Hubbard v. Alamo Irrigating & Manufacturing Co. , 53 Kan. 637 ( 1894 )

The opinion of the court was delivered by

Allen, J.:

Numerous assignments of error are made in this case, and many questions are discussed in the briefs.

, 1. Trust ftinfls, cover — practice'

2i defendants1!8 I. The plaintiff in error, Hubbard, H. E. Hayes, individually and as former administrator of Lord's estate, the Johnson County Bank, which was owned entirely by Lord, and Emma Lord, his widow, were all joined as defendants. This, it is urged, was a misjoinder of parties. The defendant Hubbard moved to strike out those parts of the petition relating to other defendants, and also to require the plaintiff to separately state and number its causes of action. We fail to see how the defendant was materially prejudiced by the joinder of the other parties, especially as the court found that there was no cause of action against them. The peti- ° , * tion states but one cause of action, equitable in its nature, aud there was no occasion for separately stating and numbering. All of the bonds were delivered to Lord under one contract and as one transaction, and the plaintiff might properly recover in one action the unsold bonds and the proceeds of those that had been negotiated. These motions being overruled, the defendant demurred to the petition, on the ground that there was a defect of parties defendant, that several causes of action were improperly-joined, and that the petition did not state facts sufficient to constitute a cause of action. An excess of parties, it has been frequently held, is not a defect within the meaning of the statute. It is claimed that the creditors of Lord’s estate are necessary parties to the determination of the question of plaintiff’s right to priority in payment out of the funds of the estate, and that the court cannot in their absence adjust the priorities. It appears that, on their application, between 60 and 70 creditors, representing claims amounting to over $40,000, were made parties, and appeared at the trial. • It has never been supposed that, in an action against an executor or administrator, who stands as the representative of the decedent, the creditors, legatees or distributees entitled to the proceeds of the estate were necessary parties, nor are we able to perceive why they are so in this case. Of course the rights of persons not parties are not concluded by the judgment rendered. Any creditor or other person not before the court at the trial may uudoubtedly protect whatever rights he has in a proper action, and may establish such countervailing equities as he has. We think the other grounds of the demurrer were not well taken. We think the motion to make the petition more definite and certain was also properly overruled.

II. Complaint is made of the refusal of the court to permit the plaintiff to inquire of Overton with reference to the delivery of stock in the plaintiff corporation by him to Lord at the time the arrangement was made for the negotiation of the bonds. In this connection it is earnestly insisted that, as it appeared in evidence that all of the shares of stock issued by the plaintiff corporation were in Lord’s possession at the time of his death, and in the hands of Hubbard, as administrator, at the time of the trial, it was competent for the defendant, on cross-examination of Overton, to inquire fully into all the details of the transaction between him and Lord with reference to the sale of the bonds and the delivery of the stock to him. Overton, having testified with reference to the progress of the work on the ditch, the arrangement with Lord with reference to the sale of the bonds, the receipt of moneys from Lord which he claimed were advances, and other matters, on cross-examination was asked the question: “At the time these bonds were issued and delivered to Mr. Lord, were there any negotiations between you as to the stock of the company?” This was objected to as not cross-examination, and as immaterial. Counsel for the defendant then stated that he desired to prove by the witness that, at the time of the negotiation whereby Lord took the bonds to negotiate, it was understood that 930 shares, which stood in the name of the witness, should be transferred to Mr. Lord. The court excluded the testimony. There was no allegation in the answer of the defendant asserting the ownership by Lord of all the stock in the corporation. The ruling of the court was that, under the pleadings, and especially on cross-examination, the question was not a proper one. We find no error in the ruling of the court. Conceding, for the purpose of the argument, that the witness would have testified that all the stock in the corporation was transferred to Lord, still it would not make him, under the circumstances developed in this case, the owner of the corporation^ nor of its property. It is an undisputed fact that $19,000 of bonds of the corporation, secured by a mortgage on all its property, were outstanding, and in the hands of bona fide holders, .who hada primary lien upon the property of the corporation. These creditors are entitled to have the property of the corporation protected and preserved for their security and ultimate payment, and their rights are paramount to those of the stockholders. Conceding that Lord owned all the stock, he yet had no right to divert moneys raised from a sale of the company’s bonds to his own individual use. There was no substantial error, therefore, in excluding this testimony. Had it appeared that the corporation was out of debt, so that the ownership of the stock would carry with it all beneficial interest in funds due the corporation, the question counsel seek to raise would have been presented.

