell it to the original owner for its cost any indication that the former holds it in trust for the latter. The tax title of Steinbeck was not charged with any direct or express trust. His notice of January 29, 1892, that he had purchased the tax certificate, his notice of August 15, 1892, that $210 was required to redeem from it and to pay subsequent taxes, his taking and recording of his tax deeds, his statements in his letter of December 31, 1896, that a purchaser became entitled to a deed after three years; that he had had deeds for some time ; that he could deed back to the company; that he was ready to convey to the company or to those stockholders only who were willing to take a chance, upon payment of a part of the cost, his letter of January 9, 1897, that he had expended $650 in payment of the taxes; that if the company would refund $500 he was willing to let $150 go on his share, and would “see that all that was necessary to be done to clear the title was accomplished”; that he had leased to Barrett; that “in the matter of the taxes I think I have made a reasonable proposition and I hope for a speedy acceptance. If there is any dissatisfaction perhaps I may make further concession. I am willing to do almost anything within the bonds of reason to facilitate a resumption of work on the property,” and the facts that the company knew all that has been recited and neither accepted his offer nor asked further concessions — converge with compelling force to prove that Steinbeck intended to buy and actually secured this tax title for his own benefit only and that it was never subject to any express trust in favor of the company. No proposition to convey for a consideration to the company or to the stockholders who would take a chance, no terms of conveyance were pertinent or necessary if he held the title in trust for the benefit of the corporation. A simple declaration of that fact would have been the natural and — 343 — probable evidence of it. No such declaration or admission can be found in the record. The only trust with which the property could be charged was therefore a constructive trust arising from the fiduciary relation, and, as he was guilty of no betrayal of confidence, no abuse of his fiduciary relation, and ho breach of duty in acquiring or holding it and the failure of the corporation to secure it resulted only from its refusal to accept his offer to convey it, this title was not chargeable with any constructive trust for the benefit of the corporation. There are other rules of law which interpose serious obstacles to a recovery by the Bon Homme Company in this suit if this title were chargeable with such a trust. It was not subject as we have seen to any express or direct trust, and hence it does not fall under the rule that no time runs against a trust until it is repudiated. But the title of a purchaser chargeable with a constructive trust for the benefit of his correlate by reason of their fiduciary relation is not void, but voidable at the option of the cestui que trust only, and the absence of a prompt affirmative election to avoid it confirms it. “It is only voidable, and, as it may be confirmed by the parties interested directly, so it may be by long acquiescence or the absence of an election to avoid the conveyance within a reasonable time after the facts come to the knowledge of the cestui que trust.” Hammond v. Hopkins, 143 U. S. 224, 250, 12 Sup. Ct. 418, 36 L. Ed. 134. Four years after a stockholder and director of a corporation had purchased its property under a deed of trust made to secure a debt to him the corporation brought a suit to charge the title with a trust in its favor. The purchaser had made the statement to other stockholders that he only designed to purchase for the corporation, and there was testimony that after the sale he offered to relinquish his purchase if his debt was paid. The Supreme Court said: “The doctrine is well settled that the option to avoid such a sale must be exercised within a reasonable time. * * * Though not falling'exactly within the rule as to time for rescinding', or offering to rescind, a contract by one of the parties to it for actual fraud, the analogies are so strong as to give to. this latter great force in the consideration of tlic (tase. Tn this class of cases the party is bound to act with reasonable diligence as soon as the fraud is discovered, or his right to rescind is gone. No delay for the purpose of enabling tlio defrauded party to speculate upon the chances which the future may give him of deciding profitably to himself whether he will abide by his bargain, or rescind it, is allowed in a court of equity.” And the court dismissed the bill. Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 592, 23 L. Ed. 328; Harwood v. Railroad Co., 17 Wall. 78, 21 L. Ed. 558; Hayward v. National Bank, 96 U. S. 611, 21 L. Ed. 855; Galliher v. Cadwell, 145 U. S. 368, 373, 12 Sup. Ct. 873, 36 L. Ed. 738. Counsel for the company endeavor to avoid the effect of this principle because Steinbeck never demanded payment of the amount he had expended for his tax title and in payment of the subsequent taxes, ■and they insist that no time ran against the company because such a demand was not made. If the company had been legally liable to pay the amount which Steinbeck expended for his title and in payment of taxes, there would be more reason for this contention. In that case the company might have had a right to redeem reciprocal with liis — 344 — .right to enforce payment. But the company was not liable to repay to Steinbeck the money he expended, and the only right the com.pany had was not the right to redeem from the tax sale, but the right to exercise its election to avoid it by paying its cost, or to affirm it and abandon the property. Nor could it avoid that election either by silence or by inaction after it had received the knowledge that Steinbeck held the tax deeds and the title under them, because delay, vacillation, an attempt to speculate upon the option, to await the event and thereafter to avoid, if the property has advanced in value, and to affirm, if it has depreciated, is fatal to the option, and affirms the sale. The Bon 'Homme Company knew the facts which conditioned its right to elect to avoid this tax title in January, 1897. Steinbeck then offered to convey it for a part of its cost. The company failed to accept and thereby rejected that offer. Steinbeck leased the property, operated it, sold it, caused the expenditure of tens of thousands of dollars upon it and the development of a body of ore which transformed land of such a character that its owner would not pay taxes upon it nor redeem it from tax sales into a productive and valuable mine, and then more than six years after it had learned every fact material to its right this company by the institution of this suit sought to exercise its option to avoid this tax title. It was too late. The law had exercised its option. Its speculation upon it, its inaction, its failure to share the heavy burden of the property, its care and operation during the tedious 90’s affirmed the title of Steinbeck and estopped it from sharing the benefits his care and toil and money had earned. Finally, section 2912 of Mills’ Annotated Statutes of Colorado provides that : “Bills of relief in case of the existence of a trust not cognizable by the courts of the common law * * * shall be filed within five years after the cause thereof shall accrue and not after.’’ If this tax title was chargeable with any trust, it was with a constructive trust not cognizable by the courts of the common law. The cause of action to enforce it accrued in January, 1897, and such an action was barred in the courts of Colorado before this suit was instituted. Courts of equity are not bound by, but they usually act or refuse to act in analogy to the statute of limitations relating to actions at law of like character. Radical changes in the condition and value of the property and its speculative character often induce them to apply the doctrine of laches in a shorter time than that fixed by the statute of limitations for, similar actions at law. Kelley v. Boettcher, 29 C. C. A. 14, 21, 85 Fed. 55, 62; Lemoine v. Dunklin Co., 2 C. C. A. 343, 348, 51 Fed. 487, 492. Dord Camden said: "A court of equity which is never active in relief against conscience or public convenience has always refused its aid to stale demands, when tire party has slept upon his right, and acquiesced for a great length of time.’’ Smith v. Olay, 2 Amb. 645. “If the property is of a speculative or precarious nature, it is the duty of a.man complaining of fraud to put forward his complaint at the darkest possible time. Fie. cannot be allowed to remain passive. — 345 — prepared to affirm the transaction if the concern should prosper, or to repudiate it if that should prove to his advantage.” Kerr, Fraud & Mistake, p. 306. “The reason upon which the rule is based is not alone the lapse of time during which the neglect to enforce the right has existed, but the changes of condition which may have arisen during the period in which there has been neglect. In other words, where a court of equity finds that the position of the parties has so changed that equitable relief cannot be afforded without doing injustice, or that the intervening rights of third parties may be destroyed or seriously impaired, it will not exert its equitable powers in order to save one from the consequences of his own neglect.” Penn. Mutual Life Ins. Co. v. Austin, 168 U. S. 685, 698, 18 Sup. Ct. 223, 42 L. Ed. 626. In Patterson v. Hewitt, 195 U. S. 309, 321, 25 Sup. Ct. 35, 49 L. Ed. 214, the complainants had transferred their interests in certain mining claims to a trustee who had made a written agreement of trust to convey their interests in the property, which amounted to one-fourth, to them upon the performance of certain conditions, and those conditions had been performed in 1884. One of the complainants demanded his deed in 1885 and another just before the commencement of suit in 1903. The analogous statute of limitations was 10 years. During the eight years just preceding the suit the trustee and his associates had performed a large amount of work in developing the mine to which the complainants did not contribute, and a large body of rich ore was discovered in 1890. The Supreme Court said: “If appellants had expected a share in this property, they should either have brought a bill promptly to enforce their rights, or at least contributed their proportionate share to the subsequent work and labor, and the expenses then incurred. To award them now a deed to their original interest in the property would bo grossly unjust to the defendants, through whose exertions the value of the property was discovered and the mine put upon a payin; basis. While it is true the court might impose upon the appellants the pay ment of their proportionate share of labor anil expenses as a condition of re lief, it could not compensate the defendants for the risk assumed by then: that their exertions would come to naught. There is no class of proper!r more subject to sudden and violent fluctuations of value than mining lands, A location which to-day may have no salable value may in a month become worth its millions. Years may be spent in working such property apparently to no purpose, when suddenly a mass of rich ore may be discovered, from which an immense fortune is realized. Under such circumstances persons having claims to such property are bound to the utmost diligence in enforcing them, and there is no class of cases in which the doctrine of laches has been more relentlessly enforced.” And the decree which dismissed the bill was affirmed. Stout v. Rigney, 107 Fed. 545, 549, 46 C. C. A. 459, 463; Hayward v. National Bank, 96 U. S. 611, 24 L. Ed. 855; Speidel v. Henrici, 120 U. S. 377, 387, 7 Sup. Ct. 610, 30 L. Ed. 718; Kinne v. Webb (C. C.) 49 Fed. 512; Societe Fonciere v. Milliken, 135 U. S. 304, 10 Sup. Ct. 823, 34 L. Ed. 208; Galliher v. Cadwell, 145 U. S. 368, 375, 12 Sup. Ct. 873, 36 L. Ed. 738; Alsop v. Riker, 155 U. S. 448, 460, 15 Sup. Ct. 162, 39 L. Ed. 218. The land in controversy here was a prospective mine, property of the most speculative nature. While it was unproductive, while — 346 — its value was doubtful, and the burden of protecting it against taxes and tax titles and the labor of developing it were heavy and the benefits to be derived problematical, the complainant refused to share either. For more than eight long years when times were hard, and the burden of caring for and protecting this property exceeded the benefit, Steinbeck bore it alone. Now, after he has prospected and operated the property, after he has bought the tax titles upon it and paid subsequent taxes, after grantees and lessees whom he secured have developed the rich ore and the benefit exceeds the burden, the complainant, which has refused to bear or to share the burden or the risk, prays a court of equity to confer upon it the reward which the money, the toil and the energy of Steinbeck have earned. There is no equity in such a suit. The complainant speculated upon its op-L tion. If the expense, toil, and effort of Steinbeck had come to naught, it would never have reimbursed him or have brought this suit. Its neglect, inaction, and silence during the six years after it knew he had a tax title to its property and the marvelous change in its value meanwhile estop it from, maintaining this suit and compel a dismissal of its bill. As Steinbeck’s title under the tax deeds is impregnable to attack in this suit, it is not material whether or not his title under the sheriff’s deeds and his decree quieting the title in himself were wrongfully obtained. They did not in any event impair his tax title, and they cannot affect the result of this suit. They will not therefore be further considered. The decree below is reversed, and the case is remanded to the Circuit Court with instructions to dismiss the bill.