In re Taylor Orphan Asylum , 36 Wis. 534 ( 1875 )

Ryan, C. J.

Emeline A. Taylor, of Racine, by her will, bequeathed a large sum of money to certain ladies, in trust, to erect and-support an orphan asylum in that county; to be paid to the asylum when incorporated and empowered to receive it ; and her residuary devise - was to her executors (of whom the appellant James H. Kelley was one), in trust for the maintenance of the asylum. The will gave power to the executors to sell real estate.

The ladies named' in the will were incorporated by ch. 340 of 1867, amended by ch. 192 of 1868, and ch.- 81 of 1874, to establish and maintain the asylum; and the corporation was authorized to receive all bequests of the will for the asylum. The corporation is the respondent in these appeals.

Upon due submission of the question by the executors and the corporation, the circuit court of' Racine county adjudged the corporation entitled to receive and administer the residuary bequest. And the fund, to a large amount, has been paid by the executors to the corporation.

As early as 1873, the controversy involved in these appeals arose, touching the alleged liability of these appellants and John Gr. Meacham, then directors of the corporation, to the corporation,. for profits made by them individually from a transaction in real estate of the testatrix, appertaining to the residuary bequest of the will, under a sale by the executors.

Oh. 81 of 1874 requires the board of directors of the corporation to render' annual accounts of the administration of the trust fund to the circuit court of Racine county, and makes it the duty of that court to enforce, audit and correct such accounts.

These appeals are from an order of the circuit court, made upon such accounting, adjudicating.the appellants liable, and ordering them to pay to the corporation, severally, certain sums, being their respective profits in the transaction in question.

Tbe appellants deny that tbe special jurisdiction conferred by tbe statute on the circuit court can cover tbe case set up against them. And that is tbe first question which presents itself for our decision,

I. It was argued with great acuteness and ability, that the act of 1874 is not broad enough to reach this case; that the principal provision is for a settlement of the accounts of the board of directors, expressly limited to funds actually received from the executors under the will; and that the authority to compel individual directors to pay over to the corporation is incidental and ancillary to the principal provision, and therefore subject to the same limitation. In other words, the argument is, that as, on the accounting, the board can be held liable only for what it has received from the executors, individual directors can be held liable only for what the board has so received, and not for any part of the fund which they may have received but the board has not.

We are not prepared to sanction so narrow a construction of the statute. There are several distinct clauses in that part of the first section providing for the accounting. The first relates to the first account, from the beginning to its date, to be rendered by the board of directors at the next term of the circuit court; the second, to the annual account to be rendered thereafter; the third, to the jurisdiction of the court to enforce, receive and investigate the accounts so to be rendered; and the fourth, to the power and duty of the court, upon the accounting.

The authority conferred on the court by the statute is essentially equitable. Account is an ancient and familiar branch of equitable jurisdiction. In cases of charity, to be administered by trustees, whether private persons or corporations, a court of equity has jurisdiction, at the instance of the attorney general or other proper party, to take an account, and to correct abuse or misuse of the trust funds; and even to remove delinquent or improvident trustees. Story’s Eq., § 1191. And the authority, in this statute, is also visitatorial. Eor the court puts itself in motion, without suit or suitor; and this, not blindly or arbitrarily, but in conformity with wise and settled usage. This is an eleemosynary corporation. In the absence of a visitor of right or by appointment — as seems to be the case here, — the visitatorial power would probably devolve upon the state, and be exercised by or under the authority of the circuit court. Angell & Ames, §§ 694, 695.

So the statute under consideration does not confer the jurisdiction; it only gives the summary proceeding, in furtherance of a jurisdiction already inherent in the court. The scope of the summary proceeding certainly depends on. the language used in giving it. But, unless the letter of the statute plainly limits the jurisdiction, we are disposed to hold it as broad as the jurisdiction of the court in a suit for an account of the trust fund against the parties before the circuit court on the accounting. We cannot think that, in giving this summary proceeding, it was the intention of the legislature to lessen or to cripple the inherent jurisdiction of the court to exact and enforce a full account and settlement of the trust fund.

