People ex rel. Collins v. Donohue

O’BRIEN, J.

This action was brought against the defendant as surety upon a bond dated October 6, 1865, conditioned for the faithful performance and discharge by one Welcome R. Beebe of his duties as trustee, in pursuance of an order of the supreme court appointing said Beebe trustee to receive and hold, for the use and benefit of Maria Louisa Collins, a certain fund of money which had been left by her mother, by last will and testament. Subsequent to the death of the trustee, Beebe, which occurred in 1884, Maria Collins, who was the life beneficiary of the trust fund, upon her application, was appointed trustee, under an order which directed her to apply the use, interest, and income of the fund, as directed by her mother’s will, to her own use, and the principal to the person or persons to whom the same should be determined to belong. She, having made a demand upon the executors of the former trustee, and failed to obtain the fund, commenced an action against such executors, which was referred to a referee, who subsequently reported that said Beebe, as trustee, was chargeable with the principal and interest upon the fund. Upon such report of the referee a judgment for the sum of $12,357.67 was entered; that being the amount, as found by the referee, for which said Beebe, as trustee, was chargeable. Having failed to obtain payment of this judgment, or the satisfaction of an execution issued thereon, this action was commenced to enforce the liability of the sureties. Upon the trial, evidence wa§ presented that a check for the amount of the trust fund was delivered to Beebe subsequent to his appointment as trustee. Such evidence, supplemented by the judgment entered upon the report of the referee, was relied upon as establishing the defendant’s and appellant’s liability. This liability was resisted upon two principal grounds; the first, that the judgment entered against the executors of the trustee, fixing the amount for which the trustee,, Beebe, was chargeable, was not binding upon the surety. In Black on Judgments (section 586, p. 698) it is said that:

“Tlio general tendency of the English and American jurisprudence is to hold, in ordinary cases of suretyship, that a judgment against the principal is not conclusive upon the surety unless the latter was made a defendant to the action. * * * On the whole, the best rule which can be deduced from the authorities is that the judgment is conclusive upon the surety only In cases where the principal may be considered as the farmer’s agent in the particular transaction, and where, upon a fair construction of the contract of indemnity, it may be construed as binding the surety to a responsibility for the conduct or result of the suit in which the judgment is rendered; ■otherwise, the judgment proves only the fact of its own existence.”

And in the next section this author states that:

“Where the obligation of the surety is simply to pay money if the principal fails to do so, there is no such privity between them as will make a judgment against the principal evidence against the surety. But the case is different with regard to sureties on bonds given in the course of a suit or other proceeding, for in the latter instance the surety submits himself to the acts of the principal, and to the judgment, as itself a legal consequence falling within the suretyship.”

In the American and English Encyclopedia of Law (volume 12, p. 93) the rule is thus stated:

“Where a surety has contracted with reference to the action of his principal in some judicial proceeding, he is bound by a judgment against the latter. It would seem, by the weight of authority, in all other cases of surety-ship a judgment against the principal is at least prima facie evidence against the surety. But a surety may show that a judgment against his principal was obtained by fraud or collusion, or that the court had no jurisdiction to render the judgment.”

With respect to bonds given by administrators, it has been held in this state (Casoni v. Jerome, 58 ¡N7 Y. 316) that sureties are bound by the decree'of the surrogate, “because, by their contract, they have made themselves privy to the proceedings against their principal, and, when the principal is concluded, the surety, in the absence of fraud or collusion, is concluded also;” citing cases. In Harrison v. Clark, 87 N. Y. 576, Casoni v. Jerome was cited and approved; and therefore the law may be regarded as settled that, with respect to sureties upon an ordinary administration bond, they are bound by the decree of the surrogate, or by a judgment against their principal, in the absence of fraud or collusion. The surety’s obligation upon such bonds is to be responsible for the faithful discharge of the administrator’s duties; and the binding force of a decree, as stated in the authorities, results from the nature of the contract or obligation which the surety assumes. The inconsistency that, upon a first glance, would seemingly be present in the authorities, will be dissipated if we bear in mind that there is no fixed or rigid rule, which, under all circumstances, would make a surety bound by an order or judgment against his principal, but the question is as to whether or not he is so bound as to be determined by the nature-of his obligation, and the language and terms of the bond itself. Thus, in Thomson v. Mc-Gregor, 81 N. Y. 593, which was a case of a receiver’s bond, the surety upon which was sued after the principal was ordered to pay over a sum adjudged to be the balance of the trust funds in such principal’s hands, which order was not obeyed, and where it was claimed that such order was conclusive upon the surety, it was held that the surety was not bound by the order, “and in the absence of express terms in the bond, binding him to submit to the judgment of the court, such a liability could not be imposed upon him.”

