Opinion ID: 1499665
Heading Depth: 1
Heading Rank: 6

Heading: Interest on Commingled Funds

Text: The Court found that the trustees had permitted funds belonging to the Estate of Ehrhardt D. Franz to be commingled with the funds of Buder & Buder, a law firm in which trustee G. A. Buder was a partner; and that interest upon the Estate funds so commingled, at six per centum, amounted to $7,957.27. That sum was surcharged to the trustees. The allegation in one of the exceptions is that sums of money belonging to the Corpus of the estate were deposited in the bank account of Buder & Buder and that there is due from Buder & Buder by reason thereof the sum of $30,126.88 (the amount found due from Buder & Buder in the report.) That said report does not make any allowance in favor of the Corpus of the estate for interest on funds belonging to said Estate deposited in the bank account and to the credit of Buder & Buder   . Therefore, exceptors asked that the trustees be charged with 6% interest on such funds during the time the funds were deposited to the credit of and in the possession of the said Buder & Buder. The evidence concerned with this item of surcharge is not clear in all respects. The period covered is subsequent to the death of Sophie Franz. The trustees' report here involved begins with the last previous report (June 22, 1931) and ends August 15, 1942. During this period, no books were kept in the name of G. A. Franz and G. A. Buder, Trustees. The auditors who prepared this report had to go to the books of Buder & Buder, the bank books of the trustees and to make a check of the securities held by the trustees in a safety deposit box. The ledgers of Buder & Buder contained a number of entries the title of which indicated they were part of this trust estate. These entries were interspersed among other entries of matters presumably relating solely to the business of Buder & Buder. Also, there was a separate bank account of the trustees. The method used by the auditors was that they took all the other (trust estate) accounts in the ledger, analyzed all the transactions, both debit and credit. Those that involved either money received or credits to one of these estate accounts we would charge to an account called `Buder & Buder.' All moneys that were paid out and charged to any of these ledger accounts we would credit Buder & Buder. Also, the bank account of the trustees and their cancelled checks were examined. Some of the ledger credit items to the trust estate appeared in the bank account of the trustees. The bulk of the funds or (ledger) account did not appear in the bank account of the trustees. The auditors did not examine the bank account of Buder & Buder but expect that we were told that they were handled through their (Buder & Buder) books  through their own bank account. Since there were practical difficulties in trying to trace any specific amount into the deposits, the auditors went on the theory that we were not going any farther than to charge it to Buder & Buder or give them credit. This debit or credit technically represented the balance due from the trustees. All parties were agreeable that the report be made up as it was. The balance meant the amount for which the trustees were liable in cash or any other assets acceptable to the Trust Estate. The auditors made up (for evidential purposes) a table showing, by months, the balance credit or debit due to or from Buder & Buder. This table began with June 22, 1931, and ended with August 15, 1942. The credit and debit lines moved back and forth  sometimes Buder & Buder would have a credit for some months; then the credit would change to debit for some months. Also, the monthly amounts varied, sometimes widely. Beginning with August 1938, up to the end of the reported period (August 15, 1942), there was a constant monthly debit against Buder & Buder varying from $35,030.10 to $30,126.88. The interest here in question was at 6% simple interest on $30,126.88 for this period beginning August 1, 1938, up to August 15, 1942. The amount allowed ($7,957.27) is incorrect and should be $7,305.76. Appellants urge here six contentions. Three of these seem to strike at the allowance of any interest while three set forth different grounds for diminution of the allowance. First, as to the three contentions that there should be no allowance for interest. One of these contentions is that the Commingling of Funds actually cost Estate nothing. A second contention is that even though no separate set of books of the trustees was maintained in the office of Buder & Buder that separate accounts consisting of separate pages in the ledger of Buder & Buder were maintained in the name of the trustees of the Franz Estate. The third contention is that the method of keeping their books and accounts