145 S.E. 588 | W. Va. | 1928
This suit involves the administration of a trust. The will of Henry G. Davis, probated March 15, 1916, devised to his infant grandchildren, Henry G. Davis, Jr., and Hallie E. Davis, $150,000.00 and $100,000.00 respectively, in bonds of the Coal Coke Railway Company. The will directed that the bonds be deposited with and held in trust by the Davis Trust Company; that the income therefrom be expended for the benefit of the children until they respectively reached the ages of twenty-one, when each was to receive one-half of the portion devised; and that the remaining moieties were to continue in the trust until each arrived at the age of thirty years (except $25,000.00 for Henry to be held until he became forty), the income to be paid to the beneficiaries. The will also provided that if the principal of the bonds be paid prior to their distribution, the trust company should invest the proceeds in "other safe interest bearing securities".
The inheritance tax reduced the bequests to $239,000.00. Bonds of the railroad company in that amount were delivered to the trustee by the executors of the will, "some time prior to April 1, 1917". The bonds yielded interest at the rate of five per cent and matured April 1, 1919. On March 31, 1917, the trustee exchanged all of these bonds with John T. Davis for preferred stock of the West Virginia Coal Coke Company of the par value of $239,000.00, which stock called for dividends at the rate of six per cent. The Coal Company had *231 just been organized at the time of the exchange. It was the successor of the Davis Colliery Company which operated about 25,000 acres of coal land, and which was owned by the Davis family. The financial history of the Colliery Company over a number of years is bad. By 1917 it was "in extremis", as one witness said, and could proceed no longer as a going concern. A reorganization was then effected by which its debts were paid, its holdings transferred to the West Virginia Coal Coke Company, and its stockholders received preferred stock in the latter. Other coal lands amounting to about 100,000 acres were also transferred to the coal company, which started in business with something over $2,000,000.00 in cash and other liquid assets, but with an indebtedness of $2,500,000.00. At the time the exchange of the stock for the bonds was under discussion defendant's directors "were not altogether agreed upon the matter" until a bond in the penalty of $100,000.00 was executed by John T. Davis and his sister Mrs. Hallie D. Elkins, to the trust company indemnifying it against loss by reason of the transaction. John T. Davis is the father of the plaintiffs and chairman of the board of directors of the trustee. He had owned stock in the colliery company of the par value of $1,000,000.00 for which he had "hoped" to obtain cash, but for which he had been compelled to accept preferred stock in the West Virginia Company of the par value of $800,000.00. He was indebted to the trust company at the time of the exchange. He owed "a good deal of money". Shortly thereafter he sold $100,000.00 of the bonds at from 96 to 98. What he did with the proceeds of that sale does not appear, but he put up the remaining $139,000.00 of the bonds as security on notes.
Hallie and Henry Davis became of age respectively in 1920 and 1923. As they attained their majorities, each was presented by the trustee with a paper confirming the exchange, which each signed. Dividends were paid by the West Virginia Coal Coke Company from 1918 until 1925, since when the company has been in bad financial condition. This suit was instituted in February, 1927. Its purpose is to have the exchange of the bonds for the stock declared a breach of the trust, to have the trust company account to the plaintiffs *232 for the bonds, and to have another trustee appointed in place of the defendant.
The defendant contends that the suit should not be maintained, because (1) the exchange was proper and legal; (2) the plaintiffs confirmed it; and (3) the plaintiffs are guilty of laches.
