Lee v. Lee , 67 Ala. 406 ( 1880 )

STONE, J.

— The capital stock of the Perry Insurance and Trust Company was one hundred thousand dollars, one-half of which, $50,000, was paid in. For the remaining fifty per cent, the notes of the stockholders were taken. The business of the corporation was taking fire risks, and a general banking and exchange business. The company commenced business, and in about three years had substantially paid up the residue of the stock, $50,000, in dividends declared. So that, in fact, only $50,000 of the capital stock was paid in. In what we are stating, we are governed bv what we understand to be the testimony of the officers in charge of the corporation. The principal business of the company was banking. We feel authorized to find from the testimony that by, or soon after the year 1869, three or four years after the eompany had commenced business, the bank had out near or quite sixty thousand dollars of its money, in the hands of three or four persons. Twenty-five thousand dollars of this sum was out on a loan to John H. Lee, on mortgage of two plantations and their stock and equipments, which the witnesses testify were worth twenty-five thousand dollars. None of them place the value above that sum. Another loan of sixteen thousand dollars was secured by mortgage on a plantation, testified to be worth eight thousand dollars. ■ A third loan or investment of a sum between sixteen and twenty thousand dollars, Was also resting on the security of a plantation, not claimed to have been worth more than twenty-five thousand dollars. Now, it is common knowledge that lands put up at a forced, cash sale, rarely, if ever, bring their value. They do not generally sell for half their estimated value. That these lands were not convertible into money at the face value of the debts they were pledged to secure, is shown in the fact that in 1872, and even later, they had not been converted into money. Even when the company made an assignment and failed in 1875, one of these'loans of twenty-five thousand dollars remained unsettled. A second claim of nearly or quite equal amount had not been realized upon in 1878, and the securities therefor were sold to Woodruff for about one-half they called for. The testimony does not inform us of the subsequent history or fate of the loan of sixteen thousand dollars. Add to these complications the fact that the company had a banking house worth ten thousand dollars, and we have a grand total of seventy per cent, of the capital stock invested in suspended, non-convertible securities and assets. However much the directory may have believed the corporation solvent and sound — and we cannot doubt they did — yet, viewed a,s a bank, we cannot think it was in a healthy and prosperous condition in March, 1872. And persons familiar with its condition and operations, as directors attending its meetings should have kept themselves, should have known that too much of its cash capital was invested in non-convertible securities. We are aware that men are ordinarily unduly hopeful. Bank directors are but men, and have common human infirmities. To this, in part, we ascribe the confidence the officers and directors had in their corporation in 1872, and in 1873. We do not think the bank was in a prosperous condition during either of those years. Mr. Crenshaw was one of the original stockholders, became a director in 1868, and continued such until the corporation failed in 1875. He is not shown to have been unfamiliar with the operations of the bank, and knowing the facts, he must, if necessary, be charged with knowledge that the banking operations had been imprudently conducted.

There are circumstances connected with Mr. Lee’s appointment and continuance as guardian, which we feel it our duty to refer to. The infant children of John Lee, deceased, were about to have distributed to them thirty thousand dollars in money. John H. Lee, cousin of decedent, though shown to be an honest, upright man, was insolvent, and his insolvency was known to the directors and owners of the Perry Insurance and Trust Company. His chief indebtedness was to that corporation. It is not shown that he desired or asked to be appointed guardian, or that the oldest child, who must have been over fourteen years old, or the mother of the children, originated the thought of his becoming guardian. The thing was first suggested by persons in the interest of the Perry Insurance and Trust Company ; and when Mr. Lee expressed an inability to make the bond, he was informed the company would make it for him. It is manifest from the whole proceedings that one of the conditions on which the company made the bond was, that he should lend the money to the company. If such had not been the understanding, he could not have made the bond he did ; and we have no doubt if he had withdrawn the money .from the bank, after either of his appointments, the sureties would at once have ceased to be longer bound for him, and he would have ceased to be guardian. Now, whether this loan was to be made with or without security, these were not proper considerations to enter into the selection or appointment of a guardian. A guardian for an infant should be selected for his good character, sound judgment, prudence, and adaptedness to the trust. He must safely keep the funds, and, at the same time, make them productive. The safety of the funds, and the interest of his ward, should be the sole guiding principle in the administration of his trust. In these functions he should be free and untrammeled. If he be under obligations, previously assumed, to make a particular disposition of the funds; in other words, if he be not entirely free to place the loan where it will be safest, most productive, and most readily reduced again to possession, then the personal disinterestedness of the trust is impaired, and his fiduciary relation is liable to become warped by his personal interest, or social obligation, if not by a more controlling exigency. However the pre-arrangement may have been regarded in the present case, the tendency of such bargains is antagonistic to the policy of our statutes, and must divide and weaken the severe loyalty the guardian owes his ward. He should always keep himself free to deal with a proposed borrower at arm’s length.

