There were two trustees of real and personal estate for the
benefit of a minor. One of the trustees was also administrator
de bonis non upon the estate of the father of the minor,
and the other trustee was appointed guardian to the minor.
When the minor arrived at the proper age, and the accounts came
to be settled, the following rules ought to have been applied.
The trustees ought not to have been charged with an amount of
money, which the administrator trustee had paid himself as
commission. That item was allowed by the orphans' court, and its
correctness cannot be reviewed, collaterally, by another court.
Nor ought the trustees to have been charged with allowances made
to the guardian trustee. The guardian's accounts also were
cognizable by the orphans' court. Having power under the will to
receive a portion of the income, the guardian's receipts were valid
to the trustees.
The trustees were properly allowed and credited by five percent
on the principal of the personal estate and ten percent on the
income.
Under the circumstances of this case, the trustees ought not to
have been charged upon the principle of six months' rests and
compound interest.
The trustees ought to have been charged with all gains, as with
those arising from usurious loans, unknown friends, or
otherwise.
The trustees ought not to have been credited with the amount of
a sum of money deposited with a private banking house and lost by
its failure, so far as related to the capital of the estate, but
ought to have been credited for so much of the loss as arose from
the deposit of current collections of income.
The facts in the case are stated in the opinion of the
Court.
Page 57 U. S. 539
MR. JUSTICE GRIER delivered the opinion of the Court.
The complainant, Mary E. Barney, is the only daughter of Edward
Detract, who devised all his real estate and the residue of his
personal estate to respondents, Saunders and Wightman, together
with Joseph Pearson, since dead, on the following trusts:
1st. To permit the widow to enjoy during life or widowhood
certain portions of the trust estate.
2. In trust to receive the rents, interest, dividends &c.,
and to pay over quarterly to his widow, until his daughter Mary
arrived at the age of 18, three-fourths of the said rents and
profits for the support and maintenance of herself and daughter,
and
idly. To lay out and invest the residue of the said rents and
profits &c., with the annual produce thereof, from time to time
in bank or other stocks or on good security.
4th. At the death of the widow, the trustees to hold the estate
with its increase for the sole and separate use of the daughter,
and with numerous other provisions not necessary to be stated for
the purposes of this case.
The widow of the testator refused to take under the will, and
claimed her legal rights; the executors also renounced, and letters
of administration, with the will annexed, were granted to the
widow.
Page 57 U. S. 540
Mrs. Detract died in October, 1834, leaving the complainant, her
only child, then about four years of age. At her death, the
trustees went into possession of the trust estate. Saunders one of
the trustees, took out letters of administration
de bonis
non to the estate of Detract, received the assets of the
estate, which remained unconverted, and transferred them to himself
and Wightman as trustees.
In 1836, Wightman was appointed guardian of the person and
property of the complainant.
Besides the real estate, consisting of four houses in the city,
the personal property transferred to the trustees, in mortgages and
stocks, amounted to about $17,000.
The complainant intermarried with Lieut. Barney, in 1847, and
attained the age of 18 in August, 1848. In March, 1849, the bill in
this case was filed, charging the trustees with divers breaches of
trust, demanding their removal, an account of the trust estate, and
the appointment of a receiver. The respondents filed their answer
and an account, which was referred to a master or auditor, who made
report in October, 1850.
Numerous exceptions were made to this report by the complainant
which were overruled by the court below, to whose judgment this
appeal is taken.
We shall notice those only which have been urged by the counsel
in this Court. The first is
"I. That the trustees should have been charged with the
thirty-five shares of Bank of the Metropolis stock and the
dividends accruing thereupon, alleged to have been sold in 1836 by
defendant, D. Saunders to satisfy his commission as administrator
de bonis non of Edward Detract, he not being entitled to
such commission, and not having the right to sell the bank stock
without the order of the orphans' court."
The acts of D. Saunders as administrator
de bonis non
of Detract are not the subject of review in this suit. He settled
his account as administrator in the orphans' court, and the
allowances made there cannot be reviewed collaterally in another
court, in a suit in which a different trust is involved. The
appellant may possibly have good reason to complain that her estate
has been almost devoured by the accumulation of percentages it has
been compelled to pay to the numerous hands through which it has
passed, but must have her remedy, if any, by demanding a review of
the accounts in the court which has, in the exercise of its
jurisdiction, allowed them. We are of opinion, therefore, that this
exception has not been sustained.
