Opinion
April 23, 1936.
June 26, 1936.
Trusts and trustees — Investments — Title in trustee's name individually — Absence of fiduciary designation — Rights of beneficiary — Knowledge of beneficiary — Insolvency of trustee — Deferred claim — Tracing res.
1. Where a trustee invests trust money in property which he takes in his own name as an individual, the beneficiary has the option to accept the investment or require the trustee to account for the money so invested, with interest. [51]
2. Such rule is applicable unless the beneficiary has knowledge not only of the investment but of the fact that the fiduciary relationship has not been properly evidenced. [52]
3. Even though it be presumed as a matter of law that whatever money was used to purchase the property taken in the name of the trustee was its own money, and that therefore it continued to hold as trustee the cash constituting the trust fund, to establish a preferred claim, upon insolvency of the trustee, the beneficiary must trace the trust money into some specific property, or into some particular fund or account of the insolvent, then being distributed, with which the latter mingled it. [52-3]
4. Where such beneficiary is unable to establish the necessary identification, it is limited to the status of a general creditor of the insolvent trustee for the original amount of the fund, with simple interest to the date of insolvency and allowing credit for payments of interest theretofore made. [52-3]
Appeals — Review — Question not raised in court below — Basic point — Decree of orphans' court — Act of June 7, 1917, P. L. 363.
5. Under section 22 (b) of the Orphans' Court Act of June 7, 1917, P. L. 363, on appeal from a definitive sentence or decree of the orphans' court, the appellate court must determine every basic question involved even though the point presented was not raised in the court below. [52]
6. On appeal from a decree refusing a petition by a substituted trustee for an order on the original trustee to turn over the trust fund and authorizing the original trustee to deliver to the petitioner the assets of the trust estate in kind, the appellate court considered the point that title to the property purchased by the original trustee had been taken in its name without any fiduciary designation, although such point was not brought to the attention of the court below nor argued before it, where it appeared that the facts necessary to sustain the point were contained in the petition and answer which constituted the record, that the question was one of law on the allegations of these pleadings and that the point raised was covered in the statement of questions involved and comprehended within the assignments of error. [50-53]
Before KEPHART, C. J., SCHAFFER, MAXEY, DREW, STERN and BARNES, JJ.
Appeal, No. 189, Jan. T., 1936, by trustee, from decree of O. C. Blair Co., 1929, No. 319, in Estate of Frank Fenelli, deceased. Order reversed and record remitted.
Petition by substituted trustee for an order upon its predecessor to turn over the assets of the trust estate in cash.
The opinion of the Supreme Court states the facts.
Petition dismissed, opinion by PATTERSON, P. J. Substituted trustee appealed.
Error assigned was dismissal of petition.
John E. Evans, Sr., with him B. A. Sciotto, for appellant.
Robert A. Henderson, for appellee.
Argued April 23, 1936.
In 1929 the Second National Bank of Altoona was appointed by the orphans' court trustee of a fund in a decedent's estate, the income of which was to be paid to his wife for life and the principal at her death to his sons. In 1931 the bank became insolvent and went into liquidation, whereupon the court appointed the Central Trust Company of Altoona as substituted trustee. In that capacity the Central Trust Company, in 1934, petitioned the court for an order on the original trustee to turn over the trust fund, which amounted to $17,651.74. The respondent, the Second National Bank, filed an answer setting forth that upon its appointment as trustee it had invested the fund to the extent of $15,000 in a first mortgage on a certain property in Altoona, and $2,500 as a participation in a $7,000 first mortgage on another property in Altoona, both of which mortgages were recorded in the office of the recorder of deeds. It appeared, however, that in each of the mortgages the Second National Bank was named as mortgagee without any further designation to indicate that the mortgages were owned by it in a fiduciary capacity, and it is contended that there was no specification of the fiduciary relationship even on the bank's records. The respondent asked that it be permitted to turn over these securities to the substituted trustee, but the petitioner demanded that the trust fund be paid to it in cash.
"It is well settled that where a trustee invests trust money in property which he takes in his own name as an individual the beneficiary has the option to accept the investment or require the trustee to account for the money so invested, with interest": Yost's Estate, 316 Pa. 463, 467, and cases there cited. See also Guthrie's Estate, 320 Pa. 530. Without discussing the many reasons upon which this salutary legal principle is founded, it is clear that, if petitioner's allegations be proved, it was not obliged to accept the mortgages but could call for an accounting in cash.
The orphans' court ordered that the petition be dismissed, and authorized the respondent to deliver to the petitioner the assets of the trust estate in kind. The point now raised, however, was not brought to the attention of the court below nor argued before it, and the respondent claims that for this reason it should not be considered by this court on appeal. But the facts necessary to sustain it are contained in the petition and answer which constitute the record, and the question is one of law on the allegations of these pleadings. In the court below the petitioner contended that it was entitled to receive the trust estate in cash, and the mere fact that it did not there advance in support of its position the additional argument which has since occurred to it and which is vital to the proper decision of the question involved, does not bar it from making a more extended presentation of the subject in this court, the point raised being covered in the statement of questions involved and comprehended within the assignments of error. The situation is not analogous to one where, under a statute or a rule of court, it is necessary to assign on the record specific reasons in support of a rule or motion, as, for example, for a new trial, or for judgment for want of a sufficient affidavit of defense; in such cases different considerations might perhaps be applicable. Moreover, section 22 (b) of the Orphans' Court Act of June 7, 1917, P. L. 363, provides: "The Supreme and Superior Courts of this Commonwealth shall in all cases of appeal from the definitive sentence or decree of the orphans' court, hear, try and determine the same as to right and justice may belong, and decree according to the equity thereof; . . .," and this act has been interpreted to require that this court should determine every basic question involved in such appeal even though the point presented may not have been raised in the court below: McCullough's Estate (No. 2), 292 Pa. 422; Pollock's Estate, 306 Pa. 301, 312.
Respondent contends that if the point now discussed had been suggested by petitioner in the argument in the court below, it would have been able to show that the beneficiaries of the trust knew the fund was invested in the two mortgages, and it could have amended its answer by adding such an allegation and then offering testimony to prove it. Under the circumstances there is no reason why it should not now be given this opportunity, and therefore no final order will be made at this time. Attention is called, however, to the discussion of the subject in Yost's Estate, supra, where it is indicated that the trustee must prove not only that the beneficiaries knew of the investment but that there was brought home to them knowledge that the fact of the fiduciary relationship had not been properly evidenced.
If the final ruling on this issue be in favor of the petitioner, it will then be incumbent upon it, in appropriate proceedings, to produce testimony sufficient to identify the trust res as a part of the present assets of the insolvent trustee. Even though it be presumed as a matter of law that whatever money was used to purchase the mortgages taken in the name of the bank was its own money, and that therefore it continued to hold as trustee the cash constituting the trust fund, nevertheless, if petitioner, on behalf of the beneficiary of the trust fund, wishes to fasten upon respondent a preferred claim, it must trace the trust res from the time when the latter acquired it, in accordance with the principles laid down in Mehler's Appeal, 310 Pa. 25; Royersford Trust Co.'s Case, 317 Pa. 490, and other pertinent authorities. If it find itself unable to establish the necessary identification, it will, even though entitled to payment in cash, be limited to the status of a general creditor of the insolvent bank for the original amount of the fund, with simple interest to the date of the bank's insolvency and allowing credit for payments of interest heretofore made by respondent.
The order of the court below is reversed and the record remitted for further proceedings consistent with this opinion; costs to abide the result.