First Nat. Bank v. Love

• Decision Date: 12 March 1936
• Docket Number: 838,6 Div. 818,841
• Citation: 167 So. 703,232 Ala. 327
• Parties: FIRST NAT. BANK OF BIRMINGHAM v. LOVE et al.
• Court: Alabama Supreme Court

167 So. 703

232 Ala. 327

FIRST NAT. BANK OF BIRMINGHAM v. LOVE et al.

6 Div. 818, 838, 841

Supreme Court of Alabama

March 12, 1936

Rehearing Denied May 7, 1936

Appeal from Circuit Court, Jefferson County; E.M. Creel, Judge.

Suit in equity by John T. Love and Penn Mutual Life Insurance Company (with intervention by Steiner Bros. and others) against the First National Bank of Birmingham individually and as trustee and administrator of the estate of W.C. Gewin, deceased, and others. From the decree respondent appeals, and complainant Penn Mutual Life Insurance Company and intervener Steiner Bros., respectively, file cross-appeals.

Reversed on direct appeal; affirmed on cross-appeals.

BOULDIN and BROWN, JJ., dissenting in part.

Cabaniss & Johnston and K.E. Cooper, all of Birmingham, for appellant.

Howze &amp Brown, of Birmingham, for cross-appellant Penn Mutual Life Ins. Co. and appellee Love.

Benj. Leader and Saml. Tenenbaum, both of Birmingham, for cross-appellant Steiner Bros.

BOULDIN Justice.

This is a creditor's bill to set aside an instrument creating a "Life Insurance Trust," upon the ground that it was fraudulent and void as against existing creditors of the grantor, and to subject the proceeds of the policies in the hands of the trustee to the payment of the grantor's pre-existing debts.

Pertinent provisions of the instrument appear in the report on former appeal. Love et al. v. First Nat. Bank of Birmingham et al., 228 Ala. 258, 153 So. 189. We there held the trust instrument valid in so far as the proceeds of the life insurance policies were charged with the payment of bank indebtedness of the grantor and in so far as such proceeds arose from policies payable in the first instance to the wife and children of the insured, not exceeding their statutory exemptions. In so far as the trust agreement made the wife and children of the insured beneficiaries of policies theretofore payable to the insured, a mere gift, it was held, on the authority of a long list of cases there cited, constructively fraudulent and void as against existing creditors of the insured.

On final hearing the trial court found that the trustee had received proceeds of this latter class in the sum of $61,032.32, and decreed: "1. That The First National Bank of Birmingham holds as constructive trustee for the benefit of the creditors of W.C. Gewin, deceased, whose claims existed prior to March 25, 1929, and whose claims are not barred by the Statute of Non-Claims, and who are not for any other reason barred from participating, the sum of $61,032.32, with interest thereon from the 26th day of May 1933."

Appellant, First National Bank of Birmingham, does not question this as the true amount of such funds coming to the hands of the trustee named in the trust instrument nor appellant's responsibility as a successor in the position of trustee; but does question its liability for such amount with interest thereon upon several grounds presented in answer and in evidence. Among other things, it is insisted that such liability, if any, should be limited to the fund in hand, or to the property in which the fund had been invested, at the time this bill was filed.

In considering this question and others hereinafter discussed we briefly review the course of events pertinent to such inquiries.

W.C. Gewin, the insured, died some four months after creating the life insurance trust. He left a will in which his wife and children were chief beneficiaries. The bank, trustee in the life insurance trust, was also named as executor of his will, and duly qualified as such. The will imposed on the executor active continuing duties, such as keeping the estate together until the youngest child came of age. So here we have the case of several trust relations in the same trustee, viz., the life insurance trust, and special trusts imposed by the will. In both of these the wife and children were the beneficiaries whose interest the trustee was under duty to conserve.

Then the executor as such sustained a relation of trust, first on behalf of creditors generally in the estate subject to administration; finally, a relation of trustee of this special fund, under a constructive trust in equity in favor of pre-existing creditors.

