Schwarz v. Wendell

1 Walk. Ch. 267

• Court: Michigan Court of Chancery
• Decided: September 15, 1843
• Status: Published

Opinion

The Chancellor.

The question has been discussed at some length, how far the defendant’s answer is evidence. The general rule is, that whatever is responsive to the bill is evidence for, as well as against, the defendant. But there is frequently much difficulty in applying the rule, and regard must always be had to the case made by the bill, in determining what is, and what is not responsive. Is the fact stated in the bill, and answered by defendant, material to complainant’s case, that is, must it be proved to entitle him to relief; or is it a circumstance from which such material fact may be inferred? — for the complainant may prove his case, by either positive or presumptive evidence. If it is, the answer, as it regards such fact, is responsive to the bill, and is evidence in the cause. It may also, sometimes, be evidence of a fact not stated in the bill; as where the bill sets forth part of complainant’s case, only, instead of the whole, and the part admitted and stated in the answer shows a different case from that made by the bill, and is not matter in avoidance merely. As where a bill, filed to redeem stock, alleged it had been pledged for five hundred dollars, and the answer stated it was pledged for eight hundred dollars, in addition to the five hundred dollars stated in the bill, the answer was held to be responsive. Dunham v. Jackson, 6 Wend. R. 22. Here the answer, instead of being responsive to a particular fact stated in the bill, was responsive to complainant’s case, which the answer denied, by showing a different case. But where the answer does not show a different case, but, admitting the case made by the bill, sets up new matter in avoidance of it, the answer is not evidence of such new matter. As where the defendant sets up usury, in his answer to a bill filed to foreclose a mortgage. Green v. Hart, 1 J. R. 850. Such are the general principles, to be deduced from the cases, for our guide in determining what parts of an answer are responsive to the bill. Hart v. Ten Eyck, 3 J. C. R. 62, and note at p. 92; Beckwith v. Butler, 1 Wash. C. C. R. 224; Ringgold v. Ringgold, 1 Harr. & Gill, 11, 81; Hagthorp v. Hook, 1 Gill & Johns. R. 270; 13 Ves. R. 47; 7 Ves. R. 404, 588; 2 Ball & Beat. R. 382; 3 Russ. R. 149; 19 Ves. R. 182; Attorney General v. Oakland County Bank, ante, 90.

A different exposition of the rule was given in Woodcock v. Bennet, 1 Cow. R. 711, and also, as it would seem, in Green v. Vandman, 2 Blackf. R. 324. In the first of these cases, it was held that an answer to statements, or facts, contained in a bill, whether such statements or facts were necessary to make out complainant’s case, or related to matter in avoidance of it, merely, was nevertheless responsive, and evidence in the cause. This exposition of the rule is liable to several objections. It makes defendant a witness for himself, to prove his defence, as well as a witness against himself to prove complainant’s case, and, if it b‘e right that the matter in controversy between the parties should be settled by the defendant’s oath alone, unless disproved by two witnesses, or one witness and corroborating circumstances, then his answer, in all cases, should be evidence, whether responsive in either of the senses above stated, or not. To make the rights of parties in this respect depend upon the drawing of a bill, looks too much like sacrificing right to professional skill. Defendant is not bound, nor can he be required, to answer any statement or fact in the bill not necessary to make out the complainant’s case; and, when he does, it is voluntary on his part, and his answer, for that reason, should not be binding on complainant, as he would, in no case, be likely to disclose what would make against himself. Defendant cannot be a witness for himself. Nor is there any hardship in the rule; for he may, by a bill of discovery, make complainant a witness for him on the same terms that he is a witness for complainant. Clason v. Morris, 10 J. R. 542, and Field v. Holland, 6 Cranch R. 24, are cited by the Court in Woodcock v. Bennet, but neither of them support that case. In each of these cases, the part of the answer in question was responsive to a fact stated in the bill, which it was necessary for complainant to prove, to make out his case.

