Case ID: ohio-st_83/html/0254-01.html
Source: Caselaw Access Project
Author: {"author": "Donai-iue, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Willis v. Holcomb, Trustee, et al.
    
      Testamentary trust fund invested in mortgage — Foreclosure—Purchase of property ' by trustee — Amount of sale exceeds original trust fund — Incumbent upon trustee to sequester amount of original fund — Any surplus then remaining adheres to original trust fund — Not credited as proceeds to cestui que trust— Rights of latter — Duties of trustee.
    
    1. If a trustee of a testamentary trust invests the trust fund according to the direction of the will of the testator, and without his fault the trust fund is imperiled by reason of want of bidders at a foreclosure sale of the property mortgaged to secure the fund, and for the purpose of protecting the fund, he purchases the property at sheriff’s sale, taking the title to the same in his own name as trustee, and the cestui que trust then being under no legal disability to act for himself, without protest on his part, enters into the possession of the land and uses and occupies it, or accepts from the trustee the rents or revenues thereof in lieu of the interest earnings on the trust fund had the same been continued at interest, such cestui que trust is estopped by his conduct from questioning the right or the authority of the trustee to make such purchase, and from demanding from him an accounting of an amount equal to the interest such fund would have earned during the time he so occupies the land or accepts the rents and revenues therefrom.
    2. Where such purchase has been made and it afterward appears that the trust fund is not in peril of diminution by reason of the land selling for a lesser sum than the amount thereof, it is the right of the cestui que trust to require the trustee to sell the land and reinvest the proceeds thereof according to the terms and provisions of the will creating' such trust, and upon failure of the 'trustee to do this after demand made therefor a court of competent jurisdiction may compel him to do so.
    3. Out of the proceeds of the sale of such land the original trust fund must be first sequestered and no part thereof can be used for the purpose of paying any amount or installment of interest due the cestui que trust, but if there is any such interest due the cestui que trust that he has not estopped himself from demanding, then such amount must be paid him out of the surplus of the proceeds of the sale after first deducting an amount equal to the original trust fund, and any surplus then remaining of the proceeds after such payment must be added to the original trust fund, the sum of which will constitute a new trust fund to be invested and distributed according to the terms of the trust.
    (No. 11522
    Decided February 14, 1911.)
    Error to the Circuit Court of Fayette county.
    On the 16th day of August, 1888, James M. Willis died testate. Item ninth of the first codicil to his will is as follows: “All the balance and residue of my estate I give and bequeath to my three children, namely, William R. Willis, James W. Willis and Laura B. Willis, as follows: One-third part thereof to my son, William R. Willis, one-third part thereof to my daughter, Laura B. Willis, the remaining one-third part I will and direct my executors hereinafter named, whom I now name and appoint trustees for that purpose, to invest in good first mortgage real estate securities in Fayette county, Ohio, and pay the net annual proceeds thereof to my son, James W. Willis, for and during his natural life. * * * At the death of my son, James W. Willis, the principal of said money so devised to said trustees for the use of said James W. Willis I devise to the heirs of the body of my son, James W. .Willis, if he should have issue of his body, but if he should die without issue then in that case I will and devise said sum to the heirs of the body of my said son, William R. Willis, and my daughter, Laura B. Willis, one-half to each, but if my said daughter should die without issue then I devise the whole of said sum to the heirs of the body of my son, William R. Willis.”
    William R. Willis died Januarjr 10, 1890, leaving Madison Willis and Elsie G. Willis-Hopkins, his only children and heirs at law. Laura B. Willis has since married and her present name is Laura B. Jones. William R. Willis and Mills Gardner were appointed as executor and administrator with the will annexed, respectively, and trustees of the testamentary trust created by said will. Part of the estate of said testator was .a promissory note given by Chauncey Holland, dated June 12, 1885, for the principal sum of $5,940, with interest at eight per cent., payable in one year and secured by a mortgage on real estate, and this note was by the administrators assigned to themselves as trustees of said testamentary trust for the benefit of James W. Willis. On the 7th day of September, 1889, no payments having been made and said note then being of the value of seven thousand dollars, said Holland executed a new note and mortgage to said trustees for said sum of seven thousand dollars, payable in five years at seven per cent, interest. No account was filed by said trustees up to the time of the death of William R. Willis, to-wit, January 10, 1890. On the 13th day of September, 1890, said Holland, having failed to pay the interest then due, Mills Gardner, a surviving trustee brought action to foreclose said mortgage, the amount at that time being $7,542, of which amount $1,042.95 was the accumulated interest on the original investment. July 7, 1891, Holland paid to Gardner, trustee, $976.06, and in August, 1892, he again paid $314,03. On February 7, 1894, there was due upon said mortgage indebtedness $7,775, and said land was, on said date, sold for the purpose of satisfying the judgment therefor. It failing to attract other bidders who' were willing to pay the amount of such indebtedness and cost, Mills Gardner, trustee, for the protection of said fund, purchased said land, and on July 25, 1894, the sale being confirmed the sheriff was ordered to convey and did convey the title to said real estate to said trustee. On April 10, 1895, J. W. Roebuck was appointed in the place of Mills Gardner as trustee. After his death B. M. Holcomb was, on the 9th day of January, 1897, appointed such trustee, and he is still acting in that capacity. The title to said land is still in said trustee, and it has now largely increased in value. The trustee has never made any sale thereof or any further attempt to reinvest said fund. These facts are gathered from the petition, to which a demurrer was filed, and, therefore, for the purposes of this case are taken to be true.
    On the first day of September, 1906, James W. Willis filed in the common pleas court of Fayette county a petition reciting the foregoing facts, and further averring that he is the beneficiary of the trust created by the will of James M. Willis; that the defendant, B. M. Holcomb, is the trustee of the testamentary trust created by said will; that said real estate so purchased by the trustee has largely increased in value; that the trustee refuses to sell the same and invest the proceeds according to the direction contained in said will “in good first mortgage real estate securities in Fayette county, Ohio,” and prays that said real estate may be ordered sold, and that there be paid first to the trustee $6,499.48, which plaintiff claims to be the present true amount of the trust fund; that said trustee be directed to invest the same according' to the directions contained in item nine of the first codicil to said will, and that the balance of the proceeds of such sale, after the payment of the costs of this proceeding be ordered paid to this plaintiff as the net proceeds of said trust fund, and for all other and further proper relief. To this petition the defendant, Holcomb, as trustee, filed an answer admitting all of the averments of plaintiffs petition to be true and asking the instruction and direction of the court with reference to said trust. The defendants, J. Madison Willis and Elsie Flopkins, filed a general demurrer to the plaintiff’s petition, which general demurrer the common pleas court overruled, and the said defendants not desiring to plead further, a decree was entered by the court of common pleas ordering the sale of said property by the trustee and reserving all questions as to distribution of the proceeds thereof. An appeal was taken from this decree to the circuit court, and that court sustained the demurrer to the plaintiff’s petition, and entered a final judgment dismissing the action at the cost of the plaintiff, and this proceeding in error is now prosecuted in this court to reverse that judgment.
    
