Summary
In Republic Nat. Bank Trust Co. v. Bruce, 130 Tex. 136, 105 S.W.2d 882, the court held it is the absolute and positive duty imposed on a trustee to defend the life of the trust whenever it is assailed.
Summary of this case from Hartt v. HarttOpinion
No. 6839.
Decided June 9, 1937. Rehearing overruled July 28, 1937.
1. — Trusts and Trustees.
The safety of a trust fund is the first care of the law, and a trustee of an express trust who has not spent same for trust purposes can not deny that the fund is still in his care and keeping, and having once accepted the trust he is bound to perform all the duties of same until he is discharged, either by removal and a new trustee substituted in his stead, by proceeding before the proper court, or by agreement of interested parties, or by the instrument itself, if provision be made therein for such change, but he can not voluntarily by his own action be relieved of any of the duties imposed upon him by the trust instrument, and good faith is no defense where he oversteps the bounds of his authority or has been guilty of negligence in the exercise of proper diligence regarding the trust.
2. — Trusts and Trustees.
The relationship between a trustee and the trust estate which he handles being personal and confidential, the law demands of him a strict accounting to both the letter and spirit of his contract, and it is his positive and absolute duty to defend the life of the trust whenever it is assailed, if the means of defense are known or can, with diligence, be discovered by him.
3. — Trusts and Trustees — Parties.
In a suit for breach of a trust, the trustee and the beneficiaries under the trust estate are the real owners thereof and are necessary parties to any proceeding affecting the existence of said trust.
4. — Pledges — Receivers.
A pledgee is entitled to the possession of pledged property, as against a receiver of the pledgor.
Error to the Court of Civil Appeals for the Eighth District, in an appeal from Dallas County.
Suit by Mrs. Nell G. Bruce, joined by her husband, Alf M. Bruce, against the Republic National Bank and Trust Company, to recover for the alleged conversion of certain securities which had been held by the defendant as trustee. Judgment in favor of defendant was reversed and rendered by the Court of Civil Appeals ( 74 S.W.2d 461), and defendant has brought error to the Supreme Court.
The case was referred to the Commission of Appeals, Section B, for their opinion thereon and the Supreme Court adopted same and ordered judgment entered in accordance therewith.
Judgment of the Court of Civil Appeals is affirmed.
T. B. Reese, S.W. Marshall, and H. W. Whisenant, all of Dallas, for plaintiff in error.
Leake, Henry Golden, of Dallas, for defendants in error.
It is the duty of the trustee to retain the custody of the securities for the protection of the legal holders of the secured obligations in accordance with the trust agreement, and a surrender of the securities by the trustee is a conversion of them for which it is responsible to a holder of the secured obligation. City of Houston v. Allred, 123 Tex. 35, 66 S.W.2d 655; Ex parte Renfro, 115 Tex. 82, 273 S.W. 813; Gardner v. Goodner Gro. Co., 113 Tex. 423, 256 S.W. 911.
We give here only the substance of the controlling facts in this case. A more detailed statement will be found in the opinion of the Court of Civil Appeals. Bruce et al. v. Republic National Bank Trust Co., 74 S.W.2d 461.
The North Texas Trust Company was the owner of paving certificates. In 1927 a trust instrument was executed and delivered by it, naming the North Texas National Bank trustee, and the holders of "Participation Certificates" as beneficiaries. By its terms such "Participation Certificates" were to be issued by it to an amount not greater than the total amount of paving certificates deposited with the trustee as security for the "Participation Certificates." Such securities were so deposited, and "Participation Certificates" issued in an amount approximately equal to the total of the amount of paving certificates deposited as the underlying and sole security therefor. Thereafter Mrs. Bruce, hereafter designated plaintiff, purchased 12 of these, of the value of $1,000 each. The Republic National Bank Trust Company, hereafter called defendant, subsequently became trustee of said trust estate. It surrendered to a receiver of the North Texas Trust Company without resistance and upon a void court order, all the said trust estate, including all the property deposited with it as security for the said "Participation Certificates" theretofore issued. Plaintiff brought suit against it for breach of trust, and was denied a recovery by the trial court. This judgment was reversed and rendered by the Court of Civil Appeals. See 74 S.W.2d 461, supra. The sole question here is whether or not the undisputed facts disclose such a breach of trust as requires the entry of a judgment for plaintiff against defendant.
