The principle that a trustee may purchase the trust property at
a judicial sale brought about by a third party, which he had no
part in procuring and over which he could not have had control is
upheld by numerous decisions of this Court and of other courts of
this country, and prevails in Texas.
Page 127 U. S. 590
In equity. Decree dismissing the bill. Complainant appealed. The
case is stated in the bill.
MR. JUSTICE LAMAR delivered the opinion of the Court.
This is a suit in equity in the Circuit Court of the United
States for the Eastern District of Texas. The bill sets forth that
complainant, Fannie B. Allen a citizen of Kentucky, is the
granddaughter of James Morgan, who died in 1866 seized and
possessed of an estate of 70,000 acres of land and a homestead in
Galveston, with some personal property. The land was unproductive
and scattered throughout the state. The deceased devised his
property to seven grandchildren, of whom complainant was the oldest
and who in 1866 married at the age of seventeen years.
By the terms of the will, Henry F. Gillette, George Ball, both
of Texas, and W. H. N. Smith, of North Carolina, were appointed
executors. They were authorized, after probating said will and
filing inventory and appraisement of the property, to administer
the estate without any accountability to any judge or court.
Gillette and Ball, on being duly qualified, entered upon the
management of the estate.
On the 13th day of June, 1872, complainant and her husband, H.
A. Allen gave their note for $1,200, payable six months from date,
with 12 percent interest, to the Banking and Insurance Company of
Galveston; to secure the payment of which note they also executed a
deed of trust on all complainant's interest in the various tracts
of land described in said deed belonging to the estate. Complainant
and her husband being unable to pay said note when it became due,
the deed of trust was foreclosed, her interest in said estate was
sold thereunder, and the said defendant Gillette became the
purchaser of said interest at the foreclosure sale. The complainant
alleges at length that, being poor and in
Page 127 U. S. 591
needy circumstances arising from the failure and refusal of said
defendant to settle up the said estate so as to let her have her
portion thereof or to render it available to relieve her pressing
necessities, she was induced, by the advice of said defendant, to
borrow said money from the bank and to execute the said note and
deed of trust, which she would not have done but for defendant's
promise to make her said interest in the estate available so as to
pay off said note and thus prevent the sale under the deed of
trust. She further alleges that by withholding from her information
as to the condition and value of the estate and making no reports
to the court, the defendant obtained an undue advantage over her
and was thereby enabled to bid in her interest for much less than
it was worth at the time of the sale. After alleging other
circumstances of wrongful conduct and dereliction of duty, she
states that owing to enforced absence from Texas, to her poverty,
and to the ignorance in which she was kept as to the real facts
relative to her father's estate, it was not until a few months
before this suit was commenced that she by accident discovered that
she had any lawful claim to recover of said defendant her interest
in the lands purchased by him.
The bill closes with the prayer that she be allowed to redeem
said land from the said defendant, Gillette, by paying said
purchase money, and that, in the event of her being unable to
redeem it within such reasonable time as the court might direct,
then that the land be resold for her benefit, paying the defendant
the amount of his advances and interest; that the said defendant be
required to answer under oath each and every allegation of the bill
and to make a full account of all his actings and doings as
executor of Morgan's estate.