      Mr. W. C. Tansy and Messrs. Pugh & Pugh, for plaintiff in error.
    Courts of equity have been very strict in holding trustees within the limits of the power conferred upon them. Cleveland v. Bank, 16 Ohio St., 236; Shank v. Dewitt, 44 Ohio St., 237.
    The trustees were commanded, by the testator, to pay to the plaintiff in error, during his natural life, “the net annual proceeds of the trust fund invested in good first mortgage real estate securities,” but not a cent of net proceeds from the $5,940 has ever been paid to the plaintiff in error.
    That the cestui que trust, the plaintiff in error, is entitled to redress against such a breach of trust duty is so obvious that the citation of authorities would seem superfluous. 1 Perry on Trusts (6 ed.), Sec. 462.
    The doctrine that a trustee cannot go beyond the line of duty prescribed by either the will or deed or law, and make changes of trust property from money to lands, or lands to money, was established a long time ago; it was also settled then, that when the trustee invests money in lands, without authority, the cestui que trust could elect to accept the land, or, refuse the land and demand his money, that being the form in which the trust fund was required to be kept. Harrison v. Harrison, 2 Atk., 121, 26 Eng. Rep. Re., 476.
    Plaintiff in error in this case at bar invokes the application of the principle of this decision. He asks that the land in which the trustees have kept the trust fund beyond the time for which they had authority to do so shall be sold, and that the balance for which the land shall sell shall be paid to the plaintiff in error, as representing the accretion from the enhancement of the value of the land.
    The land, before this action was brought, increased in value $4,563.42. Who is entitled to that increase? This court decided the question in a case where the trustee had authority to make a purchase, and there was a loss or gain in the value of the securities purchased. Devenney v. Devenney, 74 Ohio St., 96.
    In the case at bar the surviving trustee probably had authority to buy the real estate, as he expressed it, to “save the debt,” but he clearly had no other right and power. The accretion of the trust fund, by reason of the enhancement of the value of the real estate after that, belonged to the income. Park’s Estate, 173 Pa. St., 190, 33 Atl. Rep., 884.
    If the land has increased in value since it was bought by the trustee, that increase is part of the “net proceeds,” part of the income and profits. The term “proceeds,” has been judicially defined as the equivalent of income. Where a will was construed,, which devised property to trustees, and directed them to distribute the proceeds in a defined manner, the term “proceeds” was defined to mean income. Roberts’s Appeal, 92 Pa. St., 407. The term “net proceeds,” in a case where a note was sent to an attorney for collection, with instructions to collect it and remit the proceeds, was defined to mean the amount remitted after deducting fees. Manufacturing Co. v. Winnett, 91 N. W. Rep., 514.
    
