71 N.Y.S. 924 | N.Y. App. Div. | 1901
This action was ^commenced June 12,1899, to set aside a judgment heretofore entered on the ground that the same was procured through fraud and collusion with the defendant T). Munro Hill.. A detailed recital of the complicated, though undisputed, facts which form the basis of the cause of action is necessary to a proper comprehension of the legal principles which control its determination.
William C. Rodger in 1897, and for many years prior thereto, was . a resident of the village of Jordan in said county, and was long prominently identified with its business affairs. In conjunction with one Robert E. Greene he carried on a banking institution in the village under the firm name of Rodger & Go., of which Greene was the cashier. Said Rodger was also interested in the coal and lumber business at .Jordan, under the firm name of William G. Rodger & Co., and which he personally managed and carried on. Mr. Rodger died January 2, 1898, and it soon . developed that he was insolvent at the time of his death and that the banking company was in like financial stress. On January seventh Greene, as surviving jiartner, made a general assignment of the assets of the banking business to the defendant D. Munro Hill for the benefit of creditors, which trust the latter at once assumed. The plaintiffs-, who are numerous, were depositors in' said banking institution and their several demands had culminated in judgments, and this action is commenced by them as judgment creditors, the requisite formal facts preliminary to the maintenance of the action appearing.
In 1897' an action of partition was pending among the heirs at law of one Blair. The lands described in the complaint were situated iñ Hew York, Cayuga and Onondaga- counties. Among the heirs were six infants for whom William C. Rodger .had been appointed guardian ad litem in the action, and also by the Surrogate’s Court of Onondaga county, where the infants resided, their general gúardian. On the bonds which Rodger gave as general guardian of the infants, called the Orofut children,, the defendant Hill, who was a relative of Rodger by marriage, Was one of the sureties. The interlocutory jiidgment of sale in the partition action was
After the death of Rodger the defendant C. Julia Rodger and her brother, the defendant Lewis, were appointed his administrators, and upon their demand the avails of the check deposited in the said bank of Syracuse to the credit of William C: Rodger & Co. were turned over to said administrators for the benefit of the infants whose share it was to pay.
Thereafter, and in August, 1898, an action was commenced in the Supreme Court by said administrators against the defendant Hill individually to recover the sum of $2,000 which lie had received from the bundle placed in the safe of William C. Rodger & Co., and also to recover against said defendant, as assignee, the sum. of $6,132.93, deposited in the said bank as aforesaid. The theory of the said action was that, although the said moneys were deposited in the said bank to the credit of William C- Rodger & Co., which company was insolvent and its account overdrawn, and increased, the general deposits of said bank, that the said infants were the equitable ownefs’thereof and were entitled to a segregation of the same from the other deposits and its payment, to the. plaintiffs for. the. benefit' of the said infants. The complaint set forth, at great length the facts above recited with others, and they were admitted by the answer.
It is contended that this action was commenced and prosecuted collusively and fraudulently, and for the purpose of relieving the defendant Hill from liability as one of the sureties on the bond of Rodger as general guardian of said infants.
It appears that Mr. Homer Weston had been attorney for Mr. Rodger in his lifetime and also for the ’ defendant Hill, and upon the appointment of the administrators of Rodger’s estate his attorneyship continued in their behalf. Mr. Weston prepared the complaint in the action by them against Mr. Hill and also the answer, which was verified by the defendant.
As Mr. Weston could not in form represent the latter, Mr. Ever-son, a lawyer in the city of Syracuse, was called up On the telephone-
The learned trial judge rendered a short decision in the present case in which he found that the parties to the action “ acted in good faith and in the belief that the judgment therein obtained was justified by the law and the facts.” Because of that specific finding it is unnecessary to consider further the facts showing the manner in which the action was commenced and continued to judgment. It is but fair to Mr. Weston to add that he made a complete statement on the trial of his connection with the litigation and claims that his entire conduct during its continuance was within the compass of the highest professional ethics. The learned trial court, however, vacated the judgment “because of the personal benefit to be derived therefrom by the defendant, D. Munro Hill, and his relation as trustee for the creditors of Rodger & Company, and the knowledge of the other parties thereto of these facts, his action was illegal and constituted a constructive fraud, and the said judgment in such part is voidable.” This decision was supported by an elaborate and able opinion invoking the familiar principle that a trustee cannot deal with the estate of his cestui que trust to his own advantage and citing Munson v. S., G. & C. R. R. Co. (103 N. Y. 58, 73) and kindred cases.
