Opinion
Decided March 9, 1936.
Trusts — Testamentary — Investment in trust funds — Prohibition by settlor against commingling general and special trust funds — Investment in securities of same obligor not a breach of trust, when — Investment in undivided land trust certificates not a commingling, when — Purchase from trust estate by trustee not breach of trust, when.
1. Where a testator, by will, establishes a special trust and a general trust with directions that the special trust fund shall be kept separate from the general trust fund but grants to the trustees general discretionary powers with regard to the investment of the trust estate, the trustee does not breach its trust obligations by investing portions of both trust funds in securities issued by the same obligor.
2. In such case a purchase by the trustee, as trustee of the special fund, from itself, as trustee of the general fund, does not violate the rule that the trustee may not sell to or buy from the trust estate.
3. It is not a violation of such settlor's direction to keep the general and special trust funds separate, for the trustee to invest money from both funds in a single undivided land trust certificate. Land trust certificates are mere muniments of title to an equitable interest in real estate and such undivided interests are incapable of losing their identity and becoming commingled.
ERROR: Court of Appeals for Allen county.
Mr. John L. Cable, for plaintiffs in error.
Messrs. Thornberg Lewis, for defendants in error.
This cause comes into this court on error from a judgment of the Common Pleas Court of Allen county, Ohio, sustaining exception number 3 to the third and final account of The Lima First American Trust Company, trustee, and I.J. Fulton, superintendent of banks, etc.
The trust in question is a testamentary trust created by the will of R.L. Graham, deceased, the pertinent parts of which are as follows:
"In the name of the Benevolent Father of all, amen:
"I, R.L. Graham of the city of Lima, county of Allen and state of Ohio being of sound and disposing mind and memory, do make, publish and declare this my last will and testament, hereby revoking and making null and void all other wills and testaments by me made heretofore.
"First — My will is that all my just debts and funeral expenses shall be paid out of my estate as soon after my decease as shall be found convenient.
"Second — I give, devise and bequeath to Ersel Towsley, of Midland, Michigan, daughter of my wife, the sum of two thousand dollars ($2000.00) to be paid to her outright and in cash by my executor, within one year after my decease.
"Third — All the rest and residue of my estate, real, personal and mixed, of whatever kind and wherever situated and howsoever constituted, which I may have and own or have the right to dispose of at my decease, I give, devise and bequeath to The Lima Trust Company, of Lima, Ohio, in trust, however, upon the trusts and for the uses and purposes following, to wit:
"1. * * *
"2. I direct that my trustee herein, out of the body of my estate, set aside the sum of thirty thousand dollars ($30,000.00) which said sum I hereby give, devise and bequeath in equal shares of ten thousand dollars ($10,000.00) each to my beloved sisters, Miss Stella Graham of Cleveland, Ohio, Mrs. Laura Crider of Lima, Ohio, and Miss Anna Graham of Barnesville Ohio, upon the following terms and conditions; my said trustee shall set apart said fund, and keep same apart from my general estate, and invest the same and add the income therefrom to the original trust fund; my said trustee shall pay out and distribute the said fund with the income therefrom, to each of my said sisters hereinbefore named, in monthly payments of one hundred dollars ($100.00) to each, and in no other manner until said trust fund is entirely exhausted and used up; upon the death of any one of my said sisters, the monthly payment shall continue as before, to the heirs or legal representatives of such decedent. It is my will and purpose hereby, so that there can be no misunderstanding about it, to give to each of my said sisters the sum of ten thousand dollars ($10,000.00), but to give it to them and to their heirs in monthly payments of one hundred dollars ($100.00) each and not otherwise; and I direct that my general estate shall bear whatever cost and expense there may be upon the part of my said trustee, in carrying out this provision and that said special fund of thirty thousand dollars ($30,000.00) shall bear no part thereof.
"3. I direct that my said trustee pay to my father, Thomas J. Graham, of Barnesville, Ohio, the sum of one hundred dollars ($100.00) per month for the remainder of his lifetime, and said payments are hereby made a charge upon my general estate.
"4. All the net income from my said estate remaining after taking care of the provisions hereinbefore made, with the exceptions of the provisions of paragraph 2 preceding which is separate and apart and the income from which is therein provided for and distributed, and after taking care of taxes and the costs, and expenses of administration and of the trust herein created, I direct shall be divided between and paid to, in equal parts, my daughter Clara L. Van Duersen, and my grandson, Duncan A. MacDonnell; such payments of income to be made at such times and in such manner as my said trustee may elect, but at least annually.
