Sternfels v. Watson

GILBERT, Circuit Judge (after stating the case as above). There can be no doubt that the use of the word “trustee” in the conveyance to T. J. Watson was sufficient to put all subsequent purchasers from him upon inquiry as to the existence and nature of the trust. Railroad Co. v. Durant, 95 U. S. 576, 24 L. Ed. 391; Shaw v. Spencer, 100 Mass. 382, 97 Am. Dec. 107, 1 Am. Rep. 115; Covington v. Anderson, 16 Lea (Tenn.) 310. The rule applicable to such a case is well expressed by the Circuit Court of Appeals for the Eighth Circuit in Geyser Marion Gold Min. Co. v. Stark, [508] 106 Fed. 558, 45 C. C. A. 467, 53 L. R. A. 684, in which it was said of the use of the word “trustee”: “It is a warning and declaration to every one who reads it (1) that the person so named is not the owner of the property to which it relates; (2) that he holds it for the use and benefit of another; and (3) that he has no right or power to sell or dispose of it without the assent of his cestui que trust. It denies the equitable ownership and beneficial interest of the party to whom it is applied, and asserts that he holds it in a representative capacity. It signifies the opposite of the word ‘owner,’ and means that, while the party called ‘trustee’ has the naked legal title, he has no beneficial right, title, or interest in the property. * * * Hence the legal presumption is that a trustee has no power to sell or convey the property which he holds in his fiduciary capacity, and the fact that he holds it as trustee is a warning and a declaration to all the world that he is without the power of disposition, unless that power is specifically given by the instrument creating the trust, or by the assent of those whom he represents. The legal presumption is that a trustee has no power of sale. Jaudon v. Bank, Fed. Cas.. No. 7,230; Gaston v. Bank, 29 N. J. Eq. 98, 103; Duncan v. Jaudon, 15 Wall. 165, 175, 21 L. Ed. 142.” The mortgagee of the mortgage made by Watson and all subsequent purchasers were bound to exercise reasonable diligence to ascertain whether or not the equitable owners of this real estate had- authorized the execution of a mortgage. The investigation and inquiry that were made fall far short of what the law requires. No inquiry whatever appears to have been made by the original mortgagee or by his assignee, nor by any of the purchasers, until the purchase which was made by the defendant Batchelder. The extent of his investigation was to ascertain that no declaration of trust was of record, and to inquire of the grantor of Watson, who informed him that he did not know that the word “trustee” was in the deed, and of Milton W. Smith, .the attorney for the person from whom he purchased, who informed him that he knew of no one having any claim on the property. No inquiry was made of T. J. Watson, and no effort, so far as the testimony shows, was made to communicate with him. He, of all persons whose names appeared on the records, best knew the facts, and the contingency that he might have denied the trust was no excuse for failure to make inquiry of him. Jones v. Williams, 24 Beav. 62; Jones v. Smith, 1 Hare, 55; Geyser Marion Gold Min. Co. v. Stark, 106 Fed. 562, 45 C. C. A. 467, 53 L. R. A. 684; Shaw v. Spencer and Others, 100 Mass. 390, 97 Am. Dec. 107, 1 Am. Rep. 115; Mercantile Bank v. Parsons, 54 Minn. 64, 55 N. W. 825, 40 Am. St. Rep. 299. It is earnestly contended by the defendants that no- trust was imposed upon the title received by T. J. Watson, for the reason that the declaration of trust was not executed until three days after the execution of the deed. It is unimportant at what date the trust deed was executed. It is not disputed that the trust relation existed at and before the purchase of the property, and it is immaterial, so far as the rights of the complainants are concerned, whether the purchase price was $7,500, or $1,300, as contended for by the defendants. If it was $1,300, additional proof was thereby afforded of the mala fides of T. J. Watson, trustee. Whatever may [509] have been the consideration actually paid for the land, the facts remain that Sternfels and Rate paid their proportion as declared in the declaration of trust, the deed was taken in trust for them, and the trustee so acknowledged by the declaration. It is true that T. J. Watson in his deposition testified that the mortgage was made with the knowledge and consent of his co-owners of the property, but George B. Rate expressly denied that he ever was informed of or knew of the mortgage until after the commencement of the present suit. What Sternfels would have testified to had he lived cannot be known, but this much is shown: that on December 11, 1894 — 10 days after the complaint in the foreclosure suit was filed — he bought and paid for Watson’s nine-fifteenths interest in the property the sum of $1,739, and thereafter paid no attention to the mortgage or to the foreclosure suit, and never redeemed the property from foreclosure sale. It is not conceivable that he would thus have ignored the mortgage and the foreclosure thereof if he had had knowledge of either. In addition to this, T. J. Watson is effectually impeached by the testimony of witnesses as to his reputation in this community for truth and veracity. There is no proof that any part of the money raised upon the mortgage was expended upon the trust property, or that the other owners received the benefit thereof, although there is testimony tending to show that at some point of time not remote from the time when the mortgage was made a portion of the land was cleared. That fact alone, even if fully sustained by the evidence, would be no defense to the equitable relief which is sought by the complainants and the defendant Rate. The contention is made that, inasmuch as considerable sums were expended by Batchelder and his associates in improvements upon the property, those expenditures should, in equity, be a charge upon the other interests. But that fact presents no obstacle to the relief which is sought in the present suit. This is not to say that money so expended, if expended in good faith, may not hereafter be the basis of relief in a partition suit between the owners. There can be no question that the interest of T. J. Watson in the premises passed by the mortgage and foreclosure thereof notwithstanding his subsequent conveyance to Sternfels. Watson owned nine-fifteenths, and could lawfully mortgage his interest. As to the defense of laches, it is sufficient to say that the trust was an express one, and was never repudiated or denied by T. J. Watson otherwise than constructively by his act of mortgaging the property, and nothing came to the notice of Sternfels or Rate to show that the trust was denied, or that others claimed to hold the property adversely. The law applicable to such a state of facts is expressed in Speidel v. Henrici, 120 U. S. 377, 7 Sup. Ct. 610, 30 L. Ed. 718. The decree of the court will be that the complainants are the owners of four-fifteenths and that the defendant Rate is the owner of two-fifteenths of the property described in the complaint; that the defendants who hold the title to the interest of T. J. Watson [510] convey such interests to the complainants and the defendant Rate, respectively, within a time to be named in the decree; and that the complainants and defendant Rate recover their costs and disbursements in this suit.