Staats v. Bergen, 17 N.J. Eq. 554

Staats v. Bergen

17 N.J. Eq. 554 | N.J. | 1867

The opinion of the court was delivered by

The Chief Justice.

It will be observed from the narration of facts which precedes this opinion, that the defendant, Zaccheus Bergen, at the time he became the purchaser, at the sale by the sheriff, of the premises in question, held the second mortgage upon the land, as the trustee of Mrs. Staats, and that upon a bid made by him, of a sum which was not sufficient to pay such mortgage, together with the prior encumbrance, the farm was struck off to him. The effect of such sale, therefore, on the rights of the cestui que trust, was to render valueless, so far as the land sold was concerned, not only the mortgage held for her by the defendant, but also the two subsequent mortgages, the equitable interest in which belonged to her; the one being for her benefit, in the hands of Mr. Mann, and the other, in those of Mr. Quick. Under these circumstances, it is insisted, that the defendant was not in a position in which he could lawfully purchase this property for his own benefit.

The general principles of equity touching this subject, though somewhat ventilated, were not seriously called in question in the discussions of counsel. It was assumed on the one side,and admitted on the other, that the general rule applicable to, sales is, that if a trustee, or a person standing in any similar capacity, sell a trust estate, and become himself interested, either directly or indirectly, in the purchase, the cestui que trust is entitled, as o.f right, to have the property resold, or, at his election, to. acquiesce in the sale; and *558that it makes no difference, in the application of the rule, that the sale was at a public auction, bona fide, or for a fair price. To this extent there was no controversy; but it was insisted, that this principle did not apply to the facts of the case before the court. The argument was that, in the present instance, the property which was sold, did not belong to the cestui que trust, and that, consequently, the defendant was free to make the purchase.

To adopt this theory, would be to abandon the principle upon which most of the adjudicated cases have been founded, merely on the ground that the circumstances of such cases differed somewhat from the facts before us. But we must look at the reason of the rule, and see if the present occasion is within such reason. The rule is one of public policy. The trustee is not prevented from bidding for property which he himself sells, on the ground simply of a supposition of actual fraud, but because the law has established, as an inflexible rule, applicable to every emergency, that he shall not place himself in a situation in which he will be tempted to take advantage of his cestui que trust. This is a wise public regulation, intended to protect a species of property, which, otherwise, would be constantly exposed to peculiar hazard. The trustee, therefore, must submit to this regulation, and if he does an act in violation of it, no matter how pure his intention may be, such act is voidable at the instance of the person whom, he represents. “ However innocent the purchase may be in the given case,” says Chancellor Kent, in Davoue v. Fanning, 2 Johns. Ch. R. 260, “ it is poisonous in its consequences. The cestui que trust is not bound to prove that the trustee has made a bargain advantageous to himself. The fact may be so, and yet the party not have it in his power, distinctly .and clearly to show it. There may be fraud, as Lord Hardwicke observed, and the party not be able to prove it.” At these sales, then, the trustee is forbidden to purchase, because his interest, as such purchaser, is opposed to the interest of his cestui que trrnt, and he acts, therefore, under a bias in his own favor. Nor does this rule *559rest, to any considerable extent, in the fact that, in a particular line of cases, the trustee has peculiar opportunities for the practice of fraudulent acts, with regard to the property in his charge. The rule, to be efficacious, must be general, and the law implies, therefore, that in all casos of trusts, such opportunities may exist, and consequently the prohibition is universal, that he may not do anything which, while it is an advantage to himself, is, or may be, a loss to the trust estate. So jealous is the law upon this point, that a trustee may not put himself in a position, in which to be honest must be a strain upon him. The general rule, therefore, applies, not merely in those cases in which the confidence is absolutely betrayed, but when the circumstances are such that there was a temptation to violate it. Moore v. Moore, 4 Sandf. Ch. R. 37. I think, upon correct principle, a trustee, in no case, nor in any crisis, can become the purchaser of property, when the fact of his making such purchase, has a tendency to promote his- own interest, at the expense of his cestui que trust. This, it is conceived, is the groundwork of the decisions, in England,, and in this country.

Applying this test to the purchase in question, it is plain that it is invalid as against the complainant. As a bidder at the sheriff’s vendue, the interest of the defendant was directly antagonistic to that of the complainant. A low price was the gain of the defendant, but it was, in the same ratio, a loss to the complainant. The property was struck off for a sum, not sufficient to pay the mortgage which it was the duty of the defendant to uphold and protect; he made money bv defeating, in this transaction, that mortgage, pro tanto. Under the last declaration of trust executed by him, he appears, as it would seem, to bo under no liability to make good the fund invested, if the security proved insufficient, so that his position, as a competitor at the sheriff’s- sale, was squarely opposite to his fiduciary duties. If he has made a profitable bargain, (and as he strenuously refuses to surrender his purchase, it is a fair presumption that he has done so,) the result has boon attained by the sacrifice of the trust *560fund. As the guardian of the property of the complainant, it was his duty to use every reasonable endeavor to make the land produce the largest price. Did he perform an obligation which it was an advantage to him to neglect ? To omit the discharge of such duty was a fraud, in the eye of a court of conscience. “ It is not enough,” says the Chancellor, in the case of Whelpdale v. Cookson, 1 Ves., sen., 9, “for the trustee to say, you cannot prove any fraud, as it is in his own power to conceal it.” The observation applies to every case of this strain, and to none more than to the one under consideration. To hold this transaction valid, as against the eestui que trust, would seriously impair the general principle of equity above enounced, which has been the guide to so many decisions, and which is so eminently essential to the preservation of a perfect integrity in the administration of trust estates.

The court is clearly of one mind, that the complainant is entitled to relief.

