Hawley v. Tesch

59 N.W. 670, 88 Wis. 213, 1894 Wisc. LEXIS 35

• Court: Wisconsin Supreme Court
• Decided: October 2, 1894
• Status: Published

Opinion

The following opinion was filed June 2, 1894:

WiNsnow, J.

That part of the judgment of the circuit court which set aside as fraudulent and void the ostensible sale of the great bulk of this valuable estate to Yogel for the benefit of Boos, the son-in-law of Tesch, and of Tesch himself, is not appealed from. Its justice is not and could not be questioned. This transaction bore all the badges of fraud known to the law. It was a sham; it was kept secret; it was a conveyance by the trustee of the trust property nominally to another, but in reality to himself and his son-in-law ; the nominal consideration was grossly inadequate, and was not in fact paid except as the sales of property afterwards paid it; it was a deliberate scheme to divert from the proper beneficiaries a handsome fortune, which was well-nigh successful. Earely, we believe, has a court of equity been required to review and condemn so flagrant a breach of duty on the part of a trustee. Let us hope that such occasions will be even more rare in the future.

The important questions raised by the appeal of the grandchildren which we deem it necessary to discuss are substantially three in number. They are: First, were Munk-witz, Coleman, Anderson, and Eckstein innocent purchasers without notice of fraud by the trustees? Second, should Boos and Vogel be allowed in the accounting for improvements put by them upon the land? Third, should Boos and Vogel be charged with damages for mismanagement in handling and disposing of the property?

1. The circuit court acquitted the purchasers named in the first question of all complicity in, and of all notice, either actual or constructive, of, the fraud of Tesoh and Boos, and consequently upheld their titles as bona fide purchasers, and required Boos, Vogel, and Tesoh to account for the proceeds of the sales made to them, with interest.

We shall spend but little time considering the question as to the Iona fides of the purchases of Anderson and Eck-stein. It is true that the relations between these purchasers and Boos and Tesoh were intimate. Anderson was the son-in-law of Tesoh, and Eckstein was his housekeeper. These facts are very proper to be considered in determining the question of fraud, but they are by no means conclusive. Grood faith may still exist, notwithstanding this close relationship. The prices which thej^ paid do not, under the testimony, seem to have been inadequate. Certainly there cannot be said to have been in either case any such disparity between the value of the land and the price paid as would stamp the transaction as fraudulent. It is true that they bought from Boos and received deeds executed by trustees, but we do not think that this fact, under the circumstances in evidence, necessarily charges them with knowledge of the existence of any breach of trust. Upon this question, the circuit judge says in his opinion: “It is so manifest that they relied implicitly upon Boos’ statements and upon his honesty, and that they knew nothing of the Vogel sale and were utterly ignorant of business affairs, that it would be hard, if not contrary to equity, to charge them with notice of a breach of trust merely because their deeds were executed by the trustees. . . . I cannot say that they were consciously guilty of fraud, and there is certainly no such clear evidence of facts coming to their knowledge, calculated to put them upon inquiry, as to justify me in charging them with constructive fraud.” "We agree with the conclusions of the circuit judge on this question.

As to the Munkwitz and Coleman transfer, the question is one of greater difficulty. It is claimed by the appellants (1) that Munkwitz and Coleman had actual notice of the fraud of Boos, or at least were informed of such facts as should have put them upon inquiry, which, if followed up, would have led to actual knowledge; (2) that, even if this be not so, the fraud of Boos penetrates and vitiates the entire transaction, because Boos was the partner of Mwnh-wiiz and Coleman in the purchase, and they are legally chargeable with his fraud.

As to actual notice the circuit judge says, in the course of his opinion: “ It appears by the uncontradicted evidence bearing upon that subject that neither Munkwitz. nor Coleman knew of the sale to Yogel, and that neither of them knew or suspected that Boos had or claimed to have any interest, legal or equitable, in the Hawley estate.” A very thorough examination of the evidence in the record convinces us that this statement is entirely correct, and with this remark we shall content ourselves on this point.