Wendell’s answer in all its material statements, is responsive to the bill; and the case must be decided upon the answer, and the testimony of Stewart. So far as the case charges defendant with fraud, it is clearly disproved; and I should not hesitate for a moment to dismiss the bill, if the relation of trustee and cestui que trust had not existed between the parties, when the several transactions stated in the bill took place. There are certain relations existing in society, necessary for its prosperity and well being, and which it is the policy of the law to foster and protect. With that view, and to keep individuals from availing themselves of these relations for selfish purposes, the law has, in some cases, imposed a disability, on persons so situated, to deal with each other on the same terms, as those on which they are allowed to deal with third persons. The relation of trustee and cestui que trust is one of this description. A trustee to sell cannot purchase the trust property. So fully satisfied are courts of equity of the necessity, in order to secure the faithful execution of the trust, of removing from the trustee all hopes of personal gain, or advantage to himself, that he is not allowed to purchase the trust property for himself or another, at public or private sale; and, if he does, the sale will be set aside, or a re-sale of the property will be ordered, for the benefit of the cestui que trust, if he ask it in a reasonable time, however fair and honest the transaction may appear, on the part of the trustee. “If,” says Lord Eldon, in Ex parte Bennett, 10 Ves. R. 385, “ a trustee can buy in an honest case, he may in a case having that appearance, but which, from the infirmity of human testimony, may be grossly otherwise.” The law on this point is too well settled by adjudged cases, and the policy and reasonableness of the rule too obvious, to be departed from. Campbell v. Walker, 5 Ves. R. 678; Ex parte Bennett, 10 Ves. R. 381; Davoue v. Fanning, 2 J. C. R. 252.

A trustee may, however, purchase trust property of his cestui que trust. But courts of equity look upon such transactions with so much jealousy, and there is so much difficulty in sustaining them, that Lord Erskine, in Morse v. Royall, 12 Ves. R. 372, said he should not have regretted to have found that the rule above stated, extended to the case of a trustee purchasing of the cestui que trust. And Lord Eldon, in Coles v. Trecothick, 9 Ves. R. 244, says, “it is a transaction of great delicacy, and which the court will watch with the utmost diligence; so much so, that it is very hazardous for a trustee to engage in such a transaction.” In this case, the sale was sustained; but it was a very strong case in favor of the trustee, or, rather, for his father, for whom he made the purchase as agent, and fully justified the remark of Lord Eldon, that if any case could exist for releasing the rule, by consent of parties, that was one. In Morse v. Royall, the sale was also sustained. In that case the cestui que trust was determined to sell, and frequently teased the trustee to buy, who was reluctant, but finally consented. Some years after the sale, the cestui que trust becoming dissatisfied, it was referred to a third person to say what further consideration the trustee should pay, who awarded that he should pay as much more as he had paid in the first instance. On these and other strong circumstances, favorable to the trustee, the sale was sustained. To set aside such sale, it is not necessary to show fraud. Fox v. Mackreth, 2 Bro. R. 400. That would be placing the parties on the ground of strangers, dealing with each other at arm’s length. The Court should be satisfied, not only that there was no fraud, but, that no use had been made by the trustee of the relation existing between him and the cestui que trust, to bring it about; that it was fair in all its parts, and such a transaction throughout as the trustee himself would have approved of, had it been with a third person instead of himself. When the Court is fully satisfied on all these points, the sale, or contract, — for it is not necessary that it should be a sale of trust property, — should be sustained; when not, it should be set aside.

I cannot look upon the agreement for the purchase of the two-thirds of the Erie property in any other light, than as a joint speculation between Wendell and Mrs. Schwarz.

