Holderman v. Hood

78 P. 838, 70 Kan. 267, 1904 Kan. LEXIS 37

• Court: Supreme Court of Kansas
• Decided: December 1, 1904
• Docket: No. 13,064
• Status: Published

Opinion

The opinion of the court was delivered by

Smith, J. :

bound by the final decree. The claim that the rights of plaintiff below, Elizabeth Holderman, were concluded by the decree entered in the United States circuit court in the suit of Ford Harvey against R. T. Battey cannot be sustained, The general rule that strangers to a suit are not bound by the decree therein is not combated by counsel for defendants in error. They insist, however, that she was a party by representation; that when Morton Albaugh, receiver, and two other creditors interested in the trust came into the suit and were made defendants she became privy to the proceeding through them, and through her trustee, who was a party in the first instance. Much stress is laid on the allegation in the bill filed by Ford Harvey against Battey in the federal court, in which he stated :

“This bill is filed on behalf of complainant and all other creditors likewise situated who desire to avail themselves thereof.”

It must be remembered that a final decree in the equity suit was entered on January 8,1900. On May 25, 1901, the present action was instituted. The petition avers that on March 20, 1900, when the trustee paid plaintiff $577.79 out of the proceeds of Martin-dale’s property, sold by him, she did not know of the suit of Ford Harvey against R. T. Battey, or of the fraudulent conspiracy of defendants ;■ that she learned of the same within sixty days before this action was begun.

After an exhaustive discussion of the effect of decrees and judgments on parties not actually before the court but represented by others, Pomeroy', in his work on Remedies and Remedial Rights, second edition, section 400, sums up the result of his investigation as follows :

“If, however, the prior suit has been terminated, and the question arises in a subsequent controversy, and involves the conclusive effect of the former adjudication upon the class of persons represented by the actual parties, in order that such judgment should be conclusive upon any particular person of the class, either in his favor or against him, there must have been the previous formal act on his part of applying to the court, and an order thereon making him a party to the action, so that his name should have appeared in some manner upon the record; or it must be shown that he had notice of the proceedings, and an opportunity to unite in them, of which he neglected or refused to avail himself. These views and conclusions reconcile the decisions which at first sight appear to be conflicting, and they present a practical and harmonious rule of procedure.”

Elizabeth Holderman was so far before the court in the case of Harvey against Battey that if she had neglected, after reasonable notice, to appear and establish her claim, or make demand for other desired relief, her rights might have been concluded in a subsequent action. (Stevens v. Brooks, 22 Wis. 695.) Not being a party to the suit, and wholly ignorant of its pend-ency and final disposition, it would be an unwarranted and unjust extension of the rule to say that she was represented in any way, or that her rights in this action were affected in any degree.

' Rabie for fraudulent conspiracy. It is argued that the petition does not contain allegations sufficiently specific to show that there was fraud in obtaining the decree of the federal court: that no charge of bad faith is made to Albaugh and the two banks which came in and were made defendants. The gravamen of the charges is against Battey, Lambert, Hood, and Newman. The conspiracy originated with them, and was consummated to the financial profit of the last two, equaling the difference between the actual value of the property, alleged to be $141,500, and the amount they paid for it, to wit, $41,000.

A reference to the averments of the petition, summarized in the statement, will disclose that Lambert and his associates, desiring to obtain the property in the trustee’s hands at a price much below its value, and for much less than it could have been sold to other purchasers, used the case of Harvey against Battey, pending in the circuit court of the United States, as an instrument in furtherance of their wrongful purposes, by concealing the fact that complainant had no interest in the suit when the final decree was entered, having assigned his claim to Hood and Newman, and by deceiving the court into the belief that Hood’s bid of $41,000 was the highest obtainable. It appears directly from the allegations of the petition that, if buyers had been encouraged to bid on the land by having abstracts furnished to them showing conveyances down to the date the trustee took title, and had been afforded sufficient time for their examination, and if the time when bids were to be received had been publicly known, the property would have sold for a much higher price than Hood paid for it.