Another subject for criticism. In the effort to relieve Mr. Crenshaw of all participation in the second appointment, the execution of tbe second bond, and the renewal of the loan to the Perry Insurance and Trust Company, it has been sedulously sought to show that one of the conditions on which he, Crenshaw, consented to become, and did become, a bondsman in the first appointment, was, that he, Crenshaw, should remain bound only one year, and at the end of that time, Lee should settle his guardianship, account for the funds, and then release Crenshaw. Now, the resignation of a guardian, the making of a final settlement, and taking out new letters, each entails expense, rendered necessary only by the resignation, and that expense falls on the estate of the ward. True, under a statute of 1871, a guardian may resign his trust. — Code of 1876, § 2768. It was never contemplated, howeter, by the legislature, that a guardian should be appointed with a foregone determination to resign at the end of a year, and during the minority of the ward.

We have commented on these peculiarities, if not irregularities, attending these guardianships, with no intention of making them the basis of our decree. Our purpose has been to call attention to them, to characterize them as abuses, and, if possible, of preventing this peculiarly delicate and responsible relation of guardian from being perverted to the purposes of merchandise. We trust no probate judge would make the appointment of a guardian, if he knew that one of the conditions on which he could make his bond was, that he should commit the custody and administration of the ward’s estate to another, either natural or artificial, person ; or, if he knew the trust was to be retained for only a short period, less than the term of the ward’s minority. We take a step farther. If an administrator or guardian resign, and, at the same time, apply for re-appointment as his own successor, and offer a new bond with sureties changed, this should awaken inquiry in the .breast of the probate judge ; and, prima facie, he should refuse to make the second appointment. We do not design these remarks to apply specially to this case, more than to any other similarly circumstanced.

A great deal of testimony has been taken to prove that, when Lee was first appointed guardian, there was no prior agreement that the money of the wards should be lent to the Perry Insurance and Trust Company, without security. As matter of fact, we think there is a failure to prove such prearrangement. It is not denied, however, that it was previ-* ously agreed that the money should be lent to the corporation ; and we think we may safely affirm that without such agreement, Lee could not have procured the sureties he did, and could not have made an acceptable bond. There is,, on the other hand, no testimony that, in the previous negotiations-, any thing was said about securities, and it is very certain that when the loan came to be made, none were required. True, two names were indorsed on the written contract, but the proof is, that these indorsers signed their names without request from any oüe, and both were confessedly insolvent when they so' indorsed. We can not regard these indorsements as a compliance with the statute, or as furnishing any security whatever. — Code of 1876, § 2773. The guardian did lend the money without security, and this rendered him and his sureties liable therefor, no matter how solvent the insurance and trust company may have been at that time. He violated a positive statutory duty, and this fastened the liability. — Lee v. Lee, 55 Ala. 590, 598.

Having shown that the guardian, by lending the money without security, fastened a liability on himself and sureties, the question is, have the sureties on the first bond who were not on the second, been discharged ? The loan was made March 5th, 1872, and the liability then attached. Has iit been cancelled ?

In January, 1873, Lee, the guardian,, filed his account current and vouchers for a final settlement of his guardianship, pursuant to the agreement he made with Crenshaw. Proper order was made, notice by advertisement given, and on the 5th day of March the accounts were audited, the balances ascertained, and decrees were rendered against him for the several sums ascertained to be due his wards respectively. No objection is urged to the formal regularity of these proceedings. In point of fact, Lee was guardian when he filed his account current, and continued so until the-day of settlement, March 5th, 1873, when he resigned. He took all the steps necessary to a settlement, if he did not make the settlement itself, before he resigned. • The record does not inform us whether the settlement or resignation was first in point of time; but does iuform us that both took place March 5th, 1873. A guardian ad litem had been appointed to represent the minors in the settlement, and the decrees were ■ rendered in his favor for the use of the several minors-. There is no statute authorizing a guardian to settle his accounts finally, while he remains in office. He can settle when the ward comes of age, or, if a female, when she marries, or when his authority as guardian ceases by removal, &c. — Code of '*1876, § 2772. There are other provisions for coercive settle-merits, but they do not apply to this case. — Code, §§ 2791-2. The settlement being set on foot and made when the Probate Court had no authority or jurisdiction in the premises, it stands for nothing, and may be collaterally assailed, or treated as a nullity. — Lewis v. Allred, 57 Ala. 628. Until the term of the guardianship had ceased by the majority of the ward, or, by a cessation of the guardian’s authority, the Probate Court had no jurisdiction to take any steps looking to a final settlement. This case must be treated, then, as if no attempt had been made to settle in March, 1873.