Mrs. Schwarz had inherited one-third of the Erie property from her father, Abraham Sheridan, deceased, and Wendell held this, and other property, amounting to $10,000, or more, in trust for her. A few days before the agreement, Wight applied to Wendell, to purchase Mrs. Schwarz’s share, if the other two-thirds, or one of them, could be procured, and to give $30,000 for the whole, or $20,000 for two-thirds. Wight, about the same time, made application to Mrs. Schwarz, or to her husband, John E., who called on Wendell, and stated the shares could be bought low for money, if the heirs residing in Philadelphia, to whom they belonged, had not heard of the rise of property at Erie; and proposed to him to raise the money, and purchase them, offering to reward him well for his services. This Wendell refused, unless he could have half of the profits. Nothing further was done at this time; but, a day or two after, John E. called again, and agreed to Wendell’s proposition. A day or two more elapsed, when the written agreement of March 7th was drawn up by Wendell, and signed by him and John E. At the same time, a note for $4,000 was signed by Mrs. Schwarz, and endorsed by Wendell, on which the money was obtained at the bank to make the purchase. This part of the case comes within the rule laid down by Lord Ch. King, Keech v. Sanford, 3 Eq. Ca. Abr. 741, where a trustee applied to a lessor for a renewal of a lease, for the benefit of his cestui que trust, an infant, which the lessor refused to give. The trustee then took a lease to himself, and it was decreed that the lease should be assigned by him to the infant. The Chancellor said he must consider it a trust for the infant, “ for, if the trustee, on refusal to renew, might have a lease to himself, few trust estates would be renewed to cestuis que trust; and, though it might seem hard that the trustee was the only person of all mankind who might not have the lease, yet it was very proper that the rule should be strictly pursued, and not in the least relaxed; for it was very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestuis que trust.

When John E. applied to Wendell to raise the money, and purchase the shares of the coheirs, he refused, although promised a liberal compensation for his services, until he had secured to himself, by the agreement, an equal interest in the purchase. I will not say he was wrong in refusing, or that his duties as trustee required a compliance with the request, although, judging of things as they then appeared, it would be the means of making an advantageous sale of the trust property at Erie, and of adding something to the trust estate, by way of profits on the shares to be purchased. If the proposition, instead of coming from himself, had been made to him by the cestui que trust, he should have declined it. What he had refused to do as trustee, in a matter so closely connected with the trust, he should not have done for his own benefit. It may, as observed by Lord Ch. King, seem hard that he should be the only person of all mankind who should be excluded from making such an agreement with the cestui que trust, but public policy requires it. The object of the rule is to secure fidelity on the part of the trustee, by taking from him every possible motive to act otherwise than for the interest of his cestui que trust. He had it in his power to defeat the speculation; and, as things have turned out, it would have been well had it never taken place. The money to make the purchase could not be raised by the cestui que trust, without his consent; and to permit a trustee, under such circumstances, to impose his own terms, would be placing the cestui que trust entirely at his mercy. It is impossible to say what influence such considerations may have had, in producing the agreement of March seventh.

He succeeded in purchasing the interest of one of the heirs, and took a deed to himself, as trustee. Wight did not come to make the purchase, but, a short time before the note at the bank was due, a Mr. Fross offered to purchase a third of the property, at $10,000. He informed Mrs. Schwarz and her husband of the offer, and advised them to accept it, and that the note at the bank was approaching maturity, and he wished to take it up. They objected, and said they would provide for the payment of the note. He then wished to sell his share, at any rate; and Mrs. Schwarz and her husband offer to purchase and pay him what would be his part of the profits, if it were sold. They propose to turn out a bond and mortgage against Joshua Boyer, in part payment, and to give their note for the balance; and Stewart was employed to draw an assignment of the bond and mortgage. He did so, and called on Mrs. Schwarz to execute it. She refused, saying they wanted the property for other purposes. She also said, defendant’s account was too high. Defendant then requested Mrs. Schwarz to appoint another trustee, and to set off to him his share of the property. Mrs. Schwarz and her ■ husband again offered to purchase his interest, on the terms they had before proposed, except as to the mode of payment. Mr. Hastings was appointed to succeed the defendant in the trust. The papers, including the note for $3,980.24, were made out and executed by the respective parties. After they were executed, Mrs. Schwarz said she thought Mr. Wendell might have waited for his share until the property was sold. This is a brief outline of the case.

Defendant was the first to propose that he should share in the profits of the purchase ; and this after he had refused to raise tbe money and make the purchase as trustee. When Fross offered to purchase a third of the property, he proposed to sell him a third that had been purchased, in which he had an interest, and not the third belonging to the cestui que trust, although it was with a view of selling this last, that the purchase had been made. When he gave as a reason for selling it separately, the payment of the note at the bank, they offered to provide for its payment from other sources; and it was not until he insisted on selling his share, that they proposed to purchase it. And after Mrs. Schwarz had refused to execute the assignment of the mortgage, and not before, he asked to be discharged from the trust, and to have his share set off to him. We do not see the cestui que trust volunteering, and urging on the trustee, in one important step taken by the parties; on the contrary, they appear, for the most part, to have originated with the trustee, and to have been taken by the cestui que trust with more or less reluctance. In Morse v. Royall, Lord Erskine noticed particularly that the trustee was not the first to propose a sale, but that the cestui que trust was determined to sell, and urged the trustee to purchase.

