Clay v. Thomas

• Court: Kentucky Court of Appeals
• Writing for the Court: THOMAS, J.
• Citation: Clay v. Thomas, 178 Ky. 199, 198 S.W. 762 (Ky. Ct. App. 1917)
• Decision Date: 04 December 1917
• Parties: CLAY ET AL. v. THOMAS ET AL.

198 S.W. 762

178 Ky. 199

CLAY ET AL. v. THOMAS ET AL.

Court of Appeals of Kentucky.

December 4, 1917

Appeal from Circuit Court, Clark County.

Action by James Thomas Clay and others against Robert L. Thomas and others. From a judgment dismissing the petition, plaintiffs and certain of the defendants appeal. Reversed, with directions.

Robert B. Franklin, of Lexington, Robert C. Talbott and Denis Dundon, both of Paris, and C. C. Williams, of Mt. Vernon, for appellants.

B. R Jouett and Pendleton & Bush, all of Winchester, and E. S Jouett, of Louisville, for appellees.

THOMAS J.

The question involved on this appeal is the effect of a sale of trust property by a trustee under a will with the power of sale to himself individually. It arises in this way: James M Thomas died testate, a resident of Clark county, Ky. on June 15, 1905, and in the 24th day of the same month his will was probated before the county court of that county. The testator left surviving him two daughters, Mrs. Thomas E. Moore and Mrs. Mary T. Ireland, and two sons, William R. Thomas and Robert L. Thomas, and Richard P. Thomas, an infant, the only surviving child of a deceased son of the testator. Many specific devises and directions are made in the will, which have nothing to do with the questions involved in this case. By the will he appointed his two sons, William R. and Robert L. Thomas, and his son-in-law, Thomas E. Moore, executors thereof, and made the three trustees for his two daughters and his grandson. He owned at the time of his death a sawmill and mill site and appurtenances, located at Livingston, Rockcastle county, Ky. and also a tract of well-timbered land in Jackson county containing more than 20,000 acres. The twelfth clause of the will is:

"All of my property in Jackson and Rock Castle counties, Ky. I give to my sons, Wm. R., Thomas and Robt. L. Thomas, and my daughters, Mrs. Mary T. Ireland and Mrs. Tom Thomas Moore, equally, that is, a one-fourth to each, the same to be held, managed and disposed of by the three trustees named in paragraph 11 of this will, for the use and benefit of my said four children, and subject to all the same conditions, limitations and trusts as appear in said eleventh paragraph with reference to the interests therein given to said four children, with this exception, that same shall not be sold until after the expiration of at least three years after my death, the said trustees to have the right in their discretion to postpone said sale until as much as ten years after my death."

As will be seen, the only devisees of the property mentioned in the clause of the will are the two sons, who were given a one-fourth each, and the two daughters, who were given a life interest in a one-fourth each, with remainder to their children, and that the trustees are vested with the power to sell the property therein devised, but this power may not be exercised until after three years succeeding the testator's death, but it must not be postponed longer than ten years after his death. The thirteenth clause of the will authorizes any two of the trustees to execute the trust, should there be a disagreement between the three appointed. By subsection 3 of section 11 of the will the testator nominated the Security Trust & Safety Vault Company of Lexington, Ky. trustee for his two daughters, with authority to take charge of the property devised to them, including the proceeds of the sales of the property mentioned in the twelfth clause, after the trustees under the will should have sold it as therein directed. The Trust Company was authorized to pay to the two daughters the income from their respective portions during their respective lives, and at their deaths to turn over the property to their children, with certain limitations not necessary to the decision of this case.

At the time of the testator's death Mrs. Ireland was the mother of two infant children, appellants James T. and Laura Clay, they being children by a former husband, and Mrs. Moore was the mother of the cross-appellants, William Estill Moore, Rogers Moore, and Marion Moore, who were infants. Directly after the death of the testator, Mrs. Moore died. After her death, and something near three years and five months after the death of the testator, negotiations began between Mrs. Ireland and Thomas E. Moore, one of the executors and trustees under the will as guardian for his infant children, on the one part, and the other two trustees under the will, on the other part, looking to a sale of the two undivided one-fourth interests of the Jackson and Rockcastle county properties devised to the two daughters and their children under the terms of the twelfth clause of the will, and this finally terminated in an agreement whereby the two Thomas boys, William R. and Robert L., as trustees, agreed to pay for the interest of their two sisters $47,500 each, which was at the rate of $190,000 for the entire property. This was followed by a deed, executed by the trustees as such, to William R. and Robert L. Thomas individually, conveying the one-fourth interest each in that property devised to the two daughters and their children. This deed was made in January, 1909, although negotiations had been entered into and an agreement reached some months before that time. Within less than three years after that purchase by the two sons of the testator, they sold the property for the price of $20.66 2/3 per acre for the Jackson county land, and also sold the Rockcastle county property, consisting of the mill, mill site, etc., all for a total sum of about $490,000, which, as will be seen, was an increase of $300,000 above what they had paid for it.

