Boardman, J.
This is an appeal by the executor from the decree of the surrogate of Albany county upon a final accounting. The executor was disallowed the amount of certain investments made by him for the reason that he had not exercised due diligence, or any care or diligence in making such loans. The evidence fully sustains such allegations. In some cases the property was worthless. In other cases the security taken was a second mortgage, while the first was for the full value of the mortgaged premises. In still other instances the mortgaged premises were barely of sufficient value to pay the expenses of foreclosure. Again, a second mortgage was purchased by himself when the prior incumbrance upon the property exceeded its full value. The executor had used no caution in making these loans; he had not examined the property or secured proper searches and valuations before making the loans. Casual inquiries were made by Case, his law partner, and large sums of money were loaned by Case upon his own discretion and judgment. As a consequence the estate lost heavily. In some cases not a dollar of interest was ever paid. The mortgagors were insolvent and they were satisfied with the prices which they had got out of this executor for their property and abandoned it to him or the estate. ' The most ordinary business tact and talent, the lowest degree of care and prudence would have protected the estate from such miserable and worthless loans and consequent losses. The executor was properly disallowed such investments (Bogart agt. Van Velser, 4 Edw. Ch. Rep., 718).
The executor was properly chargeable with the amount specified in the eighth item of the decree. He was with equal justice charged with costs, expenses, taxes, &c., which flowed naturally and necessarily from such original negli[229]*229gence. These items are also disallowed in eighth item of decree.
The executor is also charged with certain amounts received upon loans made, as specified in item 4 of the decree ff. 3798, &c., to which exception is taken.
The moneys were received by the executor or his law partner as a bonus or commission for the loans made. It is true that some services were rendered, and, perhaps, some slight expenses paid by Case, which he might properly have charged to the borrower. But it is impossible from this accounting to separate such sums from the gross sums charged and received. It is apparent the transaction was, in effect, a demand of a bonus as a condition of making the loan, which the borrower paid. In some instances that was all he ever paid or could be made to pay. It frequently appears that borrowers furnished searches which Case was called upon to examine. Such searches were doubtless paid for by the borrowers. There is a good deal of reason to believe, from the evidence, that the borrowers paid all, or very nearly all, legitimate expenses attending the loans and then paid the per centage demanded by way of bonus. However that may be, the executor and Case, his law partner, shared between them in some form the sums received from the borrowers. For a time they received it on joint account and divided it equally like the receipts of their law business. As this course was obnoxious to criticism, an arrangement was made to evade the natural consequences of such conduct and to avoid the inferences that might be drawn therefrom. Then it was agreed that Case should own the commissions thus received. But’ that the executor might not lose his share of the profits, Case, in consideration thereof, was to pay an equivalent towards office expenses- of the law firm. Thus, in any event, the executor was stipulating for a share of all sums received from borrowers on account of loans made to them.
The executor undertakes to justify his conduct. He alleges these moneys did not come out of the estate; that the estate [230]*230has not paid them, and therefore he has not made these profits out of the estate. He also alleges they were payments made for legal services rendered. The last assertion has been partially considered. Case was either the attorney for the executor or for the borrower. If for the executor, then the bonus obtained from the loans continued to be assets in the executor’s hands belonging to the estate. He had never parted with them, and he would not be at liberty to charge such sums to the estate under the plea or pretense that they had been included in the loan. If Case was the attorney for the borrower, then the executor is grossly censurable. He places the funds of the estate in the hands of the borrower or his attorney without exercising the slightest care, discretion or judgment, such as the law requires of him. He does this in consideration of the commissions he is to share. He, in effect, farms out the funds of the estate and transfers his duties under his trust as a lender to the borrower. He says to Case, “ Here are the funds of this estate. I don’t want to be troubled with them. If any of your friends want to borrow them, you lend the money, but you must understand you are not my agent or attorney but the attorney for the borrower. All I ask for the abdication of my duties as trustee in your favor, the only consideration for shutting my eyes and betraying my trust is, that you shall pay to, or for me one half of all you can squeeze out of the borrowers by way of bonus, commission or fictitious claims for services and expenses.”
In this mode the property is made subservient to the interests of the executor and Case. The executor gets his commissions from the estate for what he ought to do. He fails to do it, but transfers to some irresponsible person his rights and duties. Such person administers the property for the benefit of the executor and himself. Such administration almost of necessity involves loss and invites plunder. Public policy will not sanction such a mode of discharging trust duties, or the employment of such means of personal gain to the trustee.
After charging the executor with all these illegitimate gains, [231]*231the estate is still heavily the loser by the mode in which the business was done. The executor is responsible for amounts received and retained by Case as well as those received by himself. They were acting by a common purpose. What was done was by the authority and consent of the executor. Case’s acts were attributable to the executor, and the latter was justly charged with Case’s receipts thus obtained.
