In re Estate of Binder , 1939 Ohio Misc. LEXIS 911 ( 1939 )

OPINION

By ROSS, J.

The Guardian Savings & Trust Company, later called The Guardian Trust Company, became trustee under the last will of Henry Binder, deceased. The Superintendent of Banks succeeded to such trusteeship by reason of the liquidation of the Trust Company.

Exceptions were filed to the final account filed by the conservator, and to the 5th, 6th and 7th partial accounts filed by the Trust Company. These exceptions involved seven different issues of land trust certificates which were purchased for the trust by the, Trust Company. The Probate Court sustained the exceptions as to all seven issues. On appeal to the Common Pleas Court, the action of the Probate Court was sustained and followed as to five of the issues and disproved as to two of the issues. From the judgment of the Common Pleas Court, where trial was had de novo, appeals on questions of law have been prosecuted to this court.

The Superintendent of Banks in case No. 17080 has filed an appeal from the action of the Common Pleas Court of Cuyahoga County, sustaining five of the exceptions, and the exceptors in case No. 17105, have filed an appeal on questions of law from the action of the Common Pleas Court, overruling two of the exceptions. These two appeals involving the seven separate exceptions have been heard together', and this opinion covers both appeals.

The terms of the trust are in the record, provision being made for full control and management by the trustee of the trust estate, with power to invest and reinvest the property without limitation, or the necessity of a court order. In this connection, in the light of a subsequently noted contention of the Superintendent of Banks, it will be observed that the trustee was in no way limited in the purchase of securities and that such purchases could be made immediately without any necessity of outside approval or delay.

The securities involved are (in the order here considered) Land Trust Certificates of (1) Fort. Hayes Improvement Co., Spring & Wall Sts., Columbus, Ohio, (2) Euclid “Y” Improvement Co., (3) Taylor Square Realty Co., (Euclid Ave., Taylor Rd.), (4) Chester-East 18th St. Realty Co., (5) Cleveland Hotel Building Site, (6) H. F. Neighbors Realty Co., (7) Michigan Office and Theatre Building Site, Detroit, Michigan.

Several of these issues possess certain common characteristics, which are important in view of the conflicting-contentions advanced by the opposing parties.

The Probate Court, as previously sta.ted, sustained exceptions as to all the issues noted. The Common Pleas Court of Cuyahoga County overruled exceptions as to No. 1 and No. 5.

Before proceeding to discuss the merits or demerits of the trustee’s action in purchasing these securities for the trust, a preliminary question may be here disposed of.

It is the contention of the Superintendent of Banks that the Probate Court had no jurisdiction to hear the matters presented to it, and the Superintendent has devoted a somewhat lengthy brief to this position. It is not necessary to devote any appreciable space to a consideration of this question, although the attention given it in the brief noted and in others might seem to warrant such action. It is perfectly clear that the estate being administered in the Probate Court, the trustee’s accounts being filed there, it was not the intention of the legislature in enacting appropriate legislation for the liquidation of banks and defining the duties of the Superintendent of Banks in reference thereto,

to oust the jurisdiction of the Probate Court, and the consequent jurisdiction of the Common Pleas Court on appeal on law and fact, in the matter of exceptions to the accounts of trustees, even if such trustee was a bank in process of liquidation Jt will be noted that the conclusions herein reached are limited to a justification of only such jurisdiction as is required to pass upon the exceptions to the accounts filed in the Probate Court and authorizes no action by the exceptors in the Probate Court, which would place them m any different position from any other creditor presenting his claim to the Common Pleas Court in the proceedings in liquidation, or any creditor invested with similar rights to those found to reside in the exceptors.

The Probate Court cannot- make any effective order affecting the liquidation of the bank, but such court surely may determine Whether or not a trust has been legally administered, and by such determination create in the beneficiaries a secondary right to relief extended to any creditor under the general laws affecting all creditors. The fact that the right to exercise such right of a general creditor may be made optional is beside the point. The Probate Court possessed jurisdiction to determine whether or not there is existent a wrong or a violation of a primary right, the right to have the trustee administer the trust with loyalty and fidelity to the beneficiaries and the trustor.

Its determination of the existence of such violation automatically under the law creates the secondary right to relief in the beneficiaries. The adjudication of matters involving such latter right, the proving of the claim, the distribution of appropriate assets toward its liquidation, are matters involved in the liquidation of the bank and may be considered in other appropriate litigation.

Coming now to consider the exceptions:

It is not shown in the record that the trustee or its successor w&s ever guilty of the slightest fraud in the administration of the trust. The charges deal with self-dealing, and disloyalty to the trust, beneficiaries, and trustor. If such charges are borne out by the evidence, the exceptions must be sustained.