It was not questioned on the argument, that a complaint in equity would lie, at the suit of the state or other proper plaintiff, against the corporation and individual directors, for an account and restitution to the trust fund, of moneys rightfully belonging to it and withheld or appropriated by the individual directors, although the moneys so diverted from the trust had never come to the possession of the corporation. And the precise question to be considered here -is, whether the language of the statute includes or excludes that very jurisdiction of the court. Wc have no doubt that it was intended to include it, and we think that it does.

It is true that the accounts provided by the first and second clauses of the statute to be rendered by the board of directors, are of the funds actually received by it from the executors. It is not easy to see what other account it could render. The board, is the governing body. of the corporation, and what comes to the possession of the corporation comes to the possession of the board. What might be received or intercepted by a director, and not paid over to the corporation, could not well be included in the account of the board. It ought to be in the account; but the court, not the board, has power to put it there. Doubtless it would be the duty of the board to notify the court of any such known delinquency; but it can only account for what it has received, not for what it ought to have received and has not, without fault of its own.

This is the account which the third clause of the statute authorizes the court to enforce and investigate. It is not to be supposed that a delinquent director would volunteer an account against himself; and, if he should, it might enlighten the court, but could not add to its authority. Therefore the only account which the board could render, is the account which the court is to investigate. It could not well be otherwise. And broad powers of investigation are given; indeed all the power of the court seems applicable to the investigation. Amongst these is the power to summon and examine the members of the board individually.

Then comes the fourth clause, giving the power of the court to adjudicate upon the accounting and investigation. The court has full power to revise and correct the account in all particulars, and to compel any director who has money or property belonging to the asylum, to pay or deliver it to the corporation. So far as the board and its account are concerned, the power to revise and correct seems to be all-sufficient. If the board should have failed to charge itself with anything received, or should .have credited itself with anything not paid or wrongfully paid, or should have made itself accountable for anything lost to the fund by its laches or misfeasance, or should have made other error of omission or commission in its administration of the fund or in. its account, the power to revise and correct gives ample remedy, and carries with it full authority to enforce the revision or correction. Additional words of definition might impair, but could not well enlarge the power given. And the further power to compel a director who has assets belonging to the fund in his hands, to make payment to the corporation, not only does not go to enlarge the power of the court over the account of the board, but is manifestly foreign to it. It is a distinct and separate power. It is plain that the framers of the statute foresaw that individual directors might have in their hands money or property belonging to the trust fund, and withheld from it. This might happen in many ways. The object of the whole provision is the summary protection of the fund. And the statute providing for an annual and summary proceeding to ensure the integrity of the fund against the board itself, does not leave the recovery of assets of the fund intercepted or withheld by individual directors, to the discretion of the board or to the slower remedy of ordinary proceedings. That would have been at variance with its whole policy. It provides the same summary proceeding against individual directors, as it does against the aggregate board.

And the power given is not limited to assets belonging to the fund, received by the board from the executors, and held by individual directors under the board. There is, certainly, no such limitation in the letter of the statute, which includes anything belonging to the fund. And we cannot think that there is in the spirit and object of the statute. We see no reason for imposing such a limitation on the statute, against its letter. In a provision for the protection of the charity against personal malversation of the directors, there is certainly no good reason for distinction between assets derived by directors under the corporation and withheld from the board, and assets derived under the executors and intercepted from the corporation. Both cases are equally violations of official duty. The integrity of the fund is equally impaired in both; and the completeness ,o.f .the summary remedy is dependent on reaching both.

