PURDY v. BANK OF AMERICA NAT TRUST SAVINGS ASS (1934)

Appeal by defendant from judgment of superior court for the county of Monterey holding that the crediting of the trustees' note with the amount of the deposit standing in their names, as trustees for plaintiff, was an unlawful taking of plaintiff's money, and that she was entitled to a judgment against the bank for the recovery of the amount thereof.

After affirmance, a petition for rehearing was granted.

The will of Alberto Trescony proved in Monterey county in 1894 appointed Julius A. Trescony and Robert F. Johnson trustees to hold, invest, manage, and control one–third of all the real property of the deceased for the use of two beneficiaries (grandchildren), one of whom is the (respondent) plaintiff.

In 1895 definite acreage was partitioned off to the trustees to be held, invested, managed, and controlled by them until the plaintiff, then Anita Christal, and Leo Albert Christal, then minors, respectively arrived at the age of 30 years, and to pay over to him or her, or to either of them, or to expend for him or her, or either of them, the income or such part thereof as such trustees deemed suitable until one or the other of them arrived at the age of majority, and, when the plaintiff and Leo Albert, or either of them, should attain his majority, the trustees were to transfer to the one so of age, and the other on like event, the accumulations so accrued, and annually thereafter to one or both so of legal age a share and portion of the net annual income of said trust property, less necessary expenses of said trust, until such time or times as the plaintiff and the said Leo Albert Christal shall respectively arrive at the age of 30 years, at which time or times the trustees were directed to pay over to the plaintiff or Leo Albert Christal, or to both of them, as the case might be, their respective equal shares of the trust property and the net income thereof, if any, less the necessary expenses of the trust.

In 1895 Trescony and Johnson opened a commercial account with the Salinas City Bank as the account of themselves, as trustees for Anita Purdy, then Anita Christal, and her brother, the beneficiaries referred to above; thereafter by successive borrowings they created an overdraft which, on December 31, 1908, was $13,836.97. On January 1, 1909, Trescony and Johnson opened a new account with that bank as that of themselves as trustees for Anita Christal Purdy, respondent, to which they caused said entire overdraft to be charged. On September 8, 1909, they gave the bank a note signed by them as trustees for Anita Christal Purdy and her brother. On December 20, 1914, a renewal note in the sum of $14,500 was given to the bank. That was signed “J. A. Trescony [and] R. F. Johnson, trustees for Anita Christal Purdy and Leo Christal.” The court found that the note last named was executed by them without any authority from the court permitting them to borrow money for the use of the trust or of the beneficiaries, and that the note did not bind the trust estate or the plaintiff, and that the plaintiff received no consideration for the said notes, or either of them, and that none moved from the Salinas Bank to the trust estate or to the plaintiff for the notes or for either of them; that on the 30th of October, 1916, the Salinas City Bank, without right, appropriated said deposit of $7,296.16 and applied the same in part payment of the promissory note dated December 20, 1914, for $14,500 without the sanction of the plaintiff and without any authorization so to do from any court. It is further found that the payment of the said promissory note was not secured by lien, pledge, or mortgage. At the time said appropriation of said $7,296.16 was made, plaintiff was not indebted to the trustees in any sum, but it was alleged by plaintiff and proved that at said time they were indebted to her in the sum of $11,548.15 and that no part of said sum had ever been paid by the trustees to her as beneficiary of said testamentary trust.

January 27, 1927, the defendant Salinas City Bank was sold to the Liberty Bank of America, by agreement made pursuant to section 31 of the California Bank Act (St. 1909, p. 95, as amended by St. 1921, p. 1373); February 19, 1927, said Liberty Bank of America, by similar agreement, sold to the Bank of Italy. March 1, 1927, said Bank of Italy was converted into a national association under the name of Bank of Italy National Trust & Savings Association. By an order of the trial court made July 12, 1930, the plaintiff on motion was permitted to substitute Bank of Italy National Trust & Savings Association, and was granted leave to file an amended and supplemental complaint over the objection of the substituted defendant; that, after granting the order substituting the Bank of Italy for the original defendant, the said bank with another bank, namely, the Bank of America of California, consolidated under the title of Bank of America National Trust & Savings Association, which filed an answer to the original complaint in the action without having applied for or obtained leave to answer anew the original complaint, and filed as well an answer to the supplemental complaint. One of the trustees died prior to the time of the filing of the answer of the substituted and ultimate defendant.