In a number of cases, the Bank acted as trustee for owners to whom loans were made by the bank after conveyance of the fee of the real estate involved to the bank. Certificates of trust were then issued by the Bank to the owner. There is nothing reprehensible in the Bank acting both as trustee for the owner and trustee for the estate, so long as full loyalty to each trust is preserved. The mere existence of dual trusteeship is not sufficient to create self-dealing. Ulmer v Fulton, Supt. of Banks, 129 Oh St 323, has no application. In one case, at least, this Bank as trustee for an estate, sold to itself as trustee for another estate. It seems to be generally considered that this does not create such -culpable conduct as to in itself constitute improper action or to violate the rule requiring loyaity and fair dealing. Lima First American Trust Co., Trustee v Graham, et, 54 Oh Ap 85. Barker v First National Bank of Birmingham, 20 Fed. Supp. 185 (D. C. Ala. 1937).

Certain profits were made by the Bank in connection with the handling of issues which were entirely taken up by the Bank (the first four). These profits simply amounted to compensation for trust services. They were designated as acceptance fees and annual fees. The income from the certificates was predicated upon the fixed rental paid by the original owner.

One who has the right to act as trustee for separate beneficiaries may certainly receive appropriate compensation from ea.ch, if no advantage was taken of either.

None was taken in the instant case solely by reason of the acceptance or the annual fees received by the Bank.

The trustor was unquestionably familiar with the vast amount of trust business done by the Bank, and that by reason of its engagements it had a wide field of investments from which to choose. He placed unqualified and unlimited confidence in its integrity and ability. In exchange he had the right to expect loyalty to the trust and adherence to the law governing trusts. Such is the criterion for the examination in particular of the several investments involved. §10506-40 GC. However, as will later appear, it was not the mere fact that the Bank acted as trustee for the owner which rendered the position of the Bank untenable in passing the securities issued by it as such trustee to itself as trustee for the Binder estate. The justifiable criticism of the position of the Bank lies in the fact that the Bank became the owner of the certificates, and in a capacity wholly separate from that of trustee for the owner, it purchased the certificates from the one who was entitled to them. The purchase was made by paying the owner the face value of the certificates and the Bank then could either hold them as an investment or sell them to whom it chose. There are in the record letters indicating that it was the Bank’s intention to sell these certificates to itself as trustee for the many trusts requiring securities for which it was trustee. Although the tenure of the Bank in the certificates was more or less temporary — still its ownership was unqualified in any respect.

A factor common to a number of issues may be helpfully considered at this point. The Bank, although a single corporation, had many departments, among which were the Trust Department, the Banking Department, the Bond Department, the Savings Account Department, the Mortgage Loan Department. Each of these was conducted under the management of a separate head, and in many respects the several departments were conducted toward each other as separate entities. Each, however, was a part of the single corporation, so that inter-relations might easily in view of trust obligations evolve into self-dealing. This is the contention as to a practice represented by what was designated in the Bank as Living Trust 1043 — abbreviated to L. T. 1043. And the court here carefuly distinguishes this phase of the case from that involved in the purchase of the closed issues. It is asserted on behalf of the Bank that the trust needs of the vast quantity of trust estates handled by the bank could not be satisfied insfcanter. That in many cases court orders and various consents were necessary before the actual transfer of securities could be made to the individual trust involved. Such was not the case in the Binder trust. Because, however, of this general situation requiring delay in actual transfer, the Bank through its Trust Department acquired from time to time securities which it considered would be acceptable to trust estate needs. In some cases, these needs were anticipated, in others, acquisition of securities was made by the Bank upon requisition of the Trust Department for specific trusts. Pending the payment for securities, funds in the Bank’s hands as trustee were intermingled in a general savings account. This is permitted by law. §710-164 GC. Payment for securities purchased by the Trust Department was made from the Savings Department. Thereafter, specific assignment of securities was made to individual trusts and the Savings Account records appropriately debited. Thus, in the Bank under a ledger head of L. T. 1043 there was created and maintained a pool of securities which was constantly being augmented and decreased as securities were purchased anticipating trust needs and allocation made to specific trusts.

In view of the fact that no fraud can be conceivably charged by reason of this practice and no slightest prejudice to the trusts suggested, the duty of the court becomes merely one of passing upon the practice as bemsr within the recognized limitations upon conduct proper in a trustee.

