IN RE: MACMILLAN'S ESTATE.* MACMILLAN v. DOCKWEILER et al.
The administrator appeals from those portions of the order settling final account and decree of distribution as follows:
‘The account of the administrator is hereby surcharged in the sum of $12,956.99, and it is hereby ordered, adjudged and decreed that Alice M. Dockweiler, Herbert Macmillan Booth and Malcolm R. Macmillan do have and recover said sum from R. S. Macmillan, as administrator, together with interest at 7% per annum from date of the entry of this decree, and it is ordered that execution issue therefor.’
The grounds of appeal are that (1) the amounts of the trustee's annual distributions were beyond appellant's control; (2) the amount of the surcharge was derived without factual foundation; (3) such amount is based largely upon matters recited in his first account which had been finally approved. The fallacy of appellant's logic will appear from the following account of his stewardship.
Herbert R. Macmillan died intestate January 13, 1945, leaving an insolvent estate, a brother and four heirs. His brother is R. S. Macmillan; his heirs are two sons, Gordon and Malcolm, a daughter, Alice Dockweiler, and a grandson, Herbert Macmillan Booth. The principal assets of his estate were 1918 shares of Macmillan Petroleum Corporation inventoried at $21,098, and the Thrash lease in the east Texas oil field and situate in Rusk County, appraised at $70,500. The potentialities of the lease were not wholly known at the time of decedent's passing but were fairly well obscured by decedent's debts, the asserted claims of Gordon in excess of $190,000 and by the latter's claim that a dispute existed between him and his father as to their respective interests in the Thrash lease. The result of the impact of Gordon's claims with the administrator's duties was a compromise, and the ensuing contract of April 19, 1946 provided in part:
‘The parties hereto agree as follows: 1. All right, title and interest in and to said lease (hereinafter for convenience called ‘the Thrash lease’) and in and to the production therefrom, excepting the 12.5 per cent royalty reserved to the original lessor, and excepting also the 9.834 per cent hereinbefore referred to, is owned by Gordon Macmillan, in trust, however, for himself and the estate of Herbert R. Macmillan, deceased, as follows:
Gordon's claims were thereby rejected except the demand for $41,300 for his services in managing the Thrash lease. That claim was approved on condition that when it should be paid the trustee would loan to the administrator $27,500 without interest, repayable prior to final distribution of the estate. Thereafter, and pursuant to the contract which was approved by the court, Gordon administered the Thrash lease as trustee, in Los Angeles where the oil runs of the pipeline company were deposited by the trustee and the administrator maintained his principal office.
The administrator made an unwholesome beginning by bargaining with the trustee for a loan to be used by the estate to be repaid at an indefinite time. By such act, the administrator placed himself in a position whereby he might be tempted to serve the trustee rather than the best interests of the estate and initiated a policy of condoning the trustee's withdrawals of the trust's income for his personal advantage.
For illustration, Gordon had, for a salary of $250 per month, managed the Thrash lease for two years prior to the passing of decedent in January 1945. During that period the 47 per cent interest in the lease had paid about $40,000 net annually. Immediately following January 1945, Gordon as trustee suspended payment of dividends. Instead of fixing the dates for the payment of dividends and demanding compliance, appellant permitted the trustee to determine the annual amount (70 per cent of the net profits) to be divided among the beneficiaries, but silently acquiesced when Gordon departed from his own program. From the financial statements issued by the trustee, it was disclosed to appellant that while the trustee had ceased to pay dividends, he was constantly withdrawing the revenues of the trust and using them for his own account. Such withdrawals reached a high aggregate in May 1949 of $81,635.57. Nor was haste made in reducing his debt or in returning to a normal policy of dividing the earning with the estate. In November 1950 he was still personally in debt to the trust in the sum of $78,196.49. At that time he had already taken from the trust $86,637.14 which did not include his traditional debt to the trust of $35,512.49 at the end of July 1948. He did not offer to use his individual holdings to pay his debt or consult his co-heirs or consider the welfare of the estate, but awaited the cumulation of the dividends out of the profits of the trust and his fees as trustee to pay back the money he had taken.
