Wells-Stone Mercantile Co. v. Aultman, Miller & Co.

• Decision Date: 09 November 1900
• Docket Number: 6731
• Citation: 84 N.W. 375,9 N.D. 520
• Court: North Dakota Supreme Court

84 N.W. 375

9 N.D. 520

WELLS-STONE MERCANTILE COMPANY v. AULTMAN, MILLER & COMPANY

No. 6731

Supreme Court of North Dakota

November 9, 1900

Appeal from District Court, Cass County; Pollock, J.

Action by the Wells-Stone Mercantile Company against Aultman, Miller & Co. and others. Judgment for plaintiffs. Defendant appeals.

Affirmed.

Newton & Smith, Morrill & Engerud, Mills, Resser & Mills, for appellants.

This action arises out of the same subject-matter as the case of the same plaintiff against G. A. Grover, et al, 7 N.D. 460. On the 19th day of December, 1894, Grover executed a deed of trust to one Jones; Jones accepted the trust and qualified and took possession of Grover's property. It is provided in this deed that Jones shall have power to continue the general merchandise business, sell the stock of merchandise at private sale in the usual course of trade, replenish the stock with articles of staple goods to the extent necessary to successfully continue the business. A dividend of 45 per cent. was paid to the creditors, and the report of the trustee at the time the last payment was made disclosed that he then held in his hands a net surplus of over $ 10,000. Subsequently the assignee, Jones, distributed the money in his hands and closed the estate without paying the debt of plaintiff for goods sold and delivered to Jones, as trustee to replenish the stock of merchandise while he was continuing the business. Plaintiff asked that it be subrogated to the rights of Jones, as trustee, that the defendants account for the respective sums received from Jones, as trustee, and that each of the defendants pay over to plaintiff such pro rata share of the sums received as should be necessary to pay the plaintiff's claim. It is well settled that the creditor cannot claim any lien on, or equitable right in, the trust estate, but must look entirely to the trustee and his individual property for his pay. Wells-Stone Mercantile Co. v. Grover, 7 N.D. 463. In case the trustee pays the indebtedness he may claim reimbursement from the funds in his hands. From such right arises an equity in favor of the creditor, under peculiar circumstances, to proceed directly against the trust property. Hewitt v. Phelps, 105 U.S. 393, 26 L.Ed. 1074. The peculiar circumstances referred to are where expenditures have been made for the benefit of the trust estate and it has not paid for them directly or indirectly, and the estate is either indebted to the trustee or would have been if the trustee had paid, and the trustee is insolvent or not resident so that the creditor cannot recover his demand from him, or will be compelled to follow him to a foreign jurisdiction. In such case the trust estate may be reached directly by a proceeding in chancery. In such instances the creditor is subrogated to the right of the trustee against the estate. Hewitt v. Phelps, 105 U.S. 393; Wells-Stone Mercantile Co. v. Grover, 7 N.D. 463 and cases cited in opinion. The parties may agree that the trustee shall not be held personally liable on the contract, that only the trust estate shall be chargeable with the debt. New v. Nicol, 73 N.Y. 127; Gill v Carmine, 55 Md. 339-343. If the trustee distributes the estate, leaving unpaid any of the debts incurred by him in executing the trust, a court of chancery will subrogate the creditor to his equity, and allow the creditor to follow in the hands of those who had received the property, the portion of the assets paid them by the trustee. 7 N.D. 464; Clopton v. Gholson, 53 Miss. 466; Ferne v Mayers, 53 Miss. 458; Guerry v. Caper, 1 Bailey's Eq. (S. C.) 159; Dowse v. Gorton, 40 Ch. Div. 536; Shearman v. Robinson, 15 Ch. Div. 548; Packard v. Kingman, 67 N.W. 551.

Newman, Spalding & Stambaugh, for respondents.

Jones, as trustee, was authorized, under the deed, to contract the debt in controversy. He contracted with respondent upon the credit of the trust estate and not upon his own personal responsibility, and the credit was extended to the trust estate and not to Jones. Jones was authorized to bind the trust estate by his contract and the trust estate is bound for the payment of respondents' claim. Rice v. Lane, 44 N.E. 133.

OPINION

BARTHOLOMEW, C. J.