1. The motive given for the exchange by the trustee is that after payment of taxes, the bonds would net only about two per cent, while the stock would bring the children a greater income. The testator was an experienced financier and undoubtedly knew just what the bonds would net; yet he made no provision for their sale or exchange. The will clearly indicates his intention that the bonds should be held by the trustee throughout the continuation of the trust and distributed as such to the beneficiaries if not paid before the trust expired. He obviously desired the income of his grandchildren to be safe rather than considerable. He owned 8,000 shares of stock in the Colliery Company. The fact that he devised Hallie and Henry the bonds instead of that stock is significant. The bonds were safe and had a greater market value at the time of the exchange than at the death of the testator. There is nothing to show that the children needed a larger income than the bonds would have supplied. No emergency had arisen which would have excused a departure from the wishes of the testator. It was the plain duty of the trustee to have conformed strictly to his plan. Pom. Eq. Juris., (4th ed.), sec. 1062; Perry on Trusts, (6th ed.), sec. 452; Hogg's Eq. Principles, sec. 572, p. 761. Even if we treat the transaction as a sale in anticipation of the maturity of the bonds and a purchase of the stock, we cannot justify it. The authorities uniformly agree that except where expressly authorized by the creator of the trust or by statute, the general rule is that trust funds can not be invested in stocks of private corporations. 39 Cyc. p. 401; McKinney, Liability of Trustees, p. 11; 26 Rawle C. L., p. 1309, sec. 162; Pomeroy, supra, sec. 1074, p. 2461. The better considered cases in jurisdictions where such investments are permitted admonish the trustee that the preservation of the trust fund is his paramount duty, to which his concern for a substantial return *233
must be subordinated; that he should not hazard the safety of the principal under any temptation to make extraordinary profits; that he should invest in the stock of a corporation only when the stock has a market value based on an actual and regular income and not upon contingencies, and the corporation has acquired by reason of the value of its property and prudent management for a considerable period of time such a reputation for permanence and stability that cautious and intelligent persons commonly invest their own money in the stock as a permanent investment; and that his diligence and sound judgment in making such an investment will be subjected to asearching inquiry by a court of equity. Dickenson Appeal,
The defendant says that the optimism of 1917 establishes its good faith, and invokes the rule that nothing more should be required of a trustee than good faith, and the same prudence and discretion that a prudent man exercises in the management of his own affairs. If the good faith of the trustee be admitted, where is the prudence and discretion required by the rule? Where is the prudent man who was willing at that time to invest his entire fortune in this stock? That rule contemplates facts, as well as faith. The inquiry should be not only will an enterprise be profitable, but has it proven so? "This necessarily excludes all speculation." King v. Talbot,
2. Equity regards transactions between the trustee and thecestui que trust ("a barbarous foreign idiom") with a watchful *235 and suspicious eye. Story Eq. Juris. (14th ed.) 443-445; 39 Cyc. 300-1. And while a beneficiary may confirm a breach of trust by his trustee, in order for the confirmation to be effectual it must appear affirmatively, among other things, that he had full knowledge of the facts constituting the breach and was advised of his legal rights thereunder. Perry,supra, sec. 851; Lewin on Trusts, Vol. 2, p. 1242-3; Pomeroy,supra, sec. 1083; 26 Rawle C. L., p. 1311, sec. 165. Hallie's information at the time she signed "the receipt" consisted of a statement to her in 1918 by her father that "he had made an exchange of stock for the bonds at a great sacrifice to himself — that the stock was worth a great deal more, and that it was to save the tax in West Virginia." Henry says, "Sometime during 1917 my father told me that the stock of the West Virginia Coal Coke Company had been substituted for the bonds we should have gotten under the will and that he was doing this as a favor to Hallie and me, and making up the difference between the value of the bonds and the stock, and that he did this for the reason that the bonds would have been taxable at 2 or 3 per cent, and that the stocks were non-taxable." He further says that Mrs. Elkins told him in 1920 (or maybe 1922) that she had signed some paper "pertaining to us children", but that she did not tell him its contents or purposes. John T. Davis says he informed his children of the exchange and the reason therefor at the time it was made, and told Henry that instead of getting about three thousand dollars a year income, he would get six, that the stock was better security, that the coal company at the time was making large earnings, and that it had a great area of coal lands as its backbone. The confirmation by each beneficiary appears in a paper which was prepared by the trustee and called "a receipt". The