"Fourth — Subject to the terms and provisions of the foregoing trust, and after making provision that all of the foregoing provisions shall be fully carried out as directed by me herein, I give, devise and bequeath all the rest and residue of my estate to my daughter, Clara L. Van Duersen, and my grandson, Duncan A. MacDonnell, in equal parts, share and share alike, to them and their heirs forever, but subject to the following qualification, viz: The one half share thereof to which my daughter, Clara L. Van Duersen is entitled, shall in no event be turned over to her, nor shall she be entitled to obtain possession thereof by any proceeding whatsoever, until the period of ten years (10) shall have elapsed after my decease; and the one half share thereof to which my said grandson, Duncan A. MacDonnell, is entitled, shall in no event be turned over to him, nor shall he be entitled to obtain possession thereof by any proceeding whatsoever, until he shall have attained the age of thirty (30) years. In the event of the death of either my said daughter or my said grandson, the share of such decedent in my said general estate herein provided for, shall go to become the sole property of the survivor, but subject to all the conditions herein set forth.
"Fifth — The said trustee herein named, or its successor or successors in such trust, shall hold, manage and control such property during the continuance of such trust with power as to real estate to improve, lease, rent, sell, exchange and convey the same or any part thereof, for such prices or rents, and upon such terms and conditions as my said trustee, in its discretion, may deem best, including the power to lease for any terms, irrespective of the period of the trust; and as to the personal property, to hold, control, sell, invest and reinvest, the same in such manner as it may think best, with full power of converting realty into personalty and personalty into realty. Said trustee shall have full power to compound, compromise and adjust all claims and demands in favor of or against said estate or said trust estate, upon such terms and conditions as it may seem best.
"Sixth — I hereby nominate and appoint The Lima Trust Company of Lima, Ohio, executor of this my last will and testament."
The Lima First American Trust Company, trustee, filed its third and final account with the Probate Court of Allen county, Ohio, as trustee of the trust fund created by Paragraph 2 of Item Third of the will showing an investment of $5050 of that trust fund in an undivided 5/14 interest in Land Trust Certificate No. 1183 of the Cleveland Athletic Club Building Site; the remaining 9/14 undivided interest therein being an investment of funds not included in such trust fund but belonging to the trust estate of R.L. Graham, deceased, in the possession of the trust company, as trustee.
To this account the exceptors, who are the beneficiaries of the trust fund in question, filed exceptions in the Probate Court. The exception, which is the only one sustained by the Common Pleas Court and the only one pertinent to this error proceeding, is in the following words, to wit:
"Now comes Stella Graham, Mrs. Laura Crider and Anna Graham and represent to the court that they are beneficiaries of the trust created by the estate of R.L. Graham, decased, and they except to the Third and Final Account herein filed . . . and say that said account is not true and correct in the following matters, to wit: * * *
"3. Said account shows $5050 of trust funds invested in the Cleveland Athletic Club Building Site Land Trust Certificates, whereas the fact is that said The Lima First American Trust Company, as trustee, has invested $5050 of the funds of said trust in an undivided 5/14 interest in Land Trust Certificate No. 1183 on the Cleveland Athletic Club Building Site; the remaining 9/14 undivided interest therein being an investment of funds belonging to the general estate of said R.L. Graham, deceased, and such mingling of funds is in violation of that provision of the will creating said trust which required that the same should be kept separate and apart from the general estate of said decedent and said investment thereof constituted a breach of said trust. Said Land Trust Certificate and the undivided 5/14 interest therein is not such an investment of trust funds as is authorized by law and said investment therein constitutes a breach of said trust. Exceptors further say that the value of said undivided interest in said Land Trust Certificate since the pretended investment of trust funds therein, has fallen until the same is now practically worthless and exceptors ask that this exception be sustained and that the said Superintendent of Banks of the state of Ohio be ordered and directed to replenish the trust fund out of the funds of the Lima First American Trust Company by the amount invested in said undivided interest in said Land Trust Certificate."
