American Bonding Co. of Baltimore v. Richardson

SESSIONS, District Judge (after stating the facts as above). The master’s findings of fact above set forth were approved and reaffirmed by the District Judge, are fully sustained by the evidence, and therefore, under .the well-settled rule, will be accepted and adopted by this court. This suit is not brought by the beneficiaries of the trust, nor by any one in their behalf or in privity with them. On the contrary, the surety for hire úpon the separate bond of a defaulting trustee is seeking to recover for itself from a cotrustee, who has been guilty of no active wrongdoing, the amount of the defalcation upon the sole ground that the honest trustee did not prevent the malfeasances of the dishonest one. This fact alone is sufficient to distinguish the present case from Caldwell v. Graham, 115 Md. 122, 80 Atl. 839, 38 L. R. A. (N. S.) 1029; In re Beatty’s Estate, 214 Pa. 449, 63 Atl. 975; Bermingham v. Wilcox, 120 Cal. 467, 52 Pac. 822, and similar cases upon which counsel for plaintiff place their chief reliance. [ 1 ] It is settled that, as a general rule, a trustee is responsible only for his own acts or defaults, and, except for his own -fraud or negligence, is not liable for the trust property which has been in the exclusive possession and under the sole control and dominion of a co-trustee. Peter v. Beverly, 10 Pet. 532, 563, 9 E. Ed. 522; Movius v. Lee (C. C.) 30 Fed. 298, 307; Ohio v. Guilford, 18 Ohio, 500, 509; Dyer v. Riley, 51 N. J. Eq. 124, 26 Atl. 327; McKim v. Aulbach, 130 Mass. 481, 483, 39 Am. Rep. 470. [2] It is also settled that a trustee’s obligation to'his trust is met and satisfied by the exercise of the same measure of diligence that a man of ordinary prudence would be expected to exercise in the care of his own property under the same circumstances. King v. Talbot, 40 N. Y. 76; McCabe v. Fowler, 84 N. Y. 314; In re Bartol, 182 Pa. 407, 38 Atl. 527; Smith v. Bank of New England, 72 N. H. 4, 54 Atl. 385; Mattocks v. Moulton, 84 Me. 545, 24 Atl. 1004; Scoville v. Brock, 81 Vt. 405, 70 Atl. 1014. [3] But, conceding the correctness of these rules of law, complainant insists that the conduct of Richardson does not measure up to their requirements in that the trust was not separable into parts, but was joint, requiring the joint and not the separate management of the trustees, while “Richardson paid no attention whatsoever to the part of the trust property separately held by Buck, nor to his dealings with it..” So the real question to be decided is whether Richardson was justified in acquiescing in the division of the trust estate into two distinct and separate parts and in retaining the management of o'ne part and permitting the other part to be and remain under the sole dominion and control of his cotrustee. The determination of this question involves and requires a consideration of all the peculiar circumstances, conditions, and difficulties attending and surrounding the creation, continuance, and management of the trust. The original trustees, Buck and Goodman, were both close and intimate friends and advisors of the tes^-tator and creator of the trust in his lifetime. Both had actively as [902] sisted him with reference to his investments in their respective localities. Buck was a beneficiary under his will. It was natural'that each trustee should take active charge of the property with which he was familiar. The tax litigation arose, and Buck was enjoined by the courts of Indiana from removing from that state any of the assets of the estate in his possession. Large adverse judgments were obtained in the state courts. The final outcome of the litigation was very doubtful. The attorneys for both trustees advised and the probate court of Hamilton county, Ohio, authorized and directed a division of the estate into two parts. Goodman was advised not to go into the state of Indiana, and not to do anything to submit himself or the Ohio property to the jurisdiction of the Indiana courts. This advice was given, and this direction was made in the bona fide belief that such action was necessary for the protection and preservation of the trust property. Pursuant to such advice and direction the division was made, or rather the natural division theretofore actually existing was formally declared and made a matter of record. Thereafter, with the knowledge and approval of the probate court, each of the two parts of the trust estate was treated as a separate trust. Each trustee managed his part without reference to the actions of the other. Each rendered a separate account every six months without reference to the account of the other. Each account was independently approved by the probate court. Separate distributions of the income were made to the beneficiaries. Goodman died, and Richardson was appointed his successor. Then, for the first time, the trustees were required to furnish bonds. Separate bonds were furnished. The .