The administrators certainly were permitted to bring the action
If a judgment is recovered against an-administrator by default on a promissory note made by the intestate the judgment cannot be set aside solely from the fact that an indirect benefit accrued to the administrator by the judgment. The test is in such cases : Did the "administrator act honestly ?
The effect of the certificate given by the trial justice clearing the defendants from the imputation of fraud is to establish that the administrators commenced the action in good faith ; that the assignee honestly believed the facts contained in the complaint to be true and so admitted them in his answer ; that he'was not swerved or influenced in doing this, or in anything pertaining to the conduct of the litigation, by reason of his liability,upon the bonds given by Rodger as general guardian of the infants. To sum it up, his conduct during the entire transaction was fair and upright.
There is no- doubt of the proposition that a trustee must not manage his trust estate for his own benefit. That doctrine is not applicable to this case. This trustee was not instrumental in causing the action to be commenced. It was brought by the administrators without any connivance with him. It had its inception in an honest purpose* He may have been relieved as surety by the result of the action, but he could not secure its dismissal for that reason, nor does that fact in the absence of fraud vitiate the judgment. (Geyer v. Snyder, 140 N. Y. 394.)
We*do not wish to be understood as departing in the least degree from the salutary rule which prevents an assignee or trustee1 from administering the trust committed to him for his own personal advantage. A slight deflection from that path will justify the
In view of the finding that the parties acted in good faith, I cannot assent to the proposition that what is termed “ constructive fraud” is imputable to them, and make that the basis of the cancellation of the judgment. The fraud which warrants the court in setting aside a judgment is actual and not constructive. As is said in Ward v. Town of Southfield (102 N. Y. 287, 293): “ But before a regular judgment can be thus assailed the proof should be clear and very satisfactory. It is not sufficient merely to raise a suspicion or to show what is s.ometimes called constructive fraud, but there must be actual fraud.”
And, again, in Ross v. Wood (70 N. Y. 810): “ The fraud which will justify equitable interference in setting aside judgments and decrees must be actual and positive and not merely .constructive.” (Jones v. Jones, 71 Hun, 519; Rice v. Bruff, 87 id. 511.)
The result of this action must depend entirely upon the character of the transaction which is attacked. If clean and honest, as found by the trial court, it would operate unjustly to set aside the judgment, as the defendant Hill has paid the administrators in obedience to its direction. If that action included in its scope, by the intent •of the parties, the relief of Hill as surety then it is tinged with fraud and cannot stand.
The judgment should be reversed and a new trial ordered, with costs to the appellants to abide the event.
All concur, except Adams, P. J., who dissents on opinion of Andrews, J., delivered at Special Term, and McLennan, J., not sitting.
The following is the opinion delivered at the Special Term:
Action to set aside a judgment in favor of the plaintiffs entered in the Onondaga county clerk’s office on November 15, 1898, in a certain action brought by 0. Julia Rodger and Alfred D. Lewis as
William 0. Rodger died at Jordan, EL Y"., on January 2, 1898. At that time he was a member of the firm of Rodger & Go., which conducted a banking business in the village, and also of the firm of W. C. Rodger & Go., coal dealers. Shortly after his death the surviving partner of the firm of Rodger & Go., one Robert E. Greene, made a general assignment for the benefit of creditors of the firm assets to the defendant • D. Munro Hill. About the same time the defendants C. Julia Rodger and Alfred D. Lewis were appointed administrators of the individual estate of the deceased. Mr. Homer Weston of Syracuse, ELY., was retained by the administrators to act as their attorney. For some years he had been the personal attorney of Mr. Hill, and after the assignment he was requested by the latter to act for him in the matters arising out of that transaction. He agreed to do so upon the express understanding, however, that if any question should arise-in which the interests of the assignee and the administrators were antagonistic he should appear, for the latter.