The contention that Munkwitz and Coleman had knowledge of facts which should have put them upon inquiry as to the fraud of Boos and Tesch was answered by the circuit judge, evidently after mature consideration of the evidence, in the negative. In support, of the affirmative of the proposition, many facts which are either admitted or undeniably, proven are urged with great vigor and ability by the appellants’ counsel. The most significant of these facts are: That Tesch and Coleman were married to sisters and were intimate friends; that Boos was married to TescKs daughter, who was Coleman’s niece; that Vogel was the nephew of both Tesch and Coleman; that both M-unlcwitz and Coleman knew that the title was in Tesch and Mrs. Hawley as trustees, and that both were active and intelligent business men; that Coleman and Boos were on intimate terms, and that Coleman had previously assisted Boos in embarking in the distillery business; that Coleman and Boos had dealt in mining stocks together; that Boos was almost constantly on the land, superintending grading and other improvements, with all the appearance of an owner; that Boos and Munhwitz were old acquaintances and quite intimate; that neither Munhwitz nor Coleman took any pains to ascertain whether Boos paid anything for his one-third interest in the land; and, further, that Munhwitz made contradictory statements as to his negotiations with Boos and Tesch, and as to whom he in fact dealt with.

It is unfortunate, in dealing with this question, that we have not the benefit of the testimony of Mr. Coleman, who died after the commencement of the action and before his testimony could be taken. Coleman was the most active man in the making of this purchase. It was to Coleman that Boos first suggested the purchase of the land, and Coleman seems to have principally conducted the negotiations on behalf of himself and Munhwitz with Tesch. Doubtless Coleman could have thrown much light on many matters which are now obscure, but we have not that light, and the case must be decided upon the evidence actually before us.

It is certainly true that many facts in the case, notably those above referred to, showing the close relationship •and friendship which existed between Tesch, Boos, Munh-witz, and Coleman, tend to throw considerable doubt upon the lona fides of Ifunhwitz and Ooleman in this transaction ; but, on the other hand, there are other facts equally undeniable which tend strongly to establish their entire good faith. Among these may be noticed two important facts, viz., that the sale was for a full and adequate consideration, which, so far as the shares of Mwnhwitz and Coleman were concerned, was paid at once; that Tesch, the trustee, was an old resident of Milwaukee, a prosperous business man, and a man who had always hitherto borne a good reputation. The circuit judge evidently considered these facts of great weight, and properly so. It is true these facts alone are not conclusive proof of good faith, nor, on the other hand, are the facts relied upon by appellants conclusive evidence of bad faith. It is, after all, a question of fact from the evidence whether actual knowledge, or notice equivalent to actual knowledge, of the fraud of Tesch and Boos was proven. Can we say that the conclusions of the trial court are wrong in this respect? Is there any fact proven which the court must say as matter of law is the legal equivalent of such knowdedge or notice? On a review of the whole evidence, which could not be gone over in detail without filling a good-sized volume, my brethren are all of the opinion that the findings of the trial court cannot be reversed on this question. The writer of this opinion has been and still is inclined to the opinion that the evidence calls for and justifies a finding to the effect that Mimkwitz and Coleman had knowledge of facts which should have put a prudent man upon inquiry as to the good faith of the transaction, but as he agrees with the result, upon a ground hereafter stated, he deems it unnecessary to do more than state the fact of his nonconcurrence upon this point.