      Mr. Joseph H. Harper; Mr. George H. Jones and Mr. H. Jones, for defendants in error.
    Where the interest of a trust fund was payable as income to a life beneficiary, and the securities in which the fund had been invested were sold at a profit, it was deemed error to credit the profit to the income account, as it was a gain to the principal, to which it should be added, to go eventually to the one entitled to receive the corpus. In re Lawrence’s Estate, 7 N. Y. Supp., 332.
    As between the life tenant and the remainderman the premium on certain gold coin belonging to the testator’s estate is part of the corpus and not the income. Van Blarcom v. Dager, 31 N. J. Eq., 783.
    A leading case on this subject, marking clearly just what must be treated as income on a trust fund and what as principal, is the case of Van Doren v. Olden, 19 N. J. Eq., 176; Green v. Smith, 17 R. I., 28.
    Counsel for plaintiff in error rely practically upon the case of In re Park’s Estate, 173 Pa. St., 190. If counsel had also presented to the court the case of Graham’s Estate, 198 Pa. St., 216, decided some five years later than In re Park’s, and cited and approved by this court in Devenney v. Devenney, 74 Ohio St., 102, they would probably not be so insistent that their contention is sound.
    This latter ease in 198 Pa. St., is on all fours with the case at bar, as the bequest is to the “net annual proceeds” thereof.
    
