Wichita Royalty Co. v. City Nat. Bank of Wichita Falls
| Decision Date | 11 December 1935 |
| Docket Number | No. 6800.,6800. |
| Citation | 89 S.W.2d 394 |
| Parties | WICHITA ROYALTY CO. et al. v. CITY NAT. BANK OF WICHITA FALLS et al. |
| Court | Texas Supreme Court |
Suit was by the City National Bank of Wichita Falls, defendant in error, against Wichita Royalty Company and E. E. Scannell, as its trustee and individually. Recovery was sought by the bank of a balance alleged to be due on two notes, one executed, and the other indorsed, by the Royalty Company, together with foreclosure of liens on certain properties. The Royalty Company, through E. E. Scannell, trustee, pleaded various defenses and filed its cross-action against the bank, and impleaded J. T. Harrell, one of its principal officers, seeking from both recovery of the company's alleged balance of deposit, less authorized charges against it. W. H. Peckham, individually and as administrator of the estate of G. W. Peckham, deceased, and Flora A. Kemp and C. I. Francis, independent executors of the last will and testament of J. A. Kemp, deceased, were impleaded parties, brought into the case because of alleged transactions of W. H. Peckham and J. A. Kemp prior to his decease, with G. W Peckham, relating to Marlboro, a real estate venture in which the parties were engaged in putting on a residence addition to the city of Wichita Falls.
The trial court instructed a verdict in favor of the bank on the two notes, with foreclosure, and against the Royalty Company on its cross-action, and denied recovery against the impleaded defendants. Upon appeal by the Royalty Company, the judgment was affirmed by the Court of Civil Appeals by a divided court. 74 S.W.(2d) 661, 662, 665. The majority opinion is by Judge Dunklin; Judge Power filing a concurring, and Judge Lattimore a dissenting, opinion. Upon first consideration Chief Justice Conner and Justice Lattimore constituted a majority of the court and voted to reverse and remand, each filing an opinion; Judge Conner concurring in Justice Lattimore's dissent. Following the death of Judge Conner and the appointment of Judge Power, the first decision was reversed; Judge Power filing an opinion concurring in the opinion originally filed by judge Dunklin and subsequently supplemented by him. 74 S.W.(2d) 682. Judge Lattimore adhered to his dissent, as expressed in the opinion theretofore filed. 74 S.W.(2d) 682. Writ of error was granted on the application of the Royalty Company and E. E. Scannell, trustee, "on the importance of the question," and notation was made that the case was to be submitted with Quanah, Acme & P. Ry. Co. v. Wichita State Bank & Trust Co. (Tex.Civ.App.) 61 S.W.(2d) 170, in which writ of error had theretofore been granted. The cases were submitted together before the court and commission sitting in banc.
The Royalty Company was organized in 1920 under a declaration of trust, in form a common-law trust, membership in which is evidenced by certificates of interest. The certificate holders are referred to in the declaration as stockholders. They are about 1,300 in number, and widely scattered. Briefly, the company is an association of persons who furnished the capital for a business to be operated for their joint account and for mutual profit, and to be conducted by a chosen agent or trustee who was specially empowered to set forth in a declaration of trust similar in essential respects to that involved in Thompson v. Schmitt, 115 Tex. 53, 274 S.W. 554. Its legal effect was to create a partnership in which the trustees were managing agents, or partners, and such is the legal effect of the declaration here involved, except that only one trustee is provided as managing agent. R. H. Robertson was the first trustee. Upon his resignation in 1923, G. W. Peckham was appointed in the manner set forth in the declaration as his successor. A few days after Peckham's death, on November 7, 1929, E. E. Scannell was appointed trustee. Prior thereto, and even before Peckham became trustee, Scannell had been the bookkeeper of the company, and nominally, though not in reality, its secretary-treasurer. The business to be operated as set out in the trust declaration was to purchase and sell oil and gas royalties, and other oil and gas properties. No other purpose is set forth, or authorized. The declaration stipulates that its affairs are "to be managed by one trustee"; that the trustee shall have full and exclusive authority to conduct the business of the trust; to purchase, contract for, lease, or otherwise acquire, any property necessary or proper for the purpose of the trust; to sell and convey all or any part of the property of the trust; to borrow money on the credit of the trust; and "if he deems advisable, to execute notes individually secured by a mortgage or deed of trust upon the property of the Company, and generally to do all things which in his judgment is necessary and prudent in the management and conduct of the business of the Company." The trustee's powers are broad, but no authority is granted for their exercise other than to carry on the business of the trust within its defined limits. He is empowered to "declare dividends from the net income of the Trust, and his decision as to the amount of dividends is final." No stipulation of the declaration is susceptible of the construction that the trustee is privileged to use the trust property or credit for his own benefit. While he is to be held responsible, "only for his own wilful and corrupt breach of trust and not for any honest error of judgment," he has no interest in the trust or its property other than a managing interest, and such interest as may be evidenced by a certificate of ownership. The declaration provides that all investments made and all property acquired "shall be made and held in the name of the Trustee as such Trustee" (italics ours); also that "the Trustee shall hold all the funds and property now or hereafter held by, or paid to, or transferred or conveyed to him or his successor or successors as Trustee hereunder in trust for the purpose, with the powers and subject to the limitations" therein declared, "for the benefit of the cestui que trustent." (Italics ours.)
The trust, through an arrangement made between the bank and Peckham as trustee, carried with the bank in its own name, Wichita Royalty Company, a deposit account; G. W. Peckham also had in the bank a deposit account individually throughout the period of his trusteeship. The trust had a liability record with the bank, borrowing from it and repaying to it money through Peckham as trustee from time to time. Likewise, Peckham had an individual liability record with the bank, borrowing and repaying in part from time to time. Also, Peckham was engaged in part individually in the same business as the trust, and throughout the period involved bought and sold in that business on his own account.
The statement of facts contains more than 1,100 pages, but it, together with a statement of the pleadings, is sufficiently summarized in the majority and minority opinions of the Court of Civil Appeals in connection with the questions there discussed, to serve as a basis for decision of the questions before us. Reference is made to the summation referred to, as a restatement would unduly prolong this opinion.
The questions presented grow out of transactions between the bank and the trustee, Peckham, and involve transactions of the trustee with the bank and certain of its officials which touched and affected the interests of the trust; also transactions and acts of Scannell, as trustee, with the bank and its officials after Peckham's death. The case involves primarily a series of transactions carried out in the same way over a long period of time during which Peckham, by means of his checks as trustee, payable usually to the bank, transferred large sums of money from the trust account into his active individual account, whence he checked it out by means of checks signed by him personally, largely for nontrust purposes.
These transactions lie at the very foundation of the bank's case, and will be stated in their chronological order rather than in the order pleaded. For nearly two years, so far as the record reveals, Peckham, as trustee, had observed in his banking operations the requirement of the trust declaration that all property of the trust should be held in the name of the trustee as such. On October 8, 1925, he began a system of operation with respect to the deposit account of the trust in violation of that requirement by causing a transfer of $5,500 to be made from the trust account to his own individual account in the same bank. Generally speaking, the transfers were made by means of what is known as voucher checks. The statement of the majority opinion of the Court of Civil Appeals relating to the transfers reads: ...
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