The defendant denies the allegation that the note and mortgage
were executed by said complainant at his (defendant's) suggestion,
by his advice, or with his approval, and alleges in specific detail
that each and all the statements in the bill as to his
(defendant's) conversations, actions, or privity with said
complainant and her husband, or said company, in any manner leading
to or connected with said loan, note, and trust deed, are wholly
untrue and unfounded, and avers that he
Page 127 U. S. 592
was entirely ignorant of the borrowing of the said money, and of
the execution of said note and deed of trust, and of any and all
negotiations with reference thereto, or of any purpose of the kind
on their part, until long afterwards, when he happened to see in a
newspaper an advertisement of the sale to be made under the trust
deed by complainant and her husband. The answer proceeds to give a
full recital of the circumstances of defendant's purchase of said
interest, declaring that, having failed in his efforts to prevent
said sale or to secure any better price to be paid, and that having
ascertained that the property would be inevitably sold, he attended
and purchased said interest, bidding the amount of said debts and
expenses of the sale, and that said husband of complainant was
present at the sale, repeating his assurance, previously given, of
satisfaction at the purchase of defendant in his own personal right
and for his own benefit and without trust or liability to
complainant. Defendant further alleges that the price was entirely
adequate to the value of the interest at that time and denies the
allegations of complainant to the contrary; alleges that said lands
were appraised at twenty-five cents per acre, that the indebtedness
of the estate exceeded $20,000, that if settlement had been forced,
it would not have yielded sufficient to pay the indebtedness, and
that the policy of paying off the debts gradually, by inducing
creditors to accept lands in settlement and selling in small
parcels on time, thus saving all the lands they possibly could for
division among the grandchildren of Morgan, was known to and
approved by the relations and friends of the other six minor
children. He denies all concealment of the condition and
indebtedness of the estate from complainant and her husband, who
was a young man of good business qualifications, fully able, so far
as defendant knows and believes, to maintain his family in comfort
by economy and industry, and in specific detail shows how he (the
defendant) acted in good faith, with all reasonable diligence, in
the discharge of his trust to the creditors and devisees of the
estate. The case was set for hearing upon bill and answer and the
exhibits to the bill and answer, respectively. Upon the trial, the
court held that the complainant was not entitled to the
Page 127 U. S. 593
relief prayed for in her bill, that no fraud was shown to have
been committed, and that the defendant acted in the purchase with
good faith, and rendered a decree against complainant dismissing
her bill with costs.
The complainant in this case prayed that the defendant be
required to answer upon oath, fully and distinctly, each allegation
of the bill. He did answer, and repelled every allegation of
suggestion or knowledge on the subject of complainant's
transactions with the bank or of any approval of them after he was
informed of them. His answer is corroborated by the circumstances
and facts developed. There is not in those circumstances the
slightest trace of fraud, false representation, or unfair dealing
on his part in making the purchase or of inadequacy of the price
paid. It is perhaps worthy of remark that counsel for complainant,
both in oral argument and printed brief, was particular to call
especial attention of the court to the fact that it is not alleged
"that the defendant was guilty of fraud of any kind, either
express, implied, or constructive," nor is it claimed that the
facts alleged in the bill show fraud of any kind on the part of the
defendant. The theory of his case is that on account of the
fiduciary relation of the defendant, the law conclusively presumes
that he made the purchase for the benefit of the complainant as the
cestui que trust and that he thereby acquired only the
right of holding the property as a trust mortgagee, and was
entitled to realize what he had paid for it in the same manner as a
mortgagee realizes from his investment. This is the whole extend of
the claim -- not that the purchase shall be set aside and declared
void for fraud of any kind, either express or implied, but that it
should be upheld and made to operate as a resulting trust for the
benefit of the complainant.
It must be conceded that as a general rule of equity
jurisprudence, a trustee or person acting in a fiduciary character
for the benefit of others cannot become a purchaser at his own sale
or acquire any interest therein without the express consent or
under a special permission given by a court of competent
jurisdiction. The cases cited by counsel for appellant abundantly
support this doctrine. It applies to executors
Page 127 U. S. 594
and administrators, who are not permitted to derive a personal
benefit from the manner in which they transact the business or
manage the assets of the estate entrusted to them; but whatever
advantage is derived by them from a purchase at an undervalue is
for the common benefit of the estate. In this case, the precise
nature of the trust, as well as the character and limits of the
relations of the executor to the estate, are fixed with precision
by the terms of the will, which is as follows:
"I do hereby constitute and declare the children of Son Kosinsko
Morgan and his wife, Caroline, to-wit, Fannie Belle, Charles W., P.
May Maria Orphelia, and Nellie Latham, and Ellen Lee, the daughter
of my daughter Othelia Lee, my residuary legatees, and to them, in
equal shares I will, devise, and bequeath all my estate and
property, both real and personal, wherever the same may be, after
all just debts against my estate and expenses accruing in the
settlement thereof shall have been paid and discharged. I hereby
constitute and appoint George Ball, of Galveston County, and H. F.
Gillette, of Harris, both of the State of Texas, and Mr. Wm. H. N.