To determine the surety’s liability, and the extent to which he is bound by the judgment against his principal, in the case at bar, resort must be ha,d to the bond itself, which provides as follows:

“Now, the condition of this obligation is such that if the above-bounden Welcome It. Beebe shall and will well and faithfully ‘perform and dischargt liis duties as such trustee, as named in said order, then this obligation shal’ be void, else to be and remain in full force and virtue'.”

We here find that neither by the nature of the contract nor the express terms of the bond does the surety obligate himself to be bound by the judgment of the court; and when it is sought to charge him, after the death of the principal, with the latter’s unfaithfulness, he should not be precluded by a judgment obtained against the representatives of the deceased principal in an action to which he was not a party, and of which he had no notice. But, assuming that the judgment was not binding upon the surety, there was, nevertheless, evidence presented showing that the former trustee had received the principal of the fund, and had failed to turn over the same, having converted it to his own use. The finding to this effect, therefore, was based on sufficient evidence; and, nothing to the contrary being shown, it would justify a recovery against the surety for such principal sum. In regard to the interest, it seems to me there are two grounds opposed to the recovery thereof: In the first place, no evidence has been given that interest was ever received by the trustee; and in the absence of such evidence the surety has a right to invoke the rule that a trustee is not liable to pay interest upon a fund, to a greater extent than interest has been received, which rule would prevent the trustee’s being chargeable with interest in a case where no interest was obtained by him upon a trust fund. Secondly, even though it had been shown that interest had been earned, it could not have been recovered by this trustee, because it was money that belonged, not to the trustee, but the beneficiary, to whom it should, from time to time, have been paid; and as to her right to" recover, in view of the loches here appearing, there would be serious question, for, with respect to the interest on the trust fund, which could have been demanded yearly, there is much force in the suggestion that the failure of the beneficiary, through the trustee or otherwise, to enforce her claim to the income that may have been earned by the trust fund for 19 years, was such loches as to preclude the trustee, for her benefit, enforcing such a liability against the sureties. This would not affect the sureties’ liability for the fund, because, as to such trust fund, Beebe was entitled to hold the same during the life of the beneficiary, and it was only upon his death, and the appointment of another trustee, that the right to demand it existed. It should be remembered, in regard to the interest, however, -that the beneficiary was of full age, and in a position to enforce her claims against the trustee; and the evidence shows that during all these years she had other business transactions with the trustee, and that, as appears from the judgment roll, payments had been made to her, “aggregating large sums of money,—far exceeding the trust fund, or interest thereon.” The referee held, upon the testimony before him, that these moneys so paid by Beebe had reference to other claims held by the beneficiary against him, and were properly applied to discharge such claims; leaving Beebe still chargeable with the trust fund, and interest thereon. This conduct of the beneficiary, in permitting, during 19 years, the trustee to retain the principal and any interest that may have been earned on the fund, seems to us to have been a violation of that duty which the beneficiary owed to the sureties. Such interest, if earned yearly, could have been obtained in a proper proceeding; and it was unquestionably loches for the beneficiary to suffer all these years to pass by, and pile up a liability against the sureties, which she could have prevented by insisting upon her rights; and thus she would have discharged the duty which, in all fairness, she owed to the sureties upon the bond. We do not think, after such conduct, that she should be allowed to profit thereby at the expense of the sureties. In view of the grave question presented, as to whether the trustee ever received any interest on the trust fund, —the claim being that he had mixed such trust funds with his own money, and had never had the same out at interest, which could have been prevented by the slightest effort or diligence being exercised to ascertain the condition of the fund by the beneficiary at any time during these 19 years,-—no hardship or injustice results to the beneficiary or those succeeding to her interest by preventing her from profiting by her own loches. Although the case of Toles v. Adee, 91 N. Y. 562, is not similar to the one at bar in any way, the general statement of the law therein contained is applicable to the question we are here discussing. As therein said:

“Where the contract of a surety is not an absolute guaranty of payment of a debt of his principal, but simply an undertaking of such a nature that proceedings must be taken against the debtor before the obligation of the surety to pay arises, the law implies a condition on the part of the creditor that due diligence shall be used in proceeding against the principal; and, to establish a defense based on a breach of this condition, it is not necessary for the surety to show a request on his part to the creditor to proceed, and damage resulting to him from a failure to comply. The law presumes injury, and it is not incumbent upon the surety to establish it as a matter of fact.”

