First Nat. Bank v. Basham, 6 Div. 400.

• Decision Date: 05 October 1939
• Docket Number: 6 Div. 400.
• Citation: 238 Ala. 500,191 So. 873
• Parties: FIRST NAT. BANK OF BIRMINGHAM v. BASHAM ET AL.
• Court: Alabama Supreme Court

191 So. 873

238 Ala. 500

FIRST NAT. BANK OF BIRMINGHAM v. BASHAM ET AL.

6 Div. 400.

Supreme Court of Alabama

October 5, 1939

Rehearing Denied Nov. 23, 1939.

Appeal from Circuit Court, Jefferson County; J. F. Thompson, Judge.

Suit in equity, for breach of trust by Ruth Evelyn Basham, a minor suing by her next friend, Alberta E. Basham, Alberta E Basham, Harlan Andrew Ellis, and Virginia Ellis Hill, against the First National Bank of Birmingham, individually and as trustee under the will of Virginia E. Jones, deceased. From a decree for complainants, respondent appeals.

Reversed and rendered.

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

Wm. B. White, Douglas Arant, and Bradley, Baldwin All & White, all of Birmingham, for Birmingham Trust & Savings Co., amicus curiae.

Steiner, Crum & Weil, of Montgomery, for Alabama Bankers Ass'n, amicus curiæ.

R. J. McClure, of Birmingham, for appellees.

Wm. S. Pritchard and Winston B. McCall, both of Birmingham, amici curiæ.

John W. Lapsley, of Montgomery, for Superintendent of Banks of Alabama, amicus curiæ.

BOULDIN Justice.

Bill in equity by beneficiaries of an investment trust against the trustee for alleged breach of trust in connection with certain loans of the trust funds.

The appeal is from a final decree for complainants surcharging these investments, and restoring the funds to the trust estate in the hands of the trustee of the continuing trust.

The controlling facts, substantially outlined, are these:

Virginia E. Jones, a resident of Birmingham, by her will bequeathed her residuary estate to the First National Bank of Birmingham, as trustee, for the use of her daughter, Alberta E. Basham, and her three children, Laura Virginia Ellis, Harlan Andrew Ellis and Ruth Evelyn Basham.

The trustee was vested with full power and authority to manage and control the trust estate, to invest and reinvest same as it may deem proper, and to make loans upon such security as it deems best, etc.

The net income from the trust estate was to be divided one half to the daughter, and the other half used for the maintenance and education of her three children. Distribution of income was to be made monthly, quarterly or semi-annually. The trustee was authorized to pay over the shares of income accruing to the grandchildren from time to time to their mother.

As each grandchild arrived at the age of twenty-one, his or her share of the trust estate was to be determined and paid over. The duration of the trust was fixed at the arrival of the youngest grandchild at twenty-one years of age, if then living. The youngest grandchild was seventeen years of age in 1938. The trust will probably continue to 1942.

This Bank was also made executor of the will. In August, 1925, on settlement by the executor, the trust estate, aggregating $25,650, was taken over by the trust department duly organized and functioning under the national banking laws. 12 U.S.C.A. § 248(k).

The trust estate then consisted of investments in first mortgages on real estate held by decedent at the time of her death with one or more taken by the bank as executor. All these were safe investments, collected in due course.

The course of business pursued by the trustee in administering the trust, challenged as self-dealing, and mismanagement otherwise, made the basis of the decree here for review, was substantially as follows:

Deeming first mortgages on real estate the best available investments, safety and income considered, the trust department sought desirable loans of this class. Applications by prospective borrowers were made to this department. Upon investigating the borrower and proposed security, if favorably impressed, the trust department had the property appraised, either by a trust officer or a disinterested appraiser. Titles were examined and approved by an attorney satisfactory to the trust department.

Available trust funds for investment come at irregular intervals and in varying sums. It was the policy of the trustee to perfect desirable loans in advance, available for trust investments as trust funds accumulated.

Accordingly, upon approval of a loan by the trust department the bank advanced its own money to the borrower; notes and mortgage were made to the bank, not to the bank as trustee; the notes initialed by the trust officer, earmarking them for trust investments, were retained in the bank. The mortgage, after recording, was retained in the trust department, as also the title documents, and insurance policies upon improvements as further security.

