Case ID: abbn-cas_5/html/0346-01.html
Source: Caselaw Access Project
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Date Created: 2024-08-24T03:29:51.129683

MATTER OF YOUNGS.
    
      N. T. Common Pleas ;
    
    
      Special Term, November, 1879.
    Assignee for Benefit of Creditors. — Compromise of Claim due Estate. — Notice to Creditors. — Reference.
    On an application by an assignee for leave to compromise a claim, due the estate, the court may, in its discretion, require notice to be given to the creditors so that they may be heard.
    
    The application may be referred to a referee, with directions to give by mail (or personally, where practicable), eight days’ notice to the persons indicated by the schedules as creditors.
    
    Application by the assignee of Youngs, Smith & Co., for leave to compromise a claim due the assigned estate.
    
      Miller & Peckham, for assignee.
    
      
       Note on Trustees’ Compromises.
      The following summary of the authorities on the power of courts of equity to advise and direct assignees and other trustees to compromise, taken in part from an opinion rendered by Austin Abbott, as referee in a case arising under the general assignment act, may be useful in this connection.
      I. The general function of the court as the counsel of trustees.
      
      In Shipman’s Petition (1 Abb. New Cas. 406), it was held in this court (Robinson, J.), that the county judge’s power under the act of 1860, then in force, did not extend to directing the assignee in the general administration of the estate; but the assignee must apply to a court of equity, if he desired sanction in a compromise or conversion of assets.
      Subsequently the statute was amended in the revision so as to confer this power.
      The provision of the General Assignment Act of 1877, conferring this equitable power upon the court, is as follows: “Sect. 25. Any proceeding under this act shall be deemed for all purposes, including review by appeal or otherwise, to be a proceeding had in the court as a court of general jurisdiction, and the court shall have full jurisdiction to do all and every act relating to the assigned estate, the assignees, assignors and creditors, and jurisdiction shall be presumed in support of the orders and decrees therein unless the contrary be shown; and after the filing or recording of an assignment under this act, the court may exercise the powers of a court of equity in reference to the trust and any matters involved therein.”
      This includes the power to advise the assignee. In the case of Treadwell v. Cordis, 5 Gray, 341 (Mass. Supreme Ct. 1855, Opinion by Shaw, Oh. J.), it was held that equity jurisdiction, given by statute in cases of trust arising in the settlement of estates, is broad enough to extend to cases where trustees seek the aid and direction of a court of equity, where there is doubt and difficulty, and where there are conflicting claims on the part of different parties to the same property or rights, under the instrument by which such trust is created.
      The most familiar case of the exercise of this power in our courts is that of an action by an executor for the construction of a will; but such cases are only one instance, and they rest upon the well-settled principle of equity, that any trustee placed in circumstances in which he may have reasonable doubt as to the disposition of the fund in his hand, has a right, for his own safety, to apply to a court of equity for direction, making the persons interested parties to the proceeding. Goodhue v. Clark, 37 N. H. 525.
      To the same effect is Hayden v. Marmaduke, 19 Mo. (4 Benn.) 403.
      In Jones v. Stockett, 2 Bland (Md.) 409, 425 (1830), the subject was fully discussed by Chancellor Bland. His statement of the rule is as follows: “It has been long, and well-settled, that in all cases where property has been vested in a trustee; or placed in his hands, or put under his control for the purpose of securing it for the benefit of any one; or to insure its proper application in any legal way.as prescribed by the owner, that although such trustee may, in almost all cases, if he thinks proper, take upon himself the risk of properly executing the trust without assistance from any quarter; yet he is not absolutely bound to do so. I-Ie may in all cases where the nature of the trust is governed by principles of equity, as most commonly happens, ask the direction of a Court of Chancery; and act under the indemnity of its decree; not because such a court is, in itself, considered as a proper or suitable agent for the mere safe-keeping-, or management of any property; but because where property has been put into a particular course, allowed and regulated only by principles of equity, it is fit and proper, that all who have a beneficial vested interest in it; as well as the agent to whose management it has been confided, should have an opportunity of coming before a tribunal whose peculiar province it is to apply such principles; and have such property so regulated; as well that those who may be then, or thereafter beneficially interested, may sustain no loss, as that the trustee may fall into no mistakes, nor be subjected to any unreasonable responsibility in cases, where the rules of equity, by which his administration must be governed, are complex and of difficult application. And therefore it is, that in all such cases, where a trustee comes before a court of equity, as a plaintiff, or is brought before it as a defendant, and declines to execute the trust without the direction and indemnity of the court, he is held to be so entirely justifiable in thus seeking its protection, that he is never charged with interest or costs; and that all such losses and expenses are directed to be borne by the particular trust fund in regard to which the direction has been required.”
      The exercise of the power is not confined to the determination of the construction of the trust instrument, nor to purely equitable questions.
      Thus, in Talbot v. Earl of Radnor, 3 M. & K. 353 (before the Master of the Rolls, Sir John Leach, 1834), it was held proper for trustees to file a bill to determine, among other things, a purely legal question raised by the adverse claim of a third person to property claimed by the trustee as a part of the fund; but that as the claim was a pure question of law in ejectment, the adverse claimant had a right to elect to prosecute his action at law.
      So in Wheeler v. Perry, 18 N. H. 807 (1846, Opinion by Parker, Ch. J.), it was held that a trustee, who had paid over extraordinary dividends to a beneficiary, in ignorance of a doubt as to whether the dividends did. not belong to the body of the fund, and who held other like dividends, might properly apply for aid and direction upon the conflicting claims, both as to the money he had already paid over, and re-claimed by him, and as to that still in his hands and claimed by the beneficiary.
      The question turned, not on the construction of the trust, but on the true character of extraordinary dividends.
      But in Greene v. Mumford, 4 R. I. 313, 322 (1856, Opinion by Ames, Ch. J.), the court refused to act on the bill of a trustee which was evidently framed by consent, and involved no question of doubt either on the construction of the instrument or on equitable considerations, but only the legality of a tax as to which he had an easy and safe remedy by an action at law.
      At common law and in equity, independent of statute, and without previous sanction of the court, a trustee has power to compromise, at the peril of assuming the burden of proof, if his act be afterward called in question, that the compromise was fair, in good faith, and that it was justified in the interest of the estate, by the situation at the time when it was made.
      Thus, in People v. Pleas, 2 Johns. Cas. 376, the power of an administrator to compromise a suit against the estate was established (1801, Opinion by Kent, J.). Among the assets that came to the administrator’s hands was a lease for lives; and' an action was brought against the widow who was tenant in possession to recover the estate; and the administrator, the widow and the adult parties in interest, believing that the lease had been forfeited, agreed to a compromise with the claimant of the fee, who paid them- $750. Held, valid. But it appearing that the administrator subsequently discovered that the estate was not forfeited, he was not justified, five years afterward, in giving a release.
