House v. Stokes

Barrett, J. :

The question here is whether the plaintiff, as trustee, has any cause of action against the defendant; if not, the nonsuit was correct. The complaint proceeds throughout upon the plaintiff’s trust rights and duties, and the learned counsel who opened the case emphasized this position. Indeed, it is quite evident from both complaint and reply that the action was advisedly brought in a representative capacity, and that the plaintiff’s pleadings were carefully framed to exclude its individual capacity. Thus we find that in reply to the defense of a general release, set up in the 2d subdivision of the 9th paragraph of the answer, the plaintiff pleaded as follows:

“ Eeplying to the allegations of subdivision (2) of paragraph IX of said amended and supplemental answer, the plaintiff denies, on information and belief, that on or about the 25th day of September, 1897, or at any other time, for a valuable consideration, it was agreed between the plaintiff and the defendant herein that all claims, demands or causes of action of any sort whatever, existing in favor of the plaintiff against the defendant should forthwith be cancelled and discharged, if the defendant by said allegations intends to charge that thereby claims, demands and causes of action of the plaintiff, as trustee, against the defendant were cancelled of discharged ; and the plaintiff, being so advised by counsel, alleges that it could not release its claim as trustee against the defendant in consideration of the discharge by said defendant of any alleged claims he might have against the plaintiff in its individual capacity.”

That the intention here was, while practically admitting the general release as a fact, to limit its effect to the plaintiff's individual claims, is made doubly clear by a later averment of the reply. The defendant, in the 2d subdivision of the 10th paragraph of his answer, pleaded a counterclaim of $40,000, which lie asked to have set off against any claim which the plaintiff might establish against him. To this counterclaim the plaintiff replied as follows:

“ Further replying to the allegations of said subdivision (2) of paragraph X of said amended and supplemental answer, the plaintiff alleges, on information and belief, that on or about the 25th day of September, 1897, the plaintiff asserting claims against the defendant which were matters of dispute, and the defendant asserting claims against the plaintiff which were also disputed, it was agreed between the plaintiff and the defendant herein, for a valuable consideration, that all claims, demands and causes of action of every sort existing in favor of the plaintiff in its individual capacity and against the defendant, or in favor of the defendant and against the plaintiff, should forthwith be cancelled and discharged / that all the conditions of said agreement, on the part of the plaintiff herein to be performed, were duly performed; and that by reason thereof any claim of the said defendant for or on account of the said sum of $40,000 or thereabouts, set forth in said subdivision (2) of para-

graph X of said amended and supplemental answer, are released and discharged.”

We do not mean to intimate that these releases definitely settled either the claim or the counterclaim. That question is not before us. We simply wish to point out that all questions as to their import and effect were eliminated from the case by the representative attitude which the plaintiff assumed. It thus declined the issue tendered, whether its release embraced the moneys alleged to have been withdrawn by the defendant from its funds and converted to his own use. It also declined the issue tendered, whether it withheld from the defendant and applied to its own use $40,000 received by it to his use.

The question, then, for our consideration is necessarily confined to that stated in the opening sentence of this opinion. And it is-only fair to the plaintiff to say that it presents no other question upon this appeal.. In its brief it adheres resolutely to its representative attitude and makes no individual claim.

What then is that representative claim ? The facts are few and simple. Upon the 18th day of March, 1895, the defendant assigned to three personalities a judgment which he had recovered against one Mackay. The assignment is to, (1) Ronald T. McDonald; (2) The Hoffman House (the plaintiff, individually), and (3) James D. Leary. This assignment — so it reads —■ was “ given for the purpose of indemnifying the said above-mentioned assignees against loss or damage by reason of certain obligations entered into by them as bondsmen or sureties for and at the request of Edward S. Stokes,” the defendant here. The assignment then particularizes each of these obligations. The first was to secure McDonald and Leary against their liability upon an undertaking on appeal which they had given or guaranteed in a case in which the defendant was appellant. The second was to secure the Hoffman House against a liability of about $35,000, which it had incurred individually as surety upon a bond given in a proceeding in which its predecessor, “ the Hoffman House of New Jersey,” was defendant. The third was to secure Leary for the payment to him of about $25,000 which he had previously lent to the defendant. The succeeding provisions of the assignment read as follows:

“ The said judgment and claim is to be collected by, and the money received thereon to be paid over to the Hoffman House, and by it to be applied to the extinguishment of the said several -liabilities > above recited, and the surplus, if any, to be turned over to the said Edward S. Stokes or his assigns or legal representatives.