The uncontroverted facts in this case as shown by the record are as follows:
R.L. Graham died on October 20, 1929. His will was admitted to probate on October 25, 1929. On March 1, 1930, under order of the Probate Court of Allen county, Ohio, The Lima Trust Company, executor, under the will of R.L. Graham, deceased, for the purpose of carrying out the provisions of Paragraph 2 of Item Third of the will paid over and delivered to itself as trustee of the trust fund created by that paragraph, the sum of $30,000 in notes of the Colonial Finance Company, and the trustee accepted the same and thereafter carried the same in its records and accounts as a trust fund under the provisions of Paragraph 2 of Item Third of the will.
This trust fund, which will be hereinafter referred to as the "special trust fund" to distinguish it from the other trust funds in the possession of the trustee under the will, which will be designated as the "general trust fund," remained invested in Colonial Finance Company notes until May 9, 1931, when the trustee, who was also executor of the will of R.L. Graham, deceased, and trustee of the general trust fund, in order to procure cash to liquidate an overdraft in the sum of $5000 on the account of the special trust fund, arising from the payment of a check in the sum of $5050 issued by the trustee of the fund on April 15, 1931, to Hayden, Miller Company of Cleveland, Ohio, in payment for the purchase of Cleveland Athletic Club Land Trust Certificate No. 1138 for 5/1850 equitable interest, hereinafter referred to, cashed in something in excess of $5000 of the Colonial Finance Company notes belonging to this trust, and used in the cash in payment of that overdraft.
The details with reference to the purchase of such land trust certificate are as follows:
At his death R.L. Graham, the decedent, was the owner of 19/1850 equitable interest in the Cleveland Athletic Club building site evidenced by Land Trust Certificate No. 909 thereof. This is shown by the executor's original inventory dated November 12, 1929, appearing as Item No. 13 in Schedule F (Securities) at an appraisal of $18,620. In the executor's amended inventory dated December 23, 1929, the certificate appears at the same appraised value but is listed as real estate under Schedule H. Included in the real estate Schedule G-1, in the first and final account of the executor filed December 19, 1930, is Certificate No. 909; and the executor's account of final distribution filed March 30, 1931, includes in the real estate Certificate No. 909 transferred to The Lima Trust Company as trustee free of the dower interest of the decedent's widow, Margaret Jane Graham.
On April 4, 1931, The Lima Trust Company, in order to make distribution of the decedent's estate, through its assistant trust officer, forwarded Land Trust Certificate No. 909 to Hayden, Miller Company, of Cleveland, Ohio, with instructions to sell the certificate at the present market value plus accrued rental, and asking that the company transfer the certificates as follows, billing the trust company separately for each account:
$9,000.00 — The Lima Trust Company, Trustee U/W of R.L. Graham, deceased.
5,000.00 — The Lima Trust Company, Agent for Margaret Jane Graham U/A dated March 19, 1931.
$9,000.00 — The Lima Trust Company, Trustee U/W of R.L. Graham, deceased.
Hayden, Miller Company, following these instructions, together with supplemental instruction, issued its check to the trust company for the market value of the certificates, and the trust company in turn issued its checks to Hayden, Miller Company for the market value of the certificates, plus their commission, and Cleveland Athletic Club Building Site Land Trust Certificates were issued in place of Certificate No. 909 as follows:
The Lima Trust Company, Trustee U/W of R.L. Graham, deceased:
5/1850 Certificate No. 1138 9/1850 Certificate No. 1139
Margaret Jane Graham:
5/1850 Certificate No. 1140.
Upon receipt of such certificates by the trust company about April 15, 1931, Certificate No. 1138 was allocated to and thereafter carried as a part of the special trust fund, and Certificate No. 1139 was allocated to and carried as a part of the general trust fund.
On June 20, 1931, The Lima Trust Company as trustee of the trust in question, sold its assets to The Lima First American Trust Company which as part of the consideration for such assets assumed its liabilities.
On April 8, 1932, Certificates No. 1138 for 5/1850 and No. 1139 for 9/1850 interest in the land trust of the Cleveland Athletic Club were surrendered to be reissued in the name of The Lima First American Trust Company, as trustee of the respective trusts, the certificates at that time being carried in the name of The Lima Trust Company, as trustee.
Instead of reissuing the certificate in two separate units, the re-issued Certificate No. 1183 was for 14/1850 rather than for 5/1850 and 9/1850. A 5/14 interest in said reissued certificate was thereafter carried on the books of the trustee as an investment and part of said special trust fund.