      In Murray v. Blatchford, 1 Wend. 583, 616 (Court of Error’s, 1828, Opinion by Savage, Ch. J.), it appeared that pending a suit for settlement of partnership accounts, the complainant died; his three administrators prosecuted the suit and obtained a report for $90,000; defendant having become insolvent, two of the administrators compromised with him for $30,000 and released him. This was done by'the counsel of Chancellor Kent, and with the assent of parties in interest representing two-thirds of the subject in controversy; the other parties in interest thereupon filed a bill to set aside the compromise as fraudulent. The circuit judge confirmed the compromise as to those who had assented, and declared it inoperative as to those' who objected. The court of errors reversed the decree, holding that the evidence did not sustain the charge of fraud; that two administrators had power to compromise against the will of the other. The opinion of the court lays stress upon the circumstance that the debtor compromising did not intend to submit to the judgment, but would appeal; and adds: “suppose the administrators had no interest in the avails, and those owning two-thirds of the fund had urged such an arrangement, but it was declined, and in the end much less had been recovered; or suppose the whole had been lost, through the subsequent failure of Murray, after rejecting such an offer; would not those who had urged the settlement have much more reason to call upon the administrators and charge them with a violation of duty ?”
      In Leland v. Manning, 4 Hun, 7 (1875, Opinion by Brady, J., Davis, P. J., and Daniels, J., concurring), it was held that upon general principles, an executor not only has the power, but is bound, to compound and release a debt, if the interest of the estate requires it. He is obliged to act as a discreet and prudent man would act were the debt his own.
      In Gilman v. Gilman, 6 Sup'm Ct. (T. & C.) 211 (1875, Opinion by Daniels, J.) the general term held that the majority of executors had power to compromise a claim against the estate, and to allow a part of it, although it was not recognized by the testator. That if such a settlement were collusive or fraudulent it might be impeached alike at common law and under the statute; but no want of good faith appearing, the settlement could not be opened merely because they might have erred in allowing more than the claimant was entitled to.
      In Berrien’s Estate, 16 Abb. Pr. N. S. 23, it was held that executors and administrators may be authorized by the surrogate under the statute (2 R, S. 87, vol. 3, 6th Ed. p. 95, § 35), to compromise a claim of the estate against a solvent debtor, the amount of the claim being in dispute on admitted grounds, and the difficulty of successfully resisting a recoupment or counter-claim being admitted. Overruling Howell v. Blodgett, 1 Redf. N. Y. Surr. 323.
      In Bacot v. Heyward, 5 Rich. (S. C.) 441, a compromise of litigation, made by the trustee on his own responsibility, was approved by the court. A trustee under a marriage settlement sued on bonds which he hold for the price of slaves (this was in 1870); and he recovered judgment, subject, however, to the final decision of the court of last resort of the question then pending as to the validity of such bonds. Before that court decided such bonds to be valid, as it afterward did, a compromise was agreed on between the trustee and the debtor, by which the debtor paid about half the amount of the judgment, and was released from the balance. Held, a proper compromise.
      In Reynolds v. Brandon, 3 Heisk. (Tenn.) 593, it was held that the power of the court to advise a trustee might be exercised for the purpose of sanctioning a compromise.
      In Crosby v. Mason, 32 Conn. 482; S. C., 6 Am. Law Reg. N. S. 13 (1865) the court say, on a bill by executors for the construction of a will, that although such suits are not favored (a disfavor which, so far as I know, has only been expressed in the courts of New England where equity jurisdiction is sparingly entertained in all cases), they are entertained to save litigation; and the court say: “It would be difficult to obtain competent and suitable persons to accept situations of great perplexity and responsibility, unless they were permitted to obtain the advice of a court of. chancery as to the proper discharge of their duties. The court is not bound to entertain such an application, as its interference in such cases is always a matter of discretion. It is clearly for the advantage of all parties in interest to have questions of law, interrupting and delaying the settlement of estates, disposed of in this way, and they have a full opportunity to be heard.”
      Assignees for benefit of creditors are trustees within the rule.
      Thus in Coe v. Beckwith, 10 Abb. Pr. 296; S. C., 31 Barb. 339 (Sp. T. 1860, Opinion by Leonakd, J.), it was held that a trustee for the benefit of creditors, in this case a trustee under a railroad mortgage deed, may maintain an action for direction as to the right to the funds held by him, and claimed by various persons, and among others attaching creditors; and that unknown creditors or parties in interest, if numerous, need not be joined as parties.
      In Dimmock v. Bixby, 20 Pick. 368, it was held that assignees for benefit of creditors are entitled, upon the same principle as executors or trustees in general, to the protection of a court of equity in the execution of their trusts, and that this familiar principle ought to be liberally applied in all cases where the security of trustees, acting fairly, may require the application. Whenever a trustee doubts as to his safety and security in complying with any claim of a cestui que trust, or doubts as to any other matter arising in the execution of his trust, his only prudent and safe course is, to wait for the directions of a court of equity. The common course in such cases is, for the trustee to decline acting without such a sanction, leaving the cestui que trust to bring his bill to compel the execution of the trust, but it does not seem to be material whether the trustee be a plaintiff or a defendant in the suit, the object of the application to the court being in either case the same.
      The question in this case was as to the duty of assignees for benefit of creditors in settling conflicting claims, and in construing the deed, and in applying the funds. The court held (p. 876) that the assignees were not obliged to wait until they should be sued by the creditor; and the law regards it as the duty of a trustee in a doubtful case to seek such advica. The bill, however, in this case, was held multifarious for joining other matters.
      In Freeman v. Cook, 6 Ired. Eq. (N. C.) 373, 378 (1849), Nash, J., in speaking of trustees who had acted merely under advice of counsel, and whom he held not protected, said that their only safe course was “to have procured the advice of a Court of Chancery, which they had a right to resort to. . . . The chancellor is the only safe and secure counsellor to trustees.”
      In a note to the case of Crosby v. Mason, in 6 Am. L. Reg. N. S. 13, 19, Judge Redeield, the learned author of the treatise on wills and executors, in speaking of the right of the personal representative to demand the aid and direction of a court of equity in regard to the mode of performing his duties, says: “ This is a matter of great concern to the representative, and to the extent of his personal responsibility. For if he assumes to act upon his own judgment and discretion in a matter of bona fide doubt, and where he might ask the direction of the court in such a form as to settle the rights of all parties and relieve all doubt and uncertainty, he must be regarded as acting voluntarily upon his own responsibility in a matter where there was no actual necessity of his assuming any such responsibility; and if it should ultimately appear that he was mistaken in regard to the law, it will aiford no justification or excuse that ho acted according to his best judgment and discretion and in the most undoubted good faith in a matter where he might have certainty to guide him in the performance of his duty. No trustee has any right to act upon uncercertainties or probabilities, merely.”
      On such an application the court will not order the trustees to act; but will only sanction and authorize what is proposed to be done, if proper. Wiswell v. First Congregational Church, 14 Ohio St. 31, 43 (1863, Opinion by Ranney, J.).
      So too the creditors themselves may apply. If, from any cause, the execution of the trust for creditors, under a general assignment, has become so embarrassed that the aid of equity is required for the direction of the trustee, certainly, where he admits that he contemplated asking the direction of the court, the creditors need not wait for him, but may themselves file a bill. Wilson v. Brown, 13 N. J. Eg. (1 Beas.) 246.
      II. 2'he form of the application.
      