We come now to the second proposition of the appellants, namely, that the fraud of Boos vitiates the entire transaction. In support of this contention it is said, in the first place, that Boos was a partner of MunJcwitz and Coleman in the purchases, and therefore they must be charged with his knowledge. Of the general proposition that a firm is charged with the knowledge of facts known to one partner in the course of a partnership transaction, there can be no doubt. Had there been an existing partnership, and had Boos taken partnership funds and purchased real estate held in trust, knowing such purchase to be a fraud upon the oestuis que trustent, doubtless the whole transaction could be and should be set aside as fraudulent. This, however, is not such a case. The purchase of this land was in no sense a purchase by the firm or a purchase in the course of partnership business. It is true that the articles of agreement between Munkwitz, Coleman, and Boos bear date November 2d, and recite that the parties “have this day entered into a partnership,” and it is also true that the deed of the lauds to Munhwitz was not executed until some days afterwards, and from these facts it is argued that the conveyance was in fact a conveyance to the partnership in the course of its business, which business was the purchase and sale of this identical real estate. Upon this question the circuit judge very pertinently observes: “'Equity looks not exclusively to words and names, but considers the very substance of the transactions. Following down the instrument, we find the arrangement to be that seventy-five thousand dollars of the capital stock of the partnership was to consist of lands to be purchased, not by the partnership, but by the partners individually, each to pay for or to secure by his individual notes an undivided one-third part of the land. This clearly shows that the partnership, whether it had been technically formed or not, had not gone into operation,— that the members had not as yet brought in, and were yet to bring in, each his share of the capital stock, so far as the same was to consist of land. So that it may consistently be said that Munkwitz and Coleman each bought and paid for an equal interest in this Land, and that the interest of Boos, and his interest alone, came in through the Vogel sale, and that he, and he alone, was a trustee in his own wrong of the property which he contributed to the capital stock of the firm.”

~We see no fault with this reasoning. It seems to us to amount to a demonstration that each partner was to purchase and contribute to the capital stock of the proposed firm one third of this land, and that the firm, though nominally, perhaps, formed at the time of the agreement, had no business existence until the land was bought. Each partner was to buy his own interest in the land and pay for it with his own funds, and Munkwitz and Coleman did do so; and then each contributed his undivided one-third of the land, which he individually had purchased, to the capital stock of the firm.

Looking at the transaction in this light, it seems very clear that this purchase was not a purchase, in any sense, by the firm of Munkwitz, Coleman & Boos, but it consisted of individual purchases by Munkwitz and Coleman (and, as they supposed, by Boos also) separately of an undivided one-third each of the real estate, and a contribution of such one-third, after its purchase, to the capital of the firm. If this be the proper view of the legal effect of the transaction, it is clear that the purchase by Munkwitz or Coleman of his one-third is not affected by the fraud of Boos in the acquisition of his one-third. If a person who is a trustee contributes to the capital stock of a firm trust funds, his copartners not knowing their trust character, the cestui que trust does not thereby become a creditor of the firm. 1 Bates, Partn. § 481; 1 Ewell’s Lindl. Partn. (1st ed.), 313. This is on the principle that the breach of trust or fraud is the act of the individual alone, and not the act of the firm. The same principle applies here, and its logical result manifestly is that the purchases of Munkwitz and Coleman, if made in good faith, are not affected by the fraud of Boos in the acquisition of his interest. Driffill v. Goodwin, 23 Grant, Ch. 431.

But it is said further by appellants that Boos was the agent of Tesch, the trustee, in the sale of the property, and so was incapacitated from becoming a purchaser, and that, Munkwitz and Coleman having joined in the purchase with the agent of the trustee, the entire sale is void. In support of this contention the case of O'Dell v. Rogers, 44 Wis. 136, is relied on. This case holds, in brief, that the active attorney of the executor of an estate cannot buy from the executor property of the estate, and that persons who united with the attorney in the purchase, with full knowledge of the facts affecting his disability, are also chargeable with him as trustees of the property so bought. It seems quite plain that the case is' not analogous to the one at bar. Here Boos pretended to Munkwitz and Coleman that the land belonged to the Hawley estate, and assumed to act as agent of the trustees in inducing Coleman to purchase. Coleman and Munkwitz declined to purchase unless Boos would take one third. To this Boos consented, abandoned his pretended agency, to the knowledge of all the parties, and thereafter Coleman, Boos, and Munkwitz negotiated directly with Tesch. There is no principle which prevents an agent from abandoning his agency with the knowledge and consent of his principal, and then purchasing of his former principal at arm’s length and upon an equal footing. This was the transaction as it appeared to Munlmitz and Coleman, and the difference between such a transaction and the transaction which was condemned in the case of O'Dell v. Rogers, 44 Wis. 136, is very plain.

