1. A person lending money to a trustee on a pledge of trust
stocks, and selling the stocks for repayment of the loan, will be
compelled to account for them if he have either actual or
constructive notice that the trustee was abusing his trust and
applying the money lent to his own purposes.
2. The lender will be held to have had this notice when the
certificates of the stocks pledged show on their face that the
stock is held in trust and when apparently the loan was for a
private purpose of the trustee and this fact would have been
revealed by an inquiry.
3. The duty of inquiry is imposed on a lender lending on stocks
where the certificate of them reveals a trust.
4. These principles are not affected by the fact that the stocks
pledged may be such as the trustee under the instrument creating
his trust had no right to invest in, as
ex. gr., stock of
a canal company, when he was bound to invest in state or federal
loans.
5. Notice to the cashier of a bank or of bankers that the stock
pledged is trust stock is notice to them.
In 1833 Commodore William Bainbridge, a resident of
Page 82 U. S. 166
Philadelphia, died leaving four daughters, one of whom was Mary
T. B., subsequently the wife of Charles Jaudon. By his will he left
to two trustees a considerable sum of money, directing them to
invest the same in the stocks of the United States or the stocks or
funds of any individual state and to hold the same in trust for his
several daughters, one-fourth for his daughter Mary, the interest
to be paid to her,
"for her sole use and benefit during her natural life, and at
the end of her natural life, the amount so invested to be equally
divided between her children."
The property left by the Commodore was invested by his trustees
as the will directed, chiefly in five percent loans of
Pennsylvania, and the interest was properly paid to the daughters.
The interest received from the Pennsylvania loans, five percent,
was less than the
cestui que trusts were content with, but
the trustees appointed in the will would not depart from the
directions imposed on them by it as to the class of investments in
which they could invest, and becoming thus unacceptable to the
cestui que trusts, they were discharged in 1835, at their
own request, from their trust and surrendered the estate under
their care to Samuel Jaudon, whom, on the consent of Mrs. Jaudon,
the court appointed, without security, to be trustee, in the place
of the trustees named in the will. [
Footnote 1]
The Pennsylvania five percent stock was now soon sold and the
proceeds invested by Samuel Jaudon in the stock of the Delaware
& Raritan Canal Company according to an arrangement previously
made with the
cestui que trusts, the new stock being one
of a high character in its class and which has paid for many years
with great regularity ten percent a year dividend, with occasional
large extra dividends. Mrs. M. T. B. Jaudon got thus finally 117
shares of this stock. The certificates, of which there were
several, all ran thus:
"This is to certify that S. Jaudon,
trustee for Mrs. Mary T.
B. Jaudon, is entitled to seventy shares in the capital stock
of the
Page 82 U. S. 167
Delaware & Raritan Canal Company . . . transferable on the
books of the Company and on surrender of this certificate only by
him or his legal representative."
This investment was made very soon after the new trustee was
appointed. A similar one was made for all the sisters, and was
perfectly agreeable to them all. Mrs. Jaudon considered that the
trustee was "acting very judiciously, and was very glad of it."
In this state of things, Samuel Jaudon, who had been dealing
largely on his own account in a stock known as "Broad Top Coal
Stock," a speculative stock of no established value, applied in
1865 to the National City Bank of New York to lend him money on 47
shares of this canal stock. They agreed to do so, and he delivered
to the cashier of the bank the certificates standing in his name as
trustee, executing also a power of attorney to sell in case of
nonpayment of the loan, the power describing him as
"S. Jaudon,
trustee for Mrs. M. T. B. Jaudon," and he signing himself in
the same way. This dealing of Jaudon with the City Bank, based on
the stock in question and commencing in 1865, extended through a
term of two years. During this time, ten separate loans were made
to him on the pledge of the 47 shares of the canal stock. The
securities were returned to Jaudon whenever he paid up the amount
of a loan, and redelivered to the bank each time a new loan was
effected. In December, 1867, when the last loan matured, the bank,
being unwilling to renew it and Jaudon unable to pay it, sold the
stock by the direction of Jaudon and applied the proceeds of the
sale to the payment of its debt.