had previously been approved by this Court. As to the first contention. The supporting argument is that the commingling caused no loss because banks were not paying any interest on checking account deposits. Appellants cite Cornet v. Cornet, 269 Mo. 298, 190 S.W. 333, 343-344, where only the interest paid by a bank on monthly balances was allowed. In that case, the Court stated that the trustee's bank account always had a balance greater than the trust funds commingled therein; that the trustee used reasonable care to keep the trust funds invested; that the trust funds had not been used to profit the firm beyond this interest; that the trust fund lost nothing by this practice; and that the commingling was through ignorance of any rule of law against commingling  the trustee being a businessman. That case is not in point and this contention cannot be allowed for the reason that the evidence fails to show what happened to these commingled funds except that they came into the trustees and supposedly went into the Buder & Buder bank account. Since there were no deposit items covering them in the bank account of the trustees, they were charged against Buder & Buder (really against the trustees) without tracing particular items into any bank account or into any investment  this method being agreeable to all parties. Hence there is no showing of a fact situation even similar to that in the Cornet case nor is there any evidence as to what happened to these funds even if they passed into the Buder & Buder bank account. Whether the funds remained in the bank in the account of Buder & Buder or were used is not shown. Whatever the actual profit to others than the trust or whatever the actual loss to the trust are matters within the knowledge of the trustees and the burden is upon them to produce evidence of such if they wish to avoid the rule allowing interest. Cruce v. Cruce, 81 Mo. 676, 685. Both of the two other contentions are concerned with the method of bookkeeping. Admittedly, this method was far from good bookkeeping practice, which would have been separate sets of books for the Sophie Franz estate and for the remaindermen estate, both being in control of the trustees under the trust agreement. Such proper method was indirectly suggested by this Court as early as 1929. Franz v. Buder, 8 Cir., 34 F.2d 353, 356. However, the method of bookkeeping used by the trustees is, in no wise, vital to the issues here. It did occasion difficulty to the auditors in preparing the present report; and it did affect the form of that report. In this report (acceptable as to form to all parties), it appeared that funds shown by the books as coming into the remaindermen interests were not accounted for in the bank deposits of the Trustees' account. Therefore, they were charged, in the report, as due from Buder & Buder  more accurately from the Trustees. What use was made of such funds does not appear, possibly except as to one item covered by one of the three contentions aimed at diminution of the interest allowed. It is the absence of these funds in the bank account of the trustees and for which they were answerable that is the dominating factor rather than the method of bookkeeping through which that result was reached. We need not discuss at length the law applicable to this situation. The broad rule is well stated in 54 Am.Jur. p. 248, § 313 as Failure of a trustee to keep the trust property and funds separate, his commingling of them with his own or other property and funds except where authorized by the express or implied terms of the trust,    is a violation of his duty as trustee which renders him liable for any loss therefrom with interest, irrespective of any other fault on his part, and any profit or gain resulting therefrom inures to the trust estate. In the absence of definite evidence as to profits or greater loss, the measure of the loss to the trust beneficiaries where there is commingling of funds is legal interest, McIntire v. McIntire, 192 U.S. 116, 124, 24 S.Ct. 196, 48 L.Ed. 369; Hinckley v. Gilman, C. & S. Railroad Co., 100 U.S. 153, 157, 25 L.Ed. 591; Gaskins v. Bonfils, 10 Cir., 79 F.2d 352, 355, or compounded interest, in the discretion of the Court. Barney v. Saunders, 16 How. 535, 542, 14 L. Ed. 1047; Silver King Coalition Mines Co. of Nevada v. Silver King Consol. Mining Co. of Utah, 8 Cir., 204 F. 166, 180, Ann. Cas. 1918B, 571. This measure is recognized in Missouri. Enright v. Sedalia Trust Co., 323 Mo. 1043, 20 S.W.2d 517, 522-523; Cruce v. Cruce, 81 Mo. 676, 682. [6] Therefore, the amount of interest here must be sustained unless it is diminished for one or more of the reasons advanced in the three other contentions. One of these three other contentions is that If charged with interest upon balance in favor of Estate, Trustees