Some time before the death of Mr. Rodger the heirs of a Mrs. Blair had begun an action to partition certain real estate of which she died seized. Six of these heirs were infants and Mr. Rodger was appointed their guardian. He gave the usual bonds and on three of these bonds Mr. Hill, with others, was a surety. The action resulted in a sale and the shares of the infants in the proceeds in the form of six checks were turned over to Mr. Rodger about December 23, 1897. They were made payable to his order as guardian of the several infants and amounted to the sum of $12,445.75.
One of these checks for the sum of $2,767.94 was deposited on December twenty-eighth in the Rodger & Go. bank, either to the credit of W. 0. Rodger & Co., or to the credit of one of the several other firms of which Mr. Rodger was a member.
A second check was deposited in the State Bank of Syracuse to the credit of W. G. Rodger & Co., and the proceeds seem to have remained .there at the time of Mr. Rodger’s death,
Among the defendants in the partition action were two adults, Mrs. Fannie Blair and Mrs. Howe. Their checks had also been received and had been deposited by them to their own credit in the bank of Rodger & Co. On December twenty-eighth they desired their money. They gave Mr. Rodger, therefore, their own checks on Rodger & Co. for about $1,500 and $1,800, respectively, and in return he paid them those amounts in cash out of the $5,871.90 package. Instead of placing these checks with the balance, he deposited them to the credit of W. C. Rodger & Co. in the Rodger & Co. bank.
Certain other amounts out of this same package were deposited by him to the credit of the same account until, at the time of his death there was a balance of only $2,000 in cash remaining. This subsequently was handed over to the defendant Hill.
At the time of Mr. Rodger’s death he personally had a credit with Rodger & Co. of $9,208.03, while the account of W. C. Rodger & Co. was overdrawn to the extent of $7,800. Both Rodger & Co. and Mr. Rodger individually were insolvent.
After Mr. .Rodger’s death his administrators, on behalf of the infant whose check, as has been said, was deposited with the State Bank, demanded its amount of that bank, and, after some investigation, it was paid to them.
Subsequently and in August, 1898, the question seems to have arisen whether or not the five infants who had not received their "\ property were not equally entitled to receive the amount of their respective checks, less their proportion of legal expenses, from the assets of Rodger & Go.
The administrators of Mr. Rodger’s, estate thereupon, after a demand upon the assignee,, began an action to recover the sums due the several infants. The complaint sets .forth the facts substantially as they have been here stated, and, in addition, stated that the sixth cheek had been turned over to the plaintiff’s attorneys in the partition action for their services, and that the infant in whose favor it
It is apparent that the action, if successful, would relieve Mr. Hill of his liability on the guardian’s bonds. This fact Mr. Weston and Mr. Lewis knew. Mr. Hill was also the brother-in-law of Mrs. Rodger.
But these facts, Mr. Weston testifies, had no relation to the action. It was brought, he says, without solicitation or request oñ the part of Mr. Hill, and not for the purpose of relieving him from liability, but because he- (Weston) was familiar with the facts and from those facts he believed1 but one legal result could follow.
Mr. Lewis also says that the action was brought by him independently, in good faith, and without. consultation or arrangement with Mr.'Hill.
' Mr. Hill is less definite. He probably wanted the action brought, he says, but he wouldn’t say he had anything more to do with having the action commenced than the other bonds’mein. He knew the result would be; to relieve him as a bondsman. He also seems at one time to have admitted that he- was' instrumental in having the action brought, but on the present trial says he thinks he was not. He says, also, he did not give any directions about bringing the action.