A few months prior to this sale -- that is to say in July, 1867
-- Jaudon, wanting more money, applied to Duncan, Sherman &
Co., bankers of New York, with one of which firm, William Butler
Duncan, he had had ancient relations and with whom alone he spoke
in the matter, for a loan of $7,000 at 90 days, telling him that he
had securities to offer and naming them -- the remaining 70 shares
of the canal stock, like that pledged to the bank, declared on its
face to be "in trust for Mrs. M. T. B. Jaudon."
"Upon the faith
of
Page 82 U. S. 168
the collaterals," and "to oblige" Jaudon, the
proposition was accepted by Mr. Duncan, who told his cashier to
attend to the matter. The cashier accordingly lent Jaudon the
money, taking the certificates for the 70 shares and a power to
sell like those in the other case in which he both described and
signed himself as
"trustee of Mrs. M. T. B. Jaudon."
Jaudon failing on the maturity of the loan to pay it, the stock was
sold. There was no evidence that any of the principals of the house
of Duncan, Sherman & Co. had seen the certificates or powers or
had any personal knowledge of the fact that Mrs. Jaudon claimed any
interest in them. But their clerk did see the certificates, and it
was testified by Mr. W. B. Duncan, that "without the collaterals he
certainly would not have made the loan."
Mrs. Jaudon was absolutely ignorant of all that was done until
after the stock was sold, when Samuel Jaudon disclosed the history
to her.
There was no doubt that every one of these loans, whether by the
City Bank or by Duncan, Sherman & Co., were to Jaudon in his
personal character and for his individual use, and that the money
obtained was applied to discharge liabilities incurred in the
purchase or carrying of the Broad Top coal stock, in which he was
at the time dealing on his own account, taking in his own name and
without the exhibition of any trust whatever certificates for what
he bought.
Jaudon being insolvent, Mrs. Jaudon now filed a bill in the
court below against him, Duncan, Sherman & Co., and the
National City Bank, to reach the proceeds of the property which he
had disposed of. Jaudon was himself examined as a witness, and
narrated with apparent general candor the history of the
transaction. He stated, however, in reply to questions inviting
such answers, that from his conversations with his sister-in-law
(the complainant), it was his general understanding that any
changes in investment which he deemed advisable would be approved
by her, and that if the investment in Broad Top stock had resulted
as he had anticipated, her income would have been further
increased, and that in making a purchase of the stock, his
intention was "to
Page 82 U. S. 169
surprise her by giving her something that was worth a great deal
more than all the rest." With all this he stated, however, that he
had never had any conversation whatever with his sister-in-law on
the subject of changing the investment made in the canal stock.
The court below decreed that Duncan, Sherman & Co. should
account for the value of the 70 shares pledged to them and sold,
with the dividends and other proceeds that would have been received
thereon, including interest on the dividends had they not been
diverted from the trust. And that the bank should do the same by
the 47 shares pledged to them and sold.
Both Duncan, Sherman & Co. and the City Bank appealed.
Page 82 U. S. 171
MR. JUSTICE DAVIS delivered the opinion of the Court.
It is too plain for controversy that Samuel Jaudon committed a
gross breach of trust in allowing the shares of stock in the
Delaware & Raritan Canal Company to be disposed of and applied
in the manner they were, but as he is insolvent and the specific
property cannot be reclaimed, the inquiry arises whether the
appellants, with whom the shares were pledged and for whose benefit
they were sold, or the
cestui que trust shall bear the
loss occasioned by his misconduct.
It is argued that the appellants bear a different relation to
this stock from what would be the case if the investment in it had
been authorized by the terms of the will. It is true the will
directed investments to be made in government or state stocks, and
on this account the conversion by Jaudon of the state stocks on
hand into canal stock, was a wrongful act and a breach of trust.
But the
cestui que trust was at liberty to approve or
reject this unauthorized proceeding, and her decision on the
subject concerned no one not interested in the trust estate. She
elected to approve it after she
Page 82 U. S. 172
learned of the occurrence, and by doing this adopted the new
investment and waived the breach of trust. But her waiver on that
occasion did not bind her to observe the same line of conduct in
case of further violation of duty. It would be absurd to suppose
because she ratified this transaction she intended to assent to
future breaches of trust. Indeed, it is quite clear from the
evidence that she acquiesced in the arrangement because her
relatives who had charge of the estate advised it. In the nature of
the case, she could not have had that sort of information on such a
subject on which to base a correct judgment, and, therefore
necessarily relied for the security of her rights on the counsel of
older and more experienced persons in whom she placed confidence.