The money was obtained on Mrs. Schwarz’s note, endorsed by Wendell. It should, I think, be considered a part of the trust fund, because it was obtained on the note of the cestui que trust, which the trust fund might have been called on to pay. Had it afterwards been paid by Wendell, out of his own funds, it would have been a good charge against the trust estate. Defendant says in his answer, Mrs. Schwarz signed it to save him the necessity of procuring an endorser. She should, then, have endorsed it, and not signed it as drawer. The contract states it to have been the note of Catharine Schwarz, endorsed by Wendell, and speaks of Wendell’s interest in the profits of the purchase to be made. Defendant cannot be allowed, by his answer, to explain away the terms of the written contract, and to say it is different from what it purports on its face to be. No money was advanced by him, and none was intended to be. He expected to pay the note, at maturity, with the money to be received from Wight, on the sale to him. The land was conveyed to him as trustee, and, by the written contract, he stipulated for a share in the profits of that part of it, only, which there was, at the time, a prospect of selling to great advantage.

The contract of March 7th, for these reasons, was not binding in equity on Mrs. Schwarz, the cestui que trust; and I cannot consider any thing done by her subsequently as a free and voluntary confirmation of it, with a knowledge of her rights. She appears to have been under the impression that she was bound by it, and to have acted accordingly.

If I could come to the conclusion that defendant was entitled to half the purchase, I should still doubt whether the sale of it to Mrs. Schwarz, under the circumstances, and for the reasons stated, should not be set aside. I think it should be. There is nothing in the settlement of accounts, when the trust was transferred to Hastings, to prevent it. The settlement was no waiver of her rights, unless she acted at the time with a full knowledge of what her rights were, and with an intention of waiving them. Nothing of the kind appears, but the contrary is clearly to be inferred. She stated at the time, that she thought Mr. Wendell might have waited for his share until the property was sold.

The same observations would apply to the covenant set up in the plea, if it extended to, or reached the case made bv the bill.

As to the part Mr. Schwarz took in the business, and the supposed guarantee it afforded against the trustee’s taking any advantage of the position in which he stood to the cestui que trust, I think it should have no bearing on the case. It was the duty of the trustee to consult and advise with the cestui que trust, and not Mr. Schwarz. The very object of a trust for a married woman would, in many cases, be defeated, if the wishes and inclinations of the husband were to be consulted, instead of the interest of the cestui que trust. It would be as well, at once, to place the property of the wife at the disposition of her husband.

The complainants filed their bill within three years and a half after the note was given, and within six months after it became due. I do not think the delay unreasonable, or a good ground for refusing relief. The note has not been paid, and the bill was filed soon after it became due, and complainants were called on to pay it.

No charge was made by the trustee for his services, when the trust account was settled. He was, as he stated in his answer, induced not to charge for his services, in consequence of the handsome sum he expected to realise from the sale of the Erie property to the cestui que trust. He was entitled to a reasonable compensation for his time and services as trustee. Ringgold v. Ringgold, 1 Harr. & Gill, 11, 83.

A decree must, therefore, be entered, setting aside the settlement of January 28th, 1837; and there must be a reference to a master to take and state an account of all moneys received by defendant, as trustee. In taking the account, the master must charge defendant with the amount of the note of January 28th, 1837, for $3,980.24, with six per cent interest up to the time it became duo, and seven per cent interest from that time to the taking of the account, unless defendant shall cause the note to be cancelled, and surrendered, at or before that time.

And he must allow defendant a reasonable compensation for his time and services as trustee, with interest from the termination of the trust. The question of costs is reserved until the coming in of the Master’s report.

Note. This case was appealed to the Supreme Court, but was finally settled, without any further proceedings.