The alleged misconduct of Battey is abhorrent to every principle of law governing persons engaged in the administration of a trust, where good faith and scrupulous honesty are always demanded. It was his first duty to use every exertion to sell the trust property for the highest price, and to that end invite bidders to compete with one another, giving them every facility to become acquainted with the title of the real estate in his hands and to afford them ample time and opportunity to bid. This duty he not only neglected, but it is alleged that he corruptly conspired with others that they might reap a profit from the estate in his hands at the expense of the beneficiaries in the trust. Courts would justly forfeit public confidence if they should fail to exercise watchful care over the rights of confiding beneficiaries and neglected to compel unfaithful trustees to make complete reparation to those injuriously affected by their recreant acts.

Again, it is averred that Lambert and the firm of lawyers with which he was connected were attorneys for Battey, the trustee, and received compensation therefor. This being true, it was their duty, as counsel for the trustee, to serve their client, and through him the cestuis que trust, faithfully, to the end that the trust property should bring all it was worth. The petition charges:

“But notwithstanding the duty of said defendant R. T. Battey faithfully and honestly to execute said trust in the manner above set forth, and to sell and dispose of said property for its full value and for the highest and best price that could be obtained for the same, and notwithstanding the duty of said defendant Isaac E. Lambert faithfully and honestly to assist said defendant Battey so to execute and discharge his trust, and to render all assistance possible to effect a sale of said property for its full and actual value and for the highest and best price that could be obtained for the same, and thus enable the creditors of said defendant Martindale, including this plaintiff, to obtain payment of their debts in full; yet the said defendants R. T. Battey and I. E. Lambert, in violation of their said duty, illegally confederated and conspired with defendants Calvin Hood and Geo. W. Newman for the purpose and object and with the intent that said Calvin Hood and Geo. W. Newman might make a purchase of all of said property from said R. T. Battey, as trustee, for a sum grossly inadequate and much less than its actual value, and for a much less sum and price than could have been obtained for said property if an honest and fair and just offer and effort had been made to sell the same to the highest and best bidder and for the highest and best price that could be obtained therefor ; and to prevent a fair and honest competition for the purchase of said property, and to enable said defendants Hood and Newman to purchase the same at a grossly inadequate price and at a sum much less than its actual value, and much less than it could have been sold for if said defendants Battey and Lambert had faithfully, honestly and intelligently performed and discharged their said respective duties ; and in order to carry out said conspiracy and unlawful combination, they, the last-named four defendants, did do, perform, take part in and consummate the following actions.”

The specific acts of fraud set out in the statement follow. A tort-feasor is liable to an injured party if he participate in a wrong the effect of which is to damage the former; the extent of individual participation or of expected benefit is immaterial; each of several wrong-doers is liable for the entire damage.' We are clear that the allegations of a conspiracy to defraud and its consummation are sufficiently specific to constitute a cause of action against defendants.

3. Action in tort for damages may be maintained. It is insisted by counsel for defendants in error that the remedy of plaintiff was in equity, to set aside the decree of the federal court in the case of Harvey against Battey, and for an accounting with the trustee, and that this is especially true because the petition herein shows that the trust is still open and in the process of administration. As before stated, plaintiff below was not a party to the equity suit in the federal court, either personally or by representation. She charges that after Harvey assigned his interest as complainant it became a collusive proceeding, wherein the court, kept in ignorance of the fraudulent purpose of the parties, became the innocent instrument of their wrong-doing. We have no doubt that if plaintiff had been a party to the decree, proof of the allegations of the petition in the present case would move the federal court to annul it promptly, if plaintiff should see fit to attack it for fraud. She has sought a remedy at law, however, which is adequate. In section 690, volume 2, of Beach on Trusts and Trustees, it is said:

“While the cestui qve trust has a right to follow the trust property and to hold the possessor as a constructive trustee, wherever he is not a purchaser for a valuable consideration and without notice, yet he is not bound to accept that remedy. He may hold the trustee to a personal liability. Where the trustee has conveyed the property to an innocent purchaser for a valuable consideration, and has thus put it beyond the reach of the cestui que trust, his remedy is simply in an action against the trustee. It has been held that the cestui que trust may elect to hold original or substituted property, when he can identify the trust fund, either in its original or in a substituted form, or he may hold the trustee personally liable, but if he cannot identify the property, he must rely on the personal liability of the trustee. Cestui que trust, when forced to rely upon his trustee’s personal liability, occupies a position toward the estate of the trustee which is no better, but is identical with that of a simple contract creditor.”

