Murphy-Bolanz Land & Loan Co. v. McKibben

• Decision Date: 11 January 1922
• Docket Number: (No. 278-3514.)<SMALL><SUP>*</SUP></SMALL&gt
• Citation: 236 S.W. 78
• Court: Texas Supreme Court
• Parties: MURPHY-BOLANZ LAND & LOAN CO. et al. v. McKIBBEN.

236 S.W. 78

MURPHY-BOLANZ LAND & LOAN CO. et al. v. McKIBBEN.

(No. 278-3514.)^*

Commission of Appeals of Texas, Section A.

January 11, 1922.

Error to Court of Civil Appeals of Seventh Supreme Judicial District.

Suit by Mrs. Eugenia Lomax McKibben against the Murphy-Bolanz Land & Loan Company and another. Judgment for plaintiff, and the defendants appealed to the Court of Civil Appeals, which confirmed the judgment (221 S. W. 650), and the defendants bring error. Judgments of the district court and of the Court of Civil Appeals affirmed.

Read, Lowrance & Bates, of Dallas, for plaintiffs in error.

Albert Walker and O. F. Wencker, both of Dallas, for defendant in error.

SPENCER, P. J.

This suit was instituted by Mrs. Eugenia McKibben, defendant in error, to recover of the Murphy-Bolanz Land & Loan Company, a corporation, and J. A. Power, plaintiffs in error, for the alleged improper investment and consequent loss of the sum of $2,400, alleged trust fund placed in the latter's hands.

Defendant in error alleged in substance that in December, 1910, in virtue of an agreement had with plaintiffs in error, she deposited between $5,000 and $6,000 with them to be administered as a trust fund by them; that they were to invest the money in property under a guaranty that it would make her considerable money, and with the assurance that none of it would be lost; that they invested the money from time to time, and on or about June 13, 1913, with the intention of defrauding her, they purchased and had conveyed to her a lot or tract of land located on Commerce street in the city of Dallas, which is more fully described in the pleadings, the consideration for which was $12,500, $2,400 of which was paid out of the trust fund and the balance evidenced by note secured by deed of trust upon the land.

The fraud charged by her was: That knowing she had no other money or property with which to meet the deferred payments, they represented to her that if she would permit them to invest the $2,400, they would assure her that she would lose no money by the investment, and that they would resell it before any of the deferred payments became due for more than she had given for it; that relying upon these representations and statements she did not withhold her consent to make the investment; that in violation of their trust agreement and without her knowledge or consent they represented the grantors, the parties adversely interested in the transaction, and received a commission of $250 from them for their services; and that in further violation of their agreement they failed and refused to resell the lot, but by and through their agent, Dunlap, foreclosed the deed of trust against it causing her to lose the amount invested together with legal interest thereon, as well as $800 interest paid by her on the original notes, the payment of which was secured by the property conveyed. She prayed for judgment for the three sums mentioned, with interest.

Plaintiffs in error, in addition to the general demurrer and general denial, specially denied that defendant in error deposited with them or either of them the money claimed by her to have been deposited, that there was ever any trust agreement, but alleged that the property was purchased by defendant in error in the exercise of her own judgment, uninfluenced by them, after a full investigation by her and after having been informed that they were representing the owners of the lot in the transaction; that they agreed that if she purchased the property they would resell it for her, or make her money on the investment. They further alleged that after the purchase they secured a buyer, ready, able and willing to purchase the property at a profit to her, but that she refused to sell and thereby reaffirmed and ratified the purchase.

The jury, in response to special issues, found, among other things: That defendant in error deposited $5,000 or $6,000 with the plaintiffs in error under an agreement that the latter would invest it, so that it would make her a great deal of money; (2) that she authorized plaintiffs in error to make investments without her consent; (3) that plaintiffs in error were the agents of defendant in error in the purchase of the property from Youngblood, and also trustees for her in that transaction; (4) that she did not know at the time of the transaction that they were representing Rose and Day, grantors, and would receive a commission from them for their services; and (5) that the reasonable market value of the property at the date of purchase for defendant in error was $11,500.

Upon these findings judgment was rendered in favor of defendant in error for the sum of $2,400 with interest, and upon appeal the judgment was affirmed. 221 S. W. 650.

It is insisted by plaintiffs in error that: (1) This is a suit for damages based upon fraud, misconduct, or disloyalty of agents, and that the proper measure of damages would be the difference, if any, between the contract price of the lot and the market value thereon at the time of the transaction, and not the total amount lost by the investment; (2) before she was entitled to recover the amount lost by the investment, it was her duty to rescind or offer to rescind the contract and to return to plaintiffs in error the profit of $750 made upon an investment of the trust fund in Elm street property in 1910; and (3) in claiming the benefit of the acts of her trustees by suing them for the $250 commission which they received from the grantors, she thereby ratified their act of purchase and cannot, therefore, recover for the loss of the investment.

The fallacy of the first proposition consists in the assumption that this is a suit for damages based upon the fraud of an agent inducing a purchase by his principal. They misconceive the cause of action asserted by the defendant in error. The allegations of the petition are more far-reaching in their scope than a suit for the agent's fraud in inducing a sale to his principal. It is a suit for the improper investment by the trustees of a fund confided to them under an agreement to invest it without loss to the beneficiary, and in which it is averred that the fund so invested was lost because of the bad faith of the trustees. It is true that there are allegations by defendant in error to the effect that she was induced by the fraud or deceit of plaintiffs in error to consent to invest the fund in the property purchased, and that they were disloyal to their trust in representing the seller, whose interests were antagonistic to hers; but these allegations pertain only to one phase of the case—that of authorization or consent by defendant in error to the investment.

There must be no speculation upon the part of the trustee in dealing with the trust fund. The law does not give to him the same freedom of choice in making investments which may be and often is exercised by prudent business men in the conduct of their own affairs. Pomeroy's Eq. Juris. (4th Ed.) par. 1074, p. 2459.

In the application of these principles it has been generally held that it is a breach of trust for the trustee to invest the fund in incumbered property, which subjects it to probable loss, and if he does so invest it, he becomes liable for any loss that may be sustained because of the improper investment. Pomeroy's Eq. Juris. (4th Ed.) par. 1074, p. 2463.

In dealing with the trust fund, the trustee's own personal interests and opportunities for gain must be cast completely aside. Absolute and scrupulous good faith is the very essence of his obligation. In administering the fund, he must act for the beneficiaries and not for himself in antagonism to their interests. 39 Cyc. 296. It is, of course, a breach of trust for the trustee in making an investment of the trust fund in real estate to represent the adverse parties to the transaction and to receive a commission therefor, without the knowledge and consent of the beneficiary. Magruder v. Drury, 235 U. S. 106, 35 Sup. Ct. 77, 59 L. Ed. 151.

The investment of trust funds in property incumbered as this was would be inexcusable unless the defendant in error in the exercise of her independent judgment, uninfluenced by the representations of plaintiffs in error, authorized it, or, with full knowledge of all the facts and apprised of her legal rights, ratified or acquiesced in the unauthorized investment.

The money invested represented only one fifth of the contract or purchase price. Plaintiffs in error knew that defendant in error did not have, and in all probability would not have, sufficient funds to take care of the deferred payments, and that a failure to meet these payments when due would subject the lien retained to secure them to foreclosure. The purchase was, under such circumstances, the highest form of speculation and extremely hazardous. The only contingency that would likely arise to save the fund from certain destruction, or diminution by foreclosure, would be a...