It is due to the trustee to say that the change of investment was a
family arrangement in order to obtain a greater income, and that
the stock selected for this purpose was one of the best of its kind
that the market afforded.
Although it is wrong in any case for trustees under a will, in
making investments, to depart from the rule prescribed by the
testator, yet if it is done and acquiesced in by the party in
interest, and there is no interference by the court having charge
of the trust, the right of action to the
cestui que trust
for an illegal disposition of the property thus substituted is not
affected by reason of this departure. It is still an estate held in
trust for the beneficiary under the will, and to be protected
equally with an investment made a strictly in accordance with the
terms of the will. It follows, then, that the relation of those
having dealings with the trustee, based on shares of stock held in
this way, is not changed by reason that the original purchase was
not in accordance with the directions of the testator.
This brings us to a consideration of the particular transactions
on which the claim for relief in these cases is founded. The
dealings of Jaudon with the City Bank based on the stock in
question commenced in 1865 and extended through a period of two
years.
The dealing with Duncan, Sherman & Co. was confined to a
single transaction.
Page 82 U. S. 173
The evidence leaves no room for doubt that each and all of the
loans were to Jaudon in his personal character and for his
individual use, and that the money obtained was applied to
discharge liabilities incurred in the purchase, or carrying, of
Board Top coal stock, a speculative stock of no established
reputation, in which he was at the time dealing on his own
account.
It is true, when he borrowed the money, he had no expectation of
resorting to the trust funds to repay it, but his good intention in
this respect furnishes no excuse for his conduct. It was wrong for
him, under any state of circumstance, to pledge the stock in order
to obtain money for his personal wants. He held a fiduciary
relation to it, and yet used it as if it were his own and bargained
for the consequences which followed, although the necessity for the
ultimate sale of it was not anticipated by him at the time he
pledged it. If the law allowed the property of the
cestui que
trust to be treated in this manner, there would be little
encouragement to vest an estate in trustees for the benefit of
others.
It is argued that the several transactions of Jaudon with the
bank and Duncan, Sherman & Co. were really, on his part, for
the purpose of reinvesting the trust funds. How can this be when he
had not a thought at the time he got the money of failure to pay
it? His speculations, then, were on his own account, and, like all
sanguine men who deal in stocks, he had full faith that the venture
in which he was engaged would prove remunerative. The idea of
reinvestment was an afterthought, occurring at the time he found
himself unable to pay, and obliged, as he supposed, to part with
the property of his
cestui que trust. And even then it did
not assume the shape of a settled purpose, but only an intention to
offer the injured party Broad Top security, in which he was
operating, for the canal stock, which he was about to appropriate
to his own necessities. It is natural that a trustee who makes use
of trust property to pay his own debts, without a deliberate design
to defraud, should intend, at some future time, to put the party
wronged by
Page 82 U. S. 174
him in as good a position as before; but can such an intention
be treated as a purpose to reinvest the trust funds in the
securities in which the trustee is privately speculating? If it
can, personal property in the hands of trustees, be the declaration
of trust ever so specific, is in a very unsafe condition. The stock
was not sold because it was desirable to change the investment, but
for the simple reason that it had been pledged, and it was pledged
for the sole object of enabling Jaudon to obtain money to advance
his personal ends. If, therefore, there had been occasion for
making a reinvestment and authority to do it, the transactions in
question had no reference to any such object.
But why change the investment when the canal stock, one of the
most stable of its kind in the country, was paying on the average a
semiannual dividend of 5 percent? If it were allowable under the
will to invest in the stock of private corporations at all, few
more desirable than this were accessible. Experience had shown that
it was safe and yielded a large income, and no prudent trustee
having once invested in it, and had his conduct approved, looking
alone to the interest of his
cestui que trust, would take
the hazard of selling it and purchasing another. But there was no
authority to sell it, even were it desirable to do so, or to deal
with it so that a sale might become necessary. If Jaudon thought
so, there was no foundation for his belief, and he is compelled to
admit, although his whole testimony is an effort to justify his
conduct, that he never had any conversation with his
cestui que
trust on the subject of changing this stock.