II. The second exception is to the allowance of a credit to the
trustees for sums paid to Wightman, as guardian of the
complainant.
Page 57 U. S. 541
What has been said in reference to the first exception will
apply to this. Wightman's accounts, as guardian, were not before
the auditor for settlement, and the guardian being entitled under
the will to receive a portion not to exceed three-fourths of the
income, and apply it, if necessary, to the maintenance and
education of his ward, his receipts would be good and valid
vouchers to the trustees.
The guardian's account is open for revision in the orphans'
court, on the petition of the complainant.
While on this subject, we would take the opportunity to remark
on the impropriety of appointing persons to trusts, however high
their personal character may be, who are allowed to pay from their
right hand into their left, as where A, as administrator, has to
settle an account with A as trustee; and B, as trustee, to deal
with B as guardian. To instance the present case: Saunders the
trustee, whose duty it was to scrutinize the accounts of the
administrator
de bonis non, from whom they receive the
trust estate, is himself appointed administrator, and thus left
without a check, or anyone to call him to strict account except his
co-trustee, for many years, and until the ward comes of age.
Wightman, the other trustee, is appointed guardian, being the only
person who for many years could call to account the trustees for
any negligence, mismanagement, or fraud. Thus the estate of the
infant is left at the mercy of chance, the solvency or insolvency,
the negligence or fraud of the trustees for sixteen years or more,
with no one to call them to account. That the persons appointed in
this particular case were highly honorable men is true, but the
same rule should be applied in all cases. If the estate of the
infant in this case has been so fortunate as to escape, it is an
accident or exception, which cannot affect the propriety of a
general rule. Experience has shown that the estates of orphans are
more frequently wasted and lost by the carelessness of good-natured
and honorable men who undertake to act as trustees than by the
fraud and cupidity of men of a different character.
Such appointments, we are aware, are generally made on
ex
parte applications and without objection. But in all cases,
the court exercising this important power should remember that
orphans are under their special protection, and should make no
appointments of guardians of their estates without due inquiry and
proper information.
III. The third exception is
"That the trustees should not have been allowed and credited by
five percent on the principal of the personal estate, and ten
percent on the income, as was done by the auditor; that they should
not be allowed any commission at all, either upon the
Page 57 U. S. 542
principal or income of the estate; that in any event they should
not be credited by any commission upon the amount of principal
never collected upon the amount of bank and other stocks."
In England, courts of equity adhere to the principle which has
its origin in the Roman law, "that a trustee shall not profit by
his trust," and therefore that a trustee shall have no allowance
for his care and trouble. A different rule prevails generally, if
not universally, in this country. Here it is considered just and
reasonable that a trustee should receive a fair compensation for
his services, and in most cases it is gauged by a certain
percentage on the amount of the estate. The allowances made by the
auditor in this case are, we believe, such as are customary in
similar cases in Maryland and this district, where the trustee has
performed his duties with honor and integrity. But on principles of
policy as well as morality, and in order to insure a faithful and
honest execution of a trust as far as practicable, it would be
inexpedient to allow a trustee who has acted dishonestly or
fraudulently the same compensation with him who has acted uprightly
in all respects. And there may be cases where negligence and want
of care may amount to a want of good faith in the execution of the
trust as little deserving of compensation as absolute fraud. If
trustees, having a large estate to invest and accumulate for the
benefit of an infant for a number of years, will keep no books of
account, make out no annual or other account of their trust estate;
if they risk the trust funds in their own speculations; lend them
to their relations without security; and in other ways show a
reckless disregard of the duties which they have assumed, they can
have but small claim on a court of equity for compensation in any
shape or to any amount.
But while the court agree in these principles, they are equally
divided in opinion as to the application of them to the present
case. The decision of the auditor and the court below on this
exception must therefore stand affirmed.
IV. The fourth exception is "that the auditor did not charge the
trustees upon the principle of six months' rest and compound
interest."
On the subject of compounding interest on trustees, there is and
indeed could not well be any uniform rule which could justly apply
to all cases. When a trust to invest has been grossly and willfully
neglected, where the funds have been used by the trustees in their
own business, or profits made of which they give no account,
interest is compounded as a punishment, or as a measure of damage
for undisclosed profits and in place or them. For mere neglect to
invest, simple interest only is generally imposed. Six months rests
have been made only
Page 57 U. S. 543
where the amounts received were large and such as could be
easily and at all times invested.