4, Administration — follow-iugtrust luud. III. Counsel for the plaintiff in error labor diligently and earnestly to distinguish this case from that of Myers v. Board Education, 51 Kas. 87. It is claimed that the doctrine of implied trusts does not apply to assets in the hands of an administrator; that ¶ 2864 of the General Statutes establishes the rules governing the distribution of the estate of a deceased1 person; that these rules override those equitable considera-1 tions upon which courts act in reference to an estate, either in the hands of a living person or of his assignee; that where death intervenes, and an administrator is appointed, the statute furnishes the only rule. The case of Estate of Fox, 92 N. Y. 93, is cited in support of this contention. That the statute fixes the rules for the disposition of the estate of the deceased person cannot be doubted, but the point under consideration is, whether the proceeds of the bonds sold by Lord constitute a part of his estate or not. It certainly would not be claimed that, if the identical money received by Lord as the proceeds of the bonds came in one package into the hands of the administrator, he could use it as a part of Lord’s estate. It would be the money of the plaintiff alone, in which the administrator would have no interest whatever. Let us go a step further, and assume that it had been mingled with other money of the deceased, but was still all retained: can there be a doubt that the plaintiff would have a right to have it counted out, and separated from the whole sum; or, had it been invested in some specific property to which it could clearly be traced, would a court of equity hesitate to declare the real ownership in the plaintiff, notwithstanding the death of Lord? The theory on which courts proceed in all such . , . . . 1 , cases is. and must be, that no title to the trust 7 fund ever passed to the trustee, and that, however it has been mixed and mingled with his other property, the title still remains in the cestui que trust.

In reason there can be no sound distinction between the case of an administrator and that of an assignee, and the prin-eiple on which the courts hold that the assignee must pay over the trust fund in advance of payment to the general creditors is, that the owner of the fund has a title which the trustee cannot destroy or divest by any act of his own, without the consent or knowledge of the beneficiary. The Fox case does not convince us of the correctness of counsel’s contention. The doctrine on which the courts act in all this class, of cases is broadly stated by Story, as follows:

“The general proposition which is maintained, both at law and in equity, upon this subject is, that if any property in its original state and form is covered with a trust in favor of the principal, no change of that state and form can divest it of such trust, or give the agent or trustee converting it, or those who represent him in right (not being bona fide purchasers for a valuable consideration without notice) any more valid claim in respect to it than they respectively had before such change. An abuse of a trust can confer no rights on the party abusing it, or on those who claim in privity with him.” (2 Story, Eq. Jur., § 1258.)

While most of the authorities cited are suits against either the trustee or his assignee in bankruptcy or insolvency, the same equitable doctrine was applied in Smith v. Combs, 24 Atl. Rep. (N. J. Ch.) 9, which was a case against the administrator of an executor who had used funds belonging to his testator’s estate, and the court places its decision on the ground that trust property is specifically held by the trustee for the owner, and not as his own property or for the benefit of his creditors. We concede that, if the proceeds of these bonds were in equity a part of Lord’s estate, the rules prescribed by the statute would govern. It is said that, in selling the bonds, Lord committed a fraud on the purchasers; that a fraudulent prospectus was issued and circulated to induce persons to buy. A copy of a pamphlet published by Lord, containing false representations as to the ditch and property of the company, is contained in the record, but our attention is not called to any evidence showing that any purchaser of bonds relied on the representations contained in the pamphlet, or was fraudulently induced by Lord to make the purchase. No holder of any of these bonds is in court complaining. It does not appear that the representations contained in Lord’s-pamphlet were authorized by the plaintiff, but counsel contend that, by bringing suit for the proceeds of the bonds, the company ratifies and adopts all of Lord’s acts in making the sale. It is not necessary to consider, in this case, the effect that any such ratification would have on the plaintiff’s rights, in an action between it and the holders of the bonds, but clearly neither Lord nor his personal representative can set up his own fraud in disposing of the bonds, committed without the knowledge or consent of the plaintiff, to defeat the plaintiff’s right to recover in this action. A mere statement of the proposition seems ample argument of the question.