Smith, of Murfreesborough, North Carolina, the executors of this,
my last will and testament (and to qualify without bond), with
power, jointly or either two of them, to do all such acts and
things, to sell any property necessary for the liquidation of
debts, and to take all such steps and measures as may be necessary
or expedient in the discharge or execution of the trust hereby
reposed in them and in payment and discharge of all the provisions
and bequests herein contained and in the administration of the
estate and property devised and disposed of by virtue of this
testament. And finally, it is my special desire that when this, my
last will and testament, shall have been proven and recorded, and
an inventory and appraisement of my estate recorded in the probate
court, neither such court nor any other shall have anything further
to do with the administration of my estate, but my said executors,
George Ball, H. F. Gillette, and W. H. N. Smith, or any two of them
who shall qualify and act, shall have full control of my estate
under the will,
Page 127 U. S. 595
without accountability to any judge or court further than before
expressed by the will."
It is clear that with the exception of the exemption of the
executors from accountability to the court in the details of
administration, the trust created by this will is the same that
attaches by operation of law to any executor, to-wit, a trust to
pay the debts of the estate and then to deliver over the remainder
of the lands for partition among the devisees or heirs.
The subject matter of the trust in this case is the whole estate
in its entirety (1) for the common benefit of all the creditors,
and (2) for the common benefit of all the heirs or devisees.
Respecting these creditors or devisees in their separate and
individual capacity, he is not the representative or guardian of
their person or property, and can exercise no legal control over
either. The disposition which a single creditor may make of his
debt against the estate, or the sale or other disposition which an
individual devisee may make of his individual interest in said
estate, cannot interfere with the executor's control of the estate
for the payment of the debts of the creditors, on the one hand, or
for its ultimate partition among the devisees, on the other, and
both are therefore matters entirely outside of his trust and his
office.
We have already taken it as true that fraud is out of the
question in this case, and that the defendant had no agency in the
borrowing of the money, and encumbering her separate interest, as
above described by the complainant. She had, in conjunction with
her husband, absolute authority to contract that debt and to convey
her interest in the lands of the estate in trust to the bank with a
power, in case of default of payment, to sell said property. Having
this right free from any power of interference on the part of the
executor Gillette, it must follow that the debt was a legal one,
the encumbrance a valid one, and the sale under it by the trustee
in the deed equally valid and legal. Up to this point, the
defendant occupies no relation of trust or confidence to the
transaction. With no legal power over any of the contracting
parties, with no right to interfere with the trustee, to whom full
power by
Page 127 U. S. 596
the deed is lawfully given to sell the encumbered interest at
public auction, he has no trusteeship in regard to it, no duty to
perform in respect to it. The debt itself, incurred by complainant,
constitutes no part of the liabilities of the estate which he, as
executor, represents. The sale, when made, touched that estate
nowhere, did not diminish its assets in the least, nor withdraw
from it any lands subject to the debts of creditors, and to the
ultimate partition of the devisees and their assigns.
There is nothing in the transaction, from its inception to its
final consummation, that imposed upon the defendant any duty
incompatible with his right as a purchaser at the sale.
The principle that a trustee may purchase the trust property at
a judicial sale brought about by a third party, which he had taken
no part in procuring, and over which he could not have had control,
is upheld by numerous decisions of this Court and of other courts
of this country.
Prevost v. Gratz, 1 Pet. C.C. 378;
Twin Lick Oil Co. v. Marbury, 91 U. S.
587;
Chorpenning's Appeal, 32 Penn.St. 315;
Fisk v. Sarber, 6 W. & S. 18.
It is true that the rule upon this subject, as stated by some
text writers, is more stringent than that stated in these cases. 1
Perry on Trusts ยง 205; Hill on Trustees 250. We think, however,
that the language employed by them does not present a thorough and
perfect generalization of the essential principles pervading the
decisions upon this subject. They are in manifest conflict with the
uniform current of decisions of the Supreme Court of Texas, which
are our guides in this case.
Erskine v. La Baum, 3 Tex
417;
Howards v. Davis, 6 Tex. 174;
Scott v. Mann,
33 Tex. 725;
Goodgame v. Rushing, 35 Tex 722.
From all of which we are of the opinion that the decree of
the court below was correct, and it is accordingly
affirmed.