Chester-Cambridge Bank & Trust Co. v. Rhodes
| Decision Date | 22 March 1943 |
| Docket Number | 23,24 |
| Citation | 31 A.2d 128,346 Pa. 427 |
| Parties | Chester-Cambridge Bank and Trust Company et al. v. Rhodes et al., Appellants |
| Court | Pennsylvania Supreme Court |
January 11, 1943, Argued
Appeals, Nos. 23 and 24, Jan. T., 1943, from judgment of C.P Delaware Co., Dec. T., 1939, No. 903, in equity, in case of Chester-Cambridge Bank and Trust Company, Substituted Trustee, etc. et al. v. Samuel N. Rhodes et al., Executors and the said Samuel N. Rhodes, individually. Decree reversed and bill dismissed in both appeals.
Bill in equity. Before McDONOUGH, P.J., specially presiding.
Decree nisi entered dismissing bill as to estate of decedent and entering a decree against the individual defendant. Exceptions to decree nisi sustained, before MacDADE, P.J and McDONOUGH, P.J., and KNIGHT, P.J., specially sitting, and decree entered sustaining exceptions to dismissal of bill against estate of decedent, and dismissing defendants' exceptions, and holding estate and individual defendant liable, opinion by MacDADE, P.J., concurring opinion by KNIGHT, P.J., and dissenting opinion by McDONOUGH, P.J. Defendants appealed.
The decree of the court below is reversed and the bill is dismissed at appellees' cost, in both appeals and as to both appellants.
William K. Rhodes, for appellants, No. 23.
C. William Kraft, Jr., for appellant, No. 24.
Frank A. Moorshead, and with them Mark E. Lefever, H. E. Potter and Conlen, LaBrum & Beechwood, for appellees.
Clelland L. Mitchell and Boyd Lee Spahr, filed a brief for interested party under Rule 61.
Before MAXEY, C.J.; DREW, LINN, STERN, PATTERSON, PARKER and STEARNE, JJ.
The question decisive of these appeals is whether officers of a corporate fiduciary are individually liable for a technical breach of trust committed by the corporation.
On October 9, 1929, Samuel N. Rhodes, a director of the Media-69th Street Trust Company, and two associates applied to that Company for a purchase money mortgage of $40,000. to be secured upon premises at the corner of Ashby and Copely Roads, in Upper Darby, Delaware County, which they had agreed to buy for $75,000. A committee of three, including Samuel N. Rhodes, appraised the property: the land at $80,000. and the buildings at $10,000. The appraisal was reasonable at that time. The loan was approved. Title was conveyed to a straw man, who gave a bond and mortgage to the Trust Company. The property was then conveyed to Frank B. Rhodes, President of the Trust Company and father of Samuel Rhodes, who held the title in dry trust apparently to further secure the mortgagee and to facilitate transfer. It was testified that he normally took title to such mortgaged property for the benefit of the Trust Company, and that in many instances, including the present one, the practice resulted in financial loss to him for taxes which he was obliged to pay as record owner.
At this time, Samuel Rhodes and his associates had an oral agreement with one Wilson to sell the premises to him at $110,000. for the erection of a large apartment building. Frank B. Rhodes had noted upon the loan application that there was to be no commission upon the mortgage "as it will be paid off or sold within a month".
The buildings on the mortgaged premises were razed in accordance with the oral agreement between Wilson and the real owners. The onset of the financial depression made it impossible for Wilson to perform the agreement, and the land remained unimproved, taxes and mortgage interest being paid by the real owners.
On October 8, 1931, the trust officer of the company, being informed by a clerk that a mortgage was needed in the trust mortgage pool operated by the company, transferred this mortgage to the pool. This was done without consulting either Frank Rhodes or his son, then a Vice-President, and they had no knowledge of the transaction. The transfer increased the security of the participation certificates in the face amount of $35,600. The mortgage was not then in default, and two experienced real estate operators testified that the fair market value of the premises was $60,000. at that time.
In 1933 one of Samuel Rhodes's associates died and by his direction life insurance proceeds of $10,000. were applied to the outstanding indebtedness on the mortgage loan, reducing it to $31,966.66. Shortly thereafter, Frank Rhodes reconveyed the premises to the straw owner and mortgagor. Since that time, principal and interest have been in default.
The trust company passed into the hands of the Secretary of Banking in 1933. The corporate plaintiff was appointed substituted trustee of the mortgage pool in 1934. From time to time, V. Gilpin Robinson, co-trustee with the closed trust company of the Estate of Edward C. Holmes, deceased, inquired of the Banking Department and substituted trustee of the mortgage pool, in which the estate held a participation certificate, concerning the status of this mortgage. He demanded of Frank and Samuel Rhodes details of the transaction and asserted an intention to hold them personally responsible for a breach of trust in connection therewith. In this he received no support from the Secretary of Banking or his representative. The special counsel employed by the Department testified that "it was one of the safest investments that the trust had so far as value was concerned", (R166a).
The mortgage was foreclosed by the substituted trustee in 1937, and the real estate is now held by it for the benefit of holders of participation certificates. Frank Rhodes died in 1939. The present bill was filed in 1940, against his executors and Samuel Rhodes individually to compel them to withdraw the bond and mortgage from the pool, to replace them with cash or equivalent securities, and to pay all arrearages or interest and taxes.
The chancellor found as a fact that Frank Rhodes did not profit in any way from the transaction, and that neither he nor his son participated in the transfer. Nevertheless, he concluded that a breach of trust had been committed and that Samuel Rhodes, as a recipient of the loan proceeds, was individually liable. Exceptions were filed by both parties. The court en banc entered a final decree dismissing defendants' exceptions but reinstating the bill as to the executors, who were ordered to join with Samuel Rhodes in paying $31,966.66 into the pool, with interest, taxes and costs of foreclosure. The defendants appealed.
For the purpose of this case we need not decide whether this transfer from the commercial department to the mortgage pool constituted a technical breach of trust by the corporate fiduciary: See Tracey et al., Co-Trustees v. Central Trust Co., 327 Pa. 77; Guthrie's Est., 320 Pa. 530; Greenawalt's Est., 343 Pa. 413. Nor shall we rule upon the applicability or constitutionality of the Act of June 24, 1939, P.L. 739, 7 PS Sec. 819-1111a, purporting to validate such transfers. No consideration will be given to the failure to reappraise the mortgaged premises at the time of transfer. Crane's Est., 344 Pa. 141. The mortgage was a legal investment for trust funds. We shall assume, however, but not decide, that the transfer itself constituted a technical breach of trust.
Are these two officers of the corporate trustee personally liable for the act of the corporation? The only facts established by plaintiffs show that one defendant, Samuel Rhodes, obtained a mortgage loan upon adequate security and with the approval of the proper officers of the corporation. There was nothing unlawful or improper in this initial transaction, and even if there were, these plaintiffs...
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