After the demand was made upon him, however, and While the complaint was being prepared, he did consult Mr. Weston on the subject, and was told that the latter could not represent him, as his interests as assignee were opposed to those of the administrators. After some discussion of the names of different attorneys, Mr. Weston' advised him to apply to Mr. Giles B. Everson, saying that he was a capable attorney and one who' would be reasonable in his charges. - Mr. Hill was not acquainted With Mr. Everson, blit seems to have assented and to have left the matter in Mr. Weston’s hands. He was then served with the complaint in Mr. Weston’s office. Mr. Westoh thereupon telephoned Mr. Everson that he had a client for him in an important matter, and asked him if he could attend to it.
Upon the pleadings so framed the issues came on for trial before Mr. Justice McLennan. The only proof offered was a formal stipulation of the attorneys as to the identity of the Viola Blair mentioned in the complaint with the Viola H°we who made the deposit in the Rodger & Go. bank and to the interest upon various sums. The attention of the court was not drawn to the fact of Mr, Hill’s liability as bondsman. Judgment was thereupon directed upon tliis stipulation and upon the admissions contained in the answer in favor of the plaintiff directing the defendant, out of the assets of Rodger & Co., to pay over to the infants the various sums alleged to he due. Such a judgment was entered and has since been complied with.
Upon this state of facts the plaintiffs in the present action, who are judgment creditors of Rodger & Co., claim that such judgment is, as to them, collusive and fraudulent. It was the result of untrue admissions made by Mr. Hill for the purpose of protecting himself as bondsman. In making such admissions he was unfaithful to his duties as trustee for the creditors of Rodger & Co. The true facts were concealed from the court. They, therefore, ask that the judgment be set aside; that the defendants Hill, Lewis and. C.. Julia Rodger, individually and as assignee and administrators, be required to return the moneys paid over in compliance with its provisions, and that the- defendant Hill be removed as assignee.
There seems to be no claim made that the complaint does not state facts sufficient to constitute a cause of action. Indeed, it could not he, for, apparently, it is well settled that the creditor of an assigned estate may himself bring suit, in aid of the assignment, to set aside
The defendants do urge, however, that there is no proof of fraudulent intent or collusion on the part of any of the parties to: the judgment which it is here sought to set aside, or on the part of any of tlreir attorneys. In this I think they are right. In view of all the circumstances I have no doubt that they all acted with the utmost good faith. Further, in view of the decision of this court in the case of Blair v. Hill, and of the Court of Appeals in Matter of Holmes, both matters arising out of the transactions of Mr. Rodger, their views of the legal aspect of the controversy between the trustee and the administrators may be correct. Still this does quite meet the difficulty.
It is undoubtedly true that the assignee, under a general assignment in this State, is not bound to litigate every claim made against such estate. If he is satisfied of its correctness and deems that a defense would entail useless expenses he may undoubtedly compromise or neglect to defend an action brought.to enforce such claim. (Coyne v. Weaver, 84 N. Y. 386.)
If he may neglect to defend such action he may go further, and- in his answer may admit the truth of such allegation in a complaint against him as he knows to be truly stated, and there is nó reason why a court of equity may not render judgment Upon such .pleadings when they come before it in the same manner as would be done by it in any case.
But certain.other principles are, at least, equally well established. A trustee may not, without the knowledge of his eestui gue ■trust, so deal with the trust estate as to gain directly or indirectly any private advantage. If he does, the latter may, when the facts come to his knowledge, avoid the transaction. This is his absolute right. It is no defense to say that the result was beneficial to him; that the act was. done in good faith; that there was no evil design. The law requires a trustee to be beyond - suspicion. It designs to relieve him from -even temptation. It aims to secure to the benefieiai'y his best services, unhampered by even the shade of' prejudice or self-interest
The Court of Appeals has well stated this rule in Munson v. S. G. & C. R. R. Co. (103 N. Y. 58, 73). “We are of opinion,” it says, “that the contract of September 14, 1875, is repugnant to the great rule of law which invalidates all contracts made by a trustee or fiduciary, in which he is personally interested, at the election of the party he represents. * * * The law permits no one to act in such inconsistent relations. It does not stop to inquire whether the contract or transaction was fair or unfair. It stops the inquiry when the relation is disclosed, and sets aside the transaction or refuses 'to enforce it at the instance of the party whom the fiduciary undertook to represent without undertaking to deal with the question of abstract justice in the particular case. It prevents frauds by making them, as far as may be, impossible, knowing that real motives often elude the most searching inquiry, and it leaves neither to judge nor jury the right to determine upon a consideration of its advantages or disadvantages whether a contract made under such circumstances shall stand or fall.”
