Dunning v. Bates

• Decision Date: 21 June 1904
• Citation: 71 N.E. 309,186 Mass. 123
• Parties: DUNNING v. BATES et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

186 Mass. 123

71 N.E. 309

DUNNING v. BATES et al.

Supreme Judicial Court of Massachusetts, Suffolk.

June 21, 1904

COUNSEL

Alonzo R. Weed, for appellant.

Walter Bates Farr, for appellees.

OPINION

KNOWLTON, C.J.

The plaintiff was the holder of certain bonds, a part of an issue amounting to $1,000,000 at their face value, which were secured by mortgages of land in Missouri, and were known as the bonds of the North Side Land & Mortgage Company. Default having been made in the payment of the principal and interest due on these bonds, the defendants were appointed trustees to obtain a foreclosure of the mortgages, and to organize a new corporation to buy the lands and hold them for the benefit of the original bondholders, who were to become the stockholders of the new corporation. The defendants have executed the trust in most particulars, but the plaintiff alleges that they have failed to account for a part of the proceeds of the property that came into their hands and that they have been guilty of negligence or other misfeasance in the performance of their duties, whereby he and the other bondholders whom they represented have failed to receive all that they were entitled to. He brings this bill for himself and such other of the original bondholders as shall become parties thereto, and prays for an account and that the balance found due shall be paid to the plaintiff and the others in whose behalf this suit is brought. The defendants demurred, and stated, as grounds of the demurrer, want of equity, laches, the want of proper parties, and that the plaintiff had accepted the securities of the new corporation in full satisfaction of his bonds of the North Side Land & Mortgage Company. The demurrer was sustained, and the case is here upon the plaintiff's appeal from the decree sustaining the demurrer and dismissing the bill.

The defense of laches, and that the plaintiff has accepted the securities of the new corporation in full satisfaction of his claims, is met by the averments of the bill that, 'until on or about the 11th day of June, 1902, the plaintiff was wholly ignorant of the matters herein complained of, and had no knowledge thereof, and no reason to be upon any inquiry thereof, but believed that the plaintiffs had faithfully administered their said trusts, * * * and that, immediately upon the discovery of the matters herein complained of, the plaintiff made a written demand upon the defendants for an account,' etc.

The most important questions raised by the demurrer are whether the North Kansas City Land & Improvement Association, the new corporation, is a necessary party to the bill, and whether the right sought to be enforced is the right of that corporation, and not of the plaintiff and his associates. This last question is not necessarily whether there is a right founded on the alleged neglect or misfeasance which may be enforced by the new corporation, but whether there is such a right which belongs to the plaintiff and his associates and which may be enforced by them. On this part of the case we are of the opinion that the plaintiff's contention is correct. The defendants were trustees by appointment of the original bondholders; the plaintiff and his associates are the cestuis que trust to whom they are accountable. They on one side and the defendants on the other were the only parties to the contract or arrangement on which the rights of the parties depend. The organization of a new corporation was to be a part of the machinery which they devised by which to serve the interests of the bondholders. This corporation to be created was not a party to the trust, and cannot be made a party to the trust, for it was not in existence when the trust was created. Abbot v. Hapgood, 150 Mass. 248, 252, 22 N.E. 907, 5 L. R. A. 586, 15 Am. St. Rep. 193, and cases there cited. Neglect or misfeasance of the trustees is a breach of duty toward the cestuis que trust, for which they are entitled to a remedy directly against the trustees, under the agreement to which they and the trustees were the only parties. A failure to turn over to the new corporation all that ought to be turned over is not a breach of contract with the new corporation. It is a breach of contract with the bondholders, and an abuse of their trust and confidence. We have no doubt that the bondholders may proceed directly against the trustees to obtain a remedy for a failure to account in a case of this kind. This seems to have been assumed without question in other somewhat similar cases. King v. Barnes, 109 N.Y. 267, 16 N.E. 332; White v. Wood, 129 N.Y. 527, 29 N.E. 835; Coppell v. Hollins, 91 Hun, 570, 36 N.Y.S. 500; Matthews v. Murchison (C. C.) 15 F. 691; First Nat. Bank v. Radford Trust Co., 80 F. 569, 26 C. C. A. 1; Venner v. Fitzgerald (C. C.) 91 F. 335. The question whether the new corporation should be a party to this suit depends upon whether the corporation, as an independent entity, has any standing in reference to this trust, except as the creature of it, representing no one but the bondholders. It seems that it is but an instrument created solely for their use and benefit. No one but them has any interest or ownership in it. Such as...