In re Myers

• Citation: 131 N.Y. 409,30 N.E. 135
• Parties: In re MYERS, (two cases.)
• Decision Date: 01 March 1892
• Court: New York Court of Appeals

131 N.Y. 409

30 N.E. 135

In re MYERS, (two cases.)¹

Court of Appeals of New York.

March 1, 1892.

Appeal from supreme court, general term, first department.

Separate petitions by Matilda and Louisa Myers for allowances out of their respective shares of the income of the estate of Alfred G. Myers, deceased. Matilda Myers afterwards died, and Theodore A. Myers, her administrator, was substituted. The executors, R. Baring Gould, John A. Rutherford, Richard King, and I. Champlin Morris, answered the petitions, and the issues thereon were referred to a referee. The decree of the surrogate, confirming the referee's report, directed the executors to pay to the attorney of the first-named petitioner the sum of $6,176.31 on account of her share of the income of the estate, and the sum of $183 out of the principal of the estate for one-half the referee's and stenographer's fees in the reference; and directed them to pay to John W. Thomson, as committee of the person and estate of the second petitioner named, or to his attorneys, the sum of $6,176.31 on account of the income of the estate, and the sum of $183 out of the principal for one-half the referee's and stenographer's fees in the reference. From a judgment of the general term modifying the surrogate's decree, by reducing the sum which the executors were ordered to pay, both parties appeal. Reversed in part.

Hoadly, Lauterbach & Johnson, (Edgar M. Johnson, of counsel,) for executors.

Foster & Thomson, for Louisa Myers.

MAYNARD, J.

With the exception of some unimportant legacies, the testator gave his entire estate to the four executors of his will, in trust, with the direction to collect, invest, and reinvest the same, and pay the income thereof, in equal shares to his two sisters, and after their death to divide the principal equally between the surviving partners in the business of stock-brokers in New York city, one of whom was an executor, and the other a brother of such executor. Upon the day after his death this executor and his brother formed a new copartnership, taking in another member, and continuing the business under the same firm name in which it had been carried on in the life-time of the testator. It appears that substantially all the property which he left was invested in this business, and that he and the executor referred to contributed all its working capital, and that the firm owed him, on various accounts, over $60,000, and owed him and the executor jointly upon an account, known as the ‘I. R.’ account, the sum of $241,750, of which one-half, or $120,825, belonged to him; thus making the total amount due him from the firm over $180,000. These accounts mainly represented loans on margins to customers, for which the firm held ample security, and it has been shown that they were all good, and that there has been no loss on any of them. The new firm, upon its formation, immediately appropriated all the assets and business of the old firm, and the property of the testator was used by it in its business, evidently in the same manner in which it had been employed in his life-time by the firm of which he was a member. The testator died March 8, 1887, and his will was proved and letters testamentary issued to the four executors, who all qualified on April 14th. Since that time the executors have paid to the sisters each the sum of $1,336, on account of the income of the trust funds in their hands, and have insisted that such amount, with the further sum of $4,055, constituted the entire income from such funds accruing from the death of the testator to October 24, 1888. This amount scarcely exceeds 2 per cent. upon the estimated value of the property which came into their hands. Within the time limited by law, a brother of the testator commenced proceedings, under the Code, for the revocation of the probate of his will, which are still pending. This brother and the two sisters are the only heirs at law of the decedent, and, in case his will should be declared invalid, would be entitled to all his property, including the income thereof which has accrued since his death, and the brother has executed a written consent that the whole of such income may be paid to his sisters pending the contest over the will. In 1888 separate applications to the surrogate were made for an order requiring the executors to account and pay to the beneficiaries such additional income as they may have received from the trust property or be lawfully chargeable with. The proceedings thereon were consolidated, and a reference ordered. The referee found, upon competent proofs, that the entire available estate of the testator was in the possession of the new firm; was actually employed by it in its business; that, after rejecting all doubtful securities, it was of the net value of $180,000; that it had, during all the time since the formation of the firm, earned 6 per cent. interest annually; and that, after deducting all payments and expenses, there was still due from the income of the trust fund to each petitioner the sum of $6,146. The surrogate confirmed the report, and directed payment accordingly. The executors appealed to the general term, where the order of the surrogate was modified by reducing this amount to $4,983, (11 N. Y. Supp. 543,14 N. Y. Supp. 535;) and from the decision of the supreme court both parties have appealed to this court.

The principal question to be determined involves the rate of interest upon the trust-estate, for which the executors should be held accountable. The executors claim that these moneys have been used in the stock-brokerage business of the firm, of which one of their number is a member, and that it is to be regarded in the nature of a call loan to that firm; and as such loans can usually be effected in Wall street at 2 per cent., and sometimes for less, they should not be required to account for any greater sum.

Independently of the relation which one of the executors sustained to the firm, it is apparent that this claim is untenable. Under the rules of law, as they have been judicially construed, which control trustees in the management of estates committed to their care, and which fix the measure of their responsibility, the loan of the trust property by the executors to a firm of stock brokers, without any security other than the personal obligation of the borrowers, or the employment of such property in a business of that character with the permission or acquiescence of the executors, was unauthorized, and the executors became personally responsible for the fund; and in such cases interest at the full legal rate is chargeable against them, so long as the prohibited use of the funds continues, and without regard to the productiveness of the investment. The rule upon this subject is well stated by Chief Judge RUGER in Deobold v. Oppermann, 111 N. Y. 538, 19 N. E. Rep. 94, where, speaking of the proper uses to which trust funds may be put, he says: ‘Their employment by the trustees in trade, or as loans to persons engaged in such business, or in the prosecution of mercantile, commercial, and manufacturing enterprises or speculative adventures, has been uniformly condemned as illegal, and as constituting a devastavit of the estate.’ In this view it is immaterial whether the trustees are themselves directly interested in the business undertaking in which trust moneys have been improperly invested. They become the debtors of the estate to the extent of the misappropriation, and the law prescribes the rate of interest upon every indebtedness, where it is not fixed by the agreement of the parties. The reason of the rule is that, as the primary object of the creation of a trust is ordinarily the preservation and perpetuity of the fund until the purposes of the trust have been accomplished, this object is necessarily endangered, and may be entirely defeated by exposing the estate to the perils of commercial...