Pomeroy, in his Equity Jurisprudence (§ 957), distinguishes two classes of cases. The first are those instances in which the trustee and the beneficiary consciously negotiate with each other, and there results from their dealings some conveyance or contract or gift. Here the transaction is not necessarily voidable ; it may be. valid. The second class includes those cases in which one party, purporting to act in his fiduciary character, deals with himself in his private and personal character without the knowledge of his beneficiary. Such transactions are voidable at the suit of the beneficiary and not merely presumptively or prima facie invalid.
The same author (at § 1075) says: “Absolute and most scrupulous good faith is the very essence of the trustee’s obligation. The first and principal duty arising from this fiduciary relation is to act in all matters of the trust wholly for the benefit of the'beneficiary. The trustee is not permitted to manage the affairs of the trust or to deal with the trust property so as to gain any advantage, directly or indirectly, for himself beyond his lawful compensation.”
Chaplin, in his work on Express Trusts and Powers, at section 193, is equally explicit. It is the duty, he says, of the trustee in his. dealings with the trust property to look solely to the best interests of the beneficiary and to refrain from seeking personal advantage. It is one of the great rules of law that all contracts "made 'by a trus^ tee or fiduciary in which he is personally interested are invalid at the election of the party he represents. The value of the rule lies to a great extent in its stAibbornness and inflexibility. Its rigidity gives it one of its chief uses as a preventive or discouraging influence, because it weakens the temptation to dishonesty or unfair dealing on the part of the trustee by vitiating, without attempt at discrimination, all transactions in which he assumes the dual character of principal and representative. The intrinsic fairness of the given transaction is immaterial.
An instance of the application of this rule is found in Elias v. Schweyer (17 Misc. Rep. 707). Here the defendant, as a trustee, in. connection with another, h ild certain shares of stock in a corporation. Coveting the presidency, with its salary, he so manipulated this stock as, by the aid of minority stockholders, to; gain this position. Judge Pryor said: “ Hot only did fidelity to his trust exact of defendant to employ the power of the stock he held to secure a corporate administration in its interest, but the same obligation for-; bade him also to assume a relation in which a motive of personal gain might operate to seduce him from his duty as trustee. * * * A stockholder in his own right may vote himself into office, because in so voting he violates no fiduciary obligation; while a trastee of stock, in voting for himself, sets his personal interest in opposition, to the interest of his- trust. In the election of directors the beneficiaries of the trust were entitled to the unbiased judgment of their
In the case at bar the defendant Hill had plainly an interest adverse to that of the creditors of the assigned estate whom he represented as trustee. As a bondsman for the guardian who was claimed to have dissipated or lost the property of these infants, it was important for him that their loss should be made good. As representing the creditors of Rodger & Co., it was his duty to protect, as far as possible, the integrity of the assigned estate. Under, the circumstances he should not allow a judgment to be taken against himself by default without some notice to those interested. Clearly he had still less right by an affirmative act to put the executors of Mr. Rodger in a position where they could obtain the judgment desired without making any proof whatever.
The defendant claims that the facts upon which the judgment is based are true facts, and that their truthfulness has not been impeached in the present action. Yery likely this is so, but whether true or false the trustee had no right to admit them in a case where such admission would inure to his own advantage and to the disadvantage of those he represented.