Indeed, there is a peculiarity in the language used which may be accidental, but which seems to point directly to the liability, on the accounting, of individual directors for assets not realized by the board or received under its authority. For they are required to make satisfaction to the corporation, not for money or property belonging to the corporation, but for money or property belonging to the orphan asylum. The trusts of the will were created in view of a corporation, but not dependent on one. The trusts for the orphan asylum under the will preceded the corporation, and were independent of it. The distinction of phrase is, therefore, not a distinction without a difference. It may well be that the language of the statute was chosen, ex industria, to include all assets within thé trusts of the will, coming to the hands of directors, whether or not they had before been reduced to possession by the corporation; and that therefore the terms of the statute, in providing for the liability of individual directors, on the accounting, go beyond the letter of the provision for the liability of the board itself. Indeed, it is difficult to resist the impression that the statute was framed in view of such cases as the present. It certainly includes them.

We have dwelt at this length on the construction of the statute, not for any inherent difficulty, but out of deference to the earnest and very able argument of the eminent counsel of the appellants.

II. But, conceding this construction of the statute, the position was taken that this case does not come within it, on another ground. It was urged, correctly as a general rule, that dealings by trustees for their own advantage in the subject of their trust are not void, but voidable only at the election of the cestuis que trust. And it was therefore contended that, taking this transaction at its worst against the appellants, it was not void, but voidable only at the suit of the corporation, and valid until so avoided; and that, not being so avoided, the profits of the transaction were not moneys of the orphan asylum, within the statute.

It may well be doubted whether the rule relied on has any application in such a case as this; whether it is not confined to cases where the object is strictly the avoidance of the title acquired by the trustee, and the restoration of the thing itself to the trust. Where the trustee sells again, and there is nc question of the restoration of the thing, the trust attaches itself to the trustee’s profit on the transaction, and he is accountable for it to his cestui que trust. Story’s Eq., §§ 321, 465. It is not easy to see, in such a case, what there is to avoid. But we prefer to rest this point on another ground.

Conceding the application of the rule otherwise, the difficulty of the argument is in its application to a charity. In case of a charitable trust, whether administered by natural persons or a corporation, all entrusted with the administration are trustees. “ The beneficiaries are generally unknown, uncertain, changing, and incapable of taking or dealing with the legal title.” Such are incapable of acting to protect the trust fund, or of electing to avoid voidable dealings of the trustees, or of proceedings in avoidance of them. Here, the corporation succeeded the trustees named in the will, and is charged with the administration of the charity under the will. It acts through its board of directors. And there is undoubtedly, subject to the trusts of the will, a fiduciary relation of the directors to the corporation; but the corporation is not a cestui que trust; it is itself a trustee. The desolate children for whom the beneficence of the testatrix makes provision, are the beneficiaries ; and yet it cannot be said that they are, in legal sense, and as capable of acting-in protection of the fund, cestuis que trust. Perry on Trusts, § 66. Undoubtedly the corporation could, in a proper case, maintain a suit to avoid a transaction of the character in question. But is the remedy limited to and dependent on the corporation, itself a fiduciary? We cannot think so. If it were so, the connivance or negligence of the corporation, not to speak of its own improvidence or malversation, might effectually waste the charity. Quis custodiet ipsos custodes ? There should be a right somewhere; and there is. It is in the visitor. If there be no personal visitor, and we think that even if there be, it is in the state. And we have no doubt that it goes, under the statute, as part of the visitatorial duty delegated to the circuit court; the power on its own motion of protecting the trust fund. When a court of equity has the facts and the parties properly before it in one proceeding, it would be a departure from the uniform rule of equitable administration, to remit the subject and the parties to another proceeding before it, to obtain its decree. Equity favors no such circuity. If it were necessary to avoid the title of the appellants, there would have been neither need nor propriety in directing a proceeding by the corporation to that end, and in the meantime suspending a judgment which the court was then prepared to make. The corporation seems to have been passive. Some of the directors appear to have properly, but not necessarily, assumed the part of litigants. For, conceding that the transaction was voidable, and that the remedy depended on its avoidance, it was within the visitatorial and equitable power and duty of the court, on its own motion, on the accounting, to act for the charity and the founder, to avoid the transaction of a fiduciary of the charity in fraud of it. That is the duty of a visitor. That is the jurisdiction of equity. Angelí & Ames, ch. 19, passim. Here the visitatorial power and the equitable jurisdiction met, under this statute, in the circuit court. And, in a proper case, it would be the duty of the court to avoid a voidable transaction of the directors, and to compel restitution or payment of the resulting liability. And the appellants cannot complain that they have not had their day in court. They were before, the court under the provisions of the charter of a corporation of which they were voluntary officers, to account for their dealings with the trust fund administered by the corporation. They had the right to be heard, and were heard, as suitors in their own behalf; and cannot now be heard to object to the summary proceeding to which they made themselves subject of their own choice.

