Opinion
No. 29929
Decided December 13, 1944.
Limitation of actions — Period applicable determined from pleadings — Nature of demand and ground of action — Action against trustees for loss arising from breach of trust — Barred four years after trusteeship terminated, when — Section 12224, General Code.
1. The period of limitation within which an action must be commenced is determined from the nature of the demand and the ground of the action as set out in the pleadings.
2. An action against trustees of an express trust for loss of funds arising from a breach of trust involving tortious conduct such as bad faith, negligence and double-dealing, is one at law, the cause of action accrues, in the absence of undiscovered fraud, when the trusteeship as to such trustees is terminated, and the action is barred in four years by virtue of the provisions of Section 11224, General Code.
APPEAL from the Court of Appeals of Cuyahoga county.
A demurrer to the amended petition of the Superintendent of Banks, hereinafter called the superintendent, was sustained on the ground that the action was barred by the statute of limitations, and, the superintendent not desiring to plead further, final judgment was entered in favor of the defendants.
That judgment was affirmed by the Court of Appeals.
The case is here for review, a motion to certify the record having been allowed.
The amended petition discloses that in 1913, The Guardian Trust Company, formerly The Guardian Savings Trust Company, instituted a pension fund, later called the retirement fund, for the benefit of its employees; that the management and control of the retirement fund were placed in a board of trustees consisting of seven members — four selected by The Guardian Trust Company, two by the contributing employees, and the other member the president of the bank; that contributions to the fund were made by each subscribing employee while contributions in a like amount were made by the bank; that the defendants in this action, J. Arthur House, W.A. Daley, I.C. Bolton, A.W. Dean and A.S. Taylor, were continuously trustees of the retirement fund from January 21, 1930, until May 11, 1933, and were, during the same period, directors of The Guardian Trust Company; that prior to 1931 the money in the retirement fund was invested in mortgage securities purchased from The Guardian Trust Company; and that the trustees in May 1930 began to sell the mortgage securities and with the proceeds purchased capital stock of The Guardian Trust Company and continued to do so until March 1933 when they had purchased 1,565 shares. The amended petition further alleges that these shares were so acquired and retained as to amount to a breach of trust, which resulted in a great loss to the trust fund in question.
On May 11, 1933, other persons were selected as trustees, successors to the defendants herein, and succeeded to the management and control of this trust. The amended petition further alleges that "prior to 1937, certain claims against the Superintendent of Banks in said capacity were duly filed by the then existing trustees of the retirement fund of said The Guardian Trust Company, and certain claims for stockholder's liability were filed against said trustees, said existing trustees being successor trustees to the defendants herein; that said mutual claims were settled and as a result of said settlement said The Guardian Trust Company liquidation received approximately $80,000 on a claim which was originally for $156,500, and in addition thereto said Superintendent of Banks had assigned to him all the right, title and interest of said retirement fund, its successor trustees and beneficiaries, to any rights, claims or demands which said. parties had against the defendants herein as a result of the operation and management of said retirement fund; that said agreement containing said assignment was duly approved by the Court of Common Pleas of Cuyahoga county upon due application thereto in the year 1937."
On November 10, 1941, this action was instituted by the superintendent as assignee against the defendants individually to collect the sum of $80,000 paid out of the trust fund, in settlement of the superadded stock liability on the shares held by the trust, and to recover the loss to the trust fund, basing his right of recover on the assignment of the rights of the successor trustees to any claim which they had against such former trustees growing out of the latter's alleged breach of trust in the illegal purchase of bank stock as an investment for the trust.
The superintendent, in order to establish his cause of action against such former trustees as individuals, alleged in his amended petition that the purchase and retention of the shares of the capital stock of The Guardian Trust Company by the defendants involved a duality of interest in view of the defendants' official positions with the trust company; that the purchase and retention of such shares were made by them to prevent the stock from being placed upon the open market and thus depress the price of similar securities, held by themselves and also by the bank as trustee; that the defendants changed investments of the trust fund from sound investments to unsound ones; that they failed to use the requisite care and skill required of trustees under such circumstances; that they acquired and retained as investments bank stock which had imposed upon it by law an additional liability in the event of failure of the bank, when better and sounder investments were available; that they acquired a portion of such shares at a price higher than the market price; that they acquired and retained such stock when they knew or should have known that the financial condition of The Guardian Trust Company was unsound and unstable and knew or should have known of the probability of the assessment of double liability on the shares; and that the acquisition and retention of the shares were an abuse of discretion on the part of the defendants as such trustees.
The prayer of the original petition is for an accounting and for a "judgment against said defendants for the amount expended by said trustees for the shares of The Guardian Trust Company, to wit: $361,292.43, plus the amount expended for double liability, to wit, approximately $80,000, as aforesaid, with interest at the rate of six per cent (6%) from the respective dates of acquisition, or in the alternative such lesser amount as said account between said parties shows is due said plaintiff thereon, and for such other equitable relief as the court finds to be just in the premises." The prayer of the amended petition is for an accounting.