It is contended for Crenshaw, that he is entirely discharged from liability : First. Because, after Lee had resigned his first guardianship, had been re-appointed, and had qualified under that appointment, the Perry Insurance and Trust Company actually paid to him the money it had borrowed from him, that he then re-lent the money to the company, and reported to the Probate Court that he had collected the several decrees rendered against him in the former guardianship. We can not agree to the proposition that what took jplace on the 5th March, 1873, amounted to a payment in fact. True, the money was shown to Mr. Lee, and we have no doubt it was the correct amount. He was also informed that there was his money, and he was requested to count it. This, however, was but an empty form. He had previously agreed not to take the money from the company, and on the strength of that agreement, the officers and stockholders of the coporation had made his second bond for him. If he had taken the money, he would have violated his agreement, and we have no doubt his sureties would have refused to be longer bound for him. The law regards the substance of things, not their semblance. There was no payment in fact.

It is contended, in the second place, that inasmuch as Mr. Lee, by his second appointment, became his own successor— thus centering in himself the authority to demand, and the duty to pay — the law, from the necessity of the case, presumes a payment of the claim to the creditor estate. This, because the law furnishes him no coercive measures for collecting the demand, and because it was his duty under the second appointment, to possess himself of the assets of his ward. We need not, and do not, in this case, decide what would be the rule, if Lee had made a valid settlement of the guardianship, and the decree of the court thereon, had fixed and determined authoritatively, the extent of liability of the first to the second guardianship. That is not this case. We have shown above that the attempt to make a settlement was a nullity, because the statutory jurisdiction did not attach. The case' then stands in law, as if the amount due from the first to the second guardianship was unascertained. In such cases, we hold that the wards are clothed with an election, to charge the sureties on the first bond, for the unauthorized loan of the money by the guardian, without security ; or, they may proceed against the sureties on the second bond, for the failure of their principal to- obtain a proper decree of the court, and transfer the assets to the second guardianship. The case is directly within the principle declared in Whitworth v. Oliver, 39 Ala. 283. See Morrow v. Peyton, 8 Leigh. 54; Aylett v. King, 11 Leigh. 486; Flinn v. Carter, 59 Ala. 364.

