1. Parties who take a lease of a ward's property under a secret
agreement with the guardian making the lease that it shall inure in
part to his personal benefit, hold the lease, and if that be
transferred to a purchaser, hold the proceeds they acquire from it,
as trustees
ex maleficio for the ward without regard to
whether the ward was actually damaged by the fraud of the guardian.
P.
268 U. S.
130.
2. In such cases, the ward may at his option, follow the
fraudulently diverted trust
res until it reaches the hands
of a
bona fide purchaser for value, or claim the proceeds
of the sale or other disposition of it in the hands of the person
who fraudulently acquired it from the fiduciary and in the hands of
that person's donees. P.
268 U. S.
132.
3. A suit to establish an equitable claim to specific property
may be prosecuted to subject the proceeds of that property to the
trust if it develop in the course of the trial that the defendant
has conveyed it away in violation of his equitable duty to the
plaintiff. P.
268 U. S.
133.
4. The guardian of an Indian leased his ward's land partly in
consideration of a secret interest for himself agreed to by his
lessees, and afterwards, in a compromise between the lessees and
one who had obtained a lease of the same land from the Indian's
curator, the guardian's lease was executed by the curator also,
and, having been approved by a county court and by the Secretary of
the Interior, was assigned to a corporation, shares of which were
issued to the respective lessees and parties claiming under them,
the assignment of the lease being the sole consideration for the
shares distributed to the lessees of the guardian.
Held,
(a) that a suit by the United States, on behalf of
Page 268 U. S. 122
the Indian, to set the lease aside or for alternative relief
could be prosecuted to reach the shares, or the proceeds thereof,
in the hands of the fraudulent lessees and their donees, including
shares bought by these lessees from the guardian, even though
relief could not be had as against the corporation and
bona
fide purchasers for value, and (b) that an agreement by the
plaintiff after defeat in the district court, not to prosecute the
appeal as against the corporation and
bona fide
shareholders did not prevent this relief as against the others. P.
268 U. S.
135.
5. In a suit praying relief from the execution and legal effects
of a lease because it was procured by the fraud of the lessees, the
lessees can not, while claiming under it and holding the benefits
derived from it, deny the authority of the lessor to make it. P.
268 U. S.
135.
6. One who claims the benefit derived from a breach of trust in
which he actively participated and who shows no prejudice from a
delay of six years in bringing suit to compel him to account,
cannot complain of laches. P.
268 U. S.
136.
288 F. 158 reversed in part, affirmed in part.
Appeal from a decree of the circuit court of appeals affirming a
decree of the district court which dismissed a bill brought by the
United States, on behalf of a full-blooded Choctaw Indian, a minor,
to cancel for fraud an oil and gas lease on the Indian's land in
Oklahoma, or, in the alternative, to affix a trust on shares held
by defendants in a corporation, also a defendant, to which the
lease had been assigned.
Page 268 U. S. 126
MR. JUSTICE STONE delivered the opinion of the Court.
This is an appeal from the United States Circuit Court of
Appeals for the Eighth Circuit from so much of its decree as
affirms a decree of the district court of the United States for the
Eastern District of Oklahoma dismissing the bill of the plaintiff,
the appellant here. 288 F. 158.
Suit was begun to cancel an oil and gas lease of 40 acres of
land, given to appellees Dunn and Gillam by Thomas, guardian, and
signed by Eaves, curator of Allie Daney, a minor full-blood Choctaw
Indian. Both Thomas and Eaves claimed the right to represent the
minor and to lease her land. Eaves was appointed curator
Page 268 U. S. 127
of the minor by the United States Court for the Southern
District of the Indian Territory in November, 1905, and, on
admission of the Territory of Oklahoma and the Indian Territory to
statehood as the State of Oklahoma, that court transmitted the
curatorship record to the County Court of Love County. Thomas was
appointed guardian by the County Court of Le Flore County in July,
1911. On August 18, 1913, Eaves executed a lease of the premises in
question to one Mullen, which lease was approved by the County
Court of Love County. On the same day, Thomas, as guardian,
executed a lease of the same premises to Dunn and Gillam, which
lease was approved by the County Court of Le Flore County. The two
leases came to the Indian superintendent for his recommendation for
approval by the Secretary of the Interior at about the same time.