Mr. Thomas J, Herbert, attorney general, Mr. A.O. Husband, Mr. Homer H. Marshman, Mr. Harry A. Hanna, Mr. M.C. Harrison and Mr. Allan Hull, for appellant.
Messrs. Garfield, Baldwin, Jamison, Hope Ulrich, Messrs. Squire, Sanders Dempsey, Messrs. Boyd, Brooks. Wickham, Mr. Vernon R. Burt, Mr. Clan Crawford and Mr. W.D. Cole, for appellees.
The cause of action, if any, against the defendants as trustees arose when their jurisdiction and control over the res of the trust terminated. According to the amended petition this was on May 11, 1933. This action was commenced on November 10, 1941, eight years and six months after the alleged cause of action arose. The trial court held, and the Court of Appeals concurred in such holding, that the four-year statute of limitation, Section 11224, General Code, applied, and barred the plaintiff's cause of action. That section of the General Code is as follows:
"An action for either of the following cases, shall be brought within four years after the cause thereof accrued:
"1. For trespassing on real property;
"2. For the recovery of personal property, or for taking or detaining it;
"3. For relief on the ground of fraud;
"4. For an injury to the rights of the plaintiff not arising on contract nor hereinafter enumerated * * *."
It is the contention of the superintendent that this is an equitable rather than a legal action, dealing with an express trust, and that as a consequence the four-year statute of limitation above quoted has no application. On the other hand he claims that the ten-year statute of limitation, Section 11227, General Code, governs. That section of the General Code reads as follows:
"An action for relief not hereinbefore provided for, shall be brought within ten years after the cause thereof accrued. This section does not apply to an action on a judgment rendered in another state or territory."
The reasoning back of the superintendent's contention is that the four-year statute, now Section 11224, General Code, was first enacted as a catchall limitation statute in 1831; that all limitation-of-action statutes then applied to common-law actions and not to bills or suits in equity; that when the reformed procedure act of 1853, abolishing the distinctions between purely legal and equitable actions, was adopted, section 18 of the act, now Section 11227, General Code, was included as a new and additional catchall limitation statute with the intent and purpose that it apply to bar "relief" in actions in equity only; that if this were not the purpose and intent in adding section 18 of the act, its adoption was purposeless because the subject matter was already fully covered under section 15 of the act (the four-year limitation statute); and finally that the longer period of limitation provided by the ten-year statute is indicative of the fact that it was intended as a substitute for the defense of laches in equity jurisprudence which was traditionally reluctant to allow the mere lapse of time, without some negligence or fault on the part of a plaintiff, to defeat his right of action.
The superintendent alleged that as a direct result of the acts of the defendants in violation of their express trust, the value of the interest of the beneficiaries and successor trustees of the trust and of this plaintiff, the assignee of their interest, was diminished through the acquisition and retention of the shares, and through the payment of superadded liability imposed. What limitation period must be applied to the right of recovery against the defendants on a cause of action charging a breach of trust? This court has held that courts of equity are not open for the recovery of money unless some peculiarly equitable relief is sought ( Willson Improvement Co. v. Malone, 78 Ohio St. 232, 85 N.E. 51), and if there is an adequate remedy at law, an equitable action cannot be maintained. Chapman v. Lee, 45 Ohio St. 356, 13 N.E. 736.
In the case last cited this court held that an accounting in equity is not necessary in an action against several defendants charged with a conspiracy to defraud the plaintiffs thereby procuring for their own use a single sum of money which rightfully belonged to the plaintiffs and which plaintiffs were entitled to recover, and for which they sought a joint judgment against the defendants, notwithstanding that plaintiffs prayed for a full discovery and for an accounting for the full amount due them.
To bring a cause within the jurisdiction of a court of equity, it is requisite that the primary right involved be an equitable right as distinguished from a legal right, or that the remedy at law as to the right involved is not full, adequate and complete. 30 Corpus Juris Secundum, 338, Section 20. A court of equity will not ordinarily take jurisdiction where a money judgment is the ultimate relief sought. Weidman v. Weidman, 274 Mass. 118, 174 N.E. 206, 76 A.L.R., 1359.
The period of limitation within which an action must be commenced, is determined from the nature of the demand and the ground of the action as set out in the pleadings. When a fiduciary relationship exists and there is a breach of trust through mistake, illegal action, bad faith or fraud, the beneficiary may have an accounting. If the basis of the breach of trust is fraud, the four-year statute (Section 11224, General Code) clearly applies, because the action is "for relief on the ground of fraud."
By a divided court, this court has held that a cause of action by one partner against his copartner for accounting on dissolution of the partnership, where there were no bad faith, illegality or fraud, and no wrongful disposition of funds on the part of the defendant partner, is barred by the ten-year statute of limitation. Gray v. Kerr, 46 Ohio St. 652, 23 N.E. 136. But this court has, on numerous occasions, held that Section 11224, General Code, and its predecessor, Section 4982, Revised Statutes, applies to equitable as well as legal actions. Carpenter v. Cincinnati Whitewater Canal Co., 35 Ohio St. 307, 316; Howk v. Minnick, 19 Ohio St. 462, 2 Am.Rep., 413; Combs v. Watson, 32 Ohio St. 228; Loffland v. Bush, 26 Ohio St. 559. And this court has subsequently held that where an executor or administrator has filed in the Probate Court an account of final distribution and the same has been approved and confirmed by the court, and the executor or administrator discharged from the trust, such account is conclusive unless impeached for manifest error or for fraud within four years after the discovery of the fraud. Henry, Exr., v. Doyle, Exr., 82 Ohio St. 113, 91 N.E. 990, 137 Am. St. Rep., 769.