. There was a demurrer in the court below for multifariousness. The multifariousness charged was; that the bill makes both sets of the sureties defendants, and seeks a joint recov-' ery against them for the funds improperly lent to the insurance and banking company, under the circumstances disclosed above. The Chancellor sustained the demurrer for multifariousness, and the complainants appealed to this court. — Lee v. Lee, 55 Ala. 590. We reversed the ruling of the Chancellor, holding that on the face of the bill it was not multifarious. Among the averments of the bill, which we decided was not multifarious on its face, we copy as follows: “That before and on the 28th day of January, 1873, [the time when the accounts current were filed to make final settlement-of the first guardianship], the Perry Insurance and Trust Company was in failing circumstances, and unable to pay its debts, which was then well known to said J. W. Crenshaw,” and the other sureties on Lee’s first guardian bond ; “that said J. W. Crenshaw, well knowing the failing condition of said Perry Insurance and Trust Company, and that it was unable to pay its debts, and well knowing that said company was indebted to John H. Lee as guardian, as aforesaid, on account of the money so loaned, in a sum of more than twenty-seven thousand dollars, and well knowing that said John Ñ. Lee was insolvent, threatened to make application to the Probate Court to be released from the bond of said John H. Lee as guardian, as aforesaid : thereupon, it was planned between said J. W. Crenshaw and said W. R. Brown, then president of said Perry Insurance and Trust Company, said Francis A. Bates, and the other officers of said company, and said John H. Lee, that said John H. Lee should settle his said guardianship in the Probate Court, and resign his said guardianship, and then apply to be re-appointed guardian of your orators and oratrix, and give a new bond, and acknowledge satisfaction of the balances which should be found against him on such settlement; that this arrangement was contrived and planned, for the purpose and with the intent to release the said J. W. Crenshaw from liability on the said guardian bond, as the surety of said John H. Lee, without the payment of any money.” The bill then avers that all these plans were carried out with the concurrence of said J. W. Crenshaw, W. R. Brown, and F. A. Bates, and other officers of said company, and that it was done “for the purpose and with the intent on the part of said John H. Lee, J. W. Crenshaw, W. R. Brown, and other officers of said company, to carry out the plan so contrived to release said J. W. Crenshaw from his said liability, without the payment of any money ; and then prevent any call being made on the Perry Insurance and Trust Company for the payment of the money so borrowed from John H. Lee, as aforesaid.” Treating these averments as' true, as it was our duty to do on demurrer, they make a very clear and strong case of covinous combination and conspiracy to defraud the complainants. The only name found on the first bond that is not on the second, is that of J. W. Crenshaw. Hence, he alone is interested in having the first set of sureties discharged. It will be seen in the averments copied, that he is charged with full knowledge, and with active participation in all that was unlawfully planned and executed to the prejudice of complainants. The charges made, if true, fix on him a liability, common with the other bondsmen. On these grounds, and these alone, was the bill in this cause relieved of the charge of multifariousness. — Lee v. Lee, 55 Ala. 590. The case is now before us on the testimony. We have shown above that in March, 1872, and in March, 1873, the Perry Insurance and Trust Company, as a banking institution, was not in a prosperous condition. It is not shown it was insolvent, or that Crenshaw knew or believed it was in failing circumstances. On the contrary, the testimony shows that he, the other directors, and the stockholders, believed the corporation to be solvent and sound at each of those dates. There is not only no testimony connecting Crenshaw with the design, plan and combination charged, to have Lee re-appointed, to have him execute a new bond, and thus release Crenshaw, without requiring the company to pay the money, but the testimony is uniform, strong, and convincing, that he, Crenshaw^ had nothing to do with procuring the second appointment, the execution of the second bond, or the continuance of the loan to the company. The testimony is, that he did not even know there was a plan or wish to have Lee re-appointed. He desired to be released from the bond, expected Lee’s guardianship to cease, and expected the money to be paid. The testimony is, that the company had set apart the money with which to make the payment, and, at one time, expected to pay it. There was a purpose subsequently formed to have Lee re-appointed, and thus retain the money in the bank, but there was no proof connecting Crenshaw with this newly formed purpose, or showing he had knowledge of it. The combination and conspiracy charged upon Crenshaw, with others, which, on demurrer, relieved the bill of the imputation of multifariousness, is thus shown to have failed in the proof. In the only aspect in which the unities of the bill can be maintained, the complainants must fail for want of proof. The testimony fails to show a common liability resting on Crenshaw and the new' sureties on the second bond. We have shown above that each set of sureties is liable, but there is no common liability. It presents a case for election by the wards, against which set of sureties they will proceed. This objection arises on the evidence, which fails to sustain one phase of the bill, still it shows complainants are entitled to substantial relief, and they are entitled to an opportunity to amend. — Code of 1876, § 3790; Smith v. Coleman, 59 Ala. 260.

The bill in the present case was filed December 22d, 1875. In 1876 John H. Lee, by mortgage, conveyed to the Perry Insurance and Trust Company, two plantations, to secure the payment of a debt he owed the company for money advanced for him, amounting to twenty-five thousand -dollars. This debt remained uncollected, and in March, 1875, when the affairs of the corporation were becoming desperate, this mortgage and the debt it secured were transferred and assigned by the company to John H. Lee, guardian, as collateral security of the said loan, so made by Lee, guardian, to the company. It was stipulated in the assignment that the mortgage should not be purchased until after three years from the assignment. In July, 1878, the present complainants, wards of said John H. Lee, filed their bill to foreclose this mortgage, claiming the proceeds to be realized, in part payment of the said sum due them from their guardian. The defendants in this suit plead this, and rely on it as a ratification of the illegal and unauthorized loan made by the guardian, and as a bar to any further complaint by the wards that their moneys had been lent without security. When Lee, the guardian, lent the money of his wards to the Perry Insurance and Trust Company without security, he committed a devastavit — a breach of his ■ statutory, official duty. May v. Duke, 61 Ala. 53. The Perry Insurance and Trust Company, when they then borrowed the money, knew it was the property of his wards, and must be charged with knowledge that in the loan the guardian violated his statutory duty. The company aided him in this breach of duty, and became recipients of the money by and through that breach of duty. This constituted them trustees of the funds in invitum, with all the duties and disabilities of the rightful trustee and guardian, Lee, resting upon them, but, without the powers and rights of the latter. Thus making themselves trustees in invitum, it is in the power of the beneficiaries to charge this trust upon the company, and make it an original debtor to them, in common with their lawful guardian and rightful trustee. The company and Lee are joint and several trustees of this fund, and liable to account as such to the beneficiaries, if the latter elect to so treat them. — 2 Story Eq. Ju. § 1257; Perry on Trusts, §§ 832, 835, 836, 840, 841, 810, 814; Preston v. McMillan, 58 Ala. 84; Graft v. Carthman, 16 Amer. Dec. 741; Coleman v. Cocke, 18 Ala. 757; Powell v. Jones, 1 Ired Eq. 337.