There could be no excuse for the administrator's failure to know of the misappropriations. Statements on behalf of the trust were periodically issued and were currently examined by him. Indeed, when appellant had his only discussion with Gordon in July, 1948, concerning the lax handling of the finances of the trust, he told the latter that trouble was brewing and a restoration of such funds would be required before the estate could be closed. He made no demand for payment; in fact, he never became concerned about the perilous situation of the estate's welfare because he felt the trustee ‘had plenty of assets and I could make him put up the money.’ Notwithstanding such gratuitous reflections on Gordon's ability ultimately to restore the funds of the trust to the beneficiaries he knew that he could not close the estate until its debts were paid, knew that the only source from which the necessary money could be derived was the estate's interest in the Thrash lease and knew that with the passing of each day the possibility of a forced sale of the 47 per cent interest grew apace; knew that with the possible, adventitious occurrence of Gordon't demise the estate's capital assets might be dissipated. He knew the situation required exacting from the trustee a prompt and punctual repayment of the funds he had taken but the administrator made no demand for a return of the misappropriated funds or a dividend of recent profits of the lease. Although the income of the trust estate had been constant and fairly uniform for six years, the administrator borrowed from ‘the trustee’ funds for payment of debts, while at the same time he did not ask the debtor to honor the estate with a dividend of surplus revenues. Although for the three years ending July 31, 1948, the profits of the trust were $112,836.541 not a dime was divided among its beneficiaries. While its profits during the six years ending July 31, 1951, were $253,036.73, only $113,125 or 45 per cent of the profits were paid in dividends during the same period while Gordon's debt to the trust continued to mount with his successive withdrawals. It would have required no more intelligence and training than that of a field hand for an administrator to discern that the trust's available funds would justify reasonable annual dividends; that the trustee was not dealing fairly with his beneficiaries; that by his personally using the income and depriving the beneficiaries thereof, they would surely suffer loss by reason of the unorthodox management of the trust, and that his methods might be corrected by the timely action of appellant.
The finding was that for the years 1947 to 1949, inclusive, the trustee could have paid $53,000 in dividends, whereas he paid only $32,564.29. But when he realized his sins were about to find him not, in order to obtain income to reduce his personal indebtedness to the estate, he paid exorbitant dividends throughout the succeeding three years (1950–1952) to the detriment of the beneficiaries whose taxes were, by reason of the trustee's conduct, necessarily enhanced.
Payment of reasonable dividends by the trust to the estate during the three years ending July 31, 1949 would have exceeded by more than $20,435 the amount actually paid. The amount of dividends necessary to pay the estate its share of a reasonable dividend for the same three years was $38,044. Practically all of it could have been paid at the same time out of the funds borrowed by the trustee with appellant's approval. In other words, if all the sums ‘borrowed’ by the trustee had been paid to the estate and thence to the heirs in 1947 through 1949 as dividends, reasonable dividends could have been paid to all beneficiaries of the estate.
Not only did appellant know that the trustee had assets other than his interest in the Thrash lease and that he was not applying them to his indebtedness to the trust, and was waiting for his dividends from the trust to pay his debts, but appellant knew also that in December 1947 he had borrowed from the trust $12,900 while the trustee owed the trust $13,000 and he knew that a reasonable dividend could have been paid by the trust at that time with the moneys the two men owed the trust. Likewise, one year later the trustee was still delinquent. The trust had earned $51,700.62 in the fiscal year but he still owed the trust $39,998.43. That sum in the treasury of the trust could have paid a neat dividend to the estate and have prevented the extra, generous, subsequent, increased dividends. But it was not there and the estate had no administrator to attempt to correct the erring course of its chief debtor who was also the source of practically all its revenues. While the trustee paid a total dividend of $30,000 in 1949, he still owed the trust $51,592.47, and the aministrator owed it $21,005.03. It is thus seen that while appellant was condoning the trustee's frenzied finance, he was inviting a certain loss by the estate and its beneficiaries. Had the trustee paid the estate out of the profits of the trust the estate's share in regular annual, fair dividends, the income taxes would have been levied upon only the estate's receipts during those years; but because of the receipt of excessive dividends in 1950 and subsequent years, the estate was required then and subsequently to pay more than it would have paid out of reasonable dividends regularly and annually paid during administration. That excess of income taxes paid by virtue of the failure of appellant in the first four years of his regime to exhaust his endeavors to obtain larger dividends was $12,956.99, the amount surcharged to appellant's account.2 The amount of such surcharge is due mainly to the dividend paid by the trust to the estate on December 13, 1951 in the sum of $44,769.38, at the same time Gordon's own share of the dividend enabled him to pay his debt to the trust in the sum of $38,831.46 and to discharge appellant's debt of $10,001.74 due the trustee. The tax levied on the estate's income for that year was $20,861.82. By such method of treating the income of the estate it lost $16,413.50 in excessive income taxes in 1951, which it would not have paid had the trustee declared and paid reasonable dividends annually from 1947 out of the trust's earned net profits during those years.
