Opinion
November Term, 1897.
Preston Stevenson, for the appellant.
G.E. Waldo, for respondent Tuttle, as trustee.
W.C. Beecher, for respondent National Broadway Bank.
The existence of the trust is not disputed, for the plaintiff is seeking to make title to the shares of stock here in controversy through and under Hotchkiss' title as trustee. The evidence shows that, in violation of the terms of the trust, Hotchkiss sought to divert the stock and use it for his own benefit or that of his wife, and the main question is whether he has succeeded, to the detriment of the cestuis que trust, in conferring a good title to the stock upon the plaintiff. The rule is that one who takes securities from a trustee, with the word "trustee" upon their face, in payment of a private debt due from the trustee, acquires but a voidable title as against the cestuis que trust. In the well-considered case of Shaw v. Spencer ( 100 Mass. 389) it is said: "And that the mere use of the word 'trustee' in the assignment of a mortgage and note imports the existence of a trust and gives notice thereof to all into whose hands the instrument comes has been expressly decided by this court. * * * Where one known to be a trustee is found pledging that which is known to be trust property, to secure a debt due from a firm of which he is a member, the act is one prima facie unauthorized and unlawful, and it is the duty of him who takes such security to ascertain whether the trustee has a right to give it. The appropriation of corporate stock held in trust as collateral security for the trustee's own debt, or a debt which he owes jointly with others, is a transaction so far beyond the ordinary scope of a trustee's authority and out of the common course of business, as to be in itself a suspicious circumstance, imposing upon the creditor the duty of inquiry. * * * Inasmuch as such an act of pledging property is prima facie unlawful, there would be little hardship in imposing on the party who takes the security, not only the duty of inquiry, but the burden of ascertaining the actual facts at his peril. * * * Notice of the existence of a trust is, by all the authorities, held to impose the duty of inquiry as to its character and limitations. And whatever is sufficient to put a person of ordinary prudence upon inquiry, is constructive notice of everything to which that inquiry might have led." ( Suarez v. De Montigny, 12 Misc Rep. 260; 1 App. Div. 494; affd., 153 N.Y. 678.) This statement of the rule as relating to stocks and notes which, upon their face, show that the person holding them does so as trustee, is supported by the authorities in this State, and a clear definition of constructive notice is to be found in the case of Acer v. Westcott ( 46 N.Y. 384), wherein it is said: "Constructive notice may be said to be a knowledge by the purchaser of some facts which should put him upon inquiry, and require him to examine other matters that would generally unfold the true title. If he omit to make the examination in a proper case, he is conclusively charged with negligence and with notice of the defect in the title. * * * But if he exercised due diligence and failed to discover the defect, the presumption of negligence is rebutted, and he is regarded as a bona fide purchaser." In Perry on Trusts (vol. 1 [4th ed.], 288, 289, § 225) it is said: "If the transfer is by way of pledge or sale for the security or payment of the private debt of the administrator, it will be equivalent to full notice of the illegality of the transaction and fraudulent. * * * But if a purchaser takes securities from a trustee, with the word trustee upon their face, in payment of a private debt due from the trustee, the sale may be avoided by the cestui que trust, or the purchaser may be held as a trustee." And our Court of Appeals has said in Wetmore v. Porter ( 92 N.Y. 81): "Whoever receives property, knowing that it is the subject of a trust, and has been transferred in violation of the duty or power of the trustee, takes it subject to the right not only of the cestui que trust, but also of the trustee to reclaim possession of the specific property or to recover damages for its conversion in case it has been converted." We regard it, therefore, as settled that the title of the cestui que trust in trust property can never be destroyed except in favor of one who, for value, in good faith, without notice, receives it; and that one who receives property under such circumstances that he knew, or ought to have known, that it was the subject of a trust, cannot acquire title thereto as against the rightful owners.
The stock here consisted of shares of the National Broadway Bank, and had upon its face the word "trustee;" and the plaintiff in taking it had notice that the title of Hotchkiss was that of a trustee, and that he was pledging it in connection with a loan, for a purpose which it could not be assumed was a trust purpose. Inquiry at the National Broadway Bank would have shown that in the order for the transfer to Hotchkiss there was a recital of the trust of January 17, 1857, of Chester A. Adams' will, its probate in Hartford, Connecticut, the appointment of Bartholomew as trustee, and the petition for the appointment of Hotchkiss as trustee; and with this as a guide, further inquiry would have revealed the record of the original trust deed. The exercise, therefore, of ordinary caution and prudence would have led to a full disclosure of the terms of the trust; and the plaintiff having been put upon inquiry, which it failed to make, cannot be regarded as a bona fide purchaser. It will thus be seen that upon the main question we have reached the same conclusion as that arrived at by the learned trial justice, whose opinion is so satisfactory that we might well have rested our decision upon his statement of the law.
It is insisted, however, by the appellant that the court below ignored the plaintiff's special equity as against the life beneficiary of the trust estate. Considering the character of the certificate given to the plaintiff by Georgiana I. Hotchkiss, which to some extent deceived the plaintiff, she is not placed before the court in an enviable position, or entitled as against the plaintiff to any great consideration. She had no title to the stock, but as the life beneficiary had a right to the dividends; and if the power existed, a court of equity might well have compelled her to repair in part, the injury which she was instrumental in inflicting upon the plaintiff, by depriving her of the dividends and turning those over to the plaintiff. The difficulty, however, is that it was not in the power of the court, nor was it in that of the beneficiary, to alienate her interest in the dividends, the beneficiaries of trusts being expressly prohibited by statute from assigning or disposing of their interests. (1 R.S. 729, § 63.) This provision, though relating to rents and the profits of land, was held to apply, by force of other sections of the statute, to the interests of beneficiaries in similar trusts of personalty. ( Lent v. Howard, 89 N.Y. 169, 181; Graff v. Bonnett, 31 id. 9; Tolles v. Wood, 16 Abb. N.C. 1, 9.) This legislative policy should not be defeated by the action of the court in permitting such alienation or abrogating the trust; and the cases cited are authority for the proposition that it is only surplus of income, not necessary for the support of the beneficiary, that can be reached by creditors or applied to the payment of debts. As the disposition of such income cannot be anticipated by the cestuis que trust or incumbered by any contract entered into providing for its pledge, transfer or alienation previous to its accumulation, the court properly held that it could not upon any principle of estoppel turn over the dividends which, subsequent to the giving of the paper to the plaintiff by Mrs. Hotchkiss, accumulated on the stock.
The appellant further contends that Tuttle, as trustee, has no standing in court because he was not validly appointed as trustee and should not have had the stock awarded to him. As we have held that the appellant has no title to the stock, it has no interest in the question to whom it shall be awarded, and for that reason it is not necessary to pass upon this contention.
We think, therefore, that the judgment was right and should be affirmed, with costs.
VAN BRUNT, P.J., RUMSEY, PATTERSON and INGRAHAM, JJ., concurred.
Judgment affirmed, with costs.