When sufficient funds accumulated in the trust fund account available for loans of the class, the trust department took over the notes, indorsed without recourse, and took an assignment of the mortgage in writing from the bank to itself, as trustee. This assignment was kept with other documents in the trust department, but not recorded in the Probate Office. The transaction was completed by charging the amount of the loan with accumulated interest against the trust account and crediting the bank with a like sum. The loans here in question were taken over at sundry dates, varying from one to six months, an average of some two and one-half months, after the loan was made.

The loans were taken over from joint trust funds, and allocated in specific amounts to several trusts having funds needing investments, the trust department issuing participation certificates, kept with other documents pertaining to the respective trusts.

Trust department books and records, multiple contemporary records, in the conduct of a trust business disclosed at all times the state of accounts and investments of each trust. Reports were made to beneficiaries bi-annually at first, and later annually, disclosing the status of the trust estate, and its investments.

In course of administering this Jones trust, investments were made in some twenty-five "participations" in real estate mortgages. By order of court the trustee was directed to pay over to the beneficiaries $150 per month, chargeable against the corpus of the estate, as far as necessary.

In meeting this allowance, settling with the eldest grandchild on arrival at age, and making an advance to the second grandchild upon his arrival at age, the trustee has paid to beneficiaries the sum of $23,072.23.

Six of these loans, made from 1925 to 1929, antedating the depression, aggregating $11,400, and later reduced by payments on the principle to $9,641.64, constitute the subject matter of this suit.

These investments are represented by participations in mortgage loans. The full amount of the several loans, representing the interests of all participants, run from $3,500 to $20,000.

Being in default, these several mortgages were foreclosed in 1932 to 1934, and purchased by the bank, as trustee, for sums less than the mortgage debts, respectively.

The expenses of foreclosure were charged proportionately to the participating trusts, and set up as additions to the several investments to be realized from the property, or from the debtors. These properties are still held by the trustee, controlled, serviced and rented, for the use of the beneficiaries.

Little net income has been realized to date of taking testimony. These loans, yielding an income of 6 1/2 per cent, were made on a basis of one-third to one-half the appraised value of the several properties; were approved by a competent, experienced personnel acting in entire good faith, with a view to safe investments, yielding much needed income.

We have deemed it just to all parties to thus present the full picture clearly presented by the record. Some details are yet to be noted.

The trial Judge rendered a carefully considered opinion. Full and studiously prepared briefs by counsel for the parties, and several briefs presented by amicus curiae on both sides, are on file. All, with the many authorities cited and discussed, have been carefully considered.

Self-dealing.

This was made one of the grounds upon which these loans were surcharged against the trustee.

Basically, self-dealing relates to transactions wherein a trustee, acting for himself and also as trustee, a relation which demands strict fidelity to others, seeks to consummate a deal wherein self-interest is opposed to duty. Typical cases are sales of individual properties to the trust estate, or purchases of trust property for his own benefit. Equity, in such cases, pauses not to inquire, whether the trust estate has sustained a loss. As a matter of public policy, and because of the temptation to wrong-doing, equity arms the cestui que trust with an election to affirm or disaffirm, unless countervailing equities have intervened.

This rule applies with full force to Trust Companies and Banks doing a trust business. Equity would not tolerate, for example, a transfer of a bank's own depreciated holdings to the estates administered in its trust department, passing its own probable losses to others toward whom it owes all the obligations of a trustee. Courts of equity would look with disfavor on any system of business, or setup of records, which would lend itself to such practice in time of crisis, and closely scrutinize transactions in which there is suspicion of such action, by subterfuge or otherwise. Michoud v. Girod, 4 How. 503, 504, 522, 11 L.Ed. 1076, 1098; St.

Paul Trust Co. v. Strong, 85 Minn. 1, 88 N.W. 256 .

The instant case is not of the class thus condemned.

The evidence, both oral and documentary, discloses clearly and without dispute that these investments were made in the first instance for the benefit of trust estates; made pursuant to applications to the trust department and approved as good investments by that...