III. This brings us to the merits of the transaction in controversy. A piece of real property belonged to the estate of the testatrix, which is conceded to have formed part of the residuary devise. It is not material to consider the questions discussed at the bar, whether the corporation could take this property under the will, or whether the construction of the will by the circuit court covers the real estate.; because the executors actually sold this property, as they had undoubted power to do.

The executors put it up for sale at auction; and, receiving no satisfactory bid for it, directed their attorney, Mr. Fuller, to bid $20,000 for it on their behalf; and he was thereupon declared the purchaser. This was not really a sale. The property remained under the control of the executors, subject to the trusts and directions of the will. But, for what reason is not apparent, the executors actually conveyed the land to Mr. Fuller. This was an apparent, but not a substantial change of title; for the title of the attorney was in equity the title of the executors. Mr. Fuller did not claim to be a purchaser for himself. He could not rightfully have done so. Montesquieu v. Sandys, 18 Ves., 302; Cane v. Allen, 2 Dow., 289; Champion v. Rigby, 1 Rus. & Myl., 839; Edwards v. Meyrick, 2 Hare, 60; Leicester v. Black, 5 Watts, 308; Howell v. Baker, 4 Johns. Ch., 118; Hawly v. Cramer, 4 Cow., 719. He seems to have thought that, with the assent of the executors and of the corporation, he could have held the land for himself. We think that he was mistaken, for they were only trustees themselves, without power of ratification to bind the charity. But he acted with great propriety, held his title as the title of the executors, notified the corporation of his title and of his willingness to convey to it, and finally conveyed the land by order of the executors, upon their sale and on consideration paid to them.

His conveyance was made to Darwin Andrews, for the same sum for which he bid the land off at the executors’ sale. Within ten months, Andrews sold the land for $40,000. It appears plainly in evidence, and was so found by the court below, that Andrews purchased the land at the instance and on the recommendation of the appellants; that he was unwilling to make so large a purchase for himself; and that it was understood between him and the appellants, before he purchased, that he was to be the actual purchaser of one-fourth only, they agreeing with him to find other purchasers for the other three-fourths; and that after his purchase, they proposed themselves and Meacham in that behalf, and that each of those three took a contract from Andrews for one-fourth of the land on payment of one-fourth of the price, and that each paid one-fourth of the money paid down to the executors on Andrews’ purchase. After the resale by Andrews, each of the appellants and Meacham received one-fourth of the profit made. And the profits so received by the appellants are the sums adjudged by the court below to be paid over to the corporation. Meacham appears to have voluntarily made satisfaction for his share before the accounting.

Fuller’s sale and conveyance were made in right of the executors. His sale was actually their sale; and his conveyance was, in legal effect, their conveyance. The sale and conveyance were for the benefit of the orphan asylum, which was entitled to the proceeds. And the sale and conveyance were made, in contemplation of law, to Andrews, Kelley, Van Pelt and Meacham; Kelley being one of the executors, and Kelley, Van Pelt and Meacham being directors of the corporation : all fiduciaries, owing a duty to obtain the highest practicable price, for the orphan asylum, for. the very property of which they became purchasers.