We do not find it necessary to discuss the effect of the fraudulent concealment which Boos confessedly practiced on Coleman and Munlmitz in this transaction. He was in fact the owner of the property to be sold, but pretended to be first an agent for the sale of it, and afterwards an equal purchaser with them. It is urged with much force that this concealment of his real character in the transaction was a material and substantial fraud on his co-purchasers. It is said that there is no reason to think that they would have purchased had they known that Boos was in fact selling instead of buying, and instead of being interested in buying on favorable terms was in fact deeply interested in buying on the highest possible terms. It is argued that, conceding that Boos was a partner or agent of Munkwitz and Coleman in the purchase, still they will not be charged with constructive notice of the facts known to Boos, because Boos committed an independent fraud on them for his own benefit by concealing the real facts of his relationship to the property. 2 Pom. Eq. Jur. § 675, and notes. This presents an interesting question, but, as above stated, we do not find it necessary to decide it, because we have practically held that Boos was not acting as partner or agent of Munkwitz and Coleman in the making of the purchase.

The case of King v. Remington, 36 Minn. 15, is greatly relied upon by the appellants. We shall not attempt to review it. In many of its facts it is quite similar to the present case. There are, however, important differences in the facts, and when we hold that the purchase in the present case was an independent purchase by each party, and not a partnership transaction, a clear distinction is raised between the two cases, because in that case the purchase which was attacked was held on the evidence to have been a partnership act, so that notice to either party affected both partners.

There is another ground upon which it seems clear to the writer that the appellants cannot now recover, the lands conveyed to Ooleman, Munkwitz, Anderson, and Eckstein. The law is that a party injured by the fraudulent sale of property made by his trustee has a choice of remedies. He may affirm the sale and recover the price, or he may disaffirm the sale and recover back the property. Bat he cannot do both,— they are inconsistent remedies. In this case, the appellants by their complaint attempted to dis-affirm the sale and recover the property sold, The circuit court, by its interlocutory order in the nature of a judgment, dated September 17, 1890, adjudged that Munlcwitz, Coleman, Anderson, and Eolcstein were all innocent purchasers, and that the conveyance to them passed good title, and ordered a reference to ascertain the amounts which Boos, Vogel, and Tesch should account for. The plaintiffs took no appeal-from that order, but appeared before the referee on the hearing, and filed a long itemized account of the sales of lands made by Boos and Tesch, which they claimed Boos and Tesch should account for. Included among the items of this account were the sums received from Munlcwitz, Coleman, Anderson, and Eolcstein, and the referee in his report charged all these sums to Boos and Vogel, and they were included in the gross amount of 'the judgment rendered on the referee’s report. It seems to me very clear that the appellants abandoned their claim to recover the specific property, and by not appealing from the interlocutory order (which was clearly appealable), but, on the contrary, prosecuting their claim to judgment against Boos and Tesch for the consideration moneys, have barred themselves from now returning to and insisting on their right to recover the specific property. This view is simply stated as the individual view of the writer of this opinion.