are entitled to interest upon balance against estate. The tabulation made by the auditor shows balance in monthly amounts: due to Buder & Buder beginning June, 1931, and ending June, 1932, varying from $3,529.54 to $6,769.80 (five months running above $6,000); due from Buder & Buder beginning July, 1932, and ending April, 1933, July and August being $59,775.17, September being $53,688.78, October and November over $8,000 and the remaining five months between $797.81 and $718.29; due to Buder & Buder beginning May, 1933, and ending July, 1938, being approximately $3,000 the first five months, between $5,033.19 to $5,984.83 the next nine months, slightly over $6,000 the next five months, $8,000 plus the next fifteen months, approximately $10,000 the next nine months, between $10,587.08 and $10,877.32 the next twelve months, $11,375.92 the next eight months; and due from Buder & Buder beginning August, 1938, and ending August 15, 1942, being approximately $32,000 the first three months, over $31,000 the next four months, over $30,500 the next three months, over $33,000 the next four months, over $32,500 the next ten months, $32,456.64 the next three months, over $31,000 the next five months, $35,030.10 the next two months, over $34,800 the next five months, approximately $33,800 the next nine months, and $30,126.88 for August, 1942. This fact situation has been detailed to show the practical difficulties in computing interest which should be allowed. There is no settled rule of law in assessing interest against trustees for funds for which they are accountable and for the use of which they make no explanation showing actual earnings therefrom. Every case must be determined according to the facts and circumstances peculiar to it   . Cruce v. Cruce, 81 Mo. 676, 688; also, see the authorities last above cited, including footnote 6. Apparently, what the Court did was to allow interest on the smallest amount which was continuously due from Buder & Buder for the period next preceding the date of the report. Considering the complicated situation facing the Court in determining the basis of interest computation, we cannot say that the result reached did not accomplish substantial justice. [7] The second contention is that Credit not given for purchase of $10,000.00 worth of bonds. In a checkbook of G. A. Franz & G. A. Buder, Trustees, appeared a check stub showing check for $10,000 on February 11, 1942, to Commerce Warren County Bank for purchase of 10 G Bonds 2½%, 12 years defense, ten bonds $1000.00 each. The cancelled check showed issuance by G. A. Franz and G. A. Buder, Trustees by G. A. Buder Surviving Trustee. The auditor testified as follows: That he could not tell whether this check covered funds from the Ehrhardt D. Franz (remainder) estate or from some other, since the original amount in this checking account was taken from the balance shown in the checkbook when the audit began and there was no statement as to which of the estates (Sophie or Ehrhardt D.) it belonged. That, toward the end of the audit, he had asked the trustees to show him all securities held by them belonging to this Ehrhardt D. Franz estate. That he was taken to the safety box and shown various securities; made a list of them; and they are shown in the report  even those regarded as worthless. He was not shown any G bonds. That no credit for any interest from such bonds appeared in any entry as to this estate. That the balances shown by his audit against the trustees showed money of the estate not accounted for on the bank books of the trustees and might be satisfied by cash or any other assets acceptable to the trust estate as he made no breakdown of such balance. That no objection was made to him by anyone as to these balances. Appellants introduced a file from the Probate Court entitled Inventory & Appraisement No. 71459 in the Estate of Sophie Franz, Deceased, filed June 14, 1930  no part of the file, except the title, appears in this record. The purpose of introducing this file was stated to be to show the inventory of certain notes as assets of this (Sophie Franz) estate. Although testifying after the evidence as to purchase of the bonds was introduced, Mr. G. A. Buder, who signed the check for them, was silent as to this bond transaction. The substance of the argument of appellants is that the check shows that $10,000.00 in bonds was purchased by the trustees and that this purchase must have been from the Ehrhardt D. Franz estate funds since there had been an inventory and appraisement of the estate of Sophie Franz, deceased, years before this bond purchase and, therefore, there were no funds of her estate in the hands of the trustees at the time of the bond purchase. This argument is not established by the fact that there was an inventory and