After the filing of the third and final account and exceptors' exception thereto, to wit, on September 6, 1933, the Superintendent of Banks then in charge of the liquidation of The Lima First American Trust Company caused Certificate No. 1183 to be divided, and took as a part thereof Certificate No. 1332 for five units, which he claims is the property of this trust, and Certificate No. 1233 for nine units, which he claims is the property of the general trust fund.
The first account of the bank as trustee of this trust was filed November 14, 1931, and discloses that on April 15, 1931, the trustee of executors' trust estate acquired the 5/1850 interest in the Cleveland Athletic Club Land Trust Certificate and received all rentals from such certificate. The second account of the bank as trustee of this trust was filed December 10, 1932, and discloses four receipts of rentals by reason of the Cleveland Athletic Club Land Trust Certificate in question. The exceptors did not file exceptions to either of these accounts by reason of the fact that the trust estate contained the Cleveland Athletic Club Land Trust Certificates now complained of. The third account, being the account to which the exceptions were filed, shows the investment of $5050 in the Cleveland Athletic Club Land Trust Certificates.
The land trust units, which the trustee of this trust acquired at a price of 101, were of the market value of 31 at the time of the trial of this cause in the Probate Court, and the market value of the certificates had declined during the period in which Certificates Nos. 1138 and 1139 were combined in Certificate No. 1183.
It will be noted that the exceptions are based on the lack of authority of the trustee to make the investment, and not on any claim of bad faith.
On the account and exceptions thereto, the record, and the petition in error, the following questions are raised:
1. Whether the trustee of the special trust fund created under Paragraph 2 of Item Third of the will was authorized to invest the funds of such trust in the Cleveland Athletic Club Land Trust Certificates.
2. If the foregoing question is answered in the affirmative, whether the trustee of the trust fund created in Paragraph 2 of Item Third of the will was authorized to purchase from itself as trustee of the general trust fund of said estate, through a brokerage firm as intermediary, the five units represented by Cleveland Athletic Club Land Trust Certificate No. 1138.
3. And if both the foregoing questions are answered in the affirmative, whether the conversion by the trustee of Certificates Nos. 1138 and 1139 into Certificate No. 1183 evidencing the units covered by both certificates, and carrying the 5/14 interest in the units represented by Certificate No. 1138, as an investment of the trust created in Paragraph 2 of Item Third of the will, was a violation of the direction contained in said Paragraph 2 that "my said trustee shall set apart said fund, and keep same apart from my general estate."
We will discuss these questions in the order mentioned.
1. It will be noted that under the provisions of Item Third of the will all the rest and residue of decedent's estate after certain specific bequests is devised and bequeathed to the Lima Trust Company in trust upon the terms and for the uses and purposes mentioned in the will. In the four numbered paragraphs of Item Third four separate and distinct trusts are created. The trust provided in paragraph No. 1 was for the wife, but contained a condition to the effect that the provisions become null and void if the wife should decline to take under the will. As she declined to take under the will it is not necessary to discuss these provisions. The second paragraph creates the trust in question, the beneficiaries of which are the sisters of the deceased, the exceptors to the account.
The third paragraph creates a trust of which the father of the deceased is the beneficiary. The fourth paragraph creates an income trust the beneficiaries of which are a daughter and grandson of the decedent. The only provision of Item Third with reference to the investment of trust funds is contained in Paragraph 2 thereof and is applicable only to the special trust fund, and is as follows:
"My said trustee shall set apart said fund, and keep same apart from my general estate, and invest the same and add the income therefrom to the original trust fund."
Under the provisions of Item Fourth of the will the testator, subject to the terms and provisions of the trust provided for in Item Third, devises and bequeaths all the real estate and residue of his estate to his daughter, Clara L. Van Duersen, and his grandson, Duncan A. MacDonnell. There is no provision in this item covering investment of trust funds.
Under the Fifth Item power is conferred on the trustee as to the personal property "to hold, control, sell, invest and reinvest, the same in such manner as it may think best, with full power of converting realty into personalty, and personalty into realty."