[Note bt the Beporter. — At a subsequent day of the term the appellants applied for a re-hearing, upon, which the court rendered the following opinion.]

It being thus shown that the Perry-Insurance and Trust Company had made complainants claim its original debt, in common with Lee, the guardian, it follows that any partial payment made, or security given by it, is no more a bar to further suit against it, or against Lee and his sureties, than if Lee himself had made partial payment, or given collateral security.

But aside from the principle stated above, we do not think there is anything in the alleged ratification that can prejudice the present complainants. Suing as they do, they are no more estopped than they would be, if Lee, their guardian, having collected a part of the money from the company, the wards accepted it from him, with a knowledge of the source hom which it came ; or, than Lee himself would be, if suing the insurance and banking company for the money. The suit to forclose the mortgage does not exonerate Lee from liability for his devastavit and default, and his sureties are as much bound therefor as he himself is. — 2 Story Eq. Ju. § 1092; Harris v. Harrison, 78 N. C. 202; Powell v. Jones, supra; Alexander v. Doby, Rice Eq. (S. C.) 23.

The Chancellor granted relief on the cross bill. The view we take of the case would seem to leave no ground for that bill to rest on. We will simply reverse his decree on the cross-bill, and leave it for disposition in the court below, after the pleadings shall have been amended.

The decree of the Chancellor is reversed, and the cause remanded.

STONE, J. — It has been again pressed upon us with great zeal and earnestness, that the wards, complainants in this suit, by claiming the benefit and security of the mortgage of Lee, their guardian, to the Insurance and Trust Company, which was subsequently transferred by the latter back to Lee as security, of the loan to the company, must be regarded as having thereby ratified and adopted as legal, the loan made to the company. In other words, the principle is invoked, that if A, without authority, convert the money or property of B, into other property, and B, with knowledge, assert his ownership of the property into which his own effects had been converted, this is a ratification of A’s unauthorized act, and equally absolves A from liability for the conversion, and the person to whom he had delivered B’s effects from liability to account therefor. The principle is, that ratification, with full knowledge, is the equivalent of prior authority. In holding, as we did in the principal opinion, that the Insurance and Trust Company had made itself a trustee in invitum, and thereby became a principal debtor, we thought, and still think we showed the inquiry propounded above was, and is immaterial. Being a principal debtor, partial payment or partial security absolves no one, except pro tanto, any more than partial payment or security given by a joint obligor, will absolve his co-obligor.

But that principle has no application to this case. This is not the case of a conversion of trust funds by the trustee into something else, leaving the beneficiary the right and privilege of claiming the thing converted, or the thing into which it is converted.

The law, in such case, justly says he may claim either, but shall not have both. In the present case the breach of trust was committed in March, 1872, by lending the* money to the insurance company without security. The money was not converted into anything, which the beneficiaries did or could claim. Three years afterwards, the Insurance and Trust Company turned the mortgage security over to Lee the guardian, as collateral security to the debt the corporation owed to him as guardian. In equity, every one interested in the collection of the debt the insurance company owed, had the right to claim that the proceeds of that collateral security should be applied towards the liquidation of the original liability. The beneficiaries — wards—the sureties of Lee, the guardian, and the Perry Insurance and Trust Company, each and all had the right to have the collateral made available for their common benefit. See Thames v. Herbert, 61 Ala. 340.

Nor is there anything in the argument, that by asserting claim to the collateral security, the complainants (wards) weakened or impaired any right Crenshaw, as surety of Lee, could assert. His right, as surety was, to stand on the terms of the contract his principal, John H. Lee, had, by his bond, made with the complainants. It was his equitable right to have every security Lee, his principal, had acquired, utilized in his own exoneration. The complainants, the wards, had the same right, and their suit to foreclose was but an assertion of thát right. If they, by their own act, or, possibly by their negligence, had deprived Crenshaw of the benefit of that fund, a contention by him that they had thereby discharged him, would be much better supported by reason and authority than the position he now takes. If he suffered the Lees, complainants, to acquire the mortgage property at a sum below its value, that was his own error or fault.

The application for a re-hearing must be denied.