Edgecombe Bank & Trust Co. v. Barrett

78 S.E.2d 730 (1953) 238 N.C. 579

EDGECOMBE BANK & TRUST CO.
v.
BARRETT et al.

No. 107.

Supreme Court of North Carolina.

November 25, 1953.

Leggett & Fountain, Tarboro, for plaintiff, appellee.

Bunn & Bunn, Rocky Mount, for Muriel J. Barrett, defendant, appellee.

John M. King, Rocky Mount, for defendant appellants Mary Lee J. Daughtridge and husband, W. M. Daughtridge.

Andrew Joyner, Jr., Greensboro, and Henry C. Bourne, Tarboro, for defendant appellants Andrew Joyner, Jr., and wife, Pearl A. Joyner.

S. L. Arrington, Rocky Mount, for defendant appellant Edith Helen Joyner.

Smith, Sapp, Moore & Smith and Stephen Millikin, Greensboro, for defendant appellants Archie B. Joyner, Jr., and wife, Alsia G. Joyner.

JOHNSON, Justice.

It is a well-established general principle of equity that property impressed with a trust may be followed through all changes in its state and form, so long as such property or its proceeds or its products are capable of identification. Edwards v. Culbertson, 111 N.C. 342, 16 S.E. 233, 18 L.R.A. 204; Erickson v. Starling, 233 N.C. 539, 64 S.E.2d 832; 54 Am.Jur., Trusts, Sec. 248; 65 C.J. p. 967 et seq.

Mr. Pomeroy amplifies the rule this way: "In general, whenever the legal title to property, real or personal, has been obtained through actual fraud, * * * or under any other similar circumstances, which render it unconscientious for the holder of the legal title to retain and enjoy the beneficial interest, equity imposes a constructive trust on the property thus acquired in favor of the one who is truly and equitably entitled to the same, although he may never perhaps have had any legal estate therein; and a court of equity has jurisdiction to reach the property either in the hands of the original wrong-doer, or in the hands of any subsequent holder, until a purchaser of it in good faith and without notice acquires a higher right, and takes the property relieved from the trust." Pomeroy's Eq.Jur., Fifth Edition, Vol. 4, Sec. 1053. See also Edwards v. Culbertson, supra; Am.Jur., Trusts, Sec. 245; Annotations: 43 A.L.R. 1415, p. 1418; 47 A.L.R. 371; 48 A.L.R. 1269.

This rule, known as "the rule of trust pursuit," is grounded on the principle that even though the form and physical character of the property be changed, nevertheless the property ownership continues and may be asserted by the beneficial owner. Therefore, trust pursuit rests in no sense on the principle of a debt due or owing, nor on the theory of damages or compensation for the loss of property. Cheshire v. Cheshire, 37 N.C. 569; Younce v. McBride, 68 N.C. 532; Cooper v. Landis, 75 N.C. 526; 54 Am.Jur., Trusts, Sec. 248.

But it is a cardinal rule of trust pursuit that the proceeds or the product of the initial property must be traced and identified through any and all intermediate tranfers into the property sought to be reached; otherwise the beneficiary has only the rights and remedies of a general creditor to claim damages as for conversion or as for money had and received. Bank v. Bank of New Hanover, 115 N.C. 226, 20 S.E. 370; 54 Am.Jur., Trusts, Sec. 249; 65 C.J. p. 965 et seq. However, trust pursuit does not fail where substantial identification of the trust property or of the proceeds or product from a conversion thereof, is made. 54 Am.Jur., Trusts, Sec. 249. See also People's Nat. Bank v. Waggoner, 185 N.C. 297, 117 S.E. 6. And under application of the rule of trust pursuit, the trust follows and embraces not only the property or its proceeds or products, but ordinarily it also includes any profit or increase in the value of such proceeds or products over the original trust property. Erickson v. Starling, supra, 233 N.C. 539, 64 S.E.2d 832; Rouse v. Rouse, 167 N.C. 208, bottom of page 211, 83 S.E. 305; 54 Am.Jur., Trusts, Sec. 251. It is well settled that a court of equity will not permit a fiduciary to make a profit out of funds committed to his custody. Williams v. Hooks, 199 N.C. 489, at page 492, 154 S.E. 828; Motley v. Motley, 42 N.C. 211. See also Irwin v. Harris, 41 N.C. 215; Bohle v. Hasselbroch, 64 N.J.Eq. 334, 51 A. 508, 61 L.R.A. 323; Holmes v. Gilman, 138 N.Y. 369, 34 N.E. 205, 20 L.R.A. 566.

In Bohle v. Hasselbroch, supra, a trustee (mother of ultimate beneficiaries and herself a life beneficiary of the trust), in disregard of the testator's directions, used trust funds in her hands, together with her own funds, to buy real estate, and took the title in her own name. The amount of trust funds so used could not be precisely ascertained, but it exceeded one-half of the price paid at the time of purchase. Held, that the cestuis que trustent were entitled in equity to elect whether they would claim a charge upon the real estate for the amount of trust funds so invested, or would claim the real estate itself, as owners, subject to a charge for the trustee's own money so used. The court went on to say: "* * that, in endeavoring to ascertain how much was trust money and how much was the trustee's own, every reasonable intendment should be made against the trustee, through whose fault the truth had become obscure." [64 N.J.Eq. 334, 51 A. 509.]