Such a purchase by them is against the plain and salutary policy of the law, and cannot be sustained, when questioned on behalf of the charity. They took their profits on the resale, in their fiduciary character towards the trust fund, and are accountable for them to the corporation charged with the administration of the charity. Their profits out of the trust property are, within the statute, moneys in their possession belonging to the orphan asylum.

Since the leading case of Fox v. Mackreth, 2 Cox, 320, and 2 Brown’s C. C., 400, decided in 1788, the .rule which governs this case has been growing in stringency. For a time, it was confined to cases of undue advantage. Then it rested upon presumption of undue advantage, unless the trustee purchasing could make it appear affirmatively that he had acted throughout uberrima fide: a mitigation of the present rule still sometimes admitted. But we take the rule to be now very generally settled in this country, as it is well stated by Walworth, Ch., in Torrey v. Bank of Orleans, 9 Paige, 649: “It is a settled principle of equity, that no person who is placed in a situation of trust or confidence to the subject of the sale, can be a purchaser of the property on his own account. The principle is not confined to a particular class of persons, such as guardians, trustees or solicitors, but is a rule of universal application to all persons coming within its principles, which is, that no party can be permitted to purchase an interest, where he has a duty to perform that is inconsistent with the character of purchaser.” Or, as it was stated by Paine, J., in this court: “ The rule is well settled that trustees are not permitted to purchase the trust property; not because they might not in many instances make fair and honest disposition of it to themselves, but because the probability is so ’great that they would frequently do otherwise, without danger of detection, that the law considers it better policy to prohibit such purchases entirely, than to-assume them to be valid except where they can be proved to be fraudulent.” Gillett v. Gillett, 9 Wis., 194.

The vast number and variety of cases which have come within this rule, since Fox v. Mackreth, bear witness to its usefulness, and to the wisdom of the later stringency with which it is applied. It would be pedantic, in sucb a case, to cite particular authorities in detail, or to comment on them. The English cases are collected in White & Tudor’s notes, and the American in Hare & Wallace’s notes, to Fox v. Mackreth, in the valuable collection of Leading Cases in Equity of the former authors. And the rule has already been approved by this conrt in several cases. Gillett v. Gillett, supra; Puzey v. Senier, 9 Wis., 370; Roller v. Spilmore, 13 id., 26; Pickett v. School District, 25 id., 551; Stewart v. Mather, 32 id., 344.

When such a rule has been so long and so wisely held to be essential for the protection of cestuis que trust who are adult and active members of society, how imperative its application is on behalf of such a charity as this asylum, where the beneficiaries are among the most helpless of God’s human creatures, and profit made in the administration of the trust property is bread of life wrested from destitute infancy.

We rest this case on the strict rule. We are not prepared to say that the sum paid for the land by Andrews, Meacham and the appellants was not a fair price at the time, or that Meacham and the appellants were conscious of impropriety in the transaction, or that they took undue advantage of their relation to the property; far less, that the transaction was tainted by fraud in fact. They probably thought that they were paying fair value to the charity, and intended a fair operation in the property, taking the risks of the speculation. But they made a grievous mistake of their duty, under a grievous misapprehension of the law.

It was urged for the appellants, against the charge of undue advantage, that they had been zealous for the interest of the orphan asylum in this very land; and that appears to be true, especially of Mr. Kelley. He seems to have been urgent that the corporation should hold the land as an investment, before he thought of being a purchaser himself. Both appear to have had the interests of the charity at heart. And we cannot say that they are not now standing on a point of pride; litigating the account in the hope of being justified in their conduct, and aw aiting that result to make voluntary restitution, as their associate Mr. Meacham has done. In the language of Kent, Ch., in Howell v. Baker, the most reasonable conclusion and the most honorable one to the appellants is, that they hold their profits from the trust estate for the orphan asylum, and are waiting an opportunity of accounting for them with a good grace. But the judgment of the court cannot wait on so becoming a purpose. It is our duty to enforce the equitable liability as it appears before us. And restitution must be made to the trust fund.

By the Court. — The order of the court below is affirmed on both appeals.