Among the defenses sought to be urged by the ultimate defendant in its answer were that the claim against it was barred by the limitation of section 338 of the Code of Civil Procedure and other sections of said Code.

The complaint alleged (after setting out the character of the trust as hereinabove recited and the making of the note in question) that about the 1st of January, 1909, the said Trescony and Johnson had opened a commercial bank account with the defendant bank as the account of themselves as such trustees for the account of Anita Christal Purdy, plaintiff, and one of the beneficiaries of the trust, to the credit of which account they caused to be deposited certain moneys collected and received by them as such trustees as the one–half share or proportion of the plaintiff of the income or earnings of the said trust, and that on October 30, 1916, there was on deposit with the defendant bank, to the credit of the account of Trescony and Johnson, as such trustees for the account of plaintiff, the sum of $7,296.19, which said sum was an asset of, and property of, the trust, hereinabove in the complaint more particularly described, for the use and benefit of plaintiff; that on October 30, 1916, defendant, without consent or sanction of plaintiff, or of said trustees or of either of them, and without first procuring an order or judgment of any court declaring the said promissory note to be an obligation of said trust estate or chargeable against the interest of the plaintiff in said trust property, fraudulently, wrongfully, and without right appropriated all of said balance standing to the credit of said trustees for plaintiff's account in said account with the bank, and applied said sum in part payment of the principal of said note of said Trescony and Johnson.

Defendant Salinas Bank demurred to the complaint generally and for uncertainty, in that it could not be ascertained whether the promissory note referred to was executed and delivered to defendant upon a good and sufficient consideration; it being alleged merely that there was no consideration “moving from the defendant for said promissory note.” The demurrer was overruled.

Defendant Salinas City Bank made answer to the complaint as follows: It denied that Trescony and Johnson as trustees, or the plaintiff, did not receive consideration for the note referred to, and denied that no consideration moved from the defendant bank for said note, but alleged that the consideration for the note was money loaned by the defendant to Trescony and Johnson, as trustees of the trust in question. It denied the insolvency of either of the trustees. It admitted “that the sum of $7,296.19 referred to in the complaint was on October 30, 1916, an asset and property of the trust referred to in the complaint, but nevertheless subject to the right of defendant as a commercial bank to set off the same and credit the same upon the indebtedness of said trustees and said trust estate to the defendant.” It denied that the defendant had fraudulently, wrongfully, or without right appropriated said balance, or any part thereof, or had fraudulently or without right applied said sum in payment of the principal in said note given, in whole or in part.

For a further and separate defense, defendant alleged that on October 30, 1916, Trescony and Johnson, as trustees of said trust, and the trust estate represented by them, and the beneficiaries thereof, Anita Christal Purdy and Leo Albert Christal, were indebted to the defendant in an amount in excess of $14,500 for moneys loaned and advanced to said trustees for the use and benefit of the trust estate, and that at the time of said loan defendant was engaged in business as a commercial banker, and has been at all times since, that defendant was not secured, and that the deposit referred to in the complaint was placed with the defendant as a general commercial deposit, and remained such until its appropriation by the defendant and that on the 30th of October, 1916, defendant appropriated the entire deposit in partial satisfaction of said indebtedness and credited the same upon said note and upon its books in partial liquidation of the debt.

The bank appellant justifies the appropriation of the deposit as the proper exercise of a banker's lien (section 3054, Civ. Code), contending that cross–demands existed which were compensated pro tanto under section 440 of the Code of Civil Procedure. The argument advanced is that the testamentary trustees whose powers are hereinabove defined were agents for the trust property or estate, and as such had the right to incur the debts represented by the overdrafts and to make the note to cover them, relying on section 2267 of the Civil Code. That section reads as follows: “Trustee's powers as agent. A trustee is a general agent for the trust property. His authority is such as is conferred upon him by the declaration of trust and by this chapter, and none other. His acts, within the scope of his authority, bind the trust property to the same extent as the acts of an agent bind his principal.” (Italics for emphasis.) Obviously, if the trust instrument does not confer the power to incur the debt and/or give the note, it does not exist because nothing contained in the chapter of the Code referred to does. The section is a mere statutory statement of an equitable principle.