This developed a controversy between Mullen, on the one hand, and
Dunn and Gillam, on the other, as to whether Thomas or Eaves
properly represented the minor and had legal authority to enter
into a lease of the minor's lands. A compromise was finally
effected between the contesting parties whereby Eaves added his
signature as curator to the lease which had been given by Thomas to
Dunn and Gillam and acknowledged it. At the same time, the Bull
Head Oil Company, a corporation and one of the defendants, was
organized. The Thomas lease was assigned to it, under an agreement
that the lessees would take for their respective interests in the
leasehold equal shares of stock. The capital of the Bull Head Oil
Company was fixed at $18,000, of which 8,000 shares of the capital
stock of the company, having a par value of $8,000, were issued to
Mullen, the lessee under the Eaves lease, and 8,000 shares were
issued to Dunn, as trustee, for account of the lessees under the
Thomas lease and those claiming under them. The remainder of the
capital stock was reserved and issued for other corporate
purposes.
Page 268 U. S. 128
The bill of complaint joined as defendants the Bull Head Oil
Company, Dunn and Gillam and their wives, and Mullen and others,
who were stockholders of the company. It charged that the Thomas
lease was voidable because, as alleged, Thomas, the guardian, had
been induced to execute the lease by a secret agreement with Dunn
and Gillam to the effect that a one-fourth interest in the lease
was to be transferred by them to a third person for the personal
benefit of Thomas. The bill prayed that the minor, Allie Daney, be
decreed to be the owner in fee of the lands described in the Thomas
lease; that the defendants be adjudged to have no interest therein,
and that they be required to account for the oil and gas taken from
the land and for the money received by them as the proceeds of the
oil and gas so taken, and, in the alternative, if for any reason
the court should adjudge that the lease of the premises could not
be cancelled, then that the defendant stockholders be adjudged the
holders of said stock respectively in trust for the minor, and that
the plaintiff be awarded the custody thereof for her use and
benefit, and that the defendants who are or at any time have been
stockholders of the Bull Head Oil Company be required to account
for all money received by them respectively either as dividends or
as proceeds of sale of their stock.
On trial the court found that a part of the consideration moving
Thomas, as guardian, to execute the lease to Dunn and Gillam was a
one-fourth interest in the lease transferred by them pursuant to a
secret agreement with the guardian to a third person for the
personal use and benefit of Thomas. The trial court further found
that Eaves, as curator, by subscribing his name to the Thomas
lease, with the approval of the County Court of Love County and
with the approval of the Secretary of the Interior, gave legal
validity to that lease; that such action of Eaves was free from the
legal effect of the fraud of
Page 268 U. S. 129
Thomas and of Dunn and Gillam, and that, by the transfer of the
lease to the Bull Head Oil Company in exchange for its issue of
capital stock, the full legal ownership of the lease was thereupon
vested in the Bull Head Oil Company free from any legal effect of
the fraud in the execution of the original lease by Thomas, the
guardian. The court also found that, of the shares of stock
acquired by Gillam as a result of the compromise entered into with
Dunn and Gillam by Mullen, 3,266 2/3 shares, of which his wife,
Mrs. Gillam, a party defendant, held 1,266 2/3 shares, were sold by
them to one Hamon, a party defendant, for the sum of $75,000, and
that Hamon was an innocent purchaser for value of the stock; that
the defendant T. H. Dunn still retained his holdings in the stock
of the company. There was also finding that certain shares of the
Dunn and Gillam stock, transferred by them respectively to Mrs.
Dunn and Mrs. Gillam, were so transferred without consideration.
Upon the basis of these findings, the court entered its decree in
favor of the defendants and dismissed the case.
After the entry of the decree of the district court, the
plaintiff, acting by the Secretary of the Interior, entered into an
agreement, approved by the Secretary and an Assistant Attorney
General, with all the defendants other than the defendants Dunn and
his wife and the defendants Gillam and his wife, whereby it was
stipulated that, in any appeal which the United States should take
from the decision of the district court in this cause,
"the United States would neither ask nor insist upon a reversal
of the said cause, or a recovery against the Bull Head Oil Company
or against any of the defendants in said cause, save and except T.
H. Dunn, N.E. Dunn [wife of T. H. Dunn], J. Robert Gillam, and Mrs.
J. Robert Gillam, and that it will not insist upon any judgment
impressing a trust upon any of the stock in the
Page 268 U. S. 130
Bull Head Oil Company heretofore owned by J. Robert Gillam or
Mrs. J. Robert Gillam and assigned to Jake Hamon, but will insist
upon a money judgment against them for whatever amount the
testimony may show should be awarded."