      The case of Devenney v. Devenney, supra, recognizes the doctrine announced in the Graham Estate case, and adopted by a large majority of the courts of last resort.
    It was decided in Van Vleck v. Lounsbery, 34 Hun, 569, that where an executor purchased mortgaged premises on the foreclosure of their mortgage, and afterwards, sold the property at a profit of $1,300, the profit belonged to the principal of the estate.
    In In re New York Life Ins. & Trust Co., 53 N. Y. Supp., 382, may be found a clear statement of the general rule as to the increase of the corpus. Gray v. Darlington, 15 Wall., 63; and in Accounting of Gerry, 103 N. Y., 445, is a discussion of and announcement of the principle we are urging.
    In In re Lawrence’s Estate, 26 N. Y. St. Rep., 238, and Townsend v. Trust Co., 3 Redf. (N. Y.), 220, it is decided that where the value of real or personal estate held as an investment advances from natural causes, such increase is principal and goes to the remainderman. And the case of In re Vedder, 40 N. Y. St. Rep., 119, holds the same doctrine. 2 Perry on Trusts (6 ed.), Sec. 545; Cogswell v. Cogswell, 2 Edw. Ch., 231.
   Donai-iue, J.

Conceding for the purpose of the discussion of the questions involved in this record, that a trustee may purchase the mortgaged property for the protection of the trust fund, yet this departure from the terms and direction of the trust cannot longer obtain than absolutely necessary to serve the original purpose, and when that has been accomplished it becomes the duty of the trustee, upon the demand of the cestui que trust to make sale of the real estate so purchased and to invest the funds arising therefrom in manner and form as directed by the will of the testator. It is not the privilege of the trustee, or of the remainderman, to substitute his judgment as to the manner of investing the funds in the place of the judgment of the donor of the trust property and the fact that in their opinion it is more advantageous to keep this money invested in real estate that is likely to continue to enhance in value is of no importance whatever. The express provisions of the will are absolute and must guide the trustee in the administration of this trust. It is insisted in the brief of counsel that the beneficiary of this trust, James W. Willis, has been in possession of this land and receiving profits therefrom largely in excess of the interest earnings of the fund, but that does not appear in this petition, and if it did it would not be important except as to the question of distribution and the accounting by the trustee, for if the beneficiary of this trust has accepted and enjoyed the benefits of the land in lieu of the interest that he would have received from the fund, then for so long a time as he has accepted the same he could not be permitted to claim that in addition thereto he must have a further amount equal to what the fund would have earned had it been at interest. The acceptance of the use, or the rents and revenues, of this land would estop him from demanding interest upon the primary trust fund for and during the time he so used the land or accepted the rents and reveques therefrom. However, when it appears that this primary fund is not in peril of diminution by a resale of the land, it is certainly his right to compel the trustee to proceed according to the terms of the trust.

If during the time the trustee has held the legal title to this land this plaintiff, who is the beneficiary of the trust, has used and occupied the land •and taken unto himself all the benefits of the ownership thereof, he is not in position to question the right of the trustee to make the purchase, but he is entitled to receive any interest earned by this trust, or any interest that the primary fund would have earned had it been kept invested according to the terms o‘f the will up until the time he estopped himself from claiming the same by accepting the rents and revenues, or the use of this land if he ever did accept the same. If the facts pleaded in this petition are true, and this demurrer admits the truth of the same, this cestui que trust is entitled, nothing else appearing, to have this land sold, and from the proceeds arising therefrom must be taken first, an amount equal to the original trust fund. The beneficiary of the trust would then be entitled to receive out of any surplus over that amount, any earnings thereof that he has not, in-the manner above stated, estopped himself from .claiming, and any surplus still remaining from the proceeds of such sale must be added to the original trust fund forming a new principal, or new trust fund, that must be invested for his benefit as directed by the will, and at his death that fund will be paid to the person or persons designated in the will.

This court is dealing now only with the facts presented in the plaintiff’s.petition, and is perhaps going further than the necessities of this case require, yet not further than necessary to effect a speedy determination of the rights of the parties.

The circuit court erred in sustaining the demurrer to the petition, and for that • error the judgment of the circuit court is reversed and remanded to the circuit court with instructions to overrule the demurrer.

Judgment reversed.

Spear, C. J., Davis, Shauck, Price and Johnson, JJ., concur.