In answer to the finding of his behavior as depicted in the foregoing, appellant contends that he was powerless to control the discretion of the trustee in the latter's exercise of his official powers. The trustee's discretion was never involved. He had a deliberate program to operate his office for the aggrandizement of his own wealth, while instead of opposing such policy because of its effect upon the estate, appellant's indulgence and indifference nurtured it and his loans from the trustee actually encouraged the latter in his thoughtless course. Solely by reason thereof the estate was required to pay excessive taxes and penalties to the extent found by the court, $12,956.99.
Court's Method of Computation Was Correct
(1) Appellant attacks the trial court's method of computing the surcharge. He says a dividend was declared in 1946 for the benefit of all interest holders in an amount equal to decedent's debt to the trust at his death. Assuming that the estate's income in 1946 had been increased by the distribution of $66,466.93, the surcharge would be the same for the reason that it is based on appellant's negligence during the years 1947 to 1951. No penalty is claimed on account of the transactions of 1946.
(2) Appellant argues that since the court found the net earnings of the trust for the year ending with July 1947 were $38,151.39, of which the estate's share was $20,492.64, a dividend of $14,000 should have been paid to the administrator that year. Had such been done, he says according to the trial court there would have been an income tax payable by the estate in the sum of $4,499.87. But, he contends, in obtaining that result, the court did not consider the prior commitment of $66,466.93 as to the distributions and therefore the trustee did not then have sufficient funds to pay a $26,000 dividend.3 But that dividend was assumed by the trial court based upon the funds the trustee had available to lend to himself and the administrator in November, 1947. Therefore, the computations performed by appellant are a gratuitous irrelevancy. The trust had the net earnings in its treasury and in the possession of the trustee and the administrator with which it could have paid a dividend in 1947 in the amount of $26,000.
(3) Appellant contends that the dividend of 1946 in the sum of $66,466.93 was not considered as income to the estate and necessarily therefore, the computation of the surcharge was based upon a false support. But the ‘dividend’ of 1946 was not income. That sum was arbitrarily declared a ‘dividend’ in order to cancel the indebtedness of decedent who had died 17 months before, owing the trust $66,000. Now, if it be assumed that the estate would have been increased by the amount of $66,466.93, the surcharge would not have been diminished. Its computation was based upon appellant's negligence in the years 1947 to 1951. Appellant had so managed the estate that his negligence caused no damage until the exorbitant income taxes were assessed for 1950 and 1951. There was no penalty resulting from the extra ‘book’ dividend in 1946. On the other hand, had the computation of the loss been based upon the income of 1951 only, the surcharge would have been $16,413.50 or $3,456.51 more than the judgment.
Appellant finally contends that there is ‘only one year, 1951, in which according to the exceptants' and the trial court's computations, the so-called ‘negligence’ of the administrator resulted in higher income taxes for which the administrator is surcharged.' This argument was substantially answered in the preceding paragraph wherein it is shown that a consideration of appellant's acts over the entire five-year period provides the only fair method of computing the loss to which he had subjected the estate by his supine negligence if not by his conscious acquiescence in the trustee's abuse of his power. Appellant undertook to shift the responsibility for the extra generous dividend in 1951 to the heirs by testifying that he complained to the trustee that it was too large ‘but I felt that the heirs were so adamant about getting this thing closed up. * * * They put the pressure on to get this estate closed.’ The only ‘pressure’ that adorns the story of this controversy is the urgent demands upon the trustee to square his own account with the trust. In his heat to comply, Gordon declared the dividend of $44,769.38 causing a tremendous loss to the estate by way of the onerous income taxes that would have been reasonably mild had appellant duly taken action to enforce payment of the trustee's account by payment instead of acquiescing in Gordon's declaration of a large dividend in order to pay his own debt to the trust.
Final Account Basis of Surcharge
Appellant contends that the surcharge was based ‘in large part upon matters reported in the Administrator's First Account’ which had been approved, citing Probate Code, section 931; Estate of Roberts, 27 Cal.2d 70, 78, 162 P.2d 461; Security First National Bank of Los Angeles v. Superior Court, 1 Cal.2d 749, 37 P.2d 69. But in his final account, appellant claimed credit for $19,250.16 paid to U. S. Internal Revenue Collector as income taxes for 1951 and $1,611.66 to California for the same year. Basing its conclusion on the finding of the disproportionate, unnecessary and excessive income of December 13, 1951 ($44,769.38) and of appellant's encouragement of such payment, the court adjudged the surcharge. Neither prior accounts of appellant nor the payments of dividends of the earlier years of the estate were included in the court's computation.