It is the serious and vigorous contention of the exceptors thai this practice amounted to self-dealing, that the securities, until specific allocation was made, were, as was the case of the closed issues, the unlimited property of the Bank and could be fully dealt with .as such. In this record there is nothing except the testimony of bank personnel, and the letters referred to supra, to indicate than such was not the case. No resolution binding upon the Bank is in evidence. The Stone cases, decided by Judges Montgomery, Sherick, and Lieghley (No. 17221, Eighth District Court of Appeals, opinion by Montgomery, J.) appear from the opinion to be capable of differentiation on this . point. It is true the securities were isolated in the Bank’s vaults, but still there is in this pool and other securities owned by the Bank and placed in its vaults, no distinguishing characteristic except that it is stated that the securities were obtained for the trusts. It is claimed by the Superintendent that the “class” of beneficiaries could enforce a trust upon the unallocated securities in the pool. The applicability of the authorities cited in support of this contention may be seriously doubted. In the absence of any definite, conclusive and binding limitation upon the securities pooled, completely depriving the Bank of a dis-positive right over such securities to other grantees than trusts of the Bank then existent, such practice must be considered outside the limits placed by general acceptation upon trustees. It is difficult to see why such practice may not be considered self-dealing, and, consequently reprehensible, although it may be impossible to show that entire good faith has not been maintained.

A similar situation prevailed in the closed issues purchased by the Bank as an entirety, as has been before noted. The owner was paid the agreed value of the. entire issue of land trust certificates. Again, the Bank’s intention is stated to exist to divert the entire issue to the use of the trusts. Certificates were not issued until the particular trust was identified. Certificates were then issued directly to the Bank as trustee for the trust involved. Great weight is placed by the Superintendent and Amici Curiae upon this fact. No other practice, in any event, seems to be warranted, even if sale was to be made to others than the Bank as trustee, that is, to ordinary vendees. No limitation binding upon the Bank irrevocably requiring allocation to the trusts appears in the record. It is claimed the Bank only held a vehicular title. It held certainly an unlimited depository title, and, again, although no bad faith appears — -the difference between this situation and any ordinary case of self-dealing is microscopic and purely visionary. If such practice shall be approved as to a bank dealing with millions of trust funds, then it must be approved as to any trustee dealing with a modest estate. Such, certainly, may not be the case. There can only be one rule as to the fiduciary conduct of a trustee, whether that trustee is in the business of acting as trustee and deals in millions, or is an isolated individual, administering a small trust.

It is the contention of the exceptors that in paying off' certain mortgage loans held by the Bank, in clearing the title for the issuance of the land trust certificates, that the Bank permeated these certificates with a character of self-interest, which made them subject to attack when later transferred to itself as trustee for a specific trust. This contention fails in force and effect, when it appears that this action was wholly free from any fraud against, or prejudice to the beneficiaries, who later became related to the certificates involved.

Identifying the general observations, supra, with the specific issues involved —(No. 1) Port Hayes improvement Company. Regardless of other features, the record shows that the particular certificates involved were purchased by the trustee, for the Binder trust from itself as trustee for another trust. This action, no fraud appearing as to either trust, has never been considered reprehensible.

(No. 2.) Euclid Y Improvement Company. This was an entire cr closed issue, held for'the trusts, allocation being made over a considerable period. The purchase by the Bank as trustee is subject to the charge of self-dealing, noted generally supra. The bank purchased the entire issue — it paid the owner for whom it was trustee the amount of the total value of the certificates. It could have sold them to anyone at anytime. Its representatives state now it intended to use the entire issue for the trusts, and that the title was merely a temporary or necessary expedient. However, the bank did unqualifiedly own these certificates and sold them to itself as trustee for. the Binder estate.

(No. 3). Taylor Square. This issue was similar in character, as to creation and disposition, to No. 2. It is subject to the same criticism.

(No. 4.) Chester, East 18th St. This was an entire or closed issue, and in addition went through L. T. 1043. It is subject to both criticisms as herein-before noted.

(No. 5.) Cleveland Building Site. The Bank was the trustee for the owner of this issue. The entire issue was purchased by Tillotson & Wolcott, a brokerage firm in the City of Cleveland. The Bank later entered into a syndicate selling agreement with Tillotson & Wolcott, out of which it made a profit on each share in addition to an acceptance and annual fee incident to its trusteeship for the owner. The purchase of the certificates involved in this action was made however directly from Tillot-. son & Wolcott. The certificates involved were never owned after the original issue to Tillotson & Wolcott. The issue did not pass through L. T 1043. No criticism can be justly made of this purchase in the absence of a definite showing that the passage of title through Tillotson & Wolcott was a mere sham to cover a direct conveyance to the trust.

(No. 6.) Neighbors Realty Co. The Bank was trustee for this issue for the owner. The entire issue was underwritten by Otis & Company. No syndicate selling agreement with Otis & Company is' in evidence. Purchase of the certificates in question was made from Otis & Company and held in L. T. 1043. The criticism as to self-dealing is applicable.

