Opinion
October 10, 1935.
November 25, 1935.
Trusts and trustees — Debts — Proceeding against debtor — Failure to enter judgment — Circumstances.
Trustee held not liable to surcharge for failure to enter judgment against settlor of trust for unpaid installments due according to the terms of a written agreement, and to proceed with judgment execution, where it did not appear that the settlor had sufficient money or funds from which he could have paid the defaulted amounts, and the trustee in the exercise of care and diligence reasonably concluded that the effect of such action by the trustee would have been to sacrifice the property of the settlor and destroy any ability he had to make further payments.
Argued October 10, 1935.
Before FRAZER, C. J., KEPHART, SCHAFFER, MAXEY, DREW, LINN and BARNES, JJ.
Appeal, No. 156, March T., 1935, by Mary Louise Hartje Rambach, from decree of O. C. Allegheny Co., April T., 1934, No. 216, in Estate of Augustus Hartje and Mary Scott Hartje. Decree affirmed.
Audit of account of trustee inter vivos. Before MITCHELL, J.
Decree entered surcharging trustee. Exceptions to decree sustained. Exceptions to account dismissed, except in part, and account, as modified, confirmed absolutely, by the court in banc, TRIMBLE, P. J., MITCHELL and CHALFANT, JJ., in opinion by MITCHELL, J., as follows:
The question is whether the accounting trustee should be surcharged for the failure of the trust fund to produce an amount of income sufficient to pay an annuity to decedent's divorced wife and also after her death that there be the sum of $100,000 to be divided equally between the two children of decedent and his wife, because of negligence in not entering a judgment for security when unpaid installments were due according to the terms of a written agreement.
Augustus Hartje and Mary Scott Hartje, his wife, separated in July, 1905. They entered into an agreement in writing dated March 7, 1910, which provided that thereafter they would live apart and that each released his or her right, title and interest in the estate of the other. The agreement further provided that the wife should be paid $25,000 in cash and in addition thereto the sum of $6,000 annually during her life, payable in quarterly installments of $1,500 each. Within ninety days after the death of Mrs. Hartje, Augustus Hartje was to pay their children, John Scott Hartje and Mary Louise Hartje, $100,000 in cash, in equal shares, if the children be then living. This sum was to remain in the hands of the Commonwealth Trust Company as trustee until the younger child arrived at the age of twenty-five years. If either or both be dead at the time of the death of their mother, leaving issue, the share of the deceased child is to be paid to his or her issue. In case of the death of either of the children without leaving issue surviving at the death of Mary Scott Hartje then all of said sum shall be paid to the survivor of the two children. If at the death of Mary Scott Hartje both children be dead without leaving issue surviving the agreement shall terminate.
Under the same date Hartje, Mrs. Hartje and the Commonwealth Trust Company entered into another agreement which provides for the conveyance of five pieces of land in the City of Pittsburgh as security for the performance by Hartje of the terms of the agreement above referred to, and conveyance of this real estate was made to the Commonwealth Trust Company of Pittsburgh, trustee. Each of the pieces of real estate was subject to a separate mortgage. The aggregate of the mortgage debt was $233,000, and the reductions during the trusteeship amounted to $30,000, of which $6,000 were paid after the death of Hartje. Beginning April 1, 1912, Hartje agreed to reduce the principal of the mortgage on the real estate at the rate of $17,500 per annum until the mortgages were paid.
The agreement further provided for the transfer to the Commonwealth Trust Company, trustee, as additional security, 1,000 shares, of the par value of $100 each, of the capital stock of the Hartje Paper Manufacturing Company, a corporation of the State of West Virginia, and certificates covering these shares were duly transferred and delivered to the trustee. Hartje was to have the right, subject to the written consent and approval of the Commonwealth Trust Company, to sell this stock of the Hartje Paper Company, the proceeds in case of sale to be substituted in the hands of the trustee for the stock so held. He was also to be permitted to withdraw the said stock from the trust upon payment to the trustee in lieu thereof of the sum of $100,000. On June 1, 1920, with the consent of the trustee, Augustus Hartje purchased these 1,000 shares of stock of the Hartje Paper Manufacturing Company for $90,000 and paid the trustee on account $80,000, leaving $10,000 which remains unpaid. The certificates for this stock have been held by the trustee until this balance should be paid.
In the agreement between Hartje, the Commonwealth Trust Company and Mary Scott Hartje, Hartje reserved the right, providing he should not be in default in the performance of any of the covenants of this agreement, to sell, with the approval of the party of the second part, any part of the real estate held pursuant to the agreement. From the proceeds he was to pay the trustee certain amounts, depending upon the piece sold, and if all the real estate were sold the aggregate amount he would be required to pay to the trustee from the sales was $150,000. These payments could be in cash or purchase money mortgages which were a first lien on the property. On the payment of $150,000 to the trustee Hartje was to have all the property conveyed, transferred and delivered by him as security, turned back to him, and the quarterly installments provided for the wife should thereafter be earned from the income of the $150,000, Hartje, however, remaining liable if any deficiency in the income should arise.
Among the parcels of real estate conveyed by the agreement was the undivided one-half interest of an improved property at the corner of Wood Street and Second Avenue in the City of Pittsburgh. In 1920 Hartje became the owner of the other one-half interest in this property by conveyance from his brother Richard. Thereupon Hartje conveyed this acquired undivided one-half interest to the trustee as additional security. The audit statement discloses that from the beginning of the trust agreement until the year 1919 there had been expended in improvements and additions to the real estate held by the trustee about $40,000.
