Heitkemper v. Schmeer

Reversed and remanded on rehearing October 22, 1929. ON REHEARING. (281 P. 169.) This suit was commenced to enjoin an alleged breach of a trust agreement executed for the purpose of preventing the construction of an apartment house in a residential district in which plaintiff resides. The trial court sustained a general demurrer to the complaint and, upon refusal of the plaintiff to plead further, dismissed the suit. On former hearing this decree was affirmed: Ante, p. 644 (275 P. 55). Mr. Justice BROWN, speaking for the court, thus properly summarized the allegations of the complaint:

"The record discloses that eight persons, one of whom was this plaintiff and another the defendant Schmeer, conceived a plan for preserving from invasion by apartment houses or flats the residential district in which they lived. To accomplish their enterprise, they advanced the purchase price of the land hereinbefore described, and had the deed thereto executed to Schmeer, trustee. Schmeer issued to his associates in the enterprise a declaration of trust. His associates accepted the terms of the declaration, and empowered the trustee to sell and convey the land, under the restriction that neither apartment houses or flats should be erected thereon. The trustee eventually disposed of one-half of the trust property contrary to the terms of the trust, in that he granted to the vendee the right to construct both apartments and flats thereon."

We are satisfied with the original opinion in stating the object and purpose of the trust and that there was a breach thereof when the Trustee Schmeer conveyed the property to the defendant A. Larrowe, expressly excepting in the deed any restriction against the building of flats or apartment houses. When the declaration of trust executed by Schmeer is read in the light of the instrument contemporaneously executed by the beneficiaries, there can be no doubt that it was the intention of the parties thereto to prevent the invasion by apartment houses of this residential district. It appears from the allegations of the complaint, which were admitted on demurrer, that the parties so construed it. We think it was error, however, to hold that the demurrer should have been sustained for the reason that plaintiff "failed to allege sufficient facts to show that the purchaser of the land had ample notice of the restrictions." Relative to the matter of notice, plaintiff alleged:

"XVIII. "That the said A. Larrowe received the said property and made the said purchase with notice, appearing upon the face of the said deed, that the said R.W. Schmeer made the same in the double capacity of Trustee and as owner of his individual right and interest in the said property. "XIX. "That besides the notice of said trust contained in the deed from the said Gile Investment Company to said R.W. Schmeer, as Trustee, and in the deed from R.W. Schmeer, as Trustee, and in his individual right, to A. Larrowe, the said defendant A. Larrowe had other notice and knowledge that the said R.W. Schmeer held the said property as Trustee, and notice and knowledge that he held the same with no authority to sell the same free from the restrictions of the said trust against the use of the said property for the purpose of apartments or flats. "XX. "The plaintiff alleges that the said A. Larrowe had actual knowledge that the said R.W. Schmeer was a trustee and not the owner in his own right of said property, in this: That in the examination of the chain of his title he actually examined and read the recitals in the deed from the Gile Investment Company to the said R.W. Schmeer, as Trustee, and knew therefrom that he was Trustee, and not the owner thereof beyond the interest of his individual contribution to said trust."

Assuming that the allegations of the complaint are true, the equitable title to this property was vested in the plaintiff, and Schmeer, under the terms of his trust, had no power or authority thus to convey it. In order to defeat the equitable interest of the plaintiff it would be incumbent upon the grantee of Schmeer to allege and prove, as an affirmative defense, that he was a bona fide purchaser and that he had no notice nor knowledge of the plaintiff's beneficial interest therein: Bailey v. Hickey, 99 Or. 251 (195 P. 372); Hyland v. Hyland, 19 Or. 51 (23 P. 811); Rhodes v.McGarry, 19 Or. 222 (23 P. 971); Weber v. Rothchild,15 Or. 385 (15 P. 650, 3 Am. St. Rep. 162).

Notice was not an essential element of plaintiff's cause of suit. It was sufficient to allege the existence of the trust, its nature and character, and that the defendants had participated in its breach. True, if it had affirmatively appeared on the face of the complaint that Larrowe had no notice nor knowledge of plaintiff's outstanding equitable title and that he was a bonafide purchaser for value, a demurrer to the pleading would have been appropriate: 2 Pomeroy's Equity Jurisprudence (4 ed.), § 784. It is said in 46 C.J. 565:

"* * while a mere denial of notice alleged as part of plaintiff's cause of action may be good, the necessity for, and lack of, notice as an affirmative defense must be pleaded in the plea or answer at least where lack of notice is not apparent from the declaration, bill, or complaint itself."

Plaintiff, however, did not plead himself out of court.

Assuming that notice was an essential element of plaintiff's cause of suit, we think the allegations relative to the knowledge of Larrowe were not mere conclusions. An averment of knowledge is not a conclusion of law: 2 Pomeroy's Equity Jurisprudence (4 ed.), § 592; Cousins v. Wilson, 94 Okla. 29 (220 P. 923).