What that relief should be, has been a subject about which we have experienced more difficulty. The master who heard the case for the Chancellor, thought that the complainant had a right to take the bargain off the defendant’s hands, and to be substituted in his place; and the court below accordingly decreed a conveyance.

It is now urged, by the counsel of the defendant, that such order was inequitable, and that all that the complainant is entitled to, in any event, is the money due upon her mortgage, with interest.

Under ordinary circumstances,, perhaps, such a measure of reparation would answer every purpose. Such was the intimation in the opinion of Chancellor Walworth, in Van Epps v. Van Epps, 9 Paige 237, which, in many of its aspects, was strikingly similar to. the present case. But an attentive observation of the peculiar attitude of the parties to this suit, at the time of the sheriff’s sale of the property in question, will lead to the conclusion.^ that the mode of relief suggested would be defective, and entirely inadequate to the emergency. We are to assume; that,, in the view of equity,, the defendant *561neglected his duty of trustee, in not making the property produce at the sale, its fair value; it was his interest to do tiiis, and he is, therefore, to be charged with that result. On this assumption, then, it becomes probable that the cestui que trust was injured by such neglect, beyond the loss of the mortgage which ho held for her in trust. The two subsequent encumbrances were hold in trust for her, and, consequently, if, by secret acts favoring his personal ends, the trustee had the property struck off at an insufficient price, these encumbrances, in whole or in part, may, by this means, have become worthless. Hor, in this connection, should it be overlooked that, although the respondent was not the complainant in the foreclosure suit, he had a decree in his favor, and that the execution directed the sheriff to levy certain moneys for him, and that, consequently, he had a control, to some extent, over the place, time, and circumstances of the sale. The defendant, therefore, was in a situation, in some degree at least, to affect the proceeding of sale; he voluntarily placed himself in a state of repugnancy as to interest, to the complainant whom he represented, and he has no right to complain, if he is not permitted to retain a bargain which, it seems probable, has not only defeated the trust security in his own hands, but has had a like disastrous effect upon the two mortgages which were subsequent. If we assume that the farm wa.s really worth all these securities, then it becomes obvious that, if the law exacts but the payment of the one mortgage from the defendant, his misconduct, as a trustee, will be a source of considerable profit to him, and in an equal degree, a detriment to his cestui que trust. This result, it is conceived, is not consistent with the regulations before adverted to, established by law on grounds of public usefulness, to control the conduct of the trustee, and protect the rights of the cestui que trust. At this moment the defendant stands before the court, claiming the fruits of this bargain, which he has made in disregard and subversion of the interest of the complainant; if he had not infringed the rights of the complainant, he would not have acquired *562these fruits; it seems difficult to perceive any ground of equity upon which he can be permitted to retain them. But, besides this, when we look into the essence of the transaction of the vendue in question, we will perceive that in substance the defendant was purchasing, when he bought in the lands in question, the property of his cestui que trust. The farm was clearly encumbered to its full value, and the complainant was the owner of nearly two-thirds in value, of such encumbrances. The legal interest of the mortgagor, therefore, was but nominal, and the substantial interest which the defendant purchased, was the equitable rights of his own cestui que trust, and of those rights he became possessed by his purchase. They were sold in part by force of the decree in his favor as trustee, and in such a condition of affairs, it would seem to be clear, he ought not to be allowed to make a profit out of the speculation.

There is also another ground of objection to this claim of the defendant. The purchase in question, was made by the use of the mortgage which was in equity owned by the complainant. That mortgage the defendant could not lawfully use in his own concerns, so as to make a profit to himself. If a trustee use trust funds in the purchase of property, or in the transactions of business, it is a violation of his duty as trustee, and the profits of such purchase or business must enure to the benefit of his cestui que trust. It is the general rule, indispensably necessary to keep trustees in the line of their province, that they shall derive no advantage whatever from the administration of the property committed to their charge. So strictly is this disability maintained, that where trustees bought in a debt or encumbrance, to which the trust estate was liable, for a less sum than was actually due thereon, they were not allowed to take the benefit to themselves, but the other claimants had the advantage of it, and it was said that if there were no such claimants, it would go to the party entitled to the surplus. Robinson v. Pett, 3 P. W. 251, note A. “ If trust money,” says Lewin, using the language of the authorities, “ he laid out by a trustee in buying and selling *563land, and a profit be made by the transaction, that shall go, not to the trustee who has so applied the money, but to the cestui que trust, whose money has been applied. So, where a trustee or executor, has used the fund committed to his care in stock speculations, though any loss must fall exclusively on himself, he must account to the trust estate for every farthing of the profit. If he lay out the trust money in a commercial adventure, as in buying or fitting out a vessel for a voyage, or put it in the trade of another person, from which he is to derive certain stipulated gains, or if he employ it himself, for the purposes of his own business, in all these cases he must account to the cestui que trust for the profits.” Lewin on Trusts 289. A long'series of uniform precedents sustain the universality of this rule; it never bends to circumstances, and is applied with inexorable severity, whenever a person occupying a relation which implies confidence, is entrusted with the safe keeping of the property of another. To make use of such property, except for the exclusive advantage of the party beneficially interested, is in itself a breach of trust, and it would be a violation of principle to suffer the trustee to take any gain from such misconduct. In the case now before the court, the trustee has made the mortgage which belongs to the complainant, an instrument whereby the farm, in which she had a large equitable interest, has become his property. All that the complainant asks is, that she may have the fruits of this bargain. We are of opinion that, under the peculiar circumstances of this case, such relief is proper.

Let the decree stand affirmed with costs.

The decree was affirmed by the following vote:

For affirmance — Beasley, O. J., Bedle, Dalrimple, Depue, Elmer, Eort, Kennedy, Vail, Vredenburcui, Wales, Woodhull. 11.

For reversal — Clement. 1.