It is true, as a general rule, that the mere tracing of trust property or funds into the general estate of a trustee is not a sufficient identification of the trust property or funds, within the rule of trust pursuit, to preserve the trust res, and where such commingling is made to appear, the beneficiary ordinarily stands merely in the position of a general creditor of the trustee or of his estate. Roebuck v. National Surety Co., 200 N.C. 196, 156 S.E. 531; Corporation Commission v. Merchants' Bank & Trust Co., 193 N.C. 696, 138 S.E. 22; 54 Am.Jur., Trusts, Sec. 259.

However, where it is made to appear that the trustee had no individual property of appreciable substance susceptible of being commingled, or which was commingled with the trust property or funds, in either event we apprehend the true rule to be that equity will impress the trust character upon the entire mass and treat it as trust property or funds except in so far as the trustee may be able to distinguish what is his. Bohle v. Hasselbroch, supra; Peoples' Nat. Bank v. Waggoner, supra, 185 N.C. 297, 117 S.E. 6. See also 54 Am.Jur., Trusts, Sections 256 and 260.

The foregoing rules operate in harmony with the principles which govern the respective rights of the life beneficiary of a trust and the rights of the ultimate beneficiary thereof, under which increases in the value of real estate and of investment securities in the possession of the trustee as a general rule are treated as corpus increments and go to the ultimate beneficiary, as do profits made by purchase and sale of such property. Gibbons v. Mahon, 136 U.S. 549, 10 S. Ct. 1057, 34 L. Ed. 525; Holcombe v. Ginn, 296 Mass. 415, 6 N.E.2d 351, 108 A.L.R. 1134; Hornsby v. Hornsby, 185 Ky. 847, 216 S.W. 88; Boardman v. Mansfield, 79 Conn. 634, 66 A. 169, 12 L.R.A.,N.S., 793; Bains v. Globe Bank & Trust Co., 136 Ky. 332, 124 S.W. 343; Long v. Rike, 7 Cir., 50 F.2d 124, 81 A.L.R. 521; First Nat. Bank of Canton v. Mulholland, 123 Miss. 13, 85 So. 111, 13 A.L.R. 1000; 54 Am.Jur., Life Estates, Remainders, etc., Sections 333, 335, 336, and 340; Annotations: 13 A.L.R. 1004; 56 A.L.R. 1315; 81 A.L.R. 542. See also American Law Inst. Restatement, Trusts, Vol. 1, Sections 233, 236.

When we come to apply the foregoing principles to the case at hand, it would seem that decision lies in a narrow compass.

First we examine the findings and conclusions of the court below bearing on the question of estoppel. As to this, we conclude that the findings of fact are insufficient to support the legal conclusion and adjudication that the heirs at law and next of kin of Alice Lee Joyner are estopped to assert their rights in the trust fund. The fact that the beneficiaries of the trust acquiesced in permitting the Trustee, their mother, to invest and reinvest the trust funds as she did, without sanction or approval of the court, does not support the inference or conclusion that they are estopped to assert their rights under the rule of trust pursuit. It nowhere appears on this record that any one has been misled to his hurt by reliance on the conduct of these beneficiaries, as is required in estoppel. Hawkins v. M & J Finance Co., 238 N.C. 174, at page 177, 77 S.E.2d 669.

Next it is noted that Alice Lee Joyner owned the house and lot on West Gaston Street in Greensboro before the trust fund came into existence. She owned this property at the time of her death. All parties concede that it belongs to her individual estate. Hence we eliminate it from further consideration.

This leaves in controversy (1) the Leftwich Street property in Greensboro, (2) the corporate stocks, (3) the bank deposits, (4) the notes and evidences of debt shown in the plaintiff's inventory, and (5) the $5,000 in U. S. Government bonds.

It is noted that under findings of fact Nos. 19, 22, and 23, the court below found these crucial facts: "19". That the Leftwich Street property in Greensboro was purchasd with "funds belonging to the trust fund"; "22". That the "$3,000, initial purchase price of stock in Security Life & Trust Company, now totalling 312 shares, was funds belonging to the trust fund"; and "23. That the remaining * * portions of the trust fund, amounting to $17,381.80, were invested in whole or in part in other stocks set out in the plaintiff's inventory and evidence." It thus appears that under these findings all the property in controversy derives from the trust fund, except the bank deposits, the notes and evidences of debt, and the U. S. Government bonds; and as to these three items or groups of items, it appears that the court's findings are not conclusive one way or the other. On the basis of the facts as found, the court below should have concluded that the Leftwich Street property in Greensboro and all the corporate stocks, including the shares of stock in Security Life & Trust Company, belong to the trust fund.

The recitals in finding of fact No. 6 that Alice Lee Joyner "was entitled to the * * * increment" derived from the investment of the trust funds and that such "increment is and does constitute a part of the individual estate of * * * Alice Lee Joyner, and passes under her last will and testament," are not findings of fact at all. They are erroneous conclusions of law to be disregarded.

The case seems to have been tried on a misapplication of the pertinent principles of law. Where this occurs, the usual practice is to remand the cause for a hearing de novo. Universal C. I. T. Credit Corp. v. Saunders, 235 N.C. 369, at page 373, 70 S.E.2d 176; Coley v. Dalrymple, 225 N.C. 67, 33 S.E.2d 477. It is so ordered here.

Error and remanded.