Both the district court and the circuit court of appeals found,
and the appellees do not question the correctness of the finding,
that the Thomas lease to Dunn and Gillam was procured by fraud; nor
can it be questioned on this record that the claim of Dunn and
Gillam to rights under the Thomas lease was the only basis and
consideration moving from them for the compromise agreement by them
with Mullen, claiming under the Eaves lease, which resulted in Dunn
and Gillam together receiving in exchange for their interest in the
lease, 8,000 shares of the capital stock of the Bull Head Oil
Company as the fruits of their fraudulent enterprise. Of this stock
Dunn and his wife still hold a substantial amount. Gillam and his
wife have converted the stock held by them into cash by sale of it
to an innocent purchaser, and the leasehold itself, by the action
of Dunn and Gillam, has been transferred to the Bull Head Oil
Company, and has been adjudged by the decree of the district court
to be beyond the reach of the plaintiff and the plaintiff's ward,
and the plaintiff in error has abandoned its appeal from that part
of the decree.
There is thus presented the narrow question whether the
appellees, Dunn and wife and Gillam and wife, against whom this
appeal is now prosecuted, may retain the fruits of this fraudulent
course of conduct, immune from attack in a court of equity. The
court below rested its decision on the ground that the compromise
settlement entered into with the defendants, some of whom were
stockholders of the Bull Head Oil Company, other than the appellees
against whom this appeal is prosecuted, had the effect of
confirming the Thomas lease and
Page 268 U. S. 131
if the appellant had the right to continue the litigation
against Dunn and Gillam, that right is based on their alleged
fraudulent conduct, and is a claim for damages on account of the
fraud, and since there was no evidence that the lease was granted
for an inadequate return, there was no basis for an award of legal
damages to the appellant.
Undoubtedly, in an action at law for fraud or deceit, since the
action sounds in damage, the plaintiff must prove damage to
establish a right to recover. If Dunn and Gillam had retained the
lease which they fraudulently obtained from Thomas, as guardian,
the plaintiff could at its option, either have brought suit in
equity against them for the cancellation of the lease or for
damages against the guardian, or possibly also at law for damages
against Dunn and Gillam, and, on familiar principles, any
relinquishment of plaintiff's right to cancel the lease would
necessarily have limited plaintiff to a right of recovery for
damages. But such is not the situation here presented. The grant of
the lease by Thomas, the guardian, to Dunn and Gillam, with a
secret agreement that the guardian should be jointly interested in
the lease with Dunn and Gillam, was a fraud upon the ward,
rendering the whole transaction voidable at the option of the ward
or those legally representing her. It is not necessary in such a
situation, in order to establish the right to relief, to show that
the beneficiary was damaged by the fraudulent conduct of the
trustee. It is sufficient to establish that the fiduciary has
exercised his power of disposition for his own benefit without
more.
Michoud et al. v. Girod et
al., 4 How. 503,
45 U. S. 533;
Wardell v. Railway Co., 103 U. S. 651,
103 U. S. 658;
Thomas v. R. Co., 109 U. S. 552;
Burns v. Cooper, 140 F. 273, 277;
Mastin v.
Noble, 157 F. 506, 509;
New York Central & H.R. Co.R.
Co. v. Price, 159 F. 321, 323, and
Lane & Co. v. Maple
Cotton Mill, 232 F. 422, 423.
Page 268 U. S. 132
Dunn and Gillam did not retain their interest in the lease which
they had fraudulently acquired. They transferred it, together with
the secret interest of Thomas, the guardian in the lease, to the
defendant, the Bull Head Oil Company, in exchange for stock in that
corporation. They then acquired, by purchase from Thomas for the
sum of $3,500 and an automobile, his interest in the stock of the
corporation. Some of the stock which they acquired by this
transaction was turned over to their wives, who, the court found,
took as donees, and some of it was retained and is now held by
appellees, and some of it has been transferred by them to innocent
purchasers for value. In such a situation, equity adopts the
salutary rule that he who fraudulently traffics with a recreant
fiduciary shall take nothing by his fraud. The ward or the
beneficiary of a trust may, at his option, follow the trust
res fraudulently diverted until it reaches the hands of an
innocent purchaser for value, or he may, at his option, claim the
proceeds of the sale or other disposition of the trust
res
in the hands of him who fraudulently acquired it of the
fiduciary.
The legal principles governing the right to follow trust funds
diverted in breach of the trust were succinctly and accurately
stated by Turner, L.J. in
Pennell v. Defell, 4 De Gex, M.
