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TRUSTS I. EXPRESS TRUSTS. This first section deals with intentional "express" trusts, whether oral or written.
Ordinarily, especially in the case of trusts created by a written will, the language which the court is called upon to interpret has no fixed and distinct legal meaning, and so the question is "what does this language mean to convey?" To create a trust, it is not necessary that the word "trust" be sued, but if the language, fairly interpreted, means that the one to whom the property is transferred, or who is alleged to have made a declaration of trust, is to be legally bound to use it for the benefit of others, a trust arises. If, on the other hand, no such intention can be found, but only an expression of a wish or hope or desire that the property shall be so used, without any binding obligation being intended, no trust will be created. In view of the various phrases which can be and have been used, all susceptible of different constructions, it is clear that in many cases the court makes a reasonable guess as to intent. In some historical cases the meaning is reasonably clear: For example, in one well known case, the property was left by will to the wife of the testator:
The court felt clear that the testator intended to a wish or request, morally binding, perhaps, but with no intention to bind the wife legally in any way. On the other hand, in a similar case, the court reached the conclusion that
Clearly in the second example the language is open to either construction, and the court as court has to render the final decision.
In the law of contracts, in order to make a promise legally binding there must be a consideration for it, unless the promise be under seal. Equity also refuses to decree specific performance of promises, whether under seal or not, unless they be made for a consideration. Suppose one owning property declares herself trustee for one or more other persons, and does so voluntarily, i. e., without receiving any consideration. Is the result to create a valid trust, or does equity refuse to compel the one making the he declaration to abide by it? When we bear in mind that a valid declaration of a trust does not result in divesting the one making it of the title to the property, or any portion thereof, but simply gives rise to a personal claim against him, enforceable in equity, that he shall use the property he owns for the benefit of the beneficiaries of the trust, it seems clear on principle that the chancellor ought to refuse to recognize the validity of such a declaration, unless it be made for a consideration. To do otherwise is to enforce specifically a personal obligation voluntarily undertaken-one not supported by a consideration. Nevertheless, from the time of a famous decision in Ex parte Pye, 18 Ves. 140, Lord Eldon in 1811, equity has enforced a declaration of trust, though no consideration was given for it. Lord Eldon reached his decision by making a mistake which it is very easy to make, viz., treating a figure of speech as representing a reality. He seems to have thought of the equitable interest as constituting real ownership, his idea seeming to be that one who owned property absolutely, had two titles, a legal and an equitable title. The declaration of trust, then, appeared to him, if we may judge from his language in that case, as a transfer of the equitable title to the proposed beneficiary, the one making the declaration retaining the legal title. He opined:
Whatever may be the true view on principle, the validity of gratuitous declarations of trusts is almost universally recognized today.
Wherever the trust arises by the transfer, either by will or deed, of the legal title to a new owner, on his agreement to use it for the benefit of others (in trust for others), it is clear no consideration other than the transfer of the property to the proposed trustee is necessary. He certainly could not be allowed to keep the 'property thus acquired for his own benefit, and the fact that he derives no benefit, but on the contrary assumes a burden, should not stand in the way of enforcing his agreement. In fact the first "uses" were based upon just this sort of transaction, and were enforced by the chancellor in courts of equity on the ground that it was not conscientious for the new owner to keep the property for his own use.
The importance of distinguishing most carefully between the two methods of creating trusts, i. e., by declaration and by transfer to another, comes out most clearly in cases where the owner of property attempts to transfer it to another, and, because perhaps of some failure to comply with all the formalities required by law for the transfer of title, fails to accomplish his purpose. In such a case the intended gift must, as a common law proposition, fail. If, however, we should argue as did Lord Eldon in the Pye case, we might say that though the legal title did not pass, the equitable title in such a case did, as no formalities are required for that. (We are ignoring for the moment the requirements of the statute of frauds, which will be discussed separately, later). The best statement of the reason for refusing to treat such a transaction as a declaration of trust is a very simple one. One may transfer property, without valuable consideration, in one of two, ways: by doing such acts as amount in law to a conveyance or assignment of the property, and thus completely divest himself of the legal ownership, in which case the person who by those acts acquires the property takes it beneficially, or on trust, as the case may be; or the legal owner of the property may, by one or other of the modes recognized as amounting to a valid declaration of trust, constitute a trustee, and, without an actual transfer of the legal title, may so deal with the property as to be deprived of its beneficial ownership, and declare that he will bold it from that time forward on trust for the other person. It is true one need not use the words, "I declare myself a trustee," but must do something which is equivalent to it, and use expressions which have that meaning.