It was the duty of appellant as the personal representative of the heirs of decedent to prosecute such actions as were essential to the preservation of the corpus and revenues of the estate. Probate Code, secs. 573, 612; Landis v. First National Bank, 20 Cal.App.2d 198, 207, 66 P.2d 730. It is obligatory upon him to pursue his duties promptly and expeditiously. Colden v. Costello, 50 Cal.App.2d 363, 372, 122 P.2d 959. Because the trial court found upon competent evidence that appellant failed to perform his duties in the respects herein related, the order and decree should be and are affirmed.
I dissent. This is an appeal by R. S. Macmillan,1 as administrator of the estate of Herbert R. MacMillan, deceased, from those portions of the order settling the final account and decree of distribution reading as follows:
‘The account of the administrator is hereby surcharged in the sum of $12,956.99, and it is hereby ordered, adjudged and decreed that Alice M. Dockweiler, Herbert Macmillan Booth and Malcolm R. Macmillan do have and recover said sum from R. S. Macmillan, as administrator, together with interest at 7% per annum from date of entry of this decree (Oct. 24, 1952), and it is ordered that execution issue therefor.’
Facts: Decedent died intestate on January 13, 1945, and letters of administration were issued to his brother. He left as heirs two sons, Gordon Macmillan2 (appellant), and Malcolm R. Macmillan; a daughter, Alice M. Dockweiler, nee Alice Macmillan; and a grandson, Herbert Macmillan Booth, son of a deceased daughter.3
The principal assets of the estate consisted of (1) an oil and gas lease in Texas known as the Thrash lease and (2) 1,918 shares of the capital stock of Macmillan Petroleum Corporation.
During the lifetime of decedent a dispute existed between himself and Gordon as to what portion or share each owned in the Thrash lease. After the death of Herbert R. Macmillan the administrator and Gordon entered into an agreement dated April 19, 1946, which was approved by the probate court on June 7, 1946. This agreement contained the following provisions:
‘3. R. S. Macmillan as administrator of the estate of Herbert R. Macmillan, deceased, will quitclaim to Gordon Macmillan all right, title and interest of the estate of Herbert R. Macmillan, deceased, in and to any interest in the Thrash lease or the production therefrom, other than the 47 percent undivided interest held in trust by Gordon Macmillan for the heirs of Herbert R. Macmillan, deceased.
‘4. Gordon Macmillan waives any and all rights which he has or may have to participate as an heir or distributee in the matter of the estate of Herbert R. Macmillan, deceased, in and to such 47 percent, and hereby assigns all his interest therein, as heir or otherwise, to the other heirs of Herbert R. Macmillan, deceased, share and share alike.’
By this agreement Gordon became the trustee of a 47% undivided interest in the Thrash lease for the heirs of decedent other than himself. In consideration of this agreement the administrator agreed to approve a claim of Gordon, individually, against the estate in the sum of $8,651.74, while Gordon agreed to the rejection of a claim filed by him as trustee in the sum of $99,114.78.
The net appraised value of decedent's estate was, $97,788.13. The appraised value of the estate's 47% interest in the Thrash lease was $70,500, and of the 1,918 shares of Macmillan petroleum stock, $21,098 (or $11.00 per share).
From the date of decedent's death until the filing of the final account on February 20, 1952 (approximately 7 years) the total income exclusive of a credit of $66,466.93, which the parties mutually agreed had been received by decedent during his lifetime from the Thrash lease, was $131.956.68, of which $124,333.82 was received as distributions (sometimes called dividends), from the Thrash lease and $7,384.30, as dividends on the Macmillan petroleum stock.
It was further agreed that Gordon should pay to himself individually $41,300 as compensation for managing and operating the Thrash lease out of which sum Gordon was to loan the administrator $27,500 to be repaid without interest before the final distribution of the estate.
The dividends received from the trust, and the taxes paid thereon by the estate are as follows:
Respondents claim that the administrator ‘has been grossly negligent in the administration of the estate due to his failure to properly supervise the income received by the estate from the Thrash lease, with the result that the estate has paid burdensome and unnecessarily excessive income taxes on its income from said lease.’ Respondents support this claim by asserting that the trust could have declared dividends in the following table, and that the taxes would have been as indicated, which would have resulted in the estate paying $12,956.99 less than it actually paid in taxes.
This is the question presented:Was the administrator negligent in the administration of the estate in not compelling the trustee of the Thrash lease to make annual distributions from trust income in such amounts as would best suit the income tax situation of the estate without regard to the tax situation of other beneficiaries and the discretionary right of the trustee to maintain adequate reserves for contingencies?