& G. 372, 388, as follows:
"It is an undoubted principle of this Court that, as between a
cestui que trust and trustee and all parties claiming
under the trustee, otherwise than by purchase for valuable
consideration without notice, all property belonging to a trust,
however much it may be changed or altered in its nature or
character, and all the fruits of such property, whether it is in
its original or its altered state, continues to be subject to or
affected by the trust."
To the same effect are
v. Piatt, 3
How. 333,
44 U. S. 401;
Lane v. Dighton, Amb. 409;
Ex parte Dumars, 1
Atk. 232, 233;
Taylor v. Plummer, 3 Maule & Selwyn
Page 268 U. S. 133
562, 571;
Cobb v. Knight, 74 Me. 253;
People v.
California Safe Deposit & Trust Co., 175 Cal. 756;
Hubbard v. Burrell, 41 Wis. 365.
The rule is the same as against a fraudulent vendee who has
exchanged the property purchased for other property.
American
Sugar Refining Co. v. Fancher, 145 N.Y. 552.
The rule is the same with respect to the proceeds of property
tortiously misappropriated and found in the hands of the tortfeasor
or his transferee with notice.
Newton v. Porter, 69 N.Y.
133.
Dunn and Gillam, when they fraudulently acquired the Thomas
lease by the corrupt action of the guardian, which action they
actively induced, became trustees
ex maleficio of the
lease, and as such trustees they became equitably bound to hold the
lease for the benefit of the ward or, in the event of a sale or
other disposition of it, to hold its proceeds upon a like
obligation. Any other rule would enable the fraudulent recipient of
trust property acquired through a breach of trust to render himself
immune to the remedial action of equity by the simple expedient of
transferring the trust
res thus acquired to an innocent
purchaser for value, or otherwise placing it beyond the reach of
the defrauded beneficiary of the trust. Nor are they in any better
situation with respect to the stock which they acquired by purchase
from Thomas with full knowledge that it was a part of the proceeds
of the lease fraudulently acquired from the guardian and by them
fraudulently transferred to the oil company. Not being innocent
purchasers, they took it impressed with the trust to which the
lease itself was subject.
Newton v. Porter, supra.
The plaintiff's bill was framed in conformity to the rule as we
have stated it. It prayed cancellation of the lease in the hands of
the Bull Head Oil Company, the transferee of Dunn and Gillam, "but
if for any reason the
Page 268 U. S. 134
court shall hold" that the lease could not be cancelled, then it
prayed that the stockholders be adjudged to hold the stock in trust
for the plaintiff. The district court having decreed that the
leasehold itself could not be followed into the hands of the Bull
Head Oil Company, the plaintiff was not barred from claiming the
proceeds of the lease in the form of stock or money in the hands of
those stockholders who were not innocent purchasers for value, and
the pleadings were appropriately framed to that end. Suit to
establish an equitable claim to specific property does not bar a
recovery of the proceeds of that property if it develops in the
course of the trial that the defendant has conveyed it away in
violation of his equitable obligation to the plaintiff.
Taylor
v. Kelly, 56 N.C. 240;
Haughwout v. Murphy, 22
N.J.Eq. 531-547;
Valentine v. Richardt, 126 N.Y. 273;
Sugg v. Stowe, 58 N.C. 126;
Siter's Appeal, 26
Pa. 178;
Frick's Appeal, 101 Pa. 485;
Bartz v.
Paff, 95 Wis. 95.
See also Jarvis v. Smith, 1
Hoffman's Ch. 470;
Daniels v. Davison, 16 Vesey 249, and 1
Sugden on Vendors 277.
In
Valentine v. Richardt, supra, suit was brought in
equity to cancel a conveyance of real estate for fraud. The alleged
fraudulent grantee and his grantee and a subsequent mortgagee were
made parties defendant, and the relief demanded was that the two
conveyances and the mortgage be declared void, and that they be
surrendered up and cancelled and for such further and other relief
as might be just. On the trial, the court found that the first
conveyance was procured by fraud, but that the second conveyance
and the mortgage were taken in good faith for value, and the
complaint was dismissed as to them. It was held that the first
grantee was a trustee of the property
ex maleficio, that
the bill might be retained against the first grantee, and that the
plaintiff might, in equity, secure a money judgment for the value
of the land, not as damages, but as a substitute for the land
itself,
Page 268 U. S. 135
and that, under the frame of the bill and prayer, the court had
power to render any judgment consistent with the facts alleged and
proved -- a principle of decision which we think is exactly
applicable to the present case.