The case would not be more palpable if the executor had allowed Case to loan the money of the estate at four, five or six per cent, white one, two or three per cent was obtained from the borrowers for the benefit of the executor and Case. In the present case the money was loaned upon poor security, because a heavy bonus could be there obtained. On good securities it could not be had. In the ease supposed, the money is loaned at a low rate of interest, because the difference between that and a fair rate can be pocketed by the trustee- and his partner. The wrong is too evident for discussion. .
It is not simply that this money comes out of the estate, though that is practically true, but it is because to tolerate such conduct would expose trust estates to the rapacity of self-interest scarcely concealed and to most destructive waste. Trustees would cease to be responsible for the discharge of the duties imposed by law upon them. They would be authorized to transfer them to a partner, a clerk or a stranger upon such terms as should yield the greatest profit to the trustee without reference to the interests of the trust estate.
Free access — add to your briefcase to read the full text and ask questions with AI
Boardman, J.
This is an appeal by the executor from the decree of the surrogate of Albany county upon a final accounting. The executor was disallowed the amount of certain investments made by him for the reason that he had not exercised due diligence, or any care or diligence in making such loans. The evidence fully sustains such allegations. In some cases the property was worthless. In other cases the security taken was a second mortgage, while the first was for the full value of the mortgaged premises. In still other instances the mortgaged premises were barely of sufficient value to pay the expenses of foreclosure. Again, a second mortgage was purchased by himself when the prior incumbrance upon the property exceeded its full value. The executor had used no caution in making these loans; he had not examined the property or secured proper searches and valuations before making the loans. Casual inquiries were made by Case, his law partner, and large sums of money were loaned by Case upon his own discretion and judgment. As a consequence the estate lost heavily. In some cases not a dollar of interest was ever paid. The mortgagors were insolvent and they were satisfied with the prices which they had got out of this executor for their property and abandoned it to him or the estate. ' The most ordinary business tact and talent, the lowest degree of care and prudence would have protected the estate from such miserable and worthless loans and consequent losses. The executor was properly disallowed such investments (Bogart agt. Van Velser, 4 Edw. Ch. Rep., 718).
The executor was properly chargeable with the amount specified in the eighth item of the decree. He was with equal justice charged with costs, expenses, taxes, &c., which flowed naturally and necessarily from such original negli[229]*229gence. These items are also disallowed in eighth item of decree.
The executor is also charged with certain amounts received upon loans made, as specified in item 4 of the decree ff. 3798, &c., to which exception is taken.
The moneys were received by the executor or his law partner as a bonus or commission for the loans made. It is true that some services were rendered, and, perhaps, some slight expenses paid by Case, which he might properly have charged to the borrower. But it is impossible from this accounting to separate such sums from the gross sums charged and received. It is apparent the transaction was, in effect, a demand of a bonus as a condition of making the loan, which the borrower paid. In some instances that was all he ever paid or could be made to pay. It frequently appears that borrowers furnished searches which Case was called upon to examine. Such searches were doubtless paid for by the borrowers. There is a good deal of reason to believe, from the evidence, that the borrowers paid all, or very nearly all, legitimate expenses attending the loans and then paid the per centage demanded by way of bonus. However that may be, the executor and Case, his law partner, shared between them in some form the sums received from the borrowers. For a time they received it on joint account and divided it equally like the receipts of their law business. As this course was obnoxious to criticism, an arrangement was made to evade the natural consequences of such conduct and to avoid the inferences that might be drawn therefrom. Then it was agreed that Case should own the commissions thus received. But’ that the executor might not lose his share of the profits, Case, in consideration thereof, was to pay an equivalent towards office expenses- of the law firm. Thus, in any event, the executor was stipulating for a share of all sums received from borrowers on account of loans made to them.
The executor undertakes to justify his conduct. He alleges these moneys did not come out of the estate; that the estate [230]*230has not paid them, and therefore he has not made these profits out of the estate. He also alleges they were payments made for legal services rendered. The last assertion has been partially considered. Case was either the attorney for the executor or for the borrower. If for the executor, then the bonus obtained from the loans continued to be assets in the executor’s hands belonging to the estate. He had never parted with them, and he would not be at liberty to charge such sums to the estate under the plea or pretense that they had been included in the loan. If Case was the attorney for the borrower, then the executor is grossly censurable. He places the funds of the estate in the hands of the borrower or his attorney without exercising the slightest care, discretion or judgment, such as the law requires of him. He does this in consideration of the commissions he is to share. He, in effect, farms out the funds of the estate and transfers his duties under his trust as a lender to the borrower. He says to Case, “ Here are the funds of this estate. I don’t want to be troubled with them. If any of your friends want to borrow them, you lend the money, but you must understand you are not my agent or attorney but the attorney for the borrower. All I ask for the abdication of my duties as trustee in your favor, the only consideration for shutting my eyes and betraying my trust is, that you shall pay to, or for me one half of all you can squeeze out of the borrowers by way of bonus, commission or fictitious claims for services and expenses.”
In this mode the property is made subservient to the interests of the executor and Case. The executor gets his commissions from the estate for what he ought to do. He fails to do it, but transfers to some irresponsible person his rights and duties. Such person administers the property for the benefit of the executor and himself. Such administration almost of necessity involves loss and invites plunder. Public policy will not sanction such a mode of discharging trust duties, or the employment of such means of personal gain to the trustee.