This fifth item contains no language indicating that it was the intention of the testator to limit this grant of powers to any specific provision of the will. The grant, being general in terms and not limited to any specific item, and being contained in an item in the will separate and apart from any provision creating a trust, applies to all the property devised and bequeathed to the trust company in trust. The provision contained in Paragraph 2 of Item Third above referred to is solely a direction to invest, while the provisions of Item Fifth, above referred to, fix and determine the limits of the power and the manner of investment and authorized the trustee to invest the trust fund created by said Paragraph 2 of Item Third in such manner as it might think best, with full power of converting realty into personalty and personalty into realty. This being the case, the trustees of the trust fund provided in Paragraph 2 of Item Third were authorized by the terms of the will to invest the trust funds in the land trust certificates in question.
2. The first question having been answered in the affirmative, we will now consider the second question. As The Lima First American Trust Company succeeded to the liabilities as well as the assets of The Lima Trust Company so as to make the former liable for breaches of trust committed by the latter, it now devolves upon us to consider whether The Lima Trust Company's purchase, as trustee of the special fund, from itself, as trustee of the general fund, was a breach of trust. It is a well settled rule of law relating to trusts that a trustee in his individual capacity may not either sell to or purchase from the trust estate. The law does not stop to inquire into the fairness of the sale or the adequacy of the price, but stamps its disapproval upon a transaction which conflicts between the self-interest and the integrity of the trustee. The purpose of this rule is to remove all temptation from a trustee to defraud the trust estate through incentive to personal profit by individual transactions with it. In transactions between a trustee of one trust fund and the same person acting as trustee of another trust fund there can be no incentive of personal profit, and consequently no incentive to defraud and therefore no reason for the application of the rule mentioned. There being no reason for the application of the rule, the rule does not apply to such transactions.
There was no fraud, either actual or constructive, in the transaction between the bank, as trustee under Paragraph 2 of Item Third, and of other funds in its hands as trustee. The purchase and sale were made at the market price and no individual profit was derived by the trustee from the transaction. Ignoring the intermediary entirely in the transaction and considering the sale as a sale by the trust company as trustee of one fund to itself as trustee of another fund, the transaction was valid and did not constitute a breach of trust.
3. The next question relates to the question as to whether there was a breach of trust on the part of the trustee by way of commingling trust funds in violation of the provisions of the will. The original investment of the trustee of the trust fund created by Paragraph 2 of Item Third of the will was evidenced by a single trust certificate for 5/1850 interest in the Cleveland Athletic Club Land Trust Certificate, and, being authorized, did not constitute a breach of the condition of the will, that the fund should be kept separate, or a commingling of the trust estate. It is, however, contended that the conversion of this certificate with another certificate which the trustee held under other provisions of the will, into a certificate for 14/1850, the equitable interest and the allocation to the trust in question on the books and accounts of the trustee of an undivided 5/14 interest in such certificate constitutes a violation of the provisions of the will and a commingling of the trust funds, although subsequent to the filing of exceptions herein such substitute certificate was converted into two certificates of five and nine units, respectively, and the certificate representing five units was allocated to the trust in question.
Land trust certificates are muniments of title to equitable interests in real estate. The equitable interest in the real estate therefore constituted the corpus of the investment, and the trust certificates were only evidence of the investment. The conversion of the certificates of five and nine units into a certificate for fourteen units did not change the investment in any manner, but only changed the evidence of the investment, and the allocation of a 5/14 interest under this certificate to the trust fund in question separated this investment from the investment of other funds of the estate, as 5/14 of an undivided 14/1850 equitable interest is exactly the same as an undivided 5/1850 equitable interest, and such allocation entitled the trustee and the beneficiary of the special trust fund at any time to have such interest evidenced by separate certificate.
The rule of law as to commingling relates only to personal property and applies only to such items of personal property as have separate identities and are susceptible of blending in a mass with consequent loss of identity, and can not, from its nature, have any application to undivided interests in real estate which are of such a character that they are incapable of separation or identification, and cannot have any application to the evidences of the ownership thereof. Consequently the action of the trustee in the respects mentioned did not constitute a violation of the provisions of the will, or a commingling of funds, or a breach of trust.
For the reasons mentioned, the judgment of the Common Pleas Court sustaining such exception is contrary to law in that it is not sustained by any evidence, and this court, entering the judgment upon the uncontroverted facts the Court of Common Pleas should have entered, will enter final judgment in favor of plaintiffs in error at the cost of defendants in error.
Judgment reversed and final judgment for plaintiffs in error.
KLINGER, P.J., and CROW, J., concur.