But, apart from all this, the beneficiary, and not the trustee, could alone recover such interest.

Another and a serious question is as to the validity of the order appointing Maria Collins trustee in the place and stead of Beebe, deceased. She was the life beneficiary, and the result was to vest in her, as trustee, the legal title to a fund, the use, interest, and income of which were bequeathed to her during life. In Greene v. Greene, 125 N. Y. 506, 26 N. E. Rep. 740, it is said:

“To the constitution of every express trust there are essential these elements, viz. a trustee, an estate devised to him, and a beneficiary. The trustee and the beneficiary must be distinct personalities, or otherwise there could be no trust, and the merger of interests in the same person would effect the legal estate in him of the same duration as the beneficial interest designed. That the legal and beneficial estates can exist, and be maintained separately, in the same person, is an inconceivable proposition. It is quite 51s much of an impossibility, legally considered, as it is physically.”

And in Woodward v. James, 115 N. Y. 346, 22 N. E. Rep. 150, the court said:

“It is undoubtedly true that the same person cannot be both trustee and beneficiary of the same identical interest. To say that he could, would be a contradiction in terms as complete and violent as to declare that two solid bodies can occupy the same space at the same instant.”

Upon these and other authorities, which support the same view, it is strenuously urged by the appellant that tire order of the court appointing Maria L. Collins trustee was an absolute nullity, upon the theory that no person can be both trustee and beneficiary for the same interest at one and the same time; that the existence of this dual relation is a physical and legal impossibility; and that no decree, however positive in its terms, can render such a relation a reality. We think that in this argument, and in the authorities to which reference has been had, the appellant overlooks the distinction between the creation of a trust and the selection of a trustee to carry out the provisions of a valid trust. As held in Greene v. Greene, supra, the fact that the beneficiary was appointed trustee would prevent the creation of a valid trust, and for the reasons therein stated. But, where a valid trust has been created, —which, it is conceded, was the situation in the case at bar,—it remains but to determine what effect, if any, results from the appointment of the beneficiary for life as trustee of the trust fund. It, no doubt, would have been more advisable to have selected some one else, because, as the fund was intended eventually to go to persons other than the beneficiary for life, it would be more natural, and apparently more secure, to have it held by some one other than such life beneficiary, who might not be very zealous in seeing that the fund was preserved, and kept intact, for those who would succeed after her death. We do not think, however, that any of these reasons or suggestions as to the impropriety of the appointment are sufficient to justify our holding that the court was without jurisdiction, and that the order itself, appointing the life beneficiary, was void, or, as contended for by the appellant, an absolute nullity. Those interested might have a reasonable ground for applying for another trustee; but we fail to see how, upon the trial of an action brought by a trustee appointed by order of the court, the surety upon a bond given by a former trustee can thus collaterally assail the validity of this appointment. Assuming, however, the surety has such right, we do not think that the order appointing the beneficiary as trustee was either a nullity or void, for, as held in Moke v. Norrie, 14 Hun, 132, “a cestui que trust is not absolutely excluded from occupying the relation of trustee for his own benefit, and especially is this so where he is but one of several trustees.”

I therefore have reached the conclusion that for the principal sum shown to have been given to the trustee, and never accounted for to the beneficiaries, the surety is liable, less any amount which he can legally claim as an offset against the same. In this connection the defendant proved that he had given to the beneficiary some $900, and this fact was found by the learned trial judge. This finding was not excepted to, and, no appeal having been taken 'by plaintiff from the judgment, the defendant is entitled to be credited with such amount. My opinion is that the judgment in favor of the plaintiff should be reduced to the principal sum of $4,397.29, less the $900, for which balance, with interest thereon from the 22d day of May, 1884, the plaintiff should recover, and that the judgment, as so modified, should be affirmed, without costs to either party upon this appeal.