Gould v. Gould

Page, J.:

The court is agreed upon the power of the court at Special Term to remove a testamentary trustee upon a motion made in an action brought by trustees for a judicial settlement of their accounts, and also that the record disclosed facts sufficient to require drastic action by the court. We differ only in this, that the majority of this court are of opinion that the admitted and uncontroverted facts fully justified the decision of the justice at Special Term that George J. Gould should be removed as testamentary trustee of the trusts created by the last will and testament of Jay Gould, while the minority are of opinion that he should have been suspended pending the action.

In my opinion the court cannot suspend a testamentary trustee. The Surrogate’s Court is given power to remove a testamentary trustee. (Surr. Ct. Act, § 99; Code Civ. Proc. § 2569.) No power is granted to suspend such a trustee. Likewise the Supreme Court is given broader powers to remove a trustee and appoint his successor.' (Real Prop. Law, § 112.) No provision is made for his suspension. The reason for this is apparent. If a trustee is deprived of his power to execute the trust, its execution devolves upon the Supreme Court, which can only discharge the duty of administration through the appointment of a successor trustee or receiver. Furthermore the court should not take such drastic action unless it clearly appears that the trustee has violated or threatened to violate his trust, or unless for any other cause he shall be deemed to be an unsuitable person to execute the trust. (Real Prop. Law, § 112.) If it does so clearly appear that he is unsuitable, he should be removed. If it does not clearly appear, he should be allowed to remain as a trustee. There can be no middle ground. The question must be determined on the facts proved on the application for the removal. If they are not sufficient, in my opinion it is improper to suspend pendente lite, upon the theoiy that more persuasive proof may be presented later or that the trustee may be able, on the trial of the issues, to produce proof exonerating him from the charges. If he did not have such an opportunity afforded upon the motion, then it should have been denied.

In the present case there were sufficient facts admitted by the trustee to show that he was an unsuitable person to execute the trust, and to justify the order for his removal. We will not discuss many of the facts presented by the voluminous record. A few of the more prominent derelictions will be sufficient.

In considering the transactions of this trustee with the property, it is well to have in mind what was said by this court in Pyle v. Pyle (137 App. Div. 568, 572; affd., 199 N. Y. 538): “ It is a fundamental rule relating to the acts of a testamentary trustee that he must not only act for the benefit of the trust estate, but also in such a way as not to gain any advantage, directly or indirectly, except such as the law specifically gives him, for himself. He owes an undivided duty to his beneficiary, and he must not, under any circumstances, place himself in a position whereby his personal interest will come in conflict with the interest of his cestui que trust. [Citations.] The purpose sought to be secured by this rule of law is to require a trustee to assume a position where his every act is above suspicion and the trust estate, and it alone, can receive not only his best services, but his unbiased and uninfluenced judgment. When he has acted otherwise, or when he has placed himself in such a position that his personal interest has or may come, in conflict with his interest as trustee, then, so far as I have been able to discover, the court never hesitates to remove him. Under such circumstances the court does not stop to inquire whether the transactions complained of were fair or unfair.”

The trustees of the estate of Jay Gould held 210,028 shares of the stock of the Western Union Telegraph Company of the par value of $21,002,800. As of the date of April 29, 1909, said shares of stock were sold by a majority of the said trustees to one Winsor, who acted for the American Telephone and Telegraph Company, for $85 per share. This sale had been negotiated by an attorney employed for the purpose by George J. Gould, whether individually or as trustee does not appear. The agreement for the sale of said shares required that the trustees, together with certain other persons, should deliver to the purchaser 229,000 shares, and made provision for the subsequent acceptance of further shares at the same price from other persons, including Helen Gould Shepard, who was not informed of, or consulted as to, the sale of the shares of the trust estate at the time, although she was one of the trustees. As a part of the negotiation, and prior to the delivery and payment for said shares of the estate, the attorney entered into a written contract with Winsor, acting for the American Telephone and Telegraph Company, to pay him a commission of $3.50 per share on every share of stock delivered pursuant to the first mentioned agreement. The attorney received this commission on the stock transferred, which, on the estate’s shares, amounted to $735,098. George J. Gould testified that he asked the attorney to divide with him, and he received all of this commission except $125,000/ which the attorney was paid as his compensation for effecting the sale. Thus George J. Gould received all of the commission on the shares of the individuals and $610,098 on the stock of the estate. He retained this for eight years, and it was not until he had been served with the order for his examination before trial that he paid to the estate $620,401.71, which was based on his computation of the amount received, and did not include interest on the amount withheld for eight years. In his letter transmitting the check for this commission he stated, “ I felt I was entitled to this commission earned ” through the attorney’s services. “ I had no notion that the case was any different as to the estate stock than as to the privately owned stock involved. I have been recently advised * * * however that I ought to give the estate the benefit of the pro rata share of this commission. I therefore have concluded to waive my personal claims and give the estate the benefit thereof by paying over the net commission per share above * * * [the attorney’s] charge.”