“ The said Hoffman House is to apply these moneys for the purposes above mentioned and for the benefit of the said Eonald T. McDonald, the Hoffman House and James D. Leary as their interest may appear at the time.”

It was conceded in- the opening that the first and third of these obligations had been extinguished. The gravamen of the action, therefore, was reduced to the plaintiff’s right, as trustee, to recover under the second specification so much of the proceeds of the Mackay judgment, withdrawn from its funds by the defendant, as might be necessary to secure its individual liability of “ about $35,000 originally.” The only additional facts which are at all material to the decision of the legal question presented are that the amount of the Mackay j udgment was paid to the Hoffman House ; that the defendant, who was its president, out of the proceeds of the Mackay judgment paid certain sums to his counsel therein and also the amount due to J ames D. Leary, as specified in the assignment, and that he withdrew the balance and converted it to his own use. This balance was $61,658.98. The plaintiff’s counsel in his opening made no claim that the plaintiff, as trustee, was entitled to recover this entire balance. What he claimed was a verdict for so much of that balance as would cover the individual obligation of the Hoffman House. This was his language: “ But we do stand here, gentlemen of the jury, insisting upon it that Mr. Stokes shall restore the money to the extent of protecting that $35,000 bond which the Hoffman House of New York is principal upon, and upon which Daniel J. and James D. Leary are sureties.” And again : “We-now stand here as the Hoffman House, i/rustee, assuming its proper position of obligation to perform its duty as t/rustee, and appearing here for the benefit of its oestui que trusts, who me the Hoffmcm House corporation as a hotel corporation, if I may say so, individually — that is apart from any trust interest, and the two Learys and McDonald.”

It thus appears that the plaintiff insisted upon the right to recover m its representative capacity for the benefit of itself individually as cestui que trust, and that when it made that claim there was no other cestui que trust, save itself individually, left under the assignment. It is true that it claimed that its own sureties upon the very bond in which it was individually the principal were also its cestui que trustent. That certainly is a formidable proposition. These sureties were not mentioned as such in the assignment. One of them, James D. Leary, was, as we have seen, named independently in the third specification, and the other (Daniel J. Leary) was merely a witness to the instrument. The assignment was not either in express terms or impliedly, to secure these sureties against the failure of their principal (the Hoffman House) to respond to its obligation. On the contrary, every implication is that the Hoffman House individually, as principal, was able to and would respond, and consequently that, as co-assignee with the others, it took the Mackay judgment just as the assignment reads, specifically to secure itself. When a principal receives security for his liability, he does not so receive it as trustee for his sureties. He receives it as collateral to his own obligation. He undoubtedly owes a duty to his sureties with respect to the collateral. But what is that duty ? In case the principal fails to fulfill his obligation, and the sureties are thereupon compelled to respond, he is bound to subrogate them to his rights with respect to the collateral. Until the duty of subrogation thus attaches, the principal holds the collaterals in his own interest, and in reducing them to possession or in following their avails he proceeds in his own right. The relations of the parties throughout are contractual, and their mutual duties with respect to the collateral result from well-settled principles of equity. But it is not in every instance where one has an equity in the res that a trust is created with regard thereto. It would be carrying the trust doctrine into the realm of travesty to say that every principal in a bond who is secured by collaterals becomes a trustee for those who have guaranteed the fulfillment of his primary obligation. If the principal fulfills, that is the end of the subsidiary guaranty. If he fails, and the sureties then respond, then they are entitled to be subrogated to the collaterals. Even then they take under the equitable rule, and not because the principal was their trustee.

