Court Opinion

ID: 9662371
Source: CourtListenerOpinion
Date Created: 2023-08-23 23:07:06.354176+00
Date Added: 2024-06-11T18:14:38.922800
License: Public Domain

Mr. Justice Garwood
dissenting.
Counsel for the trustee appeared to admit on oral argument that if a trust owns a mortgage note in default as to interest, and the debtor and trustee somehow properly settle the interest obligation by payment to the trustee of property other than money, equitable title to the property would be in the income beneficiary of the trust even before it is delivered to him. But I think this is not so, since the trustee certainly has the right to use that very item of property by way of discharging current expenses of administration, including payment of trustee fees to itself, and could also keep it and account to the income beneficiary in money for the amount of interest for which the property was given in payment. Still less, should the income beneficiary acquire an equitable fee interest in a case like the instant one, where, in the usual course of business, there is a foreclosure for default of both principal and interest, and the trustee owner of the mortgage bids in the property and later, in effect, sells the mineral part of it. In such a situation the applicable rule would seem to be that given in the Restatement, Trusts, Sec. 241, (as elaborated in the 1948 Supplement of the same work), which is one of equitable accounting based on the general right of the income beneficiary to an appropriate share of the benefits of the transaction in the light of her loss of income due to failure of the debtor to pay the interest, but not based on a pro rata fee interest of the income beneficiary in the land in question. The Restatement rule, like the rule adopted by the majority opinion here, results in giving the income beneficiary part of the proceeds of the sale, even in situations where the net results of the transaction include a large loss of corpus (e. g., principal of these notes $10,000; past due interest $1,000.00; proceeds of sale by trustee following foreclosure purchase by trustee and resale, $5,000.00). In the latter case the income beneficiary would, under the Restatement rule, get a part of the $5,000.00, being the difference between $5,000.00 and a smaller sum which, at 5% per annum or such other rate as might be established as the going rate of return on trust funds, would have produced in the period between the final sale and the earlier date when the duty of the trustee arose to take action on the note, a total of $5,000.00 (principal and interest). In the hypothetical case there *68would, of course, be substantial loss of corpus (assuming the trustee had paid $10,000 for the $10,000 note or that it was worth $10,000 when the trustee acquired it from the trustor), and the income beneficiary, while receiving less than she would have gotten if the debtor had duly complied with all his obligations, nevertheless gets something. On the other hand, if in the same case the trustee should, by some lucky chance, realize not $5,000.00, but $50,000.00 out of the foreclosure-acquired land, the same formula would be applied, the corpus thus being substantially increased over the principal amount of the note or its lower actual value, and the income beneficiary likewise receiving substantially more than she would have received if there had never been any default on the note, but, in the instant case, somewhat less than she receives under the theory of joint ownership of the property received in foreclosure.
True, the instant case is not specifically covered in the portion of the Restatement referred to, the novel features here involved being, (a) the fact that the trustee took over the land more or less in discharge of a judgment for specified amounts of both principal and interest and, (b) the further fact that the trustee still owns the surface and the reversion of the minerals after receiving two cash bonus payments for the latter. Moreover, considering the long period of time between the apparent date of first default on the note and the date the trustee began to make recoveries from the property, there might well be no great difference in actual values between the division of funds based on the theory of joint ownership of the land after the foreclosure and a division based on the rule of the Restatement. At the same time, the latter rule, like that of Willis v. Holcomb, 83 Ohio State 254, 94 N.E. 486, is inconsistent with ownership by the income beneficiary of a fee interest in the land. As seems to be the thought of the dissenting justice in the Court of Civil Appeals, the idea of resulting trusts within express trusts is quite novel, and I apprehend some unnecessary confusion in the law from a precedent giving an income beneficiary an equitable fee interest when the trustee forecloses and bids in the property under a judgment for both principal and interest, especially when we do not clearly specify the determining factor for this result. Is the latter the fact that there was no personal judgment taken against the debtor or that the judgment specified both principal and interest as making up the total debt foreclosed upon, or both ? Are we holding that in every case of a foreclosure involving both principal and interest, if the trustee himself bids in the property, the income beneficiary automatically acquires a pro rata equitable fee interest therein, so that the trustee *69must give a deed to the income beneficiary of her interest or else set up a second and different trust on the books in her favor? If the debtor be insolvent, what practical difference is there between taking merely the security and taking the latter plus a worthless deficiency judgment?
No doubt it will be somewhat complicated to apply the Institute rule to the instant case involving two bonus payments, and with the trustee still holding legal title to the surface and mineral reversion. But it could be worked out, and, as stated, the result would include an equitable participation of the income beneficiary in the bonus money from the mineral leases and any other increase that has accrued to the land, although probably on a somewhat more modest basis than if we adjudicated to her a fee interest in the property taken in foreclosure.
Delivered July 20, 1955.
Rehearing overruled Nov. 9, 1955.