The auditor in this case has made yearly rests. In calculating
the interest on the loans, he says,
"it has been charged upon the days on which it became due, first
applied to the disbursements, and the balance struck at the end of
each year and interest calculated on such balances while
unemployed, but such interest has not been carried into the
receipts of the succeeding year, but into a separate column, and
the aggregate of interest for all the years on these balances is
added to the principal at the foot of the account. In this I have
followed the rule in
Granary's Case, 1 Wash. 246, and
Leigh 348."
In this way he alleges, that
"compound interest is in effect given on the loans, and simple
interest upon the annual balances while they were uninvited,
allowing a month after the termination of each rest to make the
investment."
As the sums received by the trustees in this case were small,
and as three-fourths of the annual income were liable to be called
for by the guardian for the use of his ward, we are of opinion the
auditor has stated the account in this respect with fairness and
discretion. The fourth exception is therefore not sustained.
V. The fifth exception is "that the trustees should have been
charged by the auditor with all gains, as with those arising from
usurious loans, unknown friends, or otherwise."
It is a well settled principle of equity that wherever a trustee
or one standing in a fiduciary character deals with the trust
estate for his own personal profit, he shall account to the
cestui que trust for all the gain which he has made. If he
uses the trust money in speculations, dangerous though profitable,
the risk will be his own, but the profit will inure to the
cestui que trust. Such a rule, though rigid, is necessary
to prevent malversation.
See Dicker v. Somas, 2 My. &
K. 655.
The money used in purchase of the house, having been settled by
the transfer of the same to the complainant, the subject matter of
the present exception has been confined to the usurious interest
received. It amounts only to the sum of sixty-six dollars. The
auditor and the court erred in not charging that sum to the
accountants. They cannot be allowed to aver that the profits made
on the trust funds should be put in their own pockets, because they
were unlawful gains, for fear that the conscience of the
cestui
que trust should be defiled by a participation in them. To
indulge trustees in such an obliquity of conscience would be
holding out immunity for misconduct and an inducement to speculate
with the trust funds, and put them in peril.
Page 57 U. S. 544
This exception is therefore sustained.
VI. The sixth exception is "that the trustees should not have
been credited by the loan to Fowler & Co. or any part
thereof."
This is the most important point in the case.
The facts affecting it are reported by the auditor as
follows:
"C. S. Fowler & Co. were brokers in this city, dealing in
exchange, loans, and all the usual business of such an
establishment, and in addition issued notes which formed a part of
the circulating medium of the city. They also received deposits and
allowed interest at six percent, permitting the depositor to check
on the amount to his credit at pleasure. The establishment was in
good credit in 1841, and up to the failure in the early part of
1842, many of the businessmen of the city deposited their funds
with them. On the 22d of May, 1841, Mr. Saunders placed with Fowler
& Co. $1,181 under the following agreement, entered in a pass
or check book: "
"CITY OF WASHINGTON, 22 May, 1841"
"We hereby agree with D. Saunders acting trustee of Edw.
Durant's estate, to receive his deposits and to allow him six
percent interest thereon, he to check at will."
"C. S. FOWLER & CO."
And an account was opened in said pass-book, headed thus: "Dr.
-- C. S. Fowler & Co., in account with D. Saunders acting
trustee of Edw. Durant's estate -- Cr." Other sums were afterwards
added, and on the 3d of February, 1842, when the last was made,
they amounted to $5,277.38, and the checks to $2,306.69; to the 1st
of December, 1841, the checks amounted to $1,312, and the deposits
to $3,133.88, leaving $1,825.83 indrawn in the hands of Fowler
& Co. The sums received from Cooper, and left with Fowler &
Co., amounted to $1,876, and the other sums placed with them prior
to the 1st of December, 1841, to $1,261.88, within $50.12 of the
amount checked out up to this time.
The first sum paid in $1,181 was a payment made on the same 22d
of May, by Cooper, on account of the principal and interest due on
his mortgage. The $1,700 paid on the 17th of August was also a part
of Cooper's debt. The $800 paid in on the 3d of February, was a
part of Jones' mortgage debt. The residue is supposed to have been
the current collections of the trustees from rents, dividends,
&c.
"On the 14th March, 1842, Fowler & Co. failed. No interest
had been calculated or paid. The account was balanced after the
failure, when $2,970.96, were found standing to the credit of
Saunders as acting trustee. It is a total loss. The
Page 57 U. S. 545
credit of Fowler & Co. was good up to the time of their
failure."