2. Should Boos and Vogel be credited with the amount spent by them in grading and other improvements upon the land? It appeared by the evidence that in 1885 Boos built a house and barn on the lots set apart to him, and occupied them as his homestead until April, 1891, when he surrendered possession to Johnston, the new trustee. The buildings cost about $10,000, but the evidence was conflicting as to the sum which they actually added to the market value of the lots, and $5,000 was allowed and credited to Boos upon the accounting 'on account of the increased value of the lots by reason of such house and barn. There was also allowed and credited $17,010.97 for amounts spent by Boos in grading and filling lots and grading and making streets through the property and laying water pipes and sewers. There was also credited to Boos one third of the sum of $9,061.90, which amount was spent by Munhwitz, Coleman, and Boos for grading and street work. Exception was duly taken to the allowance of all of these items, and the question is whether they were properly allowed to Boos. The building of the house and barn was of course purely a voluntary expenditure on. the part of Boos. The grading and street work were not ordered by the city authorities, but the referee found that the expenditures so made were reasonable, necessary, and advantageous, and enhanced the value of the property more than the amount expended.

We are of the opinion that none of these charges can be allowed. Boos was a fraudulent purchaser. He is not charged merely with constructive fraud, but found and amply proven to have been an active participant in the actual and intended fraud of Tesch. Such a purchaser cannot, under well-established principles, be credited with improvements voluntarily made on the trust property. The decisions of this court are to this effect. Waterman v. Dutton, 6 Wis. 265; Thompson v. Thompson, 16 Wis. 91; Witt v. Trustees, 55 Wis. 376. For other authorities in support of the proposition, see Railroad Co. v. Soutter, 13 Wall. 517; Gillespie v. Moon, 2 Johns. Ch. 602; Woodhull v. Rosenthal, 61 N. Y. 389; Dawson v. Grow, 29 W. Va. 333; 1 Lewin, Trusts (Flint’s Notes), 492. There is nothing in the case of Cook v. Berlin W. M. Co. 56 Wis. 643, which is at all in conflict with this doctrine. That was a case of constructive, not actual, fraud. It seems questionable whether a trustee to sell lands could himself be allowed for these improvements. 2 Perry, Trusts, § 526, and cases cited.

Certain other items were allowed to Boos in the account, which are complained of, but which we think were correctly allowed. They are for taxes paid on the lands, for commissions paid to real-estate agents in negotiating sales, and expenses of procuring abstracts of title for lots sold. The taxes were paid for the protection of the title, and are plainly properly allowable. Failure to pay them would have been only an additional wrong on the part of Boos. The expenses for abstracts and commissions to agents were apparently necessary expenses in making the sales of which the appellants now receive the benefit. Had the trustee himself made the sales, he would have been entitled to credit for such expenses, and we see no good reason why Boos should not be so credited.

3. The appellants claim that Boos and Vogel should be charged with not less than $70,000 for damages caused by their mismanagement in handling the property. On this point we shall only say that we are satisfied that the claim was properly disallowed by the trial court.

The appeal of the defendant Munhwitz presents but a single question. The referee found that Munhwitz had in his possession $5,956.58 on account of Boos’ one-third interest in the lands, deeded to Munhwitz, and charged Munh-witz with simple interest on that sum from the commencement of the suit until September 19, 1890, when Johnston was appointed trustee, at which time Munhwitz was ready and offered to pay said money over to Johnston. The amount of this interest is $1,133.23. The referee’s finding was confirmed by the court, and judgment rendered against Munhwitz for the amount. We see no error in this charge. The money belonged to the trust estate. The commencement of the action was in effect a demand for it. Both claimants were parties to the action. Mr. Munhwitz might undoubtedly have protected himself, and at the same time placed the money where it might earn interest for its rightful' owner, by bringing it into court for the benefit of whichever party should finally be adjudged to be the owner of it.

Uo other points require attention.

By the Court.— Upon the appeal of Munlcwitz, the judgment is affirmed, with costs; upon the appeal of the oes-tuis que trustent, that part of the judgment which allows credits for improvements upon the lands is reversed, and in all other respects the judgment is affirmed, with costs to be taxed in favor of the cestuis que trustent against Boos, Vogel, and Tesch; and the action is remanded with directions to modify the judgment as indicated in this opinion and enter final judgment in accordance herewith.

A motion for a rehearing was denied October 2, 1894.