instrument acknowledges receipt of the coal company stock certificate, briefly recites that the will of the grandfather provided that the trustee had the power to invest the proceeds of the railway company bonds in other safe interest bearing securities, that the trustee haddone so in acquiring the coal company stock, and ratifies that acquisition. The foregoing is all the information as to the exchange favorable to defendant which the record shows the plaintiffs *236 had when they signed "the receipts". When Henry received the "receipt" from the trust company, he wrote Mr. Hall requesting a conference before signing it. He then came to Elkins where he executed the paper. Defendant's brief asserts broadly that while at Elkins, Henry "went over these transactions fully", with Hall and R. S. Irons (the personal attorney of John Davis). It is true that Henry did discuss with Hall and Irons the affairs of the Coal Company as of that date, together with his own personal transactions with his father and his trustee. No witness claims, however, that the exchange or conditions existing at the time of the exchange were discussed, and Irons says that no "legal phases of the matter" were mentioned. The defendant's brief also emphasizes the fact that Hallie's husband was associated with a brokerage house which handled bonds and securities. It supposes that he was consulted by Hallie as to the exchange, and that he was in position to give and did give her expert advice thereon. John Davis admits he never discussed "the subject of values — that is market values" of the stock and bonds with Hallie. Without information as to the comparative values of the stock and bonds, how could Hallie's husband have formed any correct idea as to the propriety of the exchange even had he been a bond expert? The record shows, however, that he was merely taking a course inaccounting with the brokerage company at the time Hallie received the "receipt". We can hardly infer that as an accountant he was an expert on the exchange of stocks and bonds.
A comparison of the information which the plaintiffs had with the facts surrounding the exchange, shows several material circumstances which were not communicated to them. They were not informed
(a) in detail of the financial history of the coal company;
(b) that there was no market for the stock;
(c) that the bonds were marketable;
*237(d) that the exchange was made before the bonds matured and in violation of their grandfather's bequest;
(e) that John Davis was indebted to the trust company.
(f) that he had been compelled to accept the stock when he needed cash;
(g) that the exchange was urged by him;
(h) that the stock for which the bonds were exchanged was his stock;
(i) that he forthwith made use of at least a part of the bonds to bolster his credit;
(j) that no other like exchange was made by the trust company;
(k) that an indemnifying bond was given by John Davis to the trust company to obviate objections to the exchange.
It is therefore obvious that they did not have the fullinformation which the law requires, and the circuit court was plainly wrong in holding that they "were in possession of all the facts, and knew their legal rights at the time of signing these receipts." They had no information whatsoever tending to warn them that the value of the coal stock was entirely speculative on April 1, 1917, or which would have made them even question their father's representation that it was a better security than the bonds. They were in no position to exercise an individual business judgment on the comparative values of the stock and the bonds, or to decide whether the exchange was made in their interest or in the interest of John Davis and his creditor, their own trustee. Underhill on Trusts and Trustees, 7th ed., 497-8, says that in order for a release to cover a known breach of trust, it "must contain recitals showing fully and precisely the circumstances under which the breach took place * * * and that such circumstances did in fact amount to a breach of trust." If that requirement be considered too technical, it must nevertheless appear that the beneficiary possessed that information. Knight v. Watts,
Defendant further contends that the failure of the plaintiffs to return the difference between the dividends which they received from the stock and the amount which they would have received from the bonds, constitutes a ratification of the exchange. That failure is not an indicium of confirmation. There are several years in which the plaintiffs have received no dividends from the stock. Yet it was the duty of the trustee to secure, and the right of the plaintiffs to receive, a fair return on the principal over the entire period of the trust. If plaintiffs have received from the stock a greater return than would have been realized from the railway bonds and from aproper investment of the proceeds of those bonds after maturityin government bonds or other safe interest bearing securities, such greater return can be given consideration upon the accounting. The very prayer of plaintiffs for an accounting implies the possibility that the defendant might be entitled to a credit against their demands, otherwise the prayer would have been for a definite sum. We cannot assume in advance of an accounting, however, that such a credit is justified.