Among the provisions of the trust agreement are the following:
"The company desires to assign and deliver to the Trustee Municipal Special Assessment Certificates, * * * as the property of and for the benefit of all holders of said Participation Certificates upon the terms and conditions herein set forth, * * * for the purpose of creating a trust fund for the holders of said Participation Certificates. * * * The Trustee, shall collect the principal of all securities deposited hereunder at the maturities as therein provided and the interest thereon as therein provided, and shall pay the principal to the certificate holders at their respective maturities * * *. The Trustee shall distribute and pay out of the interest collected from said securities interest to the holders of the Participation Certificates issued hereunder at the rate of six per cent. (6%) per annum semi annually as set out in the coupons attached thereto. * * * Said collateral and the proceeds thereof, shall be held by the Trustee and its successors in trust for the equal and proportionate benefit of all present and future holders of the said Participation Certificates issued and to be issued hereunder and interest thereon, without preference, priority or distinction of any one certificate over any other certificate by reason of priority in the certification, issue or negotiation. * * * It is further agreed that the trusts created by this instrument are accepted by the Trustee upon the express condition that the Trustee shall not be responsible for making any collections of principal or interest due or accrued on the collateral held by it, and the Trustee shall not incur any liability or any responsibility whatever by reason of the invalidity, lack of value or uncollectability of any of the collateral held by it. Trustee shall be answerable only for its own wilful defaults or gross negligence, * * *. SIXTEENTH: The Trustee named herein, or any Trustee hereafter appointed may resign and thereby become discharged from the trust by notice in writing to be given to the Company at least sixty days before such resignation may take effect, in which event, a successor may be appointed, as follows:
"The Company may appoint some National Bank in the City of Dallas as Trustee hereunder. If such appointment be not acceptable to the majority in interest of the holders of the certificates issued hereunder, then such majority in interest may appoint and designate a trustee hereunder or a trustee may be appointed by a Court of competent jurisdiction on the application of the Company, or a majority in interest of the holders of the certificate issued hereunder."
A receiver was appointed for the trustor in the above instrument. To this receivership proceeding plaintiff and defendant were strangers, neither being made parties. Though the trustor had no present property rights in the trust estate the trial court issued as to these parties an ex parte summary order for its delivery by the trustee to the above receiver. This order was almost immediately obeyed without resistance and the defendant about the same time resigned as trustee without any attempt to comply with the quoted stipulation of the trust agreement governing such resignations. An executive officer of defendant was shown to have made the following statements to plaintiff's husband:
"Did he ever say anything to you about where the paving certificates actually were and where they were going to stay? A. He said they were right at the bank and were going to stay there and nobody could touch them. I asked him if there was any danger of them being involved in the North Texas and he said, no there couldn't possibly be; they were separate and distinct. Q. Now, when you saw him and had the talk with him in which you understood as a matter of fact the bank had given up the paving certificates, what did you say about how they had come to give them up? * * * He just said they went to the court house and gave them up. In fact, he wouldn't talk about it. * * * He said that is all there was to it. * * *."
1 We turn briefly to a consideration of well settled legal principles believed by us to control the disposition of the question before us.
"The safety of the trust fund is the first care of the law, and on this depends every rule which has been made for the conduct of trustees. Where a trustee of an express trust has received the trust fund and has not spent it for trust purposes, he can not deny that the fund is still in his hands." 65 C. J. 651.
"If a trustee once accepts the office, he can not by his sole action be discharged from his duties. Having once entered upon the management of the trust, he must continue to perform its duties until he is discharged in one of three ways: first, he may be removed and discharged, and a new trustee substituted in his place, by proceedings before a court having jurisdiction over the trust; second, he may be discharged, and a new trustee appointed, by the agreement and concurrence of all the parties interested in the trust; and third, he may be discharged, and a new trustee appointed, in the manner pointed out in the instrument creating the trust, if it makes any provisions upon that subject. Mere abandonment of the trust will not vest the trust property in the hands of his cotrustee, nor relieve a trustee from liability. If a trustee conveys away the trust estate to another, even his cotrustee, and appoints another to execute the trust, the conveyance may pass the naked legal title, but it will have no effect in relieving the original trustee from responsibility, if the transaction is not sanctioned by the decree of the court, or by the consent of all parties interested; * * *." Perry on Trusts and Trustees, (7th ed.) Par. 274.