This is an action brought to compel the beneficiaries under a trust deed to return certain money received by them from the trust estate, to the end that the same may be applied in payment of certain liabilities incurred in the execution of the trust. On a trial to the court the plaintiff succeeded, and the defendants appeal, and ask a retrial of the entire case. This controversy, in a somewhat different form, was before us in Mercantile Co. v. Grover, 7 N.D. 460, 75 N.W. 911. The plaintiff sold goods to the trustee named in a trust deed, and has not received pay therefor. In the former action he sought to recover against these defendants and others, who are beneficiaries under the deed, upon the ground that they were in fact partners in conducting the trust business, and the trustee was their agent in purchasing the goods. This position was held by this court to be unsound but in answering the contention of counsel that, if the plaintiff failed in that case, it was without remedy, we said that the trustee became personally liable on every contract made by him in the discharge of his trust. We also said: "It is true that the trustee may claim reimbursement from the funds in his hands for any proper expenditure made by him in the execution of the trust, and this equity is the foundation of the right of the creditor, under peculiar circumstances, to proceed directly against the trust property itself. See Hewitt v. Phelps, 105 U.S. 393, 26 L.Ed. 1072; Clopton v. Gholson, 53 Miss. 466; Norton v. Phelps, 54 Miss. 467 at 471; In re Johnson, 15 Ch. Div. 548; Dowse v. Gorton, 40 Ch. Div. 536; Mason v. Pomeroy, 151 Mass. 164, 167, 24 N.E. 202, 7 L. R. A. 771." And again we said: "Of course, the parties may agree that the trustee shall not be held personally on the contract, but that only the trust estate itself shall be chargeable with the debt. In such a case, if the instrument creating the trust authorizes this to be done, or even when it does not give such authority, if the circumstances are peculiar, the trustee is not bound, but the fund is. New v. Nicoll, 73 N.Y. 127; Gill v. Carmine, 55 Md. 339, 342, 343." And still further, in speaking of the trustee, we said: "And if he should distribute the estate, leaving unpaid any of the debts incurred by him in the execution of the trust, we have no doubt that a court of chancery would subrogate the creditors to his equity, and allow them to follow, in the hands of those who had received the property, the portion of the assets which had been paid to them by the trustee. And even while the trust property is still in the hands of the trustee, those who had dealt with the trustee as such might, under special circumstances, obtain a decree impressing upon such property an equitable lien in their behalf. See cases first above cited." Plaintiff in this action seeks to bring itself within some or all of these conditions. We restate a portion of the facts: One Grover, a general merchant doing business at Horace, in Cass county, became financially embarrassed. His property was incumbered by liens. He entered into an arrangement with creditors for an extension of time. In pursuance of such arrangement, he made a trust deed of all of his property to one Jones. The deed was executed by Grover as trustor, and Jones as trustee, and the creditors as beneficiaries under the trust. The trust deed contains the following language: "Said party of the second part shall take possession of said property and business of the said party of the first part, and shall sell, dispose of, and convert said property, and the good will of said business, into money, by and through said party of the first part, or such other person or persons as said party of the second part shall designate and appoint for that purpose, and in such manner and at such time or times as, in the judgment of the said party of the second part, will produce the most money; and that the net proceeds thereof, after payment of all costs and expenses of executing the trusts hereby established, shall be distributed among said creditors in the manner following, to-wit." Then follow provisions for pro rata distribution among secured creditors, and, when their claims are satisfied, then among unsecured creditors. We then find the following provision: "The said party of the second part shall have power to continue said general merchandise business and to sell the stock of general merchandise at private sale, and in the usual course of trade, and to replenish said stock of merchandise with such articles of staple goods as may be necessary to successfully continue said business; and such power shall continue so long as said party of the second part shall be of the opinion that the interests of said creditors will be best subserved by that method of executing said trust." The complaint in this action, after all necessary formal allegations, including the execution of the trust deed and the entry of the trustee upon his duties thereunder, alleges that said trustee applied to plaintiff to purchase certain staple goods to replenish said stock of general merchandise, and agreed that for goods so purchased he would pay plaintiff in the ordinary course of business out of the proceeds of said trust property, and that under such agreement plaintiff sold and delivered to such trustee staple goods and merchandise to replenish said stock in the amount of $ 1,292.85, and that a balance of $ 532.65, and interest from February 1, 1896, remains due and unpaid on said account. It also alleges that all of said trust estate has been...