Liberty Title & Trust Co. v. Plews
| Decision Date | 04 December 1950 |
| Docket Number | No. A--15,A--15 |
| Citation | 6 N.J. 28,77 A.2d 219 |
| Parties | LIBERTY TITLE & TRUST CO. v. PLEWS et al. |
| Court | New Jersey Supreme Court |
Allen B. Endicott, Jr., Atlantic City, argued the cause for the appellant (Starr, Summerill & Davis, Camden, attorneys).
William Elmer Brown, Jr., Atlantic City, argued the cause for the respondents, Louise Plews and others (Charles C. Babcock, Atlantic City, attorney for respondents, Lillian Welzel and others).
Augustine A. Repetto, Atlantic City, argued the cause for the respondents, Joseph W. Wells and others (Bolte & Repetto, Atlantic City, attorneys).
The opinion of the court was delivered by
This appeal comes before us on certification granted the plaintiff to review a decision of the Appellate Division of the Superior Court, 6 N.J.Super. 196, 70 A.2d 784, modifying a judgment of the Chancery Division, 142 N.J.Eq. 493, 60 A.2d 630; 142 N.J.Eq. 632, 61 A.2d 297 of that court.
The decedent, Gustavus C. Seidel, died in 1922. By his will he created a trust in the sum of $250,000, the income to be paid to his widow for life and upon her death the sum of $150,000 to be paid to her appointees, the remaining $100,000 to become a part of his residuary estate. The plaintiff, a trust company, which conducted a general banking business in Philadelphia and maintained a trust department represented to be equipped to handle trust estates, was designated as trustee under the will and in 1923 took over the administration of the trust.
In 1932 the trustee filed its first intermediate account in the Orphans' Court of Atlantic County. The account as filed showed an increase in the corpus of the trust from $247,031.34 ($250,000 less transfer inheritance taxes of $2,968.61) to $432,373.81, a principal gain of $185,342.47. This remarkable increase was directly attributable to profits from the sale of certain stock purchased by the decedent in his lifetime and stock rights accruing therefrom. Exceptions to this account were filed by Lillian W. Seidel, the life tenant, who contended that she was entitled to these profits, which had been added to corpus, and by Louise Plews, a remainderman, who resisted this contention of the life tenant, asserting, among other things, that the securities held by the trust did not have the values stated by the trustee; that the properties mortgaged were not worth the face of the mortgages held by the trust; that the trustee either was or soon would be the owner of the mortgaged property; and that at fair market prices the corpus of the trust did not exceed $216,000. That the purpose of these exceptions by the remainderman was to resist the claim of the life tenant and not to surcharge the trustee was made clear in colloquy between counsel at the hearing on the exceptions. It is significant, moreover, that the inquiry of the remainderman into the value of the property covered by the mortgages was objected to by counsel for the trustee 'on the ground that no loss has been established by the estate; there is no evidence that the interest on the obligation is in default; it is not a proper subject of testimony to be received at this time,' and the objection was sustained by the court. On December 24, 1932, the Orphans' Court entered its decree sustaining in part the life tenant's claim, but dismissing all exceptions filed by Louise Plews as remainderman. In that proceeding no suspicion of any impropriety on the part of the trustee was aroused either by its disclosures or the exceptant's limited inquiry.
On May 15, 1944, the life tenant died and on February 6, 1945, the trustee filed its final account in the Orphans' Court and Louise Plews and other beneficiaries filed exceptions thereto. These exceptions charged that the trustee had been guilty of self-dealing, self-interest and private profit-taking, and that it had made illegal investments and improperly managed the trust property. At the hearing on the exceptions in the Orphans' Court the preliminary question arose as to whether the exceptants would be allowed to introduce evidence of alleged wrongdoings prior to the 1932 decree. The exceptants contended that the earlier decree should be opened to permit such evidence, whereas the trustee contended that the doctrines of Res judicata, estoppel and acquiescence should be invoked to preclude it. After taking testimony the court expressed the opinion that the circumstances did not warrant the application of the doctrines advanced by the trustee and ruled that evidence of occurrences prior to the 1932 decree would be admitted.