Before placing the trust fund with Fowler & Co., the
trustees took the opinion of counsel, whether they could safely do
so. It was in evidence also that at any time within the last ten
years two or three thousand dollars could have been safely loaned
on mortgage of real estate in this city.
By the decision of the auditor, the trustees were charged with
those portions of the Fowler deposit which were composed of the
original capital paid in by Cooper before December, and the residue
of that loss, composed of their current annual collections and of
Jones' payment in February, on account of the original debt, was
allowed as a credit.
The court below overruled this decision of the auditor, and
ordered the charge against the trustees of $2,521.53, on this
account, to be stricken out. We are of opinion that the court below
erred in making this correction of the auditor's report.
The reasons given by the auditor, including the peculiar facts
of the case and the principles of law applicable to them, are well
stated in his report, and we fully concur in their correctness. It
will be only necessary to state them.
"The sums placed by D. Saunders as acting trustee, with Fowler
& Co., were of two descriptions -- original capital, and
current collections. Cooper's and Jones' payments were of the
former description. 1. As to those, the general rule seems to be
that a trustee, though compensated for his services, is bound to
take no greater care of the trust funds than a prudent man would of
his own. 2 Story's Eq. ยง 1268. But at the same time if the line of
his duty is prescribed he must, according to Mr. Levin, p. 413,
'strictly pursue it, without swerving to the right hand or the
left;' and if he fail to do so, and keep funds, which ought to be
invested, longer on deposit than necessary, and loss occur, he must
bear the loss. Whatever doubt may be entertained as to the duty of
the trustees in this case, to invest the surplus annual income
beyond the fourth, it is thought there can be no doubt as to their
obligation to reinvest the original loans and debts of the
testator, when paid in. If this be so, then were these sums paid by
Cooper and Jones to the trustees, and by them placed with Fowler
& Co., a loan or deposit with them. They were repayable with
interest at pleasure."
"It looks very much like a loan, payable with interest, on
demand. And if a loan, clearly the trustees are liable, because
made without security of any description. The directions of the
will are to invest on some security 'in bank or other stocks,
mortgages or other good security,' words which exclude personal
security. But the trustees, in their answers, deny it was a
loan,
Page 57 U. S. 546
and state that these sums were deposits made to await a fit
opportunity of investment."
"Assuming them to be such, the proof is that mortgages could be
obtained at any time in this city. But trustees shall be allowed a
reasonable time to select investments. What is a reasonable time?
Five months have been held to be an unreasonable time to keep money
on deposit. Cooper's first payment was left with Fowler & Co.
nearly ten months before the failure, from Mary, 1841 to March,
1842, and his second, seven months, from August to March. Jones'
was left February 3, 1842 -- not quite six weeks before the
failure. Cooper's would seem to have been on deposit waiting for
investment too long, and therefore I have charged the trustees with
those sums, deducting the arrear of interest due from him, and
deeming three months not to be an unreasonable time to be allowed
for selecting investments, have charged interest from that time. By
that rule, Jones' payment of original capital would not be
chargeable to the trustees."
We concur also in the decision of the auditor as to his refusal
to charge the trustees with the balance arising from current
collections and the payment of Jones, made within six weeks of the
failure. The funds were deposited where the accountants deposited
their own private funds. The trust funds were not mingled with
their own. Other prudent and discreet men made deposits with the
same bankers. The advice of counsel was taken. There was no reason
to suspect the solvency of the bankers. On the whole, we do not
think the trustees have acted with such want of prudence or
discretion as to render them liable for the loss of this portion of
the funds.
VII. As the whole trust estate has been delivered over to the
cestui que trust, and as the trustees hold only the bare
legal estate for the purpose of protecting the complainant in the
enjoyment of it from the debts and control of her husband, the
exception taken to the action of the court below in refusing to
remove them, becomes of no importance, and has not been insisted
on.
The decree of the court below is therefore reversed, as to
the fifth and sixth exceptions above stated, and affirmed as to the
residue. And the record remitted to the court below, with
directions to amend the decree in conformity with this
decision.
Order
This cause came on to be heard on the transcript of the record,
from the Circuit Court of the United States for the District of
Columbia, holden in and for the County of Washington, and was
argued by counsel. On consideration whereof, it is now
Page 57 U. S. 547
here ordered, adjudged, and decreed by this Court, that the
decree of the said circuit court in this cause be, and the same is
hereby reversed with costs, and that this cause be, and the same is
hereby remanded to the said circuit court for further proceedings
to be had therein in conformity to the opinion of this Court.