The estate of Dr. Gewin consisted in much of a great many tracts and parcels of realty, severally encumbered by mortgages, aggregating near $500,000. On the basis of appraisals made prior and shortly after his death and the qualification of his executor, it appeared the estate was solvent, and there were valuable equities in these properties to be conserved for the devisees under the will. Interest and installment payments were rapidly accruing on these mortgages, and there appeared to be danger of loss by foreclosure unless funds be found to meet them. Thereupon, some four months after grant of letters testamentary, the bank presented a petition to the court of equity in which the administration was pending, setting up these facts, as well as its relations as trustee in the insurance trust and as executor of the estate, and asking authority, as trustee of the insurance funds, to make a loan from said funds to the executor of the estate, the executor giving such trustee, as security, a mortgage on one unencumbered parcel of realty, known as the hospital property, then appraised at a value in excess of the proposed loan. A decree was entered accordingly, and the trustee of the insurance trust loaned to the executor of the estate $70,000 of the insurance fund, taking the note of the executor and a mortgage on the property mentioned as security. Owing to economic conditions, real estate values steadily declined, until in 1932 a reappraisal disclosed the estate had become insolvent, was so reported, and a decree of insolvency duly entered. Thereupon the trustee foreclosed the unpaid mortgage on the hospital property, bought it in at a price of $50,000, and holds the same. Its value, at the time of the final hearing, was estimated at $22,500.

The bank insists that, if otherwise entitled to relief, the creditors due to share in the insurance fund, as existing creditors of the donor when the insurance trust was created, should be limited to this property, in so far as such fund was invested therein.

It is well settled that the grantee in a fraudulent conveyance holds the property in trust, a constructive trust recognized and enforced in equity, on behalf of existing creditors of the grantor; that he disposes of same at his peril, and is personally liable for the value thereof. This rule has been applied in Alabama to cases of constructive fraud, which arise in every case of gift, regardless of the solvency of the donor or any notice to the donee of existing indebtedness. It has been applied in insurance cases. Lehman et al. v. Gunn et al., 124 Ala. 213, 27 So. 475, 51 L.R.A. 112, 82 Am.St.Rep. 159; Fearn, Ex'r, v. Ward, Adm'r, 80 Ala. 555, 2 So. 114; Lockard v. Nash, Adm'r, etc., 64 Ala. 385; Pope et al. v. Carter et al., 210 Ala. 533, 98 So. 726; Crawford et al. v. Kirksey et al., 55 Ala. 282, 28 Am.Rep. 704; Dickinson et al. v. National Bank of the Republic, 98 Ala. 546, 14 So. 550; Cook v. Clark, Davis & Co. et al., 212 Ala. 257, 102 So. 213; Cooke v. Fenner & Beane, 214 Ala. 558, 108 So. 370; Kavanaugh & Wife v. Thompson & Wife et al., 16 Ala. 817; Weingarten Bros. et al. v. Marcus et al., 121 Ala. 187, 25 So. 852; Metcalf et al. v. Arnold et al., 132 Ala. 74, 32 So. 763; Boutwell et al. v. Drinkard et al., 230 Ala. 212, 160 So. 349; 27 C.J. 669 and 855; 65 C.J. 979; Moore on Fraudulent Conveyances, vol. 2, § 36, p. 685.

We are not insensible of the force of the argument that injustice may result to a donee from a wholly solvent donor, not known to be indebted at the time, where such donee, before any notice that any one has a claim on such property, may treat it as his own, use it or lose it, and later be called to answer as for a trust he did not know existed. Admittedly the doctrine of a constructive trust imposed upon a grantee in a conveyance infected with actual fraud rests on a sound basis in justice and morals. It appears in many states the rule as to voluntary conveyances, being constructively fraudulent per se, is not so rigid as with us. Whether ours is the better rule declaring that the taking of a gift charges the donee with notice that, if the donor does not meet his debts for which the property was liable at the time of the gift, he will be held in equity accountable as constructive trustee, we do not deem a proper subject to be now reopened.

We may add, however, that, if the rule of constructive trusts should be modified to meet the special equities of the particular case, we do not find this such a case. It appears that at the time the bank accepted the insurance trust it had full knowledge, through its dealing with a real estate trust, then and theretofore existing, of the heavy mortgage indebtedness of Dr. Gewin, to whom due, its security, and the terms of payment. All this appeared at the time on the records of the bank. Moreover, it reasonably appears that, at the time the insurance fund was loaned to the estate, the bank was advised that pre-existing creditors had priority of claim on that fund, and, a little later, to avoid a suit to that end, paid off a creditor, who, it was feared, would institute such a suit as this. Without question, the bank was proceeding in good faith to protect the equities of all parties as matters then appeared; that is to say, work out the entire matter so as to pay the pre-existing indebtedness, all indebtedness, and save the equities in the lands to the devisees under the will.

But the bank took the chances on this, and its mistake cannot be visited on those whose funds, speaking in...