It may be said that such a rule is impracticable. When a verified complaint is served the defendant must either answer or submit to default. If he answers, the answer must be verified, and must consequently concede such facts as he knows are true.
But in such a case he should.at least do this. He should submit to the court a full and complete statement of the facts showing his personal interest in the litigation, and comply with such directions in regard to notifying his beneficiaries of the pending action or safeguarding their interest in other ways as may be imposed upon him.
My attention is called to cases bearing upon the conclusiveness of adjudications, .and the-;.claim is made that the judgment, such as the
In an attempt to) impeach or set aside such a judgment for fraud precisely the same rules apply as in an- attempt to gain relief with regard to any judgment of. the court.
Yet this statement of the law would appear to have no bearing upon the matter at issue in this case. Any judgment, whether entered upon confession, or after litigation, any contract, any act between the parties may be impeached and- set aside on the ground of fraud, and that is the charge in this case. There was no fraud, as I have found, in the sense of an existence of any evil intent, nor can any fraud be implied from the mere fact that the judgment rests upon conceded facts, for it has been held that where a judgment is entered for a debt justly due and owing, the fact that it was entered upon an offer to allow it, or- upon concessions contained in an answer, does not render it collusive in any sense which allows another creditor to interfere. (Columbus Watch Co. v. Hodenpyl, 135 N. Y. 430.) The fraud which exists issimply that fraud which the law implies at the request of a beneficiary because of the relation existing between- the parties. It is what is known as constructive fraud and it is equally as available to the plaintiffs in this case as if they had proved actual ill-conduct on the part of their trustee.
The defendants have cited various cases of which Geyer v. Snyder (140 N. Y. 394) is an example, where in a transaction between a trustee and his beneficiary the mere fact of the trust relation was held to be insufficient to show the invalidity of the transaction.
These cases have no application to such a transaction as the one at bar. They come under the first class distinguished by Mr. Pomeroy. The contract -or gift is not necessarily invalid, but where the trustee has, for instance, bought an interest in the trust property for an inadequate pricey then the burden is thrown upon him of proving his good faith.
In view of my finding that no fraud or collusion has been affirmatively shown to have existed on the part of the defendants or their attorneys, it is necessary to notice another line of authorities cited by the defendants. One of such cases is Ross v. Wood (70 M. Y. 8). There it was held that “ the fraud which will justify equitable interference iii setting aside a judgment or decree must be actual and positive, not merely constructive; it must be fraud occurring in the concoction or procurement of the judgment or decree- which was not known to the party at the time, and for not knowing which he is not chargeable with negligence.” _ This rule is cited with approval in Mayor v. Brady (115 N. Y. 599, 617), and is repeated in other language in Ward v. Town of Southfield (102 id. 287). The court here say that “ before a regular judgment can be thus assailed the proof should be clear and very satisfactory. It is not sufficient merely to raise a suspicion or to show what is sometimes called constructive fraud, but there must be actual fraud. There must be by one party a false and fraudulent l^iresentation, or a fraudulent affirmative act, or a fraudulent concealment of a fact for the purpose of obtaining an undue and an unjust ad vantage of the other party and procuring an unjust and unconscionable judgment.”
It is sufficient to say that these cases are all brought between the parties to the original judgment, and their statement that constructive fraud is not sufficient basis for an action to set aside a judgment is not, in any way, applicable to a case like the present.
So far as the defendant Hill is concerned, therefore, I must find that the judgment should be set aside. A like finding is required with regal'd to the defendants Lewis and 0. Julia Rodger. How much they, and particularly how much Mrs. Rodger, knew of the transaction is not clearly apparent, but they were represented therein by ail attorney who was acquainted at the time with all the facts and his knowledge must be imputed to his clients.
Bat so far as the complaint asks for the removal of Mr. Hill as
Findings in accordance with this opinion may be prepared, and if not agreed upon will be settled upon proper notice.
Judgment reversed on questions of law and of fact, and new trial ordered, with costs to appellant to abide event: