Case ID: abb-pr_16/html/0137-01.html
Source: Caselaw Access Project
Author: {"author": "Sutherland, P. J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

KERR a. BLODGETT.
    
      Supreme Court, First District; General Term,
    
    
      May, 1863.
    Trustee.—Remedies of Cestui que Trust.—Pleading in Action for Accounting.—Former Adjudication.—Collusion.
    The remedies of a cestui que trust in case of the misapplication of the fund by the trustee,—stated.
    In an action against a trustee to compel him to account for the trust-fund, it is not proper to set up in the complaint an accounting already had in an action by other cestuis que trust, which it is alleged was collusive, and which, therefore, the plaintiff seeks to avoid. But if this is done, such unnecessary allegations do hot alter the nature of the action ; nor entitle the defendant to have the complaint dismissed, on the ground that it discloses a former adjudication upon the controversy.
    In an action against a trustee for an accounting, and for payment of plaintiff's distributive share of the trust-fund, the fact that the trustee has accounted under a previous judgment, in an action by a beneficiary for himself and all others who might come in, will not be a bar, if plaintiff shows that such judgment was collusive, and in fraud of his rights.
    Appeal from a judgment.
    This action was brought by Robert H. Kerr and John P. Morgan against William T. Blodgett and Orlando Meads. The plaintiffs were judgment-creditors of one John Meads, Jr., of whom the present defendants were assignees. The relief asked was accounting and the payment of plaintiffs’judgment. A similar action in favor of James B. Wilson was heard at the same time. The claims were against a limited partnership, of which John Meads, Jr., was the general partner, and one William Tilden was the special partner. The complaint set forth that the assets had all been distributed among the creditors of John Meads, Jr., under and in pursuance of a judgment for that purpose, obtained by Dexter Reynolds against them. That on the distribution each creditor represented received a little over 61 per cent. That Dexter Reynolds bought up the claim of one of the creditors, and with it commenced a suit in the Supreme Court, Albany county, against the assignees, averring he was a creditor of the limited partnership, and claiming an accounting and settling of the trust-fund. That this suit was collusive in its nature, and instituted with a view to have a distribution in defiance of the rights of the plaintiffs and of some other creditors who refused to sell their respective claims at a sacrifice. That the present defendants, who were defendants in that suit, voluntarily appeared and admitted service of the suit. That they interposed no defence, and did not set up or assert the rights of their cesf/wís que trusty the creditors of John Meads, Jr. That the defendants, by their agent, John Meads, Jr., and other agents, while the proceedings were pending, were in frequent communication with the plaintiffs, endeavoring to purchase the plaintiffs’ claim at a lower price than its said value under said assignment. That the plaintiffs refused at all times to sell their said claim at the prices offered, believing that the same was worth more under the assignment, and were waiting, patiently, the maturity of the Meacham notes for distribution. That shortly after the mating of the assignment, and as soon as some portion of the trust-funds of said assignment were collected and in the hands of the assignees, John Meads, Jr., and others, acting on his behalf and on the behalf of the said defendants, or said Tilden, or of all of said parties, endeavored to and did purchase, from time to time, various claims against the assigned estate, from the creditors of the firm of John Meads, Jr. That false and fraudulent statements were made to said creditors as to the value of the assigned estate, and the probable time of distribution, to induce them to sell the same at a great deal less than their real value. That many of the claims purchased, were purchased at thirty and forty per cent, on the dollar, when the same were worth, under the assignment, sixty per eent., and so known to the defendants to be worth that sum.
    That in the month of June, 1859, almost all of the claims against the assigned estate had been, by said parties, purchased at the time of the commencement of said proceedings.
    That according as said claims were purchased, the same were assigned to John Meads, Sen’r, and Charlotte Meads, and one to the said Dexter Reynolds, who were represented as the parties purchasing the same, and stated as the parties advancing and paying the same.
    But, that said purchases of said claims were made, from time to time, in reality, for the benefit of the said limited co-partnership of John Meads, Jr., and the said defendants, and the said Tilden, and were paid for out of the trust-funds of said assignment; that such defendants, from time to time, furnished from the collections of the assigned estate, funds, although nominally loaning said moneys to said John Meads, Sen’r, and William Tilden & Nephew.
    That at the time of the commencing of said proceedings, nearly all of said claims against said estate had been purchased, and were nominally assigned to John Meads, Sen’r, and the said Charlotte Meads, but really were the property of the partners aforesaid.
    That at the time of the distribution under said proceedings, all of the claims against the assigned estate were nominally the property of John Meads, Sen’i, or his estate, and of the said Charlotte Meads, excepting a few hundred dollars, including the. claim of the plaintiffs, and the same had been purchased in manner aforesaid, at a price far less than their value, and that realized on said pretended distribution. That distribution was made in such proceedings of a little over 61 per cent., to these creditors who were thus represented. That all of the proceedings were conducted in a referee’s office in Albany.
    As soon as the plaintiffs ascertained the facts of the case, they brought these actions against the assignees, and claimed their dividend under the assignment; and in anticipation of the possible defence under that judgment of distribution, they set up the whole facts of the case, charged the collusive nature of that judgment, the breach of trust by the assignees, and prayed that it might be adjudged to be no protection to them.
    , The complaints contained another prayer for other general relief, and claimed that the plaintiffs be paid the whole of their judgments and interest. ♦
    The causes came on for trial before Hr. Justice Allen, who refused to permit the plaintiffs to try their cases, saying he took their facts, as averred in. the complaints, to be true, and dismissed the complaints. The plaintiffs appealed.
    
      Dennis McMahon, for the appellants.
    I. The court below-had no right to dismiss the plaintiffs’ complaints on the opening of the counsel. The court below had no right to refuse to allow to the counsel for the present appellants the right to introduce proofs in support of his case. (See Graham on New Trials, 682; Belmore a. Caldwell, 2 Bibb, 76.)
    II. The court below should have granted the motion made by the counsel for the appellants, for judgment on the pleadings. 'His refusal to do so was error. These facts were conceded by the pleadings : 1. The existence and ionafides of the plaintiffs’ claims, as such, .against the limited partnership of John Heads, Jr.; recovery of judgments thereon; issuing and return of execution. 2. That the firm of John Meads, Jr., was insolvent. 3. That it had made an assignment to the defendants, for the general benefit of creditors, and the defendants had assumed the trust. 4. That the assignees had express recorded notice of the plaintiffs being creditors of the limited partnership, and recognized their claims. That the plaintiffs demanded payment of their dividend while the trust was confessedly unclosed, and just before the commencement of this suit. 5. That the assignees did not, on the distribution before the referee Edwards, appear an'd represent these plaintiffs’ claims and interpose them; nor did they give any notice to the plaintiffs of the suit. 6. That a dividend was actually made of over 60 per cent, to the creditors on such distribution. We respectfully submit, on the foregoing conceded facts, that the plaintiffs are entitled to judgment. By the assignment and by force of the statute, the property and assets of the limited partnership of John Meads, Jr,, were to have been distributed equally among the creditors. The liability thus fixed, could not be evaded by any judicial proceedings short of one in which the present plaintiffs were directly made parties, and the assignees were plaintiffs. The assignees, under every contingency, were bound to account to the creditors for their proper dividend. (Mills a. Argall, 6 Paige, 577; S. P., Russell a. Lasher, 4 Barb., 232; Bell a. Holford, 1 Duer, 58; Sheldon a. Smith, 28 Barb., 593.) In the case of Dexter Reynolds a. The Assignees, it was the duty of the assignees to have presented their claims and asserted the rights of the present plaintiffs, who were oestuis que trust under that assignment. They cannot, by their silence, suffer a creditor thus to be defrauded, unless they make themselves responsible. (Burrill on Assignments, 503.) The suit in Albany was in form an adverse suit brought against them, as assignees, to settle their trusts. As such, the duty was plain on the assignees to guard their trust, and the interest of their oestuis que trust. (Wood a. Burnham, 6 Paige, 513, 516; Berrian a. McLane, Hoffm., 425.) And the assignee cannot be discharged, save by the consent of all persons interested in the trust. (Shepherd a. McEvers, 4 Johns. Ch., 136; Crugar a. Halliday, 11 Paige, 314.) In the settlement of that trust, the assignees represented as well the creditors as the assignor. (Buck a. Pennybacker, 4 Leight., 5; Johnson a. Caudage, 31 Maine, 28; Pengree a. Comstock, 18 Pickering, 46; Griffin, Ex’r a. McCaulay, Adm’r, 7 Grattan, 476; Berrian a. McLane, Hoffm., 421; Wood a. Burnham, 6 Paige, 513, 516.) The plaintiffs had evinced their intention to come in under the assignment, by demanding payment of the assignees, prior to these proceedings. In a voluntary assignment of this character, the creditor’s assent to come in for a dividend under it is presumed. (Halsey a. Whitney, 4 Mason, 215.) Creditors may also evince their intention to come in for a dividend, by giving notice to trustees, on presenting their claims for' payment or dividend. (Halsey a. Whitney, 4 Mason, 206, 214, 225; Acton a. Woodgate, 2 Myl. & K., 492; Burrill on Assignments, 524; Jewett a. Woodward, 1 Edw., 195.)
    III. The court erred in dictating to the counsel for the appellants how to proceed; and in refusing him leave to prove the issues joined. (Nearing a. Bell, 5 Hill, 291.)
    IV. The court below put itself in this dilemma: 1. They either had no right to shut off the appellants’ proof in the way they did, by assuming the facts they did ; or, 2. They, having assumed the facts to be as averred, erred in the legal deduction therefrom.
    V. Treating the facts as averred in the complaint to be true, as assumed by the court, the latter erred in holding that the judgment in the case of Reynolds a. Blodgett & Meads was a bar to these actions. The facts averred and assumed to be true, proved the judgment in question to be a fraudulent and collusive judgment, and no protection to the assignees. The collusive nature appeared incontestably from the facts averred.
    VI. A bill filed by a creditor to compel an assignee to account, is different in principle, also in practice, from a bill filed by the assignee, against all the creditors of the estate assigned, to have an accounting and distribution, for his own protection. 1. In the former case the assignee is not a volunteer; he is brought into court. His duty then is plain ; he is a trustee for all the creditors, and they are his eeshois que trust. 2. In the latter case, if he in good faith files a bill to have a distribution, makes as parties all the creditors whom he knows, he might, possibly, be protected by a judgment founded on proceedings and a publication like the present.
    VII. The court below erred in holding the judgment rendered in the Reynolds suit, a bar to the plaintiffs’ claims. The plaintiffs did not recognize that judgment or any of the proceedings thereunder, nor did they seek any benefit thereunder, nor did they seek to impeach it, so far as it went. The plaintiffs merely sought the performance of the trust voluntarily assumed by the defendants, and charged them with a breach of their trust. It was the plaintiffs’ right to have an execution of that trust. To resist successfully the plaintiffs’ claims, the defendants, the assignees, were hound to show the judgment was in fact a bar. This they failed to do, for no court has any power to dispose of a man’s rights or property, without he is a party, served with process or voluntarily appearing. The assignees, not having performed their duty in asserting the claims of the plaintiffs in that proceeding, cannot claim any protection therefrom. (Dobson a. Pierce, 12 N. Y., 156; De Caters a. Le Ray, 2 Paige, 490.)
    VIII. The court below should have sent the cases over to add parties, in case it thought all of the parties were not before them. They have no power to dismiss a case for want of parties, unless an issue to that effect is set up in the defendant’s answer, which was not done in this case. (2 Daniel’s Ch., 858; David a. Frowd, 1 Myl. & K., 200; Gillespie a. Alexander, 3 Russ, 130; Sawyer a. Burchmore, 1 Keen, 391.)
    
