First Nat. Bank of Birmingham v. Love , 232 Ala. 327 ( 1936 )

We concur in the opinion of Justice BOULDIN except in so far as it conflicts with what we here express.

Dr. Gewin, when in life, made an insurance trust embracing a large amount of life insurance. All of it was subject to one instrument defining the duties and powers of the trustee. The duty was to pay all bank loans which he may owe at the time of his death and to hold the balance in trust for the use and benefit of his wife and children, share and share alike.

While there was no consideration in so far as the wife and children were concerned, there was consideration for the duty to pay bank debts of, to wit, $167,250.89. After paying those debts, there was left to the insurance fund in the hands of the trustee approximately $80,000; of this amount approximately $18,000 was exempt from the payment of debts when, as here, it was payable to the wife and children. There was then left of the fund about $62,000, which, under the terms of the trust deed, was also for the benefit of the wife and children, but which could in this suit be subjected to the claims of creditors existing at the time of the execution of the trust. So that, of the total sum of $249,148.25 in the insurance trust, only about $62,000 may be subjected to the demand of complainants.

The trust agreement as a whole was not on that account subject to be vacated, although it may be conceded that a proportion of the total sum should be held by the trustee to be for the benefit of complainants and other creditors of decedent.

It is of course true that a fraudulent grantee holds the property as a constructive trustee for the creditors.

We have adopted in this state a rigid rule as to declaring invalid voluntary conveyances against existing creditors, regardless of good faith in the transaction (contrary to the great weight of authority, 27 Corpus Juris, 548), and have held (likewise, it seems, contrary to the weight of authority, 27 Corpus Juris 498) that the fact the creditor is secured creates no bar to his suit to set aside such conveyance. Jones v. Peebles, 130 Ala. 269, 30 So. 564. Our decisions are based upon the theory that the grantee, without consideration, receives the benefit of the property of the debtor, which should be devoted to the payment of the grantor's debts — that one should be just before he is generous. Lockard v. Nash, 64 Ala. 385.

Admittedly the application of the rigid rule may work a hardship in some instances and appear somewhat unjust. Nevertheless the principle is now too firmly established in this jurisdiction to be now questioned, and we steadfastly adhere thereto.

The trustee of an express trust with duties to perform was in the discharge of these duties and in good faith made a loan of funds in its hands after having first secured an authorization thereof by decree of the court.

The authorities relied upon by complainants, and cited in the opinion of Justice BOULDIN, are those in which the grantees in the conveyances are held to so account. Upon what theory of equity and justice is this rigid rule to be extended to the trustee in this case who acted in good faith, and who was not a beneficiary of the trust? There is an old quotation found among the legal maxims, "What is just and right is the law of laws."

While out of regard for conformity to fixed rules and principles it may perhaps be doubted that this can be said to have universal application, yet it at least points the way to an ethical goal. Farmers' Bank Trust Co. v. Shut Keihn,192 Ala. 53, 68 So. 363.

The fixed and rigid rule against the grantee is in no manner disturbed by the refusal of its extension to the trustee, as here shown, acting in good faith. That such extension would work injustice in this case and render the trustee in effect a guarantor against the adversities of the economic world would seem clear. Our cases have gone to no such length, and we can see no just reason for such extension of the rule.

If in this transaction the trust agreement had included only the fund which was subject to the claims of creditors, it may be conceded for the sake of this argument that the trustee, named in the trust agreement, and also by construction of law, because of the fraudulent conveyance, would have no right to invest the funds, at least without authority of an equity court, without being personally due to account for the amount, in the event the investment should not be satisfactory to the creditors. In that event, the whole instrument would be subject to be vacated, for the whole of it would be voidable at the election of the creditors.

Section 8038, Code, declares that such conveyances are void. But this court has held that the conveyance is valid as to all the world except the creditors of the grantor. And that, while as to them the conveyance is void, "the thing which he [creditor] must, in all cases, no matter to what forum he addresses himself, do is to manifest an election on his part to treat the property as the property of the debtor." McCurdy v. Kenan, 185 Ala. 183, 64 So. 578, 579. As to creditors, the conveyance is voidable and not void. McCurdy v. Kenon, 178 Ala. 345,59 So. 489; Robins v. Wooten, 128 Ala. 373, 30 So. 681. They may elect to confirm it. Robins v. Wooten, supra, 128 Ala. 373, page 379, 30 So. 681. And, if the right is not seasonably asserted it is barred. The limitations applicable depend upon the circumstances of each case, as to whether it is for real estate, as in Van Ingin v. Duffin, 158 Ala. 318, 48 So. 507; Washington v. Norwood, 128 Ala. 383, 30 So. 405, or in other instances referred to in Quick v. McDonald, 214 Ala. 587,108 So. 529.

Until and unless the creditors exercise the election within the time required, the trustee is holding the property in trust. What will he do with it? He does not know, and has no duty to inquire what the creditors will do in an exercise of their election. They have no specific lien on the property, but only a right to pursue some course by which an election is manifested. Subject to that right, the conveyance in trust is valid as to all the world.