This question must be answered in the negative and is governed by these pertinent rules:
(1) Courts do not attempt to exercise the discretion which has been confided to a trustee unless such discretion has been abused in some manner. Where the amount to be paid is to be determined by the trustee, the court should not specify the amount of payments to be made where the trustee's refusal to make such payments is based upon the belief that they are improper in the absence of a showing that the trustee is negligent or has otherwise abused his discretion. The rule is aptly stated by Mr. Chief Justice Gibson in Estate of Marre, 18 Cal.2d 184, 190, 114 P.2d 586, 590, thus:
‘It is well settled that the courts will not attempt to exercise discretion which has been confided to a trustee unless it is clear that the trustee has abused his discretion in some manner (citing authorities).’
‘It is the general rule that if the power of the trustee is discretionary, and the trustee is fairly employing his judgment to advance or not to advance, the court will not control his action merely because it disagrees with him, but it must find some abuse of discretion or bad faith before it will interfere. (Bogart on Trusts & Trustees, Vol. 4, Part 1, pp. 168–169.) The court should not be burdened with the duty of administration, nor required, nor permitted to substitute its judgment and discretion for that of the trustee so long as it acts within proper limits; nor in any event until there is an entire failure or refusal on the part of the trustee to perform its duty.’ (In re Estate of Greenleaf, 101 Cal.App.2d 658, 662, 225 P.2d 945, 948; City Bank Farmer's Trust Co. v. Smith, 263 N.Y. 292, 189 N.E. 222, 223, 93 A.L.R. 598; cf. Cleveland Clinic Foundation v. Humphrys, 6 Cir., 97 F.2d 849, 121 A.L.R. 163, 174.)
(2) A trustee can properly withhold a reasonable amount of the income to meet present or anticipated expenses which are properly chargeable to income. (Restatement of Law of Trusts (1935) Vol. I, sec. 182, Comment b, p. 467; see also Scott on Trusts, Vol. 2d sec. 182, p. 969; Shirk v. Walker, 298 Mass. 251, 10 N.E.2d 192, 197, 125 A.L.R. 620.)
Applying the foregoing rules to the facts of the instant case it is clear that it rested in the discretion of the trustee of the Thrash lease, Gordon, to determine the amount and times of the payment of dividends to the estate, which discretion in the absence of a showing of abuse thereof was not subject to the control of the court let alone to that of the administrator of the estate. It follows that since the administrator had no power to control the amounts of the trustee's distributions, he was not negligent in not trying to do what he had no legal power to do. The administrator (appellant) in his brief aptly illustrates the soundness of this position by saying:
“The manner in which a trustee shall exercise his function rests ordinarily within his discretion. If he exceeds his powers, acts negligently, or abuses his discretion, a beneficiary injured thereby may have redress, but a beneficiary has no power to control the action of the trustee.' (City Bank Farmers' Trust Co. v. Smith, 263 N.Y. 292, 189 N.E. 222, 223, 93 A.L.R. 598.)
‘Applying this rule to the instant case, it is apparent that R. S. Macmillan as administrator of the estate of Herbert R. Macmillan had no power to control the amounts of the trustee's annual distributions, and it follows that the administrator was not negligent in not trying to do what he had no legal power to do.
‘By way of emphasizing the point, let us consider the situation in which the trustee would have found himself, if two (or more) of the beneficiaries had insisted on his making a distribution to suit the respective income tax problems of each, and one had asked for a large and the other for a small dividend. Manifestly, the trustee could not be compelled to satisfy such conflicting claims, nor could he do so. Some one must have the last word and that some one is, [in the absence of an abuse of discretion] and must be, the trustee.’
It should be noted that if Gordon, as trustee of the Thrash lease, acted improperly, the remedy is by a plenary suit against him for his misconduct. Such a suit, counsel stated in the oral argument, is now pending. However, the issues in such action were not before the probate court nor are they before this court on appeal.
Those portions of the order from which an appeal is taken should be reversed.
1. Year ending July 31, 1946 $22,984.53Year ending July 31, 1947 38,151.39Year ending July 31, 1948 51,700.62
2. A chart has been prepared showing the actual income taxes paid, the assumed income taxes based upon the income that should have been paid out of actual profits; also, the annual difference during the five years, as follows:YearActual Income TaxesAssumed Income TaxesDifference1947$ 174.91$ 4,499.87$ 4,324.9619485,060.976,243.831,182.8619494,791.656,502.621,710.97195010,432.826,670.54-3,762.28195120,861.824,448.32-16,413.50$41,322.17$28,365.18$-12,956.99
3. The estate's share of a $26,000 dividend paid by the trust would be about $14,000.
1. Hereinafter referred to as the administrator.
2. Hereinafter referred to as Gordon.
3. Mrs. Dockweiler and H. M. Booth will be hereinafter referred to as respondents.
MOORE, Presiding Justice.
FOX, J., concurs.