      Some difference of opinion has existed as to whether the application may bo by petition or must be by action.
      The generally recognized principle in courts of equity is that laid down by Kent, Ch. J., in Codwise v. Gelston, 10 Johns. 531, that on a collateral matter which has reference to suit in court, the court may-act on petition.
      So in the Matter of Foster, 7 Him, 130, it was held that the proceeding to discharge a trustee may be by petition, and will be conclusive on the parties to it; and that the equity powers of the court are broad enough to entertain a petition from the cestui que trust to open the discharge, without putting him to an action.
      In Neale v. Davies, 5 De G. M. & G. 258, it was held that the defendant’s answer setting up the doubt is an application for advice on which the court can act.
      In Exp. Calmes, 1 Hill (S. C.) Eq. 112, it was held that a testamentary trustee may file a petition to obtain the sanction of the court to an investment, there being no directions in the will; and that a dismissal of the petition was error.
      In the case of the Petition of the Baptist Church, 51 N. H. 424 (1871, Opinion by Bellows, Ch. J.), it was held that by virtue of the general jurisdiction of a court of equity over trusts, a trustee in case of doubt may seek the aid and direction of the court; and that when a petition is filed instead of a bill, it is amendable if a bill be necessary.
      See also Matter of Le Blanc, 4 Abb. N. C. 221.
      III. The effect of proceeding without notice to Che creditors.
      