See also Mooney v. Byrne,
163 N.Y. 86.
The compromise agreement entered into by plaintiff with
defendants other than Dunn and Gillam was not technically a
confirmation of the lease. It was, both in form and in substance,
only an abandonment of an appeal from a decree of the court
adjudging an indefeasible title to the lease to be in the defendant
corporation. The practical effect was to enable the other
stockholders, at a price, to weaken the danger of being involved in
the fraud by their probable guilty knowledge of it. But, even if it
were deemed to be a confirmation of the lease, such a confirmation
is not inconsistent with a recovery of the proceeds of the lease
from Dunn and Gillam and those claiming under them, nor, as has
been pointed out, does it bar a recovery of the proceeds. Indeed, a
recovery of the proceeds of the assignment of the lease by Dunn and
Gillam could be predicated only on a confirmation of the transfer
which would bar a recovery of the leasehold itself.
Bonner v.
Holland, 68 Ga. 718;
Cadieux v. Sears, 258 Ill. 221;
Bettencourt v. Bettencourt, 70 Or. 384, 396.
Nor do we find it necessary to consider the question whether
Eaves, the curator, or Thomas, the guardian, properly represented
the minor, or whether either of them possessed exclusively the
power to dispose of the property of the minor, or to determine the
precise legal effect of the addition of Eaves' signature to the
Thomas lease. Thomas, under whom Dunn and Gillam claim, assumed to
act as guardian in the disposition of his ward's property. Dunn and
Gillam dealt with him in that capacity. On common law principles,
they cannot deny the legal capacity in which their lessor purported
to act in executing the lease under which they claim.
Terry v.
Ferguson, 8
Page 268 U. S. 136
Port. 501;
Pouder v. Catterson, 127 Ind. 434;
Wolf
v. Holton, 92 Mich. 136; 104 Mich. 108;
Parker v.
Raymond, 14 Mo. 535;
Steel v. Gilmour, 77
App.Div.199, 203;
Steuber v. Huber, 107 App.Div. 599;
Shell v. West, 130 N.C. 171;
Caldwell v. Harris,
4 Humph. 24; Tiffany, Landlord & Tenant, § 78(h) and (j). This
is the rule adopted by the statute of Oklahoma.
See §
5247, Compiled Statutes of Oklahoma 1921;
Avey v. Van
Voorhis, 42 Okl. 232, 241. In a suit founded upon the very
existence of the lease and praying relief from its execution and
legal operation because procured by the fraud of the lessees, the
lessees cannot claim under the lease, hold the benefits derived
from it, and at the same time deny the power and authority of the
lessor to execute it.
We can perceive no reason why a doubtful or uncertain claim of
Dunn and Gillam to the leasehold, sufficient nevertheless to
constitute the consideration for the compromise contract with
Mullen (
Blount v. Wheeler, 199 Mass. 330;
Zoebisch v.
Von Minden, 120 N.Y. 406;
Dredging Co. v. Hess, 71
N.J.Law, 327), could not become the subject matter of a trust
arising
ex maleficio from the fraud of Dunn and Gillam and
upon principles already referred to, it follows that, if Dunn and
Gillam could not resist a bill to compel the cancellation of the
lease, they cannot now resist the prayer that they account for the
proceeds of the lease acquired by their sale of it and which are
the direct fruits of their fraud.
A period of about six years elapsed between the giving of the
Thomas lease and the filing of the bill. The defendants neither
pleaded nor have they urged laches as a defense; nor do we find in
the record any adequate basis for denying relief on that ground.
One who claims the benefit derived from a breach of trust in which
he actively participates, and who shows no prejudice resulting from
the delay in bringing suit to compel him to account,
Page 268 U. S. 137
cannot complain of laches.
See Insurance Co. v.
Eldredge, 102 U. S. 545,
102 U. S. 548.
We hold that Dunn and Gillam were constructive trustees of
whatever interest they acquired in the Thomas lease, and of the
proceeds derived from the transfer thereof to the Bull Head Oil
Company, whatever its form, whether stock or money, and that they
and all defendants claiming under them, other than innocent
purchasers for value, may in equity be compelled to account to the
plaintiff for such proceeds, for the benefit of the minor.
The decree of the circuit court of appeals, with respect only to
the defendants T. H. Dunn, N.E. Dunn, J. Robert Gillam, and Mrs. J.
Robert Gillam, is reversed, and the cause remanded to the district
court for further proceedings in accordance with this opinion; as
to the other defendants, the appeal was barred by the agreement
entered into by appellant with them, and as to them the decree of
the circuit court of appeals is affirmed.
So ordered.
Reversed in part, affirmed in part.