3. The defendant contends that even if the beneficiaries did not know the circumstances surrounding the exchange, they are chargeable with what information they might have obtained had they used reasonable diligence to do so, and that acquiescence is implied. Hallie was a wife and a mother when she attained her majority. She devoted her attention to her duties as such with little thought of business. Henry continued at college after he was twenty-one, and his attention is shown to have been seriously fixed on his studies and not on business. Both were without business experience. All of these facts were well known to defendant. The information the beneficiaries possessed prior to 1925 as to the exchange had been given them by their own father. He had assured them that the exchange was to their advantage. They accepted his representations. They had implicit trust in their "grandfather's bank", as Henry called the trust company. Its officers were their personal friends. Reliance on both the father *240
and the trustee were natural and proper. Why doubt the father? Why mistrust the bank? Why make inquiries? Nothing had occurred to disturb their confidence. The law does not require confidence to engender suspicion. Consequently, they were not negligent in failing to investigate. "If there is nothing to excite suspicion and no apparent reason for making investigation, a person is not negligent in failing to make inquiry." 21 C. J. 248. Santa Marina Co. v. Bank, 242 F. 142, 149. They had the right to assume that the trustee had properly executed the trust. "It must appear that the cestui que trust
has knowledge of the breach of trust. He has a right to presume that the trustee is acting in good faith in the execution of the trust, and he is not bound to institute an inquiry in regard to the acts of the trustee." Beach on Trusts and Trustees, sec. 696, p. 1595. Perry, supra, sec. 850; Lewin,supra, p. 1238 (*923), sec. 3. Until the dividends stopped in 1925, the beneficiaries had acquired little, if any more information about the exchange than they possessed upon coming of age. They were still ignorant that the trust had been breached. "The cestui que trust can give a legal acquiescence only as * * * he understands the legal force and effect of his act." Beach, supra, sec. 695, p. 1591; Pomeroy,supra, sec. 965, p. 2092-3-4; McKinney, supra, sec. 10, p. 6; 39 Cyc. p. 413, 414; 26 Rawle C. L., p. 1311. The duty of the trust company to make to the beneficiaries full disclosures of the circumstances surrounding the exchange did not cease when the receipts were obtained. It was an absolute and continuing duty. That of the beneficiaries to seek information was a contingent duty. The trustee is therefore primarily responsible for the ignorance of the beneficiaries prior to 1925. Logic does not countenance the contention that the omission of a secondary duty by one excuses neglect of a. primary duty by another.Macomber v. Kinney,
When cessation of dividends in 1925 caused the beneficiaries to make inquiry, the trust company did not facilitate their investigation. Henry states that Mr. Wilson, who was then defendant's president, "would not answer letters". They did not learn the real circumstances of the exchange and the *241 true character of the indemnifying bond until the fall of 1926. The delay in 1925 and 1926 is attributable to the failure of the trust company to furnish this information promptly.
The defendant places especial reliance on Hoyt v. Sprague,
Defendant also cites Kelly v. McQuinn,
This is an express trust. We have specifically held that while a "long lapse of time may bar relief to the beneficiary of an express trust, it must be so long and the circumstances such in character as to establish clearly a relinquishment or abandonment thereof, or a situation occasioned by the death of witnesses, loss of evidence or other matter in the nature of an estoppel, that will make it clearly inequitable and unjust to support it." Roush v. Griffith, supra, 763; Campbell v.O'Neill,
The ill-advised exchange of safe bonds for unsafe stock, and the subsequent indifference of the trustee to the perilous position of the trust fund, are ample grounds for the removal of the trustee. Pomeroy, supra, sec. 1086; 26 Rawle C. L., p. 1276, sec. 126; 39 Cyc. 261.
The plaintiffs are therefore entitled to the full relief prayed for. The judgment of the lower court is reversed and the cause remanded.
*243Reversed and remanded.