appraisement of the Estate of Sophie Franz in the Probate Court as of June 14, 1930. This is so because this record is definite that all her property did not pass from the trustees to her executor by that date. In the report of the auditors (Cornell) of June 22, 1931, is the statement following: We find that the assets of the Estate of Sophie Franz, as set forth in Exhibit `A,' are all in the possession of Messrs. G. A. Franz and G. A. Buder, Trustees, except the following, chargeable to the Excutor: Cash on Deposit, Mercantile-Commerce Bank and Trust Company $155,693.32 Cash Distributions to Heirs 45,000.00 Amount Chargeable to the Executor on the Books of Buder and Buder 19,369.06 Burroughs Adding Machine Company Dividend Receivable 7,062.50 Accrued Interest Receivable, Accruing after April 14, 1930 23,916.97. These aggregate $251,041.85, while the total of assets of Sophie Franz was $1,811,194.91, as shown on Exhibit A of this (1931) report. In this Exhibit A, which is entitled Estate of Sophie Franz, as an asset appears an item Cash on Deposit  Mercantile-Commerce Bank & Trust Company, Trustees' Account $35,517.70. Also, another asset item with Buder & Buder, Due Trustees $21,069.11. In the Report of August 15, 1942, the auditors state: Certain transactions involving the Estate of Sophie Franz were intermingled in the accounts relating to the Estate of Ehrhardt D. Franz, and it is possible that an examination of the transactions relating to the Estate of Sophie Franz might disclose the necessity of adjusting or revising the statements presented herein. When all of the property of Sophie Franz passed from the trustees to her executor is not shown in this record. Her estate is still in course of probate. Therefore, whether these bonds were purchased from funds belonging to her estate but held by the trustees or from funds belonging to the trust estate is not determinable from the evidence. In view of all of the before stated facts, we cannot decide that the allowance of interest upon the $10,000 (as a part of the amount due from the trustees) was error. We do not determine whether these bonds were or were not bought with funds of the trust estate. What we do determine is that the evidence in this record fails to establish that they were so bought and that, as a result, the trustees are not excused from liability for interest for this unaccounted for sum. Now as to the third matter, being $1,814.14 which was in cash in the account of the trustees on August 15, 1942, the date of the present Report. The auditor testified that this sum existed and should be deducted from the $30,126.88 shown on the report as the balance then due from the trustees. The issue before us is not whether the final sum for which the trustees are accountable should be $30,126.88 or that amount less $1,814.14. Our problem is one solely of the allowance of interest. The inclusion or exclusion of the $1,814.14 is pertinent only as it may affect this matter of interest to be surcharged the trustees on varying monthly balances over the stretch of years. The measure of interest adopted by the Court was the legal rate for the slightly over four years which ended with the date of the report (August 15, 1942) and during all of which there was a sizeable balance due from the trustees. This rate was calculated upon the amount of the smallest monthly balance during that period  which balance happened to be the balance finally due. Hereinbefore, we have approved that method as resulting in substantial justice. If allowance of interest is to be affected  reduced  by this cash balance of $1,814.14 it must, of course, be by reducing, in that amount, the principal sum ($30,126.88) upon which the allowed interest was based. Putting aside any consideration that this cash balance could not be used to affect the allowed interest which was reached in the way outlined, yet there would have to be some showing additional to the mere existence of this cash balance on August 15, 1942, the final date covered by allowed interest. In this situation, there are two reasons why this contention of appellants should not prevail. One of these is that the record is silent as to how long this cash balance had existed. Whether it was recent, existed during part of the four year period or during all of it, we are not informed. The other reason is that even if we could assume  and we cannot  that this cash balance existed during the entire four years, yet it would have reduced the monthly amounts below $30,126.88 in only twelve months scattered through the four years, [8] and in only three of these twelve months would the reduction have reached one thousand dollars. In such a situation, there is no basis for permitting the cash balance to have any effect upon the interest allowance on commingled funds.