Opinion
December Term, 1852
Daniel Lord, for appellant. Charles Tracy, for respondents.
The assignment in question contained a clause by which it was mutually agreed between the parties thereto, that the assignee should not be liable or accountable for any loss that might be sustained by the trust property or the proceeds thereof, unless the same should happen by reason of the gross negligence or wilful misfeasance of the assignee.
It is difficult to conceive what motive led to the insertion of this provision in the assignment, unless it had, or was supposed to have the effect of qualifying the responsibility of the assignee, and of exempting him from accountability in cases where he might otherwise have been accountable. Nevertheless if the clause be a mere nullity, it ought not to vitiate the assignment. The question therefore is whether a trustee for the benefit of the creditors of a failing debtor is responsible for any neglect or mismanagement of the trust not amounting to "gross negligence or wilful misfeasance."
Every man who is entrusted with the property of another is bound to exercise in relation to its custody, management and disposition, a certain degree of diligence, according to the nature and circumstances of the case. According to the elementary books there are three degrees of diligence, for the exercise of which every bailee or trustee is responsible in the discharge of his duty to the real owner or beneficiary of the property. These three degrees are denominated high or great diligence, common or ordinary diligence, and slight diligence. High or great diligence is that with which prudent persons take care of their own concerns. Common or ordinary diligence is that which men in general, exert with respect to their own concerns: and slight diligence is that with which persons of less than common prudence, or indeed of any prudence at all, take care of their own concerns ( Story on Bailments, §§ 11 to 16).
Negligence is also divided into three corresponding degrees: Gross negligence is the want of slight diligence; ordinary negligence is the want of ordinary diligence; and slight negligence is the want of high or great diligence ( Story on Bailments, § 17). These distinctions are sufficiently obvious to the mind in theory; but it must be admitted that their practical application to particular cases is sometimes difficult. They appear however to be well established and generally acknowledged; and the clause in the assignment which gives rise to the present controversy, seems to have been drawn with reference to their existence and practical operation. The assignee is not exempted from accountability for gross negligence, but is exonerated from the consequence of negligence in any inferior degree.
The creditors of Mr. White were the beneficiaries in the trust created by the assignment. They became the owners in equity of the assigned property. They were entitled to the whole of it until their debt should be satisfied; and to all the rights and remedies which the law would have given them if they had created the trust.
A failing debtor by an assignment puts his property where it can not be reached by ordinary legal process. He puts it into the hands of a trustee of his own selection; often his particular friend, sometimes a man to whom the creditors would not have been willing to confide such a trust. The debtor has an interest in the application of the trust funds to the payment of his debts; but the creditors have usually a far greater interest therein; and that interest depends in many cases on the competency and diligence of the assignee. The debtor can not be permitted by creating a trust for his creditors to place his property where it can not be reached by ordinary legal remedy, and at the same time exempt the trustee from his proper responsibility to his creditors.
What degree of diligence, then, would the assignee have been bound to exercise in the business of his trust if the clause in question had been omitted? This question is answered by one elementary writer in these words: "A trustee is bound to manage the trust property for the benefit of his cestui que trust with the care and diligence of a provident owner" ( Willis on Trustees, 125); and by another as follows: "A trustee is called upon to exert precisely the same care and solicitude in behalf of his cestui que trust as he would do for himself, but greater measure than this a court of equity will not exact" ( Lewin on Trustees, 152). And in Story's Equity it is said that where a trustee has acted in good faith in the exercise of a fair discretion, and in the same manner as he would ordinarily do in regard to his own property, he ought not to be held responsible for any losses accruing in the management of the trust property (§ 1272). The first of these writers measures the liability of the trustee by the diligence of a provident owner. The two last mentioned, by the diligence of the trustee in his own concerns. But there is no substantial difference between them. The degree of diligence which a trustee uses in his own affairs can not properly be the subject of judicial inquiry. Every trustee must be presumed by the court before whom his account is taken, to use in his own concerns such diligence as is commonly used by all prudent men ( Jones on Bailments, 30). The diligence of a provident man therefore is the measure of a trustee's duty If it were otherwise there would be one rule for a careless, and a different rule for a vigilant trustee; and the careless trustee would be exonerated in the same case in which the vigilant would be held liable. This was never intended, either by the elementary writers or by the authorities from which they deduce these conclusions.
In section 1268 of Story's Equity it is suggested that in as much as a trustee is not entitled to a compensation for his services, he would seem upon analogous principles applicable to bailments, to be liable only like a gratuitous bailee, for gross negligence. But he adds, however, that it would be difficult to affirm that courts of equity do in fact always limit the responsibility of trustees, or measure their acts by such a rule.
In some of the English decisions the liability of a trustee seems to have been determined upon the analogy between a trust and a gratuitous bailment, but such a rule can not be applicable to trustees within this state, because they are in fact entitled to compensation by way of commissions on moneys received and paid (9 Paige, 403, Meacham v. Sternes); and although the smallness of their compensation may be a good reason for judging them with indulgence and liberality, they can not be placed on the footing of gratuitous bailees.
But in the case under consideration the assignment gives the trustee the right to retain the expenses of the trust and a reasonable compensation for his services in its execution. He stands therefore in regard to his obligation to exercise diligence, in the light of a paid agent for the parties interested, and not in that of a gratuitous bailee or trustee. Such an agent is liable for ordinary negligence, or the want of that degree of diligence which persons of common prudence are accustomed to use about their own business and affairs ( Story on Agency, § 183).
The debtor therefore has in this assignment exonerated the trustee from the duty of exercising ordinary diligence in the execution of the trust; and the creditors if they act under it and claim or accept dividends, are bound by its terms and conditions. In case of a loss in the collection of the assets, or in the keeping or the management of the trust fund, for the want of that degree of diligence, the loss must fall on them. A case might happen in which a great portion of the fund might be lost in this way. A failing debtor can not be permitted to put at hazard the trust fund which justly belongs to his creditors, by authorizing the trustee to manage it without due prudence and caution.
It was suggested upon the argument that the covenant of the trustee to execute the trust to the best of his ability, bound him to exercise all the diligence required by his duty as trustee. But this is qualified, and we think controlled, by that which immediately follows, and exonerates him from liability. Such doubtless was the meaning of the parties, and so the instrument is to be understood.
The judgment below ought to be affirmed.
MORSE, J., being related to the parties gave no opinion.
Judgment affirmed.