Catt v. Wm. Knabe & Co. Manuf'g Co

• Decision Date: 10 November 1896
• Citation: 93 Va. 736,26 S.E. 246
• Court: Virginia Supreme Court
• Parties: CATT. v. WM. KNABE & CO. MANUF'G CO.

26 S.E. 246

93 Va. 736

CATT.

v.WM. KNABE & CO. MANUF'G CO.

Supreme Court of Appeals of Virginia.

Nov. 10, 1896.

Trusts — Continuance of Former Business by Trustee—Jeopardizing of Trust Fund —Invalidity of Deed.

1. A trust deed which authorizes the trustee to continue the former business of the grantor, and to subject the trust property to the casualties incident thereto by which it may be lost or wasted or subjected to charges superior to those of the creditors secured, is void, as containing provisions adequate to the defeat of the object of the deed.

2. A trust deed required the trustee to take immediate possession of all the property of a private school corporation, and to conduct the school; to employ tutors, "and to pay them a reasonable compensation for their services out of the trust funds"; out of the receipts to pay for professional services in the preparation of the trust deed a commission of 5 per cent. to himself, and running expenses; the remainder to be applied to the payment of creditors' claims as thereinafter directed. The trustee was to continue the school till a date named, and then, in the event that the anticipated profits had proved insufficient to satisfy the indebtedness, he was required "to sell and apply the proceeds in the order and with the priorities as hereinbefore fully set forth. " Held, that the trustee would be first entitled to indemnity from the corpus of the trust property for all expenses incurred by him which the profits of the business did not satisfy, to the postponement of the creditors secured; and hence the deed was void, as containing a provision adequate to defeat its avowed object.

3. The property conveyed to the trustee, consisting of buildings, furniture, and appliances necessary to the conduct of the business in which the trustee was required to engage, constituted the "trust funds" out of which the running expenses were to be paid.

4. The deed could not be construed on the assumption that profits were certain to flow fromthe venture, but it was invalidated by the fact that there might be a. loss, the consequences of which would have to be borne by the trust funds.

Riely and Buchanan, JJ., dissenting.

Appeal from hustings court of city of Staunton.

Bill by the William Knabe & Company Manufacturing Company, on behalf of themselves and other creditors, against the Wesleyan Female Institution and Reeves Catt, trustee, to set aside a trust deed. From a decree in favor of complainant, defendant Catt appeals. Affirmed.

Elder & Elder and Curry & Blease, for appellant.

Echols & Braxton, for appellee.

KEITH, P. Knabe & Co., who sued on behalf of themselves and other creditors of the Weslyan Female Institute, filed their bill in the hustings court for the city of Staunton, alleging that a certain deed of trust made by the trustees of the institute, conveying its property, real and personal, to Reeves Catt, trustee, with authority to the trustee to continue to run the school in such manner as shall seem most conducive to the interest of said institute from the date of the deed until July, 1896, a period of nearly 18 months, and directing him out of the net earnings of said school to pay off the indebtedness of the institute as provided in the deed, and at the end of that period, should any of the debts remain unpaid, to make sale of the property conveyed, and pay them in the order named in the deed, was made with intent to hinder, delay, and defraud them and other creditors of the Virginia Female Institute. To the bill of complaint the Wesleyan Female Institute and Reeves Catt, trustee, filed their answers, denying its material allegations, and, the case coming on to be heard before the hustings court, upon the pleadings and proof, and that court being of opinion that the trust deed in the bill mentioned is invalid as to the complaining creditors, adjudged and decreed that it be declared null and void as to them. From this decree an appeal was taken.

The deed, which is filed as an exhibit with the bill, is upon its face subordinate to the deed of trust dated July 25, 1870, to John B. Baldwin, trustee, to secure the sum of $22,500. Subject to this deed of trust, the institute conveyed all property, real and personal, to Reeves Catt, trustee. The real estate, after payment of the deed of trust just mentioned, is charged by the deed under consideration, first with the payment of two notes, —one to the First National Bank of Harrisonburg, and the other to the Staunton Savings Bank, —and the property conveyed is then declared to be in trust to secure the payment of a number of claims specifically set out in the deed, and divided into four classes, the debt to complainant being named in the third class. A fourth class of creditors is also provided for, and to this class are relegated all creditors named in the deed who sue upon their claims at law or in equity, who are declared entitled to have applied to the satisfaction of their debts any surplus which shall remain after the debts in the preceding classes have been fully discharged. That portion of the deed containing the provisions which have controlled the court in the conclusion at which it has arrived is as follows: "It is understood that Reeves Catt, trustee, hereinbefore named, shall take immediate possession, management, and control of all the property, real and personal, hereinbefore described and conveyed, immediately upon the recordation of this conveyance, and conduct the institution known as the 'Wesleyan Female Institute, ' in said city, in accordance with the purposes and designs of the said act incorporating said institute, and the acts amendatory thereof, and as expressed in said act, in such manner as shall seem most conducive to the interest of said institute; and to that end the trustee is authorized to employ such tutors and such other agents as he may deem necessary, and to pay to them a reasonable compensation for their services out of the trust funds; and the said trustee shall keep a strict account of all the receipts and disbursements, and out of said receipts he shall first pay all the costs of executing this trust, includiing the fee and tax for the recordation of this deed, a reasonable charge for the preparation of the same and other legal services, a commission of five per cent. to said trustee, the salaries and wages of any tutors and agents employed by said trustee, the costs of insurance of the property herein conveyed, or any part thereof, and any other absolute and necessary 'running expenses' of said institute; and shall apply the remainder of the funds in the following manner, namely: First, to the payment in full of the creditors whose debts are secured in the first class in this deed, accepting the provision of this deed, and after the payment in full of such creditors secured in the first class, then to the payment in full of those creditors secured in the second class in this deed accepting the provisions of this deed, and after the payment in full of such creditors secured in the second class, then to the payment in full of those creditors secured in the third class in this deed accepting the provisions of this deed; it being understood that any creditor or creditors herein secured who sue upon their claims either at law or in equity shall constitute creditors secured in the fourth class in this deed, and after the payment in full of the creditors secured in the first, second, and third class herein, then, if any surplus shall remain, it shall be applied to the payment of the debts secured in this fourth class; it being further understood that, if the fund be not sufficient to pay all the debts secured in any one class in this deed, then the fund applicable to that class shall be paid pro rata by said trustee on such debts; it being further distinctly understood that such trustee shall have until the 1st day of July, 1896, to run said institute, and pay off the indebtedness herein secured in the order of their priority, and if at the expiration of said period he is unable to pay the same, then said trustee may sell, either publicly or privately, all the property herein conveyed as a whole or in part.and upon such terms and at such place or places as to said trustee may seem most judicious; and, in event of a sale, said trustee, after paying all the expenses of said sale, including legal commission to said trustee, shall apply the fund arising from the same in the order and with the priorities as hereinbefore fully set forth, and in accordance with the conditions and provisions of this deed. It is further understood that the trustee herein shall consult the board of trustees as to the appointment of any of the tutors."

A deed which contains provisions inconsistent with the avowed objects for which it is made, and sufficient to defeat them, is null and void upon its face. This proposition was recognized by this court in the case of Lang v. Lee, reported in 3 Rand. (Va.) 410. A provision in a deed postponing the sale for a reasonable time, and reserving the use of the property to the grantor in the meantime, does not, of itself, constitute fraud. "In such a case the interest reserved is subject to the grantor's debts, and is not withdrawn...