Opinion
April 14, 1938.
June 17, 1938.
Wills — Construction — Mandatory or precatory words — Operation of business.
1. Where testator directed in his will that the trustee was to hold his estate and that testator's son was to continue the operation of the business, the language was mandatory and such provision allowed no discretion in the trustee as to the operation of the business; that was exclusively the duty of the son. [427]
Executors and administrators — Trusts and trustees — Duties — Degree of care — Removal — Surcharge — Appointment by will.
2. Where testator provided that the executor and trustee was to hold his estate but that testator's son should operate the business, and that the son should receive the income from the business during his life, and the son, without the knowledge of the trustee, embezzled money from the business but, upon learning of the same, the trustee immediately instituted proceedings which resulted in the recovery of all the misappropriated funds, with a substantial increase for the estate, it was held that the executor and trustee was not liable to surcharge or removal. [423-9]
3. All that is required of a trustee is common skill, common prudence and common caution, and he is not liable when he acts in good faith as others do with their own property. [427]
4. Removal or limitation of a fiduciary appointed by will requires much stronger proof of lack of capacity or fidelity than trustees appointed by the courts. [428]
5. Where there is no loss to any of the parties in interest, courts are reluctant to remove fiduciaries appointed by will. [428]
Argued April 14, 1938.
Before KEPHART, C. J., SCHAFFER, MAXEY, DREW, LINN, STERN and BARNES, JJ.
Appeal, No. 3, Jan. T., 1938, from decree of O. C. Blair Co., 1934, No. 163, in Estate of Jesse L. Hartman, deceased. Decree affirmed.
Petition for review of account and surcharge and removal of executor.
The facts are stated in the opinion of the court below, by PATTERSON, P. J., as follows:
This is a petition by the residuary beneficiaries under the last will and testament of Jesse L. Hartman, deceased, for leave to file exceptions to the first and final account of the executor, filed and confirmed by the Orphans' Court, and Answer.
The amended petition prays to have the executor and trustee discharged and surcharged with a large sum of money alleged to have been misappropriated by J. Denniston Hartman, son of testator, who had, by the terms of the said last will and testament, sole control of the business of testator. Five reasons were assigned in support of said petition charging the executor and trustee with: (a) neglecting its duty in permitting the said J. Denniston Hartman to use the sum of $65,404.08 belonging to the J. L. Hartman estate for his own personal benefit and gain; (b) failing to properly account for certain income; (c) in not using due diligence in the collecting of obligations due said estate; (d) in appropriating commissions prior to performing its duties; (e) with negligence in permitting J. Denniston Hartman to manage a large portion of the estate.
Jesse L. Hartman, testator, died February 17, 1930, leaving a last will and testament dated April 21, 1926. J. Denniston Hartman, a son and only child of testator, who was the chief beneficiary, died May 19, 1932. The petitioners, Jesse Lee Hartman and Anna Duncan Hartman, are children of J. Denniston Hartman, and by the terms of the said last will and testament of Jesse L. Hartman are entitled to the residue of his estate.
Jesse L. Hartman's last will contained several codicils, none of which relate to the issues involved in this controversy. In the third item he disposes of the principal part of his estate in the following language: "I give, devise and bequeath all the rest and residue of my estate to the Hollidaysburg Trust Company in trust for the following purposes: (a) The said trustee to hold my estate and my son, J. Denniston Hartman to continue the operation of my business, and after necessary and proper salaries and expenses are paid, to pay over to my son, J. Denniston Hartman, such part or all of the said net income as in the discretion of the officers of the said trustee they may deem necessary for his use for and during the period of his natural life." J. Denniston Hartman was the first object of testator's bounty.
The operation of the business was continued by J. Denniston Hartman in the same manner as it had been for a number of years prior to the death of the said testator until the death of J. Denniston Hartman on May 19, 1932, or a period of more than two years, during which time he collected large sums of money from sale of ganister rock and deposited in the Hollidaysburg Trust Company and other banks in his own personal account the gross sum of $65,404.08. From time to time he withdrew from this account $28,030.39 and deposited the same in the Jesse L. Hartman Company account. He also applied $11,500 to his salary account. He also applied to his own use the total net profit of $34,459.80.
On the sixth day of August, 1934, the Hollidaysburg Trust Company filed its first and partial account. No exceptions were filed and the account was confirmed absolutely August 11, 1934. The said account showed a deficit resulting from misappropriation by J. Denniston Hartman during the period of his management aggregating the sum of $15,548.11. Within thirty days after the death of J. Denniston Hartman the Trust Company, Executor, filed suit in the Court of Common Pleas of Blair County, against the executors of J. Denniston Hartman to recover the money which he had misappropriated. Judgment was recovered for the total sum of $9,266.71 cash, leaving a balance on account of the deficit of $6,281.41. As against this deficit the executor holds in trust for the Jesse L. Hartman estate an interest in coal lands valued at $7,855; real estate situate in the Borough of Hollidays burg valued at $1,200 to $1,500; and royalty rights against the Taylor-McCoy Coal Company in the amount of $1,933.54, or a total of $11,288.54, which is $5,007.13 more than the deficit.
Jesse Lee Hartman, principal petitioner, in his testimony (page 31) stated: "Q. And that actually now the Trust Company on account of the defalcation is $6,000 in the red. That is true? A. Yes."
Later, (page 33) he added $1,500 alleged to be due for land sold, making a total amount claimed by petitioners against the executor of $7,500. Since the death of J. Denniston Hartman in May, 1932, the Trust Company, executor, has conducted the business with a profit, notwithstanding the depressed business conditions prevailing.