It was treated by all concerned, during the long course of years
in which it was held in trust, as a most desirable investment, and
no thought of substituting other securities for it was ever
entertained by anyone until the idea occurred to Jaudon as a means
of escape from the embarrassment in which he was placed by the
unlawful use he made of it. The
cestui que trust not only
never gave consent to pledge or sell it, but had no reason to
suppose that the trustee would attempt anything of the kind; nor
has she said or done anything, fairly interpreted, which tends even
to relieve
Page 82 U. S. 175
the trustee from the legal responsibility which pertains to the
administration of the trust estate.
It follows, then, that the use of the stocks by Jaudon in his
transactions with the bank and Duncan, Sherman & Co. was, on
his part, a flagrant breach of trust, without either justification
or excuse. If so, are they blameless? They cannot be, if they had
actual or constructive notice that the trustee was abusing his
trust and applying the proceeds of the loans to his own use. As we
have seen, the loans were for no purpose connected with the trust,
but for Jaudon's own benefit, and the face of the papers given as
collateral security for the debts thus incurred informed the
parties dealing with him that he held the stock as trustee for Mrs.
Mary T. B. Jaudon, and inquiry would have revealed the fact that
the use to which the stock was put was unauthorized.
The duty of making such inquiry was imposed on these parties,
for it is out of the common course of business to take corporate
stock held in trust as security for the trustee's own debt. The
party taking such stock on pledge deals with it at his peril, for
there is no presumption of a right to sell it, as there is in the
case of an executor. In the former case, the property is held for
custody, in the latter for administration.
It matters not whether the stock is pledged for an antecedent
debt of the trustee or for money lent him at the time. It is
unlawful to use it for either purpose.
In
Lowry v. Commercial and Farmers' Bank of Maryland,
[
Footnote 2] which was a case
of misappropriation of corporate stock by an executor, Chief
Justice Taney held
"that if a party dealing with an executor has, at the time,
reasonable ground for believing that he intends to misapply the
money, or is in the very transaction applying it to his own private
use, the party so dealing is responsible to the persons
injured."
And the Supreme Court of Massachusetts, in a recent case,
[
Footnote 3]
Page 82 U. S. 176
in its essential features like the case at bar, decides that if
a certificate of stock, expressed in the name of "A. B. Trustee,"
is by him pledged to secure his own debt, the pledgee is, by the
terms of the certificate, put on inquiry as to the character and
limitations of the trust, and, if he accepts the pledge without
inquiry, does so at his peril. In that case, the
cestui que
trust was not named in the certificate, and the court remarked
that if it were so, the duty of inquiry would hardly be
controverted.
If these propositions are sound, and we entertain no doubt on
the point, the liability of the appellants for the conversion of
the stock belonging to Mrs. Jaudon cannot be an open question. They
either knew or ought to have known, that Jaudon was operating on
his own account, and are chargeable with constructive notice of
everything which, upon inquiry, they could have ascertained from
the
cestui que trust.
If this inquiry had been pursued, they could not have failed to
discover the nature and foundation of the trust and that the
trustee had no right to pledge the stock for any purpose. The bank,
in its dealings with Jaudon, was guilty of gross negligence, and in
consequence of this inflicted serious injury upon an innocent
person. It may be that the cashier never inquired of Jaudon what he
wanted with the money, but nine successive loans to him in one
year, each time on the pledge of the same trust security, was
evidence enough to satisfy any reasonable man that the money was
wanted for private uses, and not for any honest purpose connected
with the administration of the trust.
Duncan, Sherman & Co., although intending no wrong, cannot
escape their share of responsibility. Duncan lent the money to
Jaudon to oblige him, and, in the very nature of the transaction,
he did it for Jaudon's private accommodation. On making the
application, Jaudon told him he had securities to offer, naming
them, and naturally he supposed they were Jaudon's own property. It
is his misfortune that he turned them over to his cashier, with
directions to accommodate Jaudon, without having personally
examined them. If he had made this examination, we are
persuaded
Page 82 U. S. 177
the
cestui que trust would have had no occasion to be
dissatisfied with his conduct.
It is needless to argue that Duncan is bound by the notice
communicated to the cashier when he received the certificate and
concluded the business with Jaudon.
Without pursuing the subject further, we are satisfied that the
decrees below should be
Affirmed.
[
Footnote 1]
The new trustee was a brother of Charles Jaudon, the husband of
Mrs. M. T. B. Jaudon.
[
Footnote 2]
Taney's Circuit Court Decisions, 310.
[
Footnote 3]
Shaw v. Spencer, 100 Mass. 389.