Since the decree of the lower court must be reversed and the cause remanded, it is deemed proper to consider the force and effect of Section 9853, Or. L., which provides:

"Whenever a deed to real estate is made to a person in trust or where he is designated as trustee and no beneficiary is indicated or named it shall be presumed that the grantee is trustee for himself only and a deed executed by him for said property shall convey to his grantee prima facie title thereto. After five years from the recording of the last-named deed such presumption shall be conclusive as to any undisclosed beneficiary and such title shall not be called in question by any one claiming as beneficiary under said first-named deed."

At this juncture it is well to bear in mind that in the deed from Gile Investment Company to Schmeer as trustee the beneficiaries were not named therein nor did such conveyance disclose the character of the trust. Prior to the enactment of the above statute, it is clear that the word, "trustee" in a deed would put the purchaser upon notice and make it obligatory upon him to inquire as to the nature and limitations of the trust.

The rule is thus stated in Devlin on Real Estate (3 ed.), Section 738a:

"The general rule that pervades the whole doctrine of notice is that, whenever sufficient facts exist to put a person of common prudence upon inquiry, he is charged with constructive notice of everything to which that inquiry, if prosecuted with proper diligence, would have led."

It is said in McLeod v. Despain, 49 Or. 536 (90 P. 492, 92 P. 1088, 124 Am. St. Rep. 1066, 19 L.R.A. (N.S.) 276), a decision rendered prior to the above enactment:

"* * the word ``trustee' added to a payee's name in a written instrument, is sufficient to put the purchaser upon inquiry as to all the terms and conditions under which it may have been executed, and in the absence of such inquiry knowledge thereof will be presumed. We also deem a recognition of this rule necessary to properly protect the beneficiaries of such trusts; otherwise under the claim of being a bona fide purchaser, through the neglect of the assignee of an instrument to make inquiry, the cestuis que trustent in many instances would, without fault on their part, suffer great loss. The adoption of the rule here recognized protects the innocent without hardship to investors; while the contrary doctrine offers an inducement to purchasers of this kind of property to neglect making inquiry as to the import of the word ``trustee,' by which the innocent must often suffer at the hands of dishonest trustees in whose selection it often happens the beneficiary has no voice."

Also see 26 R.C.L. 1298.

In what way does this statute alter the rule well established prior to its enactment? If we construe the words, "it shall be presumed that the grantee is trustee for himself only" in the literal sense, an absurdity results. It is not possible for a grantee to become "trustee for himself only." When the equitable title and the legal title merge in the same person there is no reason for the continuation of the trust and it terminates. As stated in 39 Cyc. 248: "It is undoubtedly true that the same person cannot be at the same time sole trustee and sole beneficiary of the same identical interest; * *." Also see 26 R.C.L. 1186. While it is almost beyond the pale of judicial construction to deduce that the legislature intended the words, "it shall be presumed that the grantee is trustee for himself only" should be equivalent to saying that "it shall be presumed that the grantee is the owner in fee," this is the only construction which can be given the statute if it is not to be declared invalid for uncertainty. We assume then that Larrowe, on inspection of the deed wherein Schmeer was named as trustee, had a right to assume in the absence of notice to the contrary, that Schmeer was the owner of the property and had the right to sell the same. A prima facie title, however, is not an indefeasible title. It is one which under the statute may be defeated if, before the expiration of five years from the recording of the deed, it be shown that his grantor did not own the property but merely acted as trustee for beneficiaries having equitable interests therein. It is incumbent upon Larrowe to show by the greater weight of evidence that he had no notice or knowledge of the trust agreement and that he was a bona fide purchaser for value. The statute does not purport to change the rule relative to burden of proof. The disputable presumption becomes a conclusive one if the title of the grantee is not "called in question," within five years from the recording of the deed. If upon trial the existence of the trust is established and defendant Larrowe fails to show by the greater weight of the evidence that he was a bona fide purchaser of the property, the plaintiff would be entitled to prevail.

We learn from oral argument of counsel that an apartment house has been constructed since the commencement of this suit and is now occupied. Under such circumstances, in the event that a decree is rendered in favor of the plaintiff it would not be equitable to compel the removal of this apartment house without granting to the owner thereof the privilege and opportunity of compensating plaintiff for damages sustained by reason of the breach of trust. Summarily to compel the restoration of the property to its original condition would unnecessarily and unjustly inflict damage upon the defendants greatly in excess of damages sustained by plaintiff. If the decree be for plaintiff it should be in the alternative, that is, that the defendants remove the apartment house from the lots within a reasonable length of time or, upon their failure so to do, to respond in damages: 14 R.C.L. 323. After issue is joined it will be proper to inquire into the extent of plaintiff's damages and, in the event of a decree in his favor, to assess and determine the amount thereof. If Schmeer violated this trust he would be liable even though it be shown that Larrowe was a bona fide purchaser.

The decree of the lower court in sustaining the demurrer and in dismissing the suit is reversed and the cause remanded, with directions to permit plaintiff to file an amended complaint. Defendants may within ten days thereafter answer if they see fit to do so. Plaintiff is entitled to his costs and disbursements.

REVERSED AND REMANDED.