The account of the trustee was filed April 2, 1934, and shows that payments were made in full to Mrs. Hartje to and including September 6, 1933; that on December 6, 1933, instead of $1,500, the required payment, there was paid to her $1,037.25. Augustus Hartje died August 10, 1922. His will was set aside by agreement among his wife, his children, and his brother and sisters, bearing date June 1, 1926. Under the terms of this agreement the two children of Hartje and his brother and sisters divided among themselves the property of Hartje. This division, as far as it concerned the property held by the trustee, was subject to the agreement providing for the quarterly payments to Mrs. Hartje.
Exceptions to the account were filed by Mary Louise Hartje Rambach, daughter of Augustus Hartje, and by Edward G. Hartje, brother of Augustus Hartje. All of the exceptions but 1 and 2 filed by Mrs. Rambach were disposed of by agreement of the parties interested. Exception No. 1 is that the trustee failed to collect the balance due from Augustus Hartje from the sale of the 1,000 shares of capital stock of Hartje Paper Manufacturing Company, in amount $10,000. The second exception charges the accountant with negligence in not collecting from Augustus Hartje the yearly installments of $17,500 of the principal of the mortgages against the real estate held by the trustee and which Hartje agreed to pay. Mrs. Mary Scott Hartje, now Mrs. Mary Scott Howard, the former wife of Augustus Hartje, filed no exceptions, nor did John Scott Hartje, the son.
The decree entered sustained exceptions 1 and 2 filed by Mrs. Rambach and ordered the trustee to make up the deficiency in the quarterly payments due Mrs. Mary Scott Howard on December 7, 1933, and further to maintain the principal in the estate so that she shall receive the quarterly payments thereafter and that the two children at the death of their mother shall receive the amounts to be paid them as set forth in the agreement between their parents. A further argument by counsel and a review of the testimony leads us to the opinion that the decree entered should not be sustained.
When the agreements of March 7, 1910, were entered into the parties were evidently satisfied with the terms and with the sufficiency of the security provided. We believe from the testimony — and it is a matter of general knowledge — that after the time of the execution of the agreement there was little demand for or sale of real estate in the district of Pittsburgh in which the pledged property was situated. Most of the buildings on this property were very old, without modern appointments and conveniences, and it was hard to find tenants to occupy them. It was necessary to spend considerable money in keeping up the buildings. Mr. Hartje at one time was regarded as a man of large means. It is complained he made payments on account of mortgages on other properties. Why did the trustee not procure payments on account of the principal of the mortgages held under the agreement? It is explained these payments were made in order to sustain his credit and to prevent injury which would come from a sheriff's sale and the probable entry of judgment on his bonds. It required a large amount of money to pay the taxes on the downtown real estate he owned, as well as to meet the expenses of repairs and insurance. The exceptants complain that the trustee should have availed itself of the authority given in the agreement and entered judgment against Hartje. This would only have sacrificed his property and destroyed any ability he had to make further payments.
The testimony shows that this trust agreement, the default of payments, and all matters pertaining to the estate were the subject of frequent and continuous conferences between the officers of the trustee and their counsel. The failure of Hartje to make reductions in the mortgages was one of the reasons for these conferences. John W. Herron and A. J. Kelly, Jr., respectively president and vice president of the Commonwealth Trust Company, and Mr. Stengel, the trust officer, were actively seeking to have Hartje comply with the terms of the agreement. These officers were generally regarded as men of high integrity and of broad business experience. They were particularly well informed as to real estate values and how to efficiently administer trust estates. Messrs. Kelly and Herron have died, and Mr. Stengel's illness prevents his giving testimony. We know from the testimony that the matter of Mr. Hartje's default in his payments was before the officers and their counsel constantly and that it was their decision that it was inadvisable to enter judgment against Hartje for the reasons above set forth, and, moreover, it would not be helpful to the trust. In view of the continuous oversight of the estate by the trustee and the care and judgment exercised by its officers we believe their actions during the administration of the estate cannot be successfully attacked, nor can we say now that Hartje had sufficient money or funds from which he could have paid the defaulted amounts. The administration of such a trust as this depends upon the judgment and discretion of the trustee. Had it pursued Hartje by judgment execution the estate would probably have suffered more, the beneficiary, Mrs. Hartje, received less than has been paid her, and ultimately the remaindermen get a smaller amount than they are likely to receive. A summary of the facts gathered from the testimony and the argument brings us to the conclusion that the trust was administered with care and prudence. The decrees of May 17, 1934, and May 18, 1934, will be vacated and set aside. The exceptions, 1 and 2, filed by Mary Louise Rambach to the account will be dismissed. The exceptions of the Commonwealth Trust Company, trustee, to the decrees are sustained with the exception of exceptions 5 and 6, which are dismissed. By agreement of counsel there is made a surcharge of $4,000 on account of the commissions taken by the accountant on the corpus of the estate and $1,475.73 on account of commissions taken on the income of the estate. With this modification the account as filed is confirmed absolutely.
Mary Louise Hartje Rambach appealed.
Error assigned, among others, was final decree.
Gifford K. Wright, of Alter, Wright Barron, and James K. Ruby, for appellant.
Albert C. Hirsch, with him John M. Freeman, of Watson Freeman, for appellee.
The decree is affirmed on the opinion of Judge MITCHELL for the court in banc.