Other courts in this state have made similar holdings. For instance, it has been held that where an action is brought by a corporation against its promoter to recover secret profits, the ground of the action is not fraud, although fraud may be averred in the petition. The action is not one for "relief on the ground of fraud" within the meaning of Section 11224, General Code, but the ground of the action in such case is breach of duty. The action is nevertheless covered by that statute. Marblehead Bank Co. v. Raridon, 4 Ohio App. 468.
An action by a corporation to recover damages for the ultra vires and negligent acts of its former directors and officers is based on the common-law rule which renders every agent liable who violates his authority or neglects his duty to the damage of his principal, and such action is one "for an injury to the rights of the plaintiff not arising on contract nor hereinafter enumerated" and must be brought within four years after the cause of action accrues. Minster Loan Savings Co. v. Laufersweiler, 67 Ohio App. 375, 36 N.E.2d 895. And the court in the case of Hilliker v. Grand Lodge, K. of P., 112 F.2d 382, held that a cause of action for the recovery of funds allegedly withdrawn with the connivance of the Superintendent of Banks, subsequent to the taking over of a bank for liquidation, is barred in four years under Section 11224, General Code.
But what limitation bar shall be applied where the cause of action is based upon the tortious conduct of trustees involving bad faith and negligence in purchasing for a trust investment shares of stock of a corporation in which they are directors, where the action, if maintained, will result in a money judgment measured by the loss suffered by the trust?
It is a general rule that when a trustee has terminated his trust and parted with control of the property, the statute of limitation begins to run in his favor as to a cause of action against him for breach of trust ( Barnes v. Barnes, Admx., 282 Ill. 593, 118 N.E. 1004, 4 A. L. R., 4) and after the trust relationship is at an end and the trustee has yielded the estate to a successor, the running of the statute begins and only actual or intentional fraud will be effective to suspend it. Spallholz v. Sheldon, 216 N.Y. 205, 110 N.E. 431. See, also, Daugherty v. Daugherty, 116 Iowa 245, 90 N.W. 65; Gibson v. Gillespie, 291 Pa. 77, 139 A. 588.
Under the facts set out in the amended petition, the operation of the trust in question had terminated and the trust was dead. The trustees had resigned and the creator of the trust was in the process of liquidation. The question presented does not relate to dereliction in the operation of an active, existing, express trust, but to the recovery of loss alleged to have occurred through the tortious conduct of the defendants while acting as trustees, and incidentally to the proper distribution of that recovery, if and when made. The primary issue was whether the defendants, as individuals, were guilty of tortious conduct resulting in loss to the trust while the issues with reference to the amount of recovery and its distribution arose only in the case the primary issue was determined against the defendants.
This court has heretofore held that an action is equitable if it is necessary to determine first whether the plaintiff is entitled to equitable relief before legal redress can be granted; but if the primary or paramount relief sought is legal and the equitable redress merely incidental, it is an action at law. Nordin v. Coulton, 142 Ohio St. 277, 51 N.E.2d 717; La Bounty v. Brumback, 126 Ohio St. 96, 184 N.E. 5. And it has been held that an action by a beneficiary claiming damages from a trustee for his breach of duty in refusing to pay or deliver the trust fund, or in making improper investments, is one at law, triable by a jury. Dettenhorn v. Hartford National Bank Trust Co., 121 Conn. 388, 185 A. 82. See, also, Minster Loan Savings Co. v. Laufersweiler, supra; United States v. Bitter Root Development Co., 200 U.S. 451, 475 and 478, 50 L.Ed., 550, 26 S.Ct., 318; City of Sedalia, ex rel. Bauman, Treas., v. Standard Oil Co. of Indiana, 66 F.2d 757, 95 A. L. R., 1514.
It is the policy of the law, as disclosed by our scheme of statutes of limitation of actions, to require actions which involve the alleged tortious conduct of a defendant to be asserted and prosecuted promptly unless concealment or undiscovered fraud on the part of the defendant is found to exist, for which exceptions are usually made in the general plan for limitation of actions.
We conclude that since this action is based upon an alleged breach of trust on the part of the defendants, it is one for "an injury to the rights of the plaintiff not arising on contract nor hereinafter enumerated" and is governed by Section 11224, General Code, popularly known as the four-year statute. The demurrer to the amended petition was properly sustained and the judgment of the Court of Appeals is affirmed.
Judgment affirmed.
WEYGANDT, C.J., MATTHIAS, ZIMMERMAN and WILLIAMS, JJ., concur.
BELL, J., concurs in judgment.