After charging the executor with all these illegitimate gains, [231]*231the estate is still heavily the loser by the mode in which the business was done. The executor is responsible for amounts received and retained by Case as well as those received by himself. They were acting by a common purpose. What was done was by the authority and consent of the executor. Case’s acts were attributable to the executor, and the latter was justly charged with Case’s receipts thus obtained.
The case would not be more palpable if the executor had allowed Case to loan the money of the estate at four, five or six per cent, white one, two or three per cent was obtained from the borrowers for the benefit of the executor and Case. In the present case the money was loaned upon poor security, because a heavy bonus could be there obtained. On good securities it could not be had. In the ease supposed, the money is loaned at a low rate of interest, because the difference between that and a fair rate can be pocketed by the trustee- and his partner. The wrong is too evident for discussion. .
It is not simply that this money comes out of the estate, though that is practically true, but it is because to tolerate such conduct would expose trust estates to the rapacity of self-interest scarcely concealed and to most destructive waste. Trustees would cease to be responsible for the discharge of the duties imposed by law upon them. They would be authorized to transfer them to a partner, a clerk or a stranger upon such terms as should yield the greatest profit to the trustee without reference to the interests of the trust estate.
Undoubtedly, professional services rendered by -a trustee who is a. lawyer, to and for the benefit of another, may be charged for and the lawyer may keep the money so earned. But such transactions cannot be made a cover for bleeding the estate by stealth and indirection. The services rendered must be distinctly charged, must be consistent with the interests of the estate, must not be mixed with other and improper charges so as to be indistinguishable and incapable of separation. The charges in this case were not of the kind described. If there were any such which were capable of separation they [232]*232might properly be allowed to the executor. There are none, or at least the executor in his, accounting has not shown any such items in a way to entitle him to be allowed therefor. If he suffers any wrong in this respect it is occasioned by his fault and neglect.
There is a further exception to the disallowance by the surrogate of a payment by the executor of $450 to one Cottrell, or his agent, in connection with the loan on the Smith property the executor obtained, as collateral security for the payment of the debt, an assignment of all the rents, profits and issues of the mortgaged property, with authority to collect the same. Out of the collections thus made the executor paid to Cottrell $450 upon a chattel mortgage which, it is said, Cottrell held against the personal property of Smith. It is-now claimed that at the time of taking the mortgage an agreement by parol was made, whereby the executor agreed to pay this amount out of the rents collected, to Cottrell, who took a chattel mortgage on Smith’s personal property. Such an agreement, if made, was in direct conflict with the real estate mortgage, by which the rents were to be applied to the payment of that mortgage only. If such parol contract was made before the real estate mortgage, by the parties thereto, it was merged in the mortgage. If after, it was without consideration so far as appears, and besides, was a contract which the executor had no right to make to the detriment of the security of the estate, which he already had. But it does not appear that Smith, the mortgagor, was a party to any such contract, or that Cottrell had any valid prior lien on the mortgaged premises. Again, as it was no part of the executor’s duty to pay Smith’s chattel mortgage out of the assets of the estate, he ought at least to have demanded and received an :assignment of the security which he paid, to wit, the chattel mortgage. In that way it may be assumed, though possibly not true, that the estate would have obtained, through the chattel mortgage, what it had lost through his payments from rents derived from the mortgaged premises. Ho reason is [233]*233assigned, or can be imagined, why the executor was not entitled to all the security Cottrell had against Smith upon payment, to Cottrell of his debt. We think, therefore, the executor was properly charged with such $450, thus lost to the estate. Should the amount ultimately be realized from Smith, it may become possible for the executor to reimburse himself.
There was no provision of the will making it the duty of the executor to sell and convert the United States bonds belonging to the estate, for the purpose of investing the proceeds in bonds and mortgages. Yet it was in the discretion of the executor to do this. So far as his sales of such securities are concerned, no fault can be found with him. He realized the market rates, which were higher than when the inventory was taken. The incompetency and gross negligence, if not wrong, occurred when the investments were made. If they had been made with proper care and judgment, such as a trustee should possess and exercise, no great harm could have come to the estate, though it would doubtless have suffered loss in any event from the sale of the choice securities left by the testator.
The executor cannot justify his action by any example set him by the testator in his life. The duties of a trustee are not regulated by the practice of any individual or class of men, but by well-settled principles of law of long standing. Experience has shown the necessity of a strict adherence to safe, equitable rules for the protection of trust funds. This may, and often does, work hardships upon trustees, who may have acted with good faith and honestly for what was believed the best interest of the funds in their hands. But it is better that trustees should occasionally suffer harshly rather than to destroy the security of beneficiaries or the safety of trust estates' by weak indulgence in sympathy or charitable disregard of wrong or misconduct.
The result of the examination of this case leads to the affirmance of the decree of the surrogate with costs against the appellant personally.