To the same effect see Sherwood v. Saxton, 63 Mo. 78; Smith et al. v. Frost, 70 N. Y. 65; Lathrop v. Bampton, 31 Cal. 17, 89 Am. Dec. 141.

The present action does not aim at an accounting in equity between plaintiff and the trustee, or between plaintiff and the other defendants. The real estate is alleged to have been transferred to bona fide purchasers. While plaintiff might have proceeded in equity and compelled defendants to account for the value of the property, she chose a concurrent remedy, which the fraudulent acts of defendants entitled her to adopt. (Sherwood v. Saxton, supra.)

An action in tort for damages may be maintained against a trustee who has fraudulently conspired with other persons to make a sale of the trust property in his hands, at less than its value and has so sold it, to the injury of a beneficiary in the trust. All parties advising, assisting and aiding the trustee to carry out his wrongful purposes are also liable to plaintiff in the same action.

4. Trust presumed to be closed. The claim that the trust is still open cannot be sustained. It is alleged that the trustee never made any report to any court, or to the creditors. The trustee was not appointed by a court, but by a judge in his individual capacity, at the request of Martindale and his creditors, under a written agreement. There was no suit pending at the time. He was not required by the terms of the stipulation to report to any creditor, or to Martindale, although we have no doubt he could be compelled to do so should he refuse. By the terms of his appointment the property received by him from Martindale was to be sold and converted into money.as speedily as possible, and the proceeds applied to the payment in full of Martindale’s debts, and, if the proceeds should be insufficient, then .to the payment of said debts, jpro rata, in equal proportions, without preference. It. was stipulated that dividends were to be paid by the trustee on the claims of creditors as speedily and as often as the proceeds would admit. Creditors were allowed sixty days to present their claims ; if not controverted, they were to be paid. If disputed by Martindale, or any of his creditors, their legality was to be determined by the judgment of a court.

In the bill of complaint filed by Fox’d Harvey against Battey in the federal court on December 20,1899, the allegations of which, by x'eference, are made a part of the petition in the present action, it was averred that “all the debts held by the parties to said agreement,”' the instrument creating the trust, “have not yet been established and detei'mined, but some of them are in controversy and unsettled as to amount.”

The creditors were allowed sixty days from the date-of the trust agreement, unless further time should be granted by the trustee, to present their claims and demands against Martindale for allowance. This agi-eement was signed on June 7, 1899. It appears that -the trustee sold all the property held by him and converted it into money on or about January 8, 1900. He paid plaintiff $577.79 out of the proceeds on March 20, 1900.

This action was begun in May, 1901, after a lapse of more than a year and six months from the time allowed creditors to present their demands to the trustee for allowance as a matter of right, and after the expiration of fourteen months from the time the trustee received the money which he was obliged to pay out in dividends “as speedily as may be without the unnecessary sacrifice of the same.” To say that controversies between the trustee and Martindale’s creditors were pending and unsettled when this action was begun would be drawing a forced inference. The trustee, under the instrument giving him power to act, was required : First, to sell the property; second, to distribute the proceeds. There can be undone at most nothing except the payment of claims. The trust was a simple one, made so in order that the creditors might be expeditiously paid. The terms of it required a speedy sale of the property, and prompt payment thereafter of Martindale’s debts.

It is also contended that the compensation of the trustee has not been fixed or paid; that at least to that extent the trust is still open. We know of no rule of law which would permit a trustee guilty of the misconduct charged against Battey in the petition to recover any compensation for his services. The implication from the petition is that he received pay from Hood and his associates to betray his trust.

The claim that the action is based on contract to recover a new judgment on one already rendered against the Excelsior Mill Company and Martindale, and on tort against the other defendants, is not well founded. While the mill company and Martindale are named as defendants, no judgment is asked against them. This is apparent from the prayer of the petition.

The judgment of the court below is reversed, with directions to overrule the demurrer to the petition.

All the Justices concurring. Cunningham, J., not sitting.