In this instance the rights of creditors attach to a relatively small proportion of the whole. It is undivided, and the trustee is charged with duties respecting the whole and all of it. He must therefore perform them. We do not think the trustee is doing any wrong when he proceeds with the enforcement of the trust in good faith as a whole until he is notified that the creditors have elected to claim that some of the trust funds are subject to their debt.

Dr. Gewin died in July, 1929. The insurance was all collected soon afterwards. The bank then proceeded to perform the trust. Property was high in value, and the bank probably indulged the reasonable presumption that the estate was largely more than solvent. The debts were secured by real estate mortgages supposed to be ample in value. But the financial crash came, and property began to depreciate. By February, 1930, the bank had paid sums as directed in the trust agreement, leaving approximately $70,000. By authority of the circuit court, in equity, this was loaned to the estate of decedent with a mortgage on property appraised to be of much more value than the amount of the loan. At that time none of the complainants had made claim. One creditor did make claim and was satisfied. The loan was made. But the security depreciated in value as did that on which complainants and others held mortgages.

When it became apparent the property would not pay the debts and the security for the loan dwindled to about $22,000, the creditors then for the first time took steps not to hold the bank for the $22, 000, but for a personal liability for the $62,000, which has been mentioned without accounting for any loss on account of such depreciation in value of the security.

It may be true that, when the bank made the $70,000 loan, as authorized by the court, it knew of the debts, but knew that they were all secured by mortgage on property worth much more than the debts. The circumstances were that the bank was a trustee of a substantial sum under the terms of an express trust. True, the bank knew at the election of creditors, then otherwise amply secured, they could subject a large part of that sum to their debts. In the meantime the bank must discharge the duties of the trust, including that part not so subject, and also be held to responsibility for profit which could be made on it all in event the creditors did not elect to subject that fund. The bank was trustee in a dual capacity, (one) imposing a duty to earn an income at least on a part, and on all, unless what then appeared a remote contingency should occur, and (the other) to stand as a constructive trustee, at the election of creditors. If the creditors finally decided to subject the fund, what claim would they make on the bank for interest? 12 R.C.L. § 149, p. 642. The trustee was under no duty to the creditors to tender this money to them. Apparently ample provision had been made for them, and decedent wished to protect his family from want. Must the trustee in the express trust, with duties to perform, hold this sum inactive until the creditors may elect to seize it, when, if they elect not to seize it, it may be he would be liable as for a breach of duty?

The treatment of the situation has been made by Justice BOULDIN as though decedent had made a voluntary trust of an amount, no more, which was subject to debts likely to be such as that demand will be made for it to satisfy them, with no other duty but to hold the fund until those creditors are barred by limitations from subjecting the fund to their debt.

But that is not the situation. Since he is here chargeable in a dual capacity, in one of which he may have duties subordinate to those of another upon an uncertain and remote contingency, his conduct in making the investment should be measured by the ordinary duties of a trustee. It seems to us that the trustee acted with due care in the observance of its duty in that respect, and should not now be held responsible for a financial depression which caused the property in trust to depreciate in value.

The bank had the right to accept the trust which included this fund as an inchoate element. It was not acting in bad faith in any respect. Equity will not require of such a trustee that he be superhuman in foreseeing future events. He must act as a prudent person in the discharge of all his duties. There can be no conflict of legal duty. Was it his duty to lend the money? Did he exercise due care and prudence when he did so? Did he violate any law?

When the whole situation is fully so considered, we do not think he did a wrong in lending this money by authority of his court of general jurisdiction.

We think that the circumstances show that the bank was innocent of any fraud. No one had any fraudulent purpose in creating and executing the trust. The rule is that, when so, though the grantee may be chargeable for the value of the property conveyed in violation of the rights of existing creditors, "he may relieve himself from liability to the creditors of his grantor by paying to bona fide creditors a sum of money equal to the value of such property." Miller v. Buell,226 Ala. 212, 146 So. 613, 614; Cottingham v. Greely-Burnham Grocery Co., 129 Ala. 208, 30 So. 560, 87 Am.St.Rep. 58; 12 R.C.L. 641, § 148; 27 Corpus Juris, 674.

When the bank loaned this money to the estate, it was all used, or due to be used, in paying debts of the estate, it then was where complainants had the right to have it go; that is, "to treat the property as the property of the debtor." McCurdy v. Kenan, supra. They must thereafter look to the executor for its proper disbursement. If it was subject to debts, the trustee was due to pay it to the executor for that purpose. Complainants had no lien until their suit was filed by which a lien was created. Barnes v. Bell (Ala. Sup.) 163 So. 616¹; McCarty v. Robinson, 222 Ala. 287, 131 So. 895; North Birmingham American Bank v. Realty Mortgage Co., 223 Ala. 30,134 So. 796.

It does not answer this to say that, when the money was paid to the executor, a debt was made by the estate to the trustee, because the value of that debt may be subject in this suit to complainants' claims. It is immaterial whether the executor used that money in paying those complainants or other bona fide debts.