In Pomeroy's Equity Jurisprudence, vol. 3 (3d Ed.) § 1062, is the following: “Under the general obligation of carrying the trust into execution, trustees and all fiduciary persons are bound, in the first place, to conform strictly to the directions of the trust. This is in fact the cornerstone upon which all other duties rest, the source from which all other duties take their origin. The trust itself, whatever it be, constitutes the charter of the trustee's powers and duties; from it he derives the rule of his conduct; it prescribes the extent and limits of his authority; it furnishes the measure of his obligations. If the trust is express, created by deed or will, then the provisions of the instrument must be followed and obeyed.”

It is the duty of a trustee when in doubt as to his right in borrowing money to make the same a charge upon the trust estate, to seek instructions from the appropriate court, either the court in probate when jurisdiction is retained or by an independent application. “Whenever there is any bona fide doubt as to the true meaning and intent of provisions of the instrument creating the trust, or as to the particular course which he ought to pursue, the trustee is always entitled to maintain a suit in equity, at the expense of the trust estate, and obtain a judicial construction of the instrument, and directions as to his own conduct.” Section 1064, Pomeroy's Equity Jurisprudence, vol. 3 (3d Ed.).

This trust instrument does not in terms give to the trustees the right or power to borrow money or to incur indebtedness to be charges upon the trust estate. In Pomeroy's Equity Jurisprudence, (3d Ed.) volume 3, note under section 1085 at page 2102, we find the following: “Beatty v. Clark, 20 Cal. 11, 30, shows what payments made by a trustee out of his own funds, and what advances made to him by third persons, can be an equitable lien upon the trust property, namely, if the payment by himself, or the loan by the creditor, was not expressly authorized by the trust instrument, such payment or loan must be necessary for the preservation of the property, or to prevent a failure of the trusts.”

By the instrument in question the trustees are given the power to hold, invest, manage, and control certain real property and to pay the income, as above indicated.

The question is then presented whether the power to borrow money is one implied from the power to manage and control the property in question, and, if it were conceded for argument's sake that such power arose by implication, the test of the right to exercise the same would be in the purpose for which the money was borrowed and used; namely, for the preservation of the property or to prevent the failure of the trust. It would seem only logical that the burden cannot be upon the plaintiff to show that the money was not borrowed for either of these purposes and put to such use, but, to the contrary, that the burden would be upon the bank which assumed the right to charge the trust estate to show that the money was loaned to the trustees and used by them for the necessary purpose of preserving the trust estate. Appellant takes the position that the complaint contains no averment whatever as to the lack of authority on the part of the trustees to borrow money for the account of the trust estate; the allegation going merely to the lack of authority on their part to execute the $14,500 promissory note without order of court, and to the lack of authority on the part of the Salinas Bank to appropriate the deposit in question without order of court. (Appellant's opening brief, p. 11.) This view does not seem to be tenable because the complaint pleads in full the trust instrument.

The fundamental inquiry, answer to which is determinative of the right of the bank to charge or “bind the trust property” with the amount of the loan or note, arises under section 2267 of the Civil Code, while the method of the appropriation, under section 3054, Civil Code, is of secondary consideration. That section provides merely the mechanics by which a deposit may be absorbed, assuming the freedom of the deposit as a part of the trust corpus from protection due to want of authority of the trustees to render such trust corpus liable for the debt.

The right and power to bind the trust property would seem to be analogous to the right and power to assert an equitable lien. It has its origin in the bestowal of a benefit upon the thing sought to be charged with the burden thereof. Applying this reasoning to the facts of the instant case, the defendant occupies the position of a would–be equitable lienor, and it must show that it has contributed to the integrity or preservation of the trust property. It need not have resolved the question of the trustees' power to borrow and thus to charge the trust property. It might have caused that question to be answered by the court. It assumed, however, to interpret the trust instrument, and must be held to have done so at its peril. Surely if it were asserting its right to an equitable mortgage on the trust property it would have to show that its advances had gone into or had been expended upon it for its preservation or necessary advantage. The answer of the Salinas City Bank admits that such funds as it took were of the corpus of the trust.

We come now to the question whether any violence has been done to the rights of the ultimate nominal defendant (appellant bank) because of the judgment rendered in spite of the denials asserted by it in its answer to the supplemental complaint. The supplemental complaint was a mere repetition of the original complaint except to the extent that it set out that the account of the trustees with the beneficiaries of the trust had become final and that a copy thereof was attached thereto. Since the purchasing defendant bank stands in the shoes of the original defendant bank, it was unnecessary that any supplemental or any complaint be filed against it to bring it into the action. In any aspect of the case, the fact that the ultimate defendant denies for want of information those allegations of the original and supplemental complaint in respect to the character of the deposit which were admitted by the original defendant cannot deprive the admission of the original defendant of such evidentiary effect as was given it by the trial court.

Appellant contends that the claim of plaintiff is barred by subdivision 1 of section 338, Code of Civil Procedure, on the ground that a claim against a purchasing bank for an alleged liability of the selling bank is upon a statutory liability. Suit herein was commenced about two months after the appropriation. Trial was in progress when the attorney for defendant Salinas City Bank suggested that submission should not be had until the determination of the case of Purdy v. Johnson, a pending suit by respondent against the testamentary trustees for an accounting. The court adopted the suggestion. The original trial judge died and a new trial was had, resulting in the judgment appealed from.

If by section 31 of the California Bank Act (as amended by St. 1921, p. 1373) the ultimate purchaser of the Salinas City Bank stands in the shoes of the original defendant, the statute of limitations cannot be successfully urged. In the sense in which appellant construes the words “statutory liability,” it cannot be said that the defendant bank is bound. The provisions of the California Banking Act compel a purchasing bank to assume every obligation of the purchased bank.

Section 31 of the California Bank Act reads:

“The rights of creditors of the selling bank shall not in any manner be impaired by any such sale [of its banking business], nor shall any liability or obligation for the payment of any money due or to become due, or any claim or demand, in any manner, or for any cause existing against such selling bank, * * * be in any manner released or impaired, and all the rights, obligations and relations of all the parties, creditors, depositors, trustors and beneficiaries of trusts shall remain unimpaired by the sale, but such bank to which the other shall sell all its business or all the business of any of its departments, shall succeed to all such relations, obligations, trusts and liabilities and be held liable to pay and discharge all such debts and liabilities and to perform all such trusts of the selling bank in the same manner as if such bank to which the other had sold had itself incurred the obligation or liability or assumed the relation of trust.”

This is in harmony with the view expressed in Barreiro v. Bank of Italy National Trust & Savings Association, 125 Cal. App. 153, 13 P.(2d) 1017. The progressive sales and purchases from and by the original bank to the ultimate defendant have no greater significance in the premises so far as concerns the obligation in suit than would a change of name of the bank.

Error is urged by appellant in overruling the demurrer of the purchasing bank for nonjoinder of the trustees individually or as trustees. In view of the fact that the trustees were called upon to take proceedings to cause a restitution of the property appropriated by the bank, and declined to do so, they are not necessary parties to this suit. They are estopped to assert any claim against the bank and thus any double payment by the bank is prevented. Assuming that they might have been proper parties, this case did not finally come on to trial and was not submitted until after the distribution of the trust estate to the plaintiff, and therefore not until after the trust period had elapsed. It was appropriate, in consequence, that judgment be rendered in her favor directly against the bank as the trust had lapsed.

Appellant says that the decision is against law because no finding was made upon the issue raised by the answer which alleged “an indebtedness by the trustees of plaintiff in the sum of about $14,500 for money advanced to them as such trustees, which was unsecured, and was due, owing and unpaid at the time of the appropriation in question.” An express finding upon that subject was unnecessary, for the reason that this case was tried and decided upon the theory that under section 2267 of the Civil Code, the trustees had no right or power to bind the trust estate for the amount of the note, or of any overdrafts which the note represented. Therefore there is an implied finding that there was no indebtedness by the trustees of the plaintiff as such in that or in any sum to the bank.

Appellant argues that there is a presumption that the trustees did not embezzle the borrowed money, and that hence it must be also presumed that they used it in connection with the management and operation of the trust estate that it might yield plaintiff an income. This deduction does not follow because the right to bind the trust property flows either from an express power to borrow or from a showing (here absent) that the money was used for the preservation of the trust property or to prevent a failure of the trust. Again it is urged that “the trustees made advances to Mrs. Purdy herself”; but it is conceded that the amount thereof “does not appear.” The evidence is uncontradicted that Mrs. Purdy had no knowledge of the borrowing or of the note in question.

In conclusion, says appellant, in any case “Mrs. Purdy had the benefit of the money loaned by the bank, either because it was used to enable the trustees to produce an income for her, or because it was actually advanced to her. Consequently, to permit her to recover a judgment against the bank is in effect to compel the bank to pay her twice, which is a glaring injustice.” This statement is grounded upon assumption rather than upon proof. Judgment is affirmed.

McNUTT, Justice pro tem.

We concur: TYLER, P. J.; KNIGHT, J.