      James B. Brinsmade, for the respondents.
    I. This must be an action for an accounting, or an action on the case for damages. It is doubtful which the plaintiff thinks it. He claims an accounting, and also claims that he recover his debt of the defendants.
    II. If it be treated as an action for an accounting, it cannot be maintained, for it is not brought for the benefit of all the creditors.
    III. Had the complaint alleged the proceedings in the Reynolds suit, it would have been clear on its face that it was not good, for the further reason that the subject-matter of the action was res adjudieata. The former suit was brought by Reynolds for himself and the other creditors; and the order of the court, specifying how they should be brought in, being carried into effect, these plaintiffs became parties to the Reynolds suit, and are bound by its result. The moment the plaintiffs, by introducing the judgment-roll in the Reynolds suit, supplied all that was wanting in the complaint to show that the action could not be maintained, the judge was right in dismissing the complaint. (Thompson a. Brown, 4 Johns. Ch., 619; Brooks a. Gibbons, 4 Paige, 374; Wilder a. Keeler, 3 Ib., 164; Egberts a. Wood, Ib., 518 ; Innes a. Lansing, 7 Ib., 583; McKenzie a. L’Amoureux, 11 Barb., 516; Story’s Eq. Jur., 530, § 549; Code, § 119; Van Santv. Eq. Pr., 77, 78.)
    IY. If the action is to be treated, in spite of the summons, the demand for relief, and of the fact that the plaintiffs demanded their distributive share, as an action on the case for damages, it cannot be maintained, because they do not allege any damage whatever.
    Y. Plaintiffs have mistaken their remedy. They should apply, in the Reynolds suit, to have the judgment opened. (Brooks a. Gibbons, 4 Paige, 374.)
   Sutherland, P. J.