"* * * If a person takes upon himself the management of property for the benefit of another, he has no right to impose that duty on others, and if he (delegates discretionary powers with reference to the control and management of the trust property he becomes a guarantor) and is responsible to the cestui que trust, to whom he owes the duty. Therefore, if a trustee confides his duties or the trust fund to the care of a stranger, (or to a trust company,) or to his attorney, or even to his co-trustee or coexecutor, he will be personally responsible." Id., Par. 402, pp. 677-678.
"By accepting the trust, a trustee becomes bound to execute it, in accordance with the provisions of the trust instrument, unless such directions are declared invalid by a court of competent jurisdiction, or unless a court of equity decrees otherwise. So, too, after acceptance, he must execute the trust without any further request from anybody, and he can be relieved from all or part of his duties only by the consent of all the beneficiaries, or by putting the administration of the trust into the hands of a court of equity. Every violation by a trustee of a duty which equity lays on him, whether wilful or forgetful, is a breach of trust, for which he is liable." 65 C. J., p. 647.
"* * * but good faith is no defense where the trustee has arbitrarily overstepped the bounds of his authority, or where he has not exercised diligence or has acted unreasonably, or has been guilty of such gross neglect as no reasonably intelligent person would consider proper." Id., p. 650.
2 The relation of a trustee to the trust estate is personal and one of confidence. He handles another's property. The law ought and does demand of him a strict accounting to the letter and spirit of his contract. It tolerates no deviation therefrom which amounts to a breach of his agreement. As said of the duty of an administrator by Judge GREENWOOD: "It is as much the administrator's duty to withhold the estate from one not lawfully entitled to receive it, as it is his duty to surrender the estate whenever the administration may be closed, to those entitled thereto." Drew v. Jarvis, 110 Tex. 136, 216 S.W. 618. "The absolute and positive duty is imposed upon him (the trustee) to defend the life of the trust whenever it is assailed; if the means of defense are known to him or can with diligence be discovered." Cuthbert v. Chauvet, 136 N.Y. 326, 32 N.E. 1088. See also 26 R. C. L., p. 1281; Hodge v. Taylor, 85 S.W.2d 799.
3 In cases of this character the trustee and the beneficiaries are considered the real owners of the trust estate. Perry on Trusts and Trustees, (7th ed.) Par. 873. Obviously the beneficiaries are necessary parties to any proceeding, the object or effect of which is to end the trust or materially alter its terms. Cavers v. Sioux Oil Ref. Co., 39 S.W.2d 862.
Here the effect of the transactions above was to place a trust estate in a receiver's hands, without even a pretense that it was threatened with insolvency, or that any statutory ground existed for such action. Not only so, but its possession and control was passed back into the estate of the trustor, by an ex parte summary proceeding to which the present beneficiary was not a party. The trustor's estate and that of the trust property here involved were distinct and separate estates.
4 It is the well settled rule that a pledgee has the right of possession of pledged property, as against the receiver of the pledgor. National Exchange Bank v. Benbrook Sch. Furn. Co., 27 S.W. 297; Ex parte Renfro, 115 Tex. 82, 273 S.W. 813; 36 Tex. Jur., p. 186.
That the trustor in this case had no present property right in the trust estate, and could exercise no right of control or possession over it until the trust agreement had been performed according to its terms, is too plain for argument. Equally plain is the proposition that the receiver of the trustor had no greater rights in same than the trustor. Suppose here, the trustor, having assigned the trust estate for the specific benefit of third parties, had peremptorily demanded and received from the trustee all such estate, leaving the beneficiaries entirely without security. Would any judicial tribunal, under these facts, hesitate to hold the trustee liable? Differing in form only, this is plaintiff's case.
The judgment of the Court of Civil Appeals is affirmed.
Opinion adopted by the Supreme Court June 9, 1937.
Rehearing overruled July 28, 1937.