The utter lack of understanding of the obligation of a trustee to the estate, shown by the above transaction, characterized his dealings with the money and property of the estate throughout his administration of the trust. He mingled the money of the estate with his own. He sold securities of the estate from time to time through his personal accounts with stockbrokers, and the proceeds were credited to him personally in his margin accounts, not accounting to the estate for many months, and in some cases for more than a year after the sale of the stock. These debit balances ran as high as $3,000,000 or $4,000,000 at times, and gave him the opportunity to himself speculate with ample capital. He used this trust money as his own, and took to himself whatever profits were, derived from the use thereof in personal enterprises and speculations. In 1916, after his use of these moneys had been called to the attention of the other trustees by accountants in the preparation for this action, he paid interest to the estate on these debit balances. Although trust moneys are thus traced into his personal accounts, it will be impossible to ascertain the amount of profit he made from the use of them, because of his destruction of his books and records, which will be more fully discussed later.

It also appears that he personally made short sales of stock, and frequently some time afterward delivered stock belonging to the trust estate in satisfaction of the contract of sale. Mr. Justice Smith refers to these transactions in his opinion, and while not palliating them upon any facts shown, seems to hold that this use of the property of a trust estate may be justified as having been indulged in in good faith and without resultant loss to the estate, and whether it would justify the removal of the trustee should be reserved “ for decision in the administration action, where all the parties are before the court and the matters may be inquired into more particularly than in affidavits presented upon a motion.” The reply to that contention is obvious. This motion was made in the action for an accounting, and, therefore, is in the “ administration action.” All the parties are before the court. And the question is not whether the trustee personally benefited, or the estate in fact suffered a loss. The trustee had no right to speculate with the stock of the estate. The added vice of the situation is that he speculated in his own name, and thus made it possible, if the price of the stock fell, to take the profit; if it advanced, to deliver the stock of the estate and receive therefor a price less than the market price, and escape a personal loss at the expense of the estate. A trustee cannot place himself in such a position that the temptation and opportunity to personally profit by his dealing is presented. Whether these transactions, as a matter of fact, were conducted for his personal profit cannot now be ascertained with any degree of certainty. The transactions were with stockbrokers in accounts carried either in his name or with fictitious designations. The record of his dealings in short sales was not carried on the books of the estate, but on his personal books and records.

Letters testamentary were issued on this estate on January 13, 1893. No accounting was had by the executors and trustees until this action was brought in 1916. In 1912 George J. Gould took his personal books, papers and records from his office to his residence on Fifth avenue, and, with the assistance of one of his sons, burned them in the furnace. For this reason he was unable to produce any books or other records of his personal transactions, from 1893 to 1912, on the direct examination before trial. As we have seen, during this period of his trusteeship transactions involving millions of dollars of the estate were conducted through the personal accounts of George J. Gould with banks and stockbrokers. In his personal books and records existed the only means of determining whether he derived personal profit from these transactions, and the amount that, by reason thereof, he is indebted to the estate. His excuse was that he contemplated moving his office and he wanted to burn up old rubbish. He, however, did not move his office. When it appears that evidence which would have been competent and material to the subject-matter under judicial investigation has been destroyed, every presumption is against the spoiler. And while the amount of the profits cannot be shown, it is fair to presume that profit to no inconsiderable, amount was realized by George J. Gould out of these transactions.

There were numerous other transactions of an improper nature for a trustee to have indulged in, but it does not seem necessary to add to those discussed above. In my opinion they show that George J. Gould was an unfit person to discharge the duty of a trustee; that he had personally profited largely out of, and at the expense of, the estate; that he has not the slightest conception of the fiduciary duty of his position; and that the order removing him as such trustee was a wise exercise of the power of the court in the protection of the interest of the cestuis que trustent.

That some of the adults may have had knowledge of these transactions, and that the enjoyment of the interest vested in the infants may be remote, affords no excuse for the failure of the court to act promptly to conserve the trust.

The order should be affirmed, with ten dollars costs and disbursements.

Clarke, P. J., and Greenbaum, J., concur; Smith and Finch, JJ., dissent.