It is true that the executor does not represent the creditors, but his testator, and has no more right to recover property fraudulently conveyed than the testator. Davis v. Swanson, 54 Ala. 277, 25 Am.Rep. 678; Davis v. W. S. Stovall Bro., 185 Ala. 173, 64 So. 586. But, when he has in his possession as such executor the assets of the estate which are subject to debts, those assets are where the creditors have the right to cause them to be, and cannot complain because they are so placed before they have elected to subject them to their debt, and thereby fixed a lien for their own account.

A fraudulent grantee is held to be a trustee in invitum, but, after the death of the fraudulent grantor, he is deemed an executor de son tort, enabling him to make any defense which could be made by the rightful executor, including the statute of nonclaim, Halfman's Ex'x v. Ellison, 51 Ala. 543; Simonton v. McLane's Adm'r, 25 Ala. 353, except where there has been no administration, Merchants' Nat. Bank v. McGee, 108 Ala. 304,19 So. 356. An executor de son tort may purge his wrong by taking out letters of administration or by delivering over the goods to the rightful administrator before action is commenced, and thereby be discharged from liability. Ward v. Bevill, 10 Ala. 197, 44 Am.Dec. 478. And, when one is executor de son tort and also the executor of right, his acts and conduct will be measured by his duty as rightful executor. Nance v. Gray,143 Ala. 234, 38 So. 916, 5 Ann.Cas. 55.

This same bank was therefore chargeable, first, as executor de son tort, and then as rightful executor, and as trustee under an express trust. If the fund was distributed by him in a way and manner as it should have been had no such voluntary donation been made, none of the creditors can make complaint, having secured no right in priority over others before such distribution. When defendant as rightful executor handled and disposed of the fund as such, in a lawful manner, others cannot complain because defendant may have also been accountable at one time as executor de son tort.

Nor can we agree with the opinion wherein the court's ruling on the matter of presentation of the claim of the Penn Mutual Insurance Company is overturned. The chancellor submitted to a jury the issue of fact as to such presentation, with the result of a verdict for defendant. In the exercise of his discretion, the chancellor accepted their finding, and adopted it as his own. Any ruling here to the contrary must evidently rest upon the theory, as argued by this cross-appellant, that due presentation was made to appear as a matter of law. To this we cannot agree. The claim of the Penn Mutual Life Insurance Company rested upon a mortgage on real estate presumably ample security for the debt. There were installment payments of principal and interest due annually. The demands made by this company for payment related to those installments and threatened foreclosure, if not so paid. The executor had reason to believe there were valuable equities in the property, well worth preserving for the estate, and we consider the reasonable inference that all correspondence and conversation were referable to these installments, and that at no time did said company make it known to the executor that it was looking to the estate for the principal not yet due.

It is not claimed there was any direct presentation; that is, any definite demand therefor. Cross-appellant's claim must therefore rest upon implication. The fact that the executor knew the amount of the debt does not prevent the bar of the statute. Brannan v. Sherry, 195 Ala. 272, 71 So. 106, 108. The governing rule is stated in this last-cited case as follows: "The actual formal presentation of the claim must be made by one having the right to make the presentation. In Jones v. Peebles, supra, the court said: ' "It is indispensable not only that the claim should be brought to the attention and knowledge of the executor or administrator, but this must be done by one having an interest in it, and a legal right to enforce its payment, and it must be evidenced by some act or word which indicates an intention to look to the estate of the deceased debtor for its payment." Allen v. Elliott, 67 Ala. 432, and cases cited. Or, to restate the principle in the language employed by Stone, J., in Smith v. Fellows, 58 Ala. [467], 472: "The result of our rulings on this question is, that to constitute a sufficient presentation, the nature and amount of the claim must be brought to the attention of the personal representative, by some one authorized in law or fact to make the presentation, and the representative must be notified, expressly or impliedly, that the estate is looked to for payment." ' "

There must be some formality of presentation, that is, something definite upon which the executor is supposed to act. Metcalf v. Payne, 214 Ala. 81, 106 So. 496.

We think the opinion lays too great a stress upon the knowledge of the executor rather than upon the question as to whether or not presentation was made as required. It may well be inferred from all the proof that cross-appellant was insisting only on installment payments as they became due, and foreclosure if not paid, and without any intention of presenting for payment out of the estate the principal sum, not yet due.

Reversed on direct appeal; affirmed on cross-appeal of the Penn Mutual Life Insurance Company, and on cross-appeal of Steiner Bros. Let the costs of appeal be taxed against the appellee on direct appeal.

ANDERSON, C. J., and GARDNER, THOMAS, FOSTER, and KNIGHT, JJ., concur.

BOULDIN, J., dissents on direct appeal and cross-appeal of the Penn Mutual Life Insurance Company and concurs on cross-appeal of Steiner Bros.

BROWN, J., dissents on direct appeal and concurs on both cross-appeals.

¹ 231 Ala. 84.