The learned judge who dismissed the complaints in these cases at special term, must be deemed, in doing so, to have assumed that the allegations of the complaint, if true, showed that the defendants had been guilty of a breach of trust; that they had knowingly and designedly, under the color or excuse of the judgment in the Reynolds action, suffered a misapplication of the trust-funds, or at least of so much of the trust-funds as the plaintiffs in these actions were entitled to under the trust created by the assignment; for the learned judge dismissed the complaints on the ground that the judgment in the Reynolds action was a bar to these actions, and that the judgment in the Reynolds action could not be attacked in these actions, to which Reynolds was not a party.

A breach, of trust in equity creates a debt in favor of the cestmi que trust. (Fonblanque's Eq., bk. 2, ch. 7, § 1, and note b; Vernon a. Vaudrey, 2 Barn. Ch., 280; 2 Atkyn, 119.)

If a trustee misapplies the funds of his cestui que trust, the latter may either take the security or other property in which the funds have been wrongfully invested, or demand payment of the trustee. (Story's Eq., § 1211; Steele a. Babcock, 1 Hill, 527.)

In. case of a misápplication or wrongful disposition of trust-funds by the trustee, the cestui que trust may, at his election, either look to the trustee for payment, or follow the trust-funds into the hands of any party or parties taking them, with notice of the trust, and of such misapplication or wrongful disposition.

Either of these remedies would be in equity. It is not clear that there is any remedy at law against a trustee for a breach of trust. (See Fonblanque’s Eq., note b, above cited.)

The judge below'dismissed the complaints in these actions, on the theory that the actions were brought to set aside the judgment in the Reynolds action, and to reach the trust-funds, or so much thereof as the plaintiffs were entitled to, in the hands of the parties to whom it had been distributed under color of that judgment. He was no doubt led to take this view of the actions from the fact that the complaints, unnecessarily and improperly anticipating the defence, attack the judgment in the Reynolds action. If the complaints had not noticed the Reynolds action, or the proceedings and judgment in it, but had simply called upon the defendants to account for and pay over the dividends to which the plaintiffs were entitled, "when on the trial the defendants came to set up the judgment in the Reynolds action as a defence, I do not doubt that the judge would then have permitted the plaintiffs to prove the facts stated in the complaint, to show that that judgment was obtained by collusion, and was at least constructively fraudulent.

A breach of trust is a wrong, and a constructive fraud upon the cestui que trust. A trustee cannot take advantage of his own wrong, by setting up his own breach of trust. Hence, we are to presume, if the judge below had looked upon these actions simply as actions to compel the defendants to account as trustees, and to pay to the plaintiffs the dividends or proportions of the trust-funds to which they were entitled, that upon the defendants’ showing on the trial that the trust-funds had been distributed or disposed of, by or under the judgment in the Reynolds action, the plaintiffs would have been permitted to show that that judgment was obtained or suffered by collusion, and under circumstances which showed that such distribution or disposition of the trust-funds, as to the plaintiffs, was a breach of trust.

It is plain that these actions should be looked upon simply as actions calling upon the trustees to account and pay over.

The unnecessary and premature allegations in the complaints, as to the Reynolds action, and judgment on it, do not alter the character of the actions, and should not prevent the plaintiffs obtaining the relief they ask for.

It is true, there .was no necessity for more than one action. The plaintiffs might have joined in bringing an action; or either Kerr & Morgan, or Wilson, might have brought an action in the name of themselves, or himself, and all other creditors similarly situated.

But the complaints were not dismissed for any defect in their frame, or of parties plaintiff. And probably any such defect was no ground for dismissal.

My conclusion is, that the judgments appealed from should be reversed, and a new trial ordered, with costs to abide the events of the actions.

Ingraham, J., concurred.

Clbrkb, J., expressed no opinion.