(No. 7.1 Michigan Office & Theatre Building Site. The Bank was not owner trustee for this issue. It participated in a selling syndicate. The Bonding Department of the bank purchased the certificates involved, held title to the same and transferred title to itself as trustee for the Binder estate. The issue was purchased by one department of the bank from another. The entire bank as a unit was both vendor and trustee. The action involved is clear self-dealing, as was the case in the entire or closed issues and L. T. 1043.

It becomes now necessary to consider a case much relied upon by the Superintendent of Banks, and which seems to have had some weight in the consideration of the Stone case, supra. That case is Stickle, Admr. v Guardian Trust Co., et, 133 Oh St 472. The syllabus of the case comprehensively covers the matters considered in the opinion. It is:

“1. Where, under the then existing Ohio statutes, a trust company was appointed executor of an estate on February 10, 1932, and as such fiduciary on the same day deposited a sum of money in its own bank as a savings account, and thereafter such trust company became insolvent and on June 15, 1933, was closed for liquidation by the Superintendent of Banks and removed as executor by the Probate Court and thereafter was succeeded by S as administrator, who, under §710-92 GC, filed an action to establish a preference for the entire amount due on such savings account when the bank closed: HELD, as against general depositors, equity will not grant a preference to such claim, in the absence of tracing such deposit to a particular fund, even though the amount of cash in the bank from the time of such deposit until the closing of the institution was at all times greater than the amount due on such savings account when the bank closed, and even though the trust company, for a period of more than two years before its closing had committed wrongful acts for v/hich it ¡would be obliged to respond to such succeeding administrator.

“2. In respect to such a claim for ..preference, the real issue is not between the succeeding administrator and the Superintendent of Banks as liquidator of the trust company, out between the equities of the succeeding administrator and the general depositors.”

It seems evident that this case can be of no service in assisting us in reaching a conclusion upon the real issues presented in the instant case. The Stickle case deals solely with the question of preference or lien of an admitted creditor. The Trust Company was admittedly a debtor to the Davey estate at the time it went into liquidation. In that case, it was sought to impress upon the assets of the Bank a lien in favor of the estate of Davey, simply because the bank, through its Trust Department, was administering such estate, and bore a fiduciary relationship to those interested in such estate.

The question presented to the Probate Court and the Court of Common Pleas on appeal in this case was whether the beneficiaries of the Binder trust should or should not be considered creditors of the Guardian Trust. In so far as such beneficiaries seek to go further along the line of preference, the Stickle case will be undoubidly a complete negation of such effort. It is not necessary to here pass upon this question.

It has been developed in what has already been said that the Trust Company violated a cardinal principle applicable to and controlling all trustees, i. e., that such trustees as trustees shall not purchase from themselves as individuals. That this rule was violated in the instances noted seems clear beyond question. The rule does not require proof of fraud or evil intent. It is a rule devised for the protection of the trusting. It is as much a protection to the trustee as to the beneficiary, for if it be followed, even the suspicions of evil cannot be leveled at the trustee.;

That by finding this rule to have; been violated, the courts enlarge the! pool of unsecured and unpreferred creditors, certainly may not be considered as any controlling factor in determining whether or not there has been a violation of the law applicable to trusts.This in no way is a case similar to the Stickle case, in which, as the Supreme Court found, the real issue was between the exceptors and the depositors. The beneficiaries in the instant case at all times had a primary right to have the trust in which they were interested administered according to law. When this right was violated,- a secondary right was created — a right to relief. Before the violation of the trust, they were not creditors of the Trust Company. After the violation, they became optional creditors, that is. they may either keep the securities purchased for them, or prove their claims for the value of the original sum invested, in the liquidation proceedings, subject to such orders as to the securities as the Court considering such liquidation proceedings shall make.

It is an inescapable conclusion, therefore, that the Common Pleas Court was correct in its findings and judgment in so far as it fixed the status of the exceptors as optional general creditors. In so far as it attempted to go further in determining matters v/hich are proper for the consideration of the tribunal administering the assets of the Trust Company among the creditors of such institution, it went beyond the proper scope of this litigation. The Superintendent of Banks in this action may not be foreclosed from raising any proper question beyond the conclusion that the exceptors have the right to the status of general creditors to the amount of the original trust investment, if they elect to occupy such status. This is the full extent to which the Courts hearing the instant action may go.

This conclusion is manifestly opposed to that reached by Montgomery, Sherick, and Lieghley, Judges in the- Stone case, supra. The case should, therefore, toe certified to the Supreme Court as the judgment entered herein will no doubt be in conflict with the judgment entered by those judges.