Court Opinion

ID: 6755964
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:27:04.707955+00
Date Added: 2024-06-11T16:02:26.242179
License: Public Domain

Stern, J.,
dissenting. The majority asserts that .Ohio common law requires that public officials stand as insurers against any loss of public funds, apparently without regard either to the nature of their custody or authority over the funds, or to the reasons for the loss. I do not agree that this is the only standard of liability which may be applied, and I do not believe that it is the appropriate standard in this case.
Early Ohio cases held that county treasurers were insurers of public funds, based upon statutory language which was construed to impose such a standard contractually. State, ex rel. Wyandot County, v. Harper (1856), 6 Ohio St. 607; Bd. of Edn. v. McLandsborough (1880), 36 Ohio St. 227. The court has also held that a postmaster is strictly liable for the loss of public funds which he was to hold and turn over to the federal government. Seward v. National Surety Co. (1929), 120 Ohio St. 47, 165 N. E. 537. But this court has also stated that “ [i]t is pretty well settled under the American system of government that a public office is a public trust, and that public property and public money in the hands of or under the control of such officer or officers constitute a trust fund, for which, the official as trustee should be held responsible to the same degree as the trustee of a private trust fund.” Crane Town*132ship, ex rel. Stalter, v. Secoy (1921), 103 Ohio St. 258, 259, 132 N. E. 851. See, also, State, ex rel. Smith, v. Maharry (1918), 97 Ohio St. 272, 119 N. E. 822. The Craw case involved the liability of township trustees for loss caused by their disregard of statutory safeguards for the; payment of public funds. This case is more directly analogous to the facts of the present case than is Seward, fbrdhe' duties of thé treasurer and his deputy which are involved here are basically those of selecting investments within the statutory guidelines, purchasing and managing the'notes, and accounting for the profits and losses which result, and the Claim. Of liability is based upon disregard of a statutory mandate, as in Crane, not upon a loss by'theft or embezzlement of money held simply to be paid -oVer, as in Seward.
Further, all those duties which R. C. 135.44 imposes upon" the treasurer are typical of those imposed upon a trustee with a duty to invest, but they are unlike the duties of an insurer. Certainly the- statute does not impose the duty of insurer upon the treasurer, for it specifically holds that he is not chargeable for losses.
In seeking to impose the standard of insurer, where the treasurer exceeds his authority, it becomes unclear just what rights the state properly has with regard to the notes. May. the state properly assert that the treasurer is liable upon the one hand because he exceeded his authority, and,;on the other hand, that the maker of the notes is also liable because the notes were purchased by the treasurer as its agent? That is the position the state asserts in its suit Upon the notes.
I do'not point out the logical difficulties with the Insurer theory of liability to argue that some'judicial solution might not be found. However, it does seem to me that any such holding would necessarily distort the legal leaning of the insurer relationship, and would do' so by disregarding the familiar principles of law which have been developed over the centuries to govern legal relationships of the'type created by R. C. 135.14. If this were a private fund,-and the treasurer had assumed the very same duties under a private contract, there would be no doubt that the *133position- created would be that of a trustee. The treasurer, as trustee,.-would be held to have assumed the familiar duties.to faithfully carry out the trust instrument, and the usual remedies' against the .'trustee for any breach , of those duties would apply.
I see no reason why the General Assembly, when it establishes such a fund as this for purposes of investment, of state funds* not to carry out any governmental purpose but simply to gain a profit in the same-manner as any prh vate investor, should not be held to have created a trustee-^ ship and to have acquired the same rights as any,other cestui que trust. Whether a public officer is in general held to a higher standard as a matter of contract or public policy, where the General Assembly establishes a classic trust in everything but name, as it has here, and has neither established a statutory standard of behavior nor set. the trust to the carrying out of a governmental function winch would entitle the state to greater protection than other , trust beneficiaries, it should be held to have established a trust governed by the principles of trust law. I would' apply that standard here, and hold that the defendants should be held responsible to the same degree as private trustees of private trust funds, as the court stated in Crane> supra.
It is clear that under those principles, both the treasurer and his deputy herein committed a breach of .trust. Specific statutory directions imposed a limit of $.50,000,000 upon investments in commercial notes. Any purchase- by the treasurer or his- deputy of an investment which caused this limit to be exceeded was a breach of trust, and any such .investment was improper. It is also well-established that if a trustee purchases a non-legal investment and thereby commits a breach-of trust, then the beneficiaries may elect-to require the trustee to make good from his own funds the losses to the trust which the breach .has caused, and that the cestui que trust is entitled to a lien on the investment, which becomes the trustee’s -individual property, to -the extent of the loss. 3 Scott on Trusts (3 Ed.), 1695, Section 210; 7 Bogert, Trusts and Trustees (2 Ed.), 418, Section 705. Under that principle, the appellees herein would, in general, be strictly liable- for the loss caused by their breach.
*134However, under the facts of this case, a further principle applies. It is established that immediately after appellee Herbert discovered the overpurchases of commercial notes, and before any loss had occurred, he ordered that some of the commercial notes be sold to bring the fund within the statutory limits. At the conclusion of that sale and thereafter, all of the commercial notes were legal invesments. Each note in the portfolio met all the requirements established by statute as of May 12, 1970, long before any loss was sustained, and there was no reason to question the safety of the King Resources notes.
As stated in 3 Scott on Trusts, supra, at page 1880, Section 230.5:
“Where a trustee makes an investment which at the time when he makes it is not a proper trust investment, but which .subsequently becomes a proper trust investment, and no loss has been incurred in the meantime, the trustee is not subject to liability even though thereafter the investment depreciates in value.” As Scott further points out:
“After the investment has become a proper trust investment, it would be absurd to require the trustee to sell if he could immediately properly repurchase it.” See, also, 6 Bogert, Trusts and Trustees (2 Ed.), 433, Section 614; Restatement of Trusts 2d, Sections 229, comment c, and 230, comment f.
In Miller v. Proctor (1870), 20 Ohio St. 442, it was hold that private trustees who are at fault in taking insufficient security for a loan, but who subsequently cause the borrower to substitute other security which would have been sufficient for the original loan, are not to be held accountable for a loss happening through unforeseen defects in the latter security, despite their original breach of trust. The court rejected the claim that they should be held absolutely liable for the breach of trust, where they had cured the; breach before any loss and where the subsequent loss was the result of an unforeseen defect.
The same reasoning should apply in the present case, since the King Resources notes had become fully legal investments long before any loss occurred. I would accordingly affirm the judgment of the Court of Appeals.