This suit was filed by Mrs. Ireland and her two children against her brother R. L. Thomas, and the representatives of W. R. Thomas, who had died, and their cotrustee, Thomas E. Moore, and against the latter as guardian for his children, and the children and the Trust Company as trustee, seeking to charge the two brothers with the plaintiff's proportion of the profits which defendants realized out of their purchase and sale of the trust property, upon the grounds that, as trustees, they had no right to sell to themselves individually the trust property, and, further, that so far as Mrs. Ireland was concerned (she being the only adult interested in any of the property devised to the two sisters and their children) she was induced to agree to the terms of sale through fraudulent misrepresentations made to her by her brothers concerning the value of the property, and about which she was totally ignorant. The answer denied the allegations of the petition, alleging fraud and misrepresentation, and charged that the purchase of the two interests of their sisters was made in good faith and for an adequate consideration, and as against Mrs. Ireland pleaded facts alleged to constitute an estoppel as to her. In another paragraph defendants attempted to rely upon a judgment obtained in the Clark circuit court in an ex parte proceeding filed for that purpose wherein the court by its judgment attempted to approve of the sale by the trustees to themselves individually which had been previously agreed to. A reply, consisting of a denial and an attack of the alleged judgment of approval of the sale made the issues, and after extensive preparation and submission, the court dismissed the petition, and to reverse that judgment Mrs. Ireland and her children prosecute this appeal, and an appeal is also prosecuted on behalf of the Moore children.

It will thus be seen that the precise question for determination is not the right of a trustee to purchase the trust property from the cestui que trust, but it is the right of the trustee to purchase the trust property from himself as such trustee. Generally speaking, unless modified by some peculiar facts, a trustee cannot purchase from himself the trust property free from the right of the cestui que trust to either treat his purchase as a continuation of the trust or to adopt the subsequent disposition of the property by the trustee and to ask for an accounting of the profits realized by the trustee. This general rule is of ancient origin, and is recognized by all courts with perhaps as much unanimity as any other principle of law. Sugden on Vendors (8th Amer. Ed.) vol. 2, pages 410-423; Story's Equity Jurisprudence (13th Ed.) vol. 1, §§ 321 and 322; 39 Cyc. page 366; Lambert v. Bainton, 1 Cha. Ca. 199 (Eng.); Perry on Trusts (6th Ed.) § 195; Lewin on Trusts, pages 395-398; Bispham's Equity,§ 94; Scholle v. Scholle, 101 N.Y. 167, 4 N.E. 334; Davoue v. Fanning, 2 Johns. Ch. (N. Y.) 252; Campbell v. Walker, 5 Vesey, Jr., 678; Ex parte James, 8 Vesey, 337; Whichcote v. Lawrence, 3 Vesey, Jr., 740; Frazier v. Jeakins, 64 Kan. 615, 68 P. 24, 57 L. R. A. 575; Scott v. Gamble, 9 N. J. Eq. 218; De Caters v. Le Ray De Chaumont, 3 Paige (N. Y.) 178; Andrews v. Hobson, 23 Ala. 219; Amer. & Eng. Ency. of Law, pages 1020-1023; Hindman v. O'Connor, 54 Ark. 627, 16 S.W. 1052, 13 L. R. A. 490; and innumerable other textbooks and adjudicated cases which might be cited. Illustrative of this universal rule, it is stated in Sugden on Vendors, page 408:

"If persons having a confidential character were permitted to avail themselves of any knowledge acquired in that capacity, they might be induced to conceal their information and not to exercise it for the benefit of the persons relying on their integrity. The characters are inconsistent. Where the trustee buying is the trustee for sale, the purchase is absolutely void; where he is a mere trustee, he must show that the transaction was in all respects a fair one."

In the volume of Cyc. referred to the rule as gathered from all the authorities, many of which are cited in the note, is...