The exceptants thereupon proceeded to give evidence to prove the trustee guilty of numerous acts of self-dealing, self-interest and private profit-taking antedating the 1932 account, of which the trustee had made no disclosure and of which the exceptants had no knowledge until the time of this proceeding. The following transactions are illustrative:
(1) In each instance in which mortgages were made to the accountant as trustee, one of the conditions of the advancement of the money for a loan or for the purchase of a mortgage was that the borrower obtain a title policy from the trustee in its individual capacity. While this policy was paid for by the mortgagor and not out of the funds of the trust estate, it was not without profit to the trustee. The plaintiff in fact maintained no title plant of its own, nor did it make any examination or search of the records preparatory to the issuance of title insurance. Instead, what it did was to secure reinsurance from the Commonwealth Title Company, predicated on which it issued its own title policy. For this reinsurance it paid Commonwealth Title Company up to fifty per cent. of the premium charged the mortgagor for title insurance and up to seventy-five per cent. of the charge for a search, keeping the balance for itself. The value of such policies is open to serious question, for in the event of a loss the trustee might be called upon to sue itself in its individual capacity. Not only did this course of action pursued by the trustee result in its making a profit out of the management of the trust estate, unknown to the court or the beneficiaries and in addition to that which it might be allowed by way of commissions, but also it placed the trustee in a position where its loyalty was divided, its interest as insurer being hostile to its interest as mortgagee-trustee.
(2) On more than one occasion mortgages which the trustee held in its individual capacity were sold to the trust estate without any appraisal being made either of the security or of the financial responsibility of the borrower at the time of the transfer.
(3) Several of the mortgages which the trustee transferred from its individually owned 'mortgage pool' to the trust estate exceeded the maximum percentage of appraised value of the property as set by statute as well as the maximum which the trustee had fixed as the limit for its own individual holdings and which were doubtless known to the decedent as a director of the plaintiff for many years.
(4) In some instances mortgages transferred by the trustee from itself individually to itself as trustee were not accomplished by formal deed of assignment, subsequently recorded so as to show irrefutable and uncontrovertible title in the trust estate, but by merely noting the transfer on a card in its own files. Although this procedure might have suited the accountant's countant's convenience, its dangers are readily apparent when it is borne in mind that the trustee individually was in the business of investing in mortgages for its own profit. Where a corporate fiduciary owns a 'mortgage pool' from which it sells to itself as trustee, keeping the balance for itself individually, it inevitably and justifiably invites suspicion, especially where there are no assignments made and recorded.
(5) One group of mortgages totalling $89,500 arose out of a transaction directly beneficial to the trustee individually. Wesley Caskey, the owner of a washing machine company, had borrowed $30,000 from the trustee individually, the loan being secured by bailment leases on washing machines supposedly sold to customers. It developed that many of these leases were worthless, having been forged by an employee of the washing machine company. In order to assure the repayment of this loan together with loans to the other banks, Caskey transferred a number of properties, encumbered by an $85,000 mortgage, to Charles Krumrine, an officer of the trustee. Krumrine then negotiated to the trustee in its individual capacity his personal bond for $85,000, the money being used to pay off the outstanding mortgages on the properties. Thereupon the properties were sold to John Ross, whose purchase was made possible by a mortgage loan of $89,000 from the assets of the trust estate. As a result of the sale, the obligation of Krumrine to the trustee individually was paid off and the indebtedness of the washing machine company to it was liquidated. It is pertinent to observe that this loan of the funds of the trust estate was approved on the same day as application therefor was made, prior to any appraisal of the properties, without any inquiry as to Ross' financal responsibility and despite the fact that the purchaser had no personal funds invested in the property, the entire price being raised by mortgage loan. This transaction, moreover, resulted in a profit of $653.75 to the trustee individually from the issuance of title insurance and $208.84 from unearned interest charges. Only four years later the properties were all described in an appraisal made for the plaintiff as being in 'poor condition' or 'very poor condition' and their appraised value had depreciated from $130,000 to $73,900.
(6) One mortgage in the principal sum of $9,000, originally taken by the trustee in its individual capacity, was sold on June 8, 1925, to the trust estate without any appraisal of the...
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