      In Lorillard v. Coster, 5 Paige, 172, 215, it was held on a bill by executors and trustees to settle the construction of a will and carry it into effect, that if neither party to such an action raises the objection that cestuis que trustent not joined are necessary parties, it is competent for the court to go on and make the proper decree so as to settle the rights of parties then before it; which decree, of course, is without prejudice to the rights of those who are not before it.
      In Kearney v. Macomb, 16 N. J. Eq. (1 C. E. Green), 189 (1863, Green, Chan.), on a bill by trustees under a marriage settlement for instructions, the court held that as the decision was solely for the guidance and protection of the trustees, and it would conclude the rights of those only who were parties, the court would determine the questions, although they might affect some who were not before the court.
      In Sollee v. Croft, 7 Rich. Eq. (S. C.) 34, 43, 45 (1854, Opinion by "Wabdlaw, Chan.), it was held that orders sanctioning a trustee’s sale of the property, made on his petitition, do not bar a cestui que trust who had no notice ; but on a bill by the latter to hold him to account, the court should approve the transaction if the facts, shown to have existed when it was made, were such that it should have been sanctioned then, had application been made.
      
        In Anonymous v. Gelpcke, 5 Hun, 245 (1875, Opinion by Daniels, J., Davis, P. J., and Brady, J., concurring), a trustee, under an assignment made for the benefit of creditors, without notice to the creditors or to his co-trustee, who he knew was opposed to the compromise of a claim, applied to the court, by a petition purporting to be made on behalf of himself and his co-trustee, for instruction to make such compromise, and obtained an order directing it. Held, on application for the passing of his accounts, that such order was no protection for the compromise made thereunder by such trustee. That when controverted rights or doubtful acts are to be determined, notice should always be given to the parties interested.
      An order of the court of chancery, authorizing a trustee to mortgage, is inoperative against cestuis que trustmt then living, who were not made parties to the proceedings in which such order was made ; and the mortgage is void as against them. N. Y. Superior Court, 1860, Horspool v. Davis, 6 Bosw. 581.
      IV. As to the extent to which the cowrt may control the discretion of a trustee, compare Gisborne v. Gisborne, L. R. 2 App. Cas. 308; 36 L. T. N. S. 564; Re Roper’s Trust, 40 L. T. N. S. 97; Pink v. De Thuisey, 2 Mad. 157; Costabadie v. Costabadie, 6 Hare, 410; Levesey v. Harding, Tamlyn, 460; Collins v. Vining, 1 C. P. Cooper's Cas. 472; Re Hodges, L. R. 7 Chan. Div. 754; Brophy v. Bellamy, 29 L. T. N. S. 380; Walker v. Walker, 5 Mad. 424; Thomas v. Dering, 1 Keen, 729; Cafe v. Bent, 3 Hare, 245; Sillibourne v. Newport, 1 Kay & J. 602; Kekewich v. Marker, 3 Macn. & G. 326; Talbot v. Marshfield, L. R. 3 Ch. App. 622.
    
    
      
       See on this point, Loring v. Steineman, 1 Metc. 207; Kerr v. Blodgett, 48 N. Y. 62; 16 Abb. Pr. 137; Matter of Empire City Bank, 18 N. Y. 199; S. C., 8 Abb. Pr. 192; Metrop. Board of Health v. Heister, 37 N. Y. 661.
    
   J. F. Daly, J., in directing notice to be given to the creditors, held as above.