¿Etna Indemnity Company became surety upon Richardson’s bond, and the complainant became surety upon the bond of Buck. In his application to the complainant to become surety upon his bond, Buck truthfully described and set forth the Indiana property in his possession for which the surety was to become responsible. Acting under like advice and direction as had been given to his predecessor, Richardson took charge of and continued to manage and control the Ohio property, and permitted the Indiana property to be and remain in the sole custody of Buck. By the semiannual reports of the trustees and otherwise, the complainant was, at all times, fully informed as to the condition and method of the administration of the trust estate, and made no objection or protest until after the death of Buck and the discovery of his defalcation. Even at this late day, the gist of its complaint is that Richardson was negligent in that he failed to personally examine the securities held by his cotrustee or to investigate the Indiana records and thus to discover that fictitious mortgages were being reported. But, to have done either would have been,to act contrary to the advice of his counsel and in violation of the direction of the probate court. Besides, Buck was the older trustee, appointed by the creator of the trust, and was a man of reputed ability, honesty, and integrity. His reports were made regularly, and the apparent income from the trust funds was paid promptly to the beneficiaries. There was no reason to suspect him of dishonesty. Under these circumstances, it cannot be said that Richardson was negligent, or that he was lacking in care, prudence, and diligence in his actions with reference to the trust property. In re [903] Halstead, 44 Misc. Rep. 176, 89 N. Y. Supp. 806, and In re Halsted, 110 App. Div. 909, 95 N. Y. Supp. 1131, affirmed 184 N. Y. 563, 76 N. Y. 1096; In re Westerfield, 32 App. Div. 324, 53 N. Y. Supp. 25, and 48 App. Div. 542, 63 N. Y. Supp. 10; Croft v. Williams, 88 N. Y. 384; Paulding v. Sharkey, 88 N. Y. 434; In re Cozzen’s Estate (Sur.) 15 N. Y. Supp. 771; Ormiston v. Olcott, 84 N. Y. 339; Estate of Fesmire, 134 Pa. 67, 19 Atl. 502, 19 Am. St. Rep. 676; Colburn v. Grant, 181 U. S. 601, 21 Ct. 737, 45 L. Ed. 1021. _ _ _ [4] The defendant trustees filed a cross-bill, seeking to recover against complainant the amount of Buck’s defalcation to the extent of the bond. Complaint is made of the finding of the master, affirmed by the District Court, that complainant is equitably chargeable with interest on $50,000, the penal amount of its bond, from the time of the filing of its bill instead of from the date of the decree. The bill was filed May 26, 1909. The decree was made July 24, 1912. The record shows that on January 25 and February 8, 1909, the trustees, Richardson and Morgan, notified complainant of the death of Mr. Buck, and warned it to take measures for its own protection. They offered their co-operation. They made an indefinite estimate of the probable deficit of Buck, f>ut made no demand of payment of a definite amount. The bill alleges that, in February, 1909, an inventory of all of the Indiana trust property which had been found after Buck’s death was filed in the circuit court of Tippecanoe county.' This inventory and the investigation then made showed that the deficit was large. Instead of availing itself of the tendered assistance and co-operation of the trustees and offering to make good the amount of the loss, complainant commenced this suit in which it- sought to compel Richardson to hold it harmless from the payment of any sum whatsoever. As said by the master: “While it was entitled to the aid of the court of equity to determine the amount of its liability under the bond, it cannot equitably take advantage of the delays incidental to this judicial inquiry and thus postpone the date from which interest should be charged. Spalding v. Mason, 161 U. S. 375, 395 [16 Sup. Ct. 592, 40 L. Ed. 738]; Sturn v. Boker, 150 U. S. 312, 342 [14 Sup. Ct. 99, 37 L. Ed. 1093].” The decree of the lower court is affirmed.