The testator was president and the controlling figure in the Trust Company, executor, for a period of thirty-five years. He was a successful business man, operating large ganister rock quarries in central Pennsylvania, and a former member of Congress. He had unbounded confidence in the ability and integrity of his son, J. Denniston Hartman. He also had full knowledge of the management and the method of transacting business by the Hollidaysburg Trust Company. At the time of the making of his will, directing that his son should continue the operation of the business, he had more intimate knowledge of the ability, strength and weakness of his son, J. Denniston Hartman, than any other person. The will had been executed almost four years prior to his death, during which period a number of codicils were added, none however affecting the responsibilities or the interests of the said son. Under these facts the question arises whether or not the executor shall be surcharged with the admitted defalcations of the son and discharged as executor and trustee.
Should an executor and a testamentary trustee which has acted in good faith be removed and surcharged where no loss has been sustained by the cestui que trustants? Under the law such action would be unwarranted and unjust. The testator placed the defaulting son in unlimited control of his business, and provided that he should receive the income from said business for and during his natural life, so that it cannot be successfully charged that the executor exercised bad judgment or was negligent in the management of the affairs of the said estate in selecting the defaulting son to operate the business. And this is especially true in view of the fact that immediately after the son's death the executor and trustee recovered from the personal estate of J. Denniston Hartman property and money amounting to $5,007.14 over and above the amount of the defalcation. The estate has not been managed at a loss but at a substantial gain. The betrayal of confidence reposed in J. Denniston Hartman by his father and the alleged embezzlement in no wise resulted from any negligence or misconduct on the part of the trustee. There is no allegation that the trustee was guilty of supine negligence or wilful default. The trustee was the victim of the default of the man appointed and designated by the testator to continue the business. It had no knowledge of the maladministration or misappropriation until after his death, and upon learning of the same it immediately and successfuly instituted proceedings which resulted in the recovery of all the misappropriated funds, with a substantial increase for the estate. The trustee is to be commended for its alert, energetic, and faithful conduct in saving the estate from a loss occasioned by the man appointed by the testator to manage and control his business.
In the third item of said last will testator used the following mandatory language: "The said trustee to hold my estate, and my son J. Denniston Hartman, to continue the operation of my business."
This provision allowed no discretion in the trustee as to the operation of the business. That was exclusively the duty of the son.
In Stinson's Estate., 232 Pa. 218 (221), the Supreme Court states: "When used [words 'although precatory'] to express his [testator's] manifest intention to control or direct, they are mandatory, and will be so construed in saying what effect is to be given to them."
". . . 'Words of recommendation, request, wish or expectation addressed to the executor and used in respect to the direct disposition of the testator's property are prima facie testamentary and imperative rather than precatory' . . .": Hand's Estate, 315 Pa. 238.
In Dempster's Estate, 308 Pa. 153 (159), the Supreme Court, opinion by Mr. Justice SCHAFFER, says: "We further said . . . that all that is required of a trustee 'is common skill, common prudence and common caution, and he is not liable when he acts in good faith as others do with their own property . . . a trustee will not be held personally liable for an honest exercise of a discretionary power, in the absence of supine negligence or wilful default.' "
The testimony shows that the assets of the estate are intact; that in face of an embezzlement by the beneficiary appointed by the testator to operate the business through the trustee, through diligence and wise conduct the trustee has recovered an excess from the defaulter's estate.
It has been held by the appellate courts that removal or limitation of a fiduciary appointed by will requires much stronger proof of lack of capacity or fidelity than trustees appointed by the courts: "It is a serious matter to dismiss trustees appointed by will; much more should be shown by those who wish them dismissed than would be the case where the trustees are appointed by the court. Perry on Trusts, 6th edition, 276 says: 'The power of removal of trustees appointed by a deed or will ought to be exercised sparingly by the courts. There must be clear necessity for interference to save the trust property. Mere error or even breach of trust may not be sufficient; there must be such misconduct as to show want of capacity or of fidelity putting the trust in jeopardy': Bailey's Estate, 306 Pa. 334 (337); Stevenson's Appeal, 68 Pa. 101; Neafie's Estate, 199 Pa. 307; Price's Estate, 209 Pa. 210. "
Where there is no loss to any of the parties in interest, courts are reluctant to remove fiduciaries appointed by will.
"Frequently trustees invest in unauthorized investments for the benefit of their cestui que trust, and have never, to our knowledge, been dismissed where no loss has occurred": Bailey's Estate, supra.
And in Hughes' Estate (No. 1), 319 Pa. 321, quoting from the syllabus:
"1. A trustee will not be removed at the mere whim or caprice of the beneficiary; a substantial reason therefor must appear before such fiduciary will be removed.
"2. An executor will not be removed unless it clearly appears that he is wasting or mismanaging the property or estate under his charge, or that for any reason the interests of the estate are likely to be jeopardized by his continuance as an executor."
"The executor was entitled to his commissions. He did not have to await the final settlement of the estate before taking them": Hughes' Estate (No. 1), supra, (325).
It is ordered, adjudged and decreed that the petition to file exceptions to the first and final account of executor is hereby dismissed at the cost of the petitioners.
Petitioners appealed.
Errors assigned were various findings of the auditing judge and the final decree.
Frank G. Smith, with him Robert V. Maine and John J. Haberstroh, for appellants.
George G. Patterson, for appellee.
The decree is affirmed on the opinion of Judge PATTERSON at appellants' cost.