Upon the main question, it is essential that the precise legal status of the parties should be clearly understood. As the Mackay judgment was assigned to the three personalities not absolutely, but as security for the specified obligations, those three personalities acquired a specific lien thereon, while the residuary interest therein remained in Stokes. In this situation the only trace of a trust was that resulting to Stokes. The three assignees became trustees for him, however, only in the sense in which a pledgee is trustee for his pledgor. (Wheeler v. Newbould, 16 N. Y. 398; Gillet v. Bank of America, 160 id. 560.) These relations were not substantially altered by the payment of the assigned judgment. The proceeds were thereupon substituted as the security. The specified lien of the three assignees was transferred thereto, as was Stokes’ residuary interest therein. Again, the assignees became resulting trustees for Stokes, but solely in the pledgor and pledgee sense. It is idle to talk of this as a trust transfer, or as the creation of a trust, in the accepted sense of that term. As was said in Leitch v. Hollister (4 N. Y. 216): “ A trust as to the surplus results from the nature of the security, a/ncl is not the object, or one of the objects, of the assignment.” In other words, it becomes the assignee’s duty, upon the satisfaction of his demand or extinguishment of his liability —■ as the case may be — to restore the collateral or its proceeds to the assignor; and that duty is in its nature fiduciary. That is the sum and substance of the transaction.

The three assignees here were certainly not trustees for themselves. That could not be, and it was not attempted. Their rights under the assignment were not those of trust beneficiaries. They took possession thereunder of the judgment or of its avails —• as direct mortgage assignees ; and that possession continued for their individual security until their liabilities were extinguished.

The appellant, however, contends that, as between themselves, these co-assignees created a trust in the proceeds of the judgment, which trust went into effect when those proceeds were received by the Hoffman House. There is no force in this contention. The rights of the assignees were not varied by the selection of one of their number to act for all in the collection and application of these proceeds. They did not - by that provision—- already quoted—cease to be co-assignees of either judgment or proceeds. Surely this provision did not turn the Hoffman House into a sole trust ssignee for the other two, or rather into a sole trust assignee for all three. It simply created an agency for their joint convenience. If the three assignees, without disturbing or varying the assignment, had stipulated that A. B., a stranger to the instrument, should collect and receive the amount due on the judgment, and apply it to the extinguishment of their several liabilities, it might with equal force be claimed that their joint possession was thereby divested, and their mortgage lien turned into a trust estate — vested in A. B. as trustee, with themselves as his cestuis que trust. The fact that one of their number was intrusted with, the defined duty of collection and application, did not in the least' alter the legal status of these assignees with regard to the security or its proceeds. In collecting and applying the proceeds of the judgment under these provisions of the assignment, the Hoffman House would undoubtedly act in a fiduciary capacity with regard to its co-assignees. So, too, would A. B. in the illustration. But that would not create a trust title or representative right of action, in the sense in which the plaintiff here asserts that title and right. It may be that, upon the reduction of the judgment to possession, the Hoffman House, as custodian of the proceeds, had a right of action against one who deprived it of that custody ; and that it could have maintained such an action without joining its co-assignees as coplaintiffs. But, as we have seen," that is not this action ; and that fact is emphatically pressed upon us by the appellant. We think, however, it is the appropriate action which the plaintiff had. Even if it were possible — as we think it was not — to sustain its “ trustee ” position with regard to the other assignees, and if, while the latter’s liability existed, the Hoffman House could, upon the assumption of a trust estate, range “ over the whole estate for the purpose of its management and disposition ” (Woodward v. James, 115 N. Y. 357), the ranging would certainly cease when nothing was left of the trust save the trustee’s individual interest. Then, at least, the trust ended, and the situation which Judge Finch, in the case cited, so happily illustrated at once arose; and as two solid bodies cannot occupy the same space at the same instant, there was nothing left for it but the merger referred to in Greene v. Greene (125 N. Y. 510). Were this otherwise, what would be the result? For example, if James D. Leary had been selected as the particular one of the three assignees who should collect and apply the proceeds of the judgment, and if all the other claims save his had been satisfied, what sort of a legal spectacle would be presented by his action as trustee for himself individually to recover the debt due to himself individually ? That is the precise legal status of the plaintiff here. And that status is certainly not bettered or rendered less grotesque by the suggestion that this representative action includes in its purpose sureties for the plaintiff’s individual obligation, whose liability ceases the moment the recovery is had and .the application of the sum realized thereupon is made.

However the case may be viewed, the conclusion is inevitable that the plaintiff has no right of action as trustee, and that the non-suit was correct.

The judgment appealed from should be affirmed, with costs.

Van Brunt, P. J., Rumsey and Patterson, JJ., concurred; McLaughlin, J., dissented.