s'Swe’df01" We are unable to distinguish the facts of this case, with reference to the mingling of the trust funds with the general estate of the trustee, from those in Myers v. Board of Education, supra. It is urged that there is a negative showing here to the effect that the funds were not mingled with the assets of Lord’s bank. We do not so understand the evidence nor the findings of the court. Lord was a banker, carrying on his business at Olathe, Kas., and having a branch or agency in Nashua, N. H. These bonds were negotiated through that agency, and the court found that the $19,000 did pass into Lord’s hands, and was by him appropriated to his own use, and mingled with and used as his other property and money. There is no showing that any specific portion of this money was lost or squandered, but the fair and necessary implication is, that his estate received the full benefit of it. In the Myers case, the funds had been mingled with the funds of the bank, and used in the ordinary course of the private banking business of John Higinbotham, in the payment of the debts of the bank. It would be difficult to find two cases more nearly identical in the circumstances. The mere fact that the money was received at a point distant from Lord’s bank appears to us of no consequence, for funds were remitted back and forth as occasion required. We think the argument of the learned counsel is directed against the position taken by this court in Peak v. Ellicott, 30 Kas. 156, and Myers v. Board of Education, 51 id. 87. We have again carefully examined the question involved, and are satisfied with the rule as declared in these cases.

''' by trustee— compensaiion. A cross-petition in error is filed by the defendant in error, and the allowance of commissions to Lord on the sale of $10,-000 of the bonds is challenged as erroneous. It is urged that, having violated his trust, he has forfeited all right to compensation. The sale of $10,000 of the bonds was authorized, however. It was only when that sum was exceeded that he acted beyond his authority, and the court has allowed him no compensation for the excess. In an equitable action, such as this is, we should be loath to disturb the judgment of the trial court in refusing to enforce ° ° , a forfeiture of compensation because of a misappropriation, where the effect of a reversal would be not to deprive Lord himself of the allowance, but to deprive his other creditors of it.

We perceive no substantial error in the rulings, findings, or judgment of the court. The decree is affirmed.

JOHNSTON, J., concurring.

After the foregoing opinion was handed down, and judgment entered thereon, a motion for a rehearing was filed and argued. The motion was overruled by the court, and thereafter Horton, C. J., filed his own views of the case, as follows:

I think that the principle announced in Peak v. Ellicott, 30 Kas. 156, and Ellicott v. Barnes, 31 id. 170, ought not to be extended.

In Peak v. Ellicott, supra, it was observed that,

“Wherever a fiduciary relationship exists, and money coming from the trust, lies in the hands of the person standing in that relationship, it can be followed by the principal and separated from any money of the wrongdoer.”

If Lord had real estate at the time of his death which was acquired before ibe sale of any of the bonds referred to in the petition, no trust can be impressed thereon to repay the Alamo company for any of the proceeds of the'bonds received by Lord in his lifetime. (District Township of Eureka v. Bank of Fontanelle, 55 N. W. Rep. [ Iowa,] 342; McClure v. Board of Co. Comm’rs, 34 Pac. Rep [Colo.] 763.)

In order to establish a trust, it must be shown that the estate in the hands of the administrator has been actually augmented by the trust fund; otherwise, the rights of the company are not superior to those of the general creditors of the estate. If a trust is to be established, it must be on the ground that the proceeds of the bonds, not paid over at the death of Lord, have increased his estate, and that such increase came into the hands of the administrator.