In discussing the question of the necessity for notice to the proposed cestui in order to complete the creation of a trust, we must once again divide our cases into the same two classes. If the trust is to be created by transferring the property to a new owner in trust for one or more other persons, no notice is necessary, and the trust is valid and irrevocable although the fact of its creation be absolutely unknown to the cestui. On the other hand, in dealing with declarations of trust, some of the courts have fallen into confusion. Some hold that notice to the cestui is necessary. Others hold that this is not necessary, any more than in the case of trusts created by the transfer of title to another in trust for the proposed cestui. Much of the confusion has arisen from a failure to notice that in many cases no real declaration of trust was intended. For example, in order to evade the rule of the savings banks limiting deposits to a certain amount, depositors have not infrequently, when they had reached the limit with one deposit, opened an account ostensibly as trustee for some child or other relative. On its face, this looks like a trust, but the surrounding circumstances often show no intention on the part of the depositor to confer any claim, legal or equitable, upon the supposed cestui, but on the contrary, only an intention to evade the rule of the bank above referred to. If this be the case, then no trust is intended, and none can arise, and the fact that the deposit remains until the death of the depositor cannot alter the situation.
In order that there be a trust created, it is necessary that the property or thing to be held in trust be set apart or identified in some way. All through our discussion down to this point we have assumed this to be true, and indeed any other view is impossible. If one has an "equitable interest," it must be an interest in something. He must have a personal claim against his alleged trustee that the latter shall devote to his use some definite thing or res recognized by, the law as capable of being owned. Anything which would constitute assets in the hands of an administrator of an estate on one's death is a definite thing or res capable of being held in trust, even though it be only an intangible claim against some one. For example, if someone owes me $100, I may hold the claim I have against him in trust for someone else. My claim as creditor is regarded by the law as being owned by me; my administrator would have to list it as part of the assets of my estate; I may transfer my right to collect it to another. All these things show that in such a case I have something definite, viz., my right against my debtor, that I own and can therefore hold for the use and benefit of another.
We must however, beware of turning this proposition around. Although a creditor may hold his claim against his debtor in trust for some one else, the debtor as such cannot hold the debt in trust for the creditor. In fact, we are talking nonsense when we state any such proposition. The debtor has not the debt; the creditor is the owner of that. Nor has the debtor, as such, anything which belongs to the creditor. If A loan B $100, the title to the money vests in B, and he is entitled, according to the exact terms of the bargain, to use the money for any purposes he pleases, returning only an equivalent sum. Of money belonging to the creditor. he has none. As already suggested, a failure to note this carefully has led to astonishing decisions by some courts.
We have seen that equity recognizes that the trust-res need not be a tangible thing, but may consist of a claim or "chose in action." Suppose one having an equitable interest in property declares himself trustee of the same for one or more other persons. It would seem that since equity recognizes a mere common law debt (which is only a personal right to get a sum of money) as a res which can be held in trust, it ought also to recognize that its own creature, the equitable interest (this personal claim enforceable in equity, that a specific res be used for the benefit of the cestui) may itself be held by the latter under another personal duty to use it for the benefit of others.: While not common, especially in this country, such trusts are not unknown and are recognized as valid.
By the English statute of frauds all declarations or creations of trusts of real estate II shall be manifested and proved by, some writing, signed by the party who is by law enabled to declare such trusts, or by his last will in writing, or else they shall be utterly void and of none effect. The statute however, farther excepts from the operation of its provisions all trusts "which shall or may arise or result by the implication or construction of law." In addition, all grants or assignments (transfers) of trusts are required to be in writing. Similar legislation has been enacted in this country, many states following substantially the wording of the English statute, others modifying it by requiring a deed or conveyance instead of a mere writing signed by the party. In a few states no statute has been enacted, and in these an oral trust of land would apparently be valid and enforceable. By its terms, the statute does not apply to anything except express trusts of real property. What are known as resulting and constructive trusts are, as stated, expressly excepted from its operation. These trusts and the relation of the statute to them will be discussed in the next chapter. Also, it should be noted, an oral trust of personal property is valid and enforceable, as the statute includes only real property within its provisions.
Whatever be the language of the statute, it is almost universally held that the oral declaration of a trust creates a trust, which, however, is unenforceable until the writing or deed comes into existence. The result is that a subsequent writing or deed is sufficient, and, when such a writing comes into existence, the trust becomes enforceable, and dates from the time of the oral declaration. If the statute follows the language of the English statute, almost any kind of a writing which contains the terms of the trust and is signed by the proper person will be sufficient, e. g., a letter or receipt. The subsequent writing operates simply as an admission of the existence of the trust already created, and so the purpose or intention of the one signing the paper is not material. It is even held that a defendant in a suit in equity based upon an oral trust, who admits the trust in his answer without relying upon the statute, has thereby lost the benefit of the statute, if the pleadings disclose the terms of the trust, although if he relies upon the defense of the statute he may escape from the operation of this rule. The writing or deed must of course contain the terms of the trust. It is not necessary however, that all the terms be contained within the four corners or one piece of paper. If the pieces are physically connected or one refers to the other, it is sufficient. Connection between two separate papers has even been permitted to be established by parol evidence in one or two relatively recent cases. Where only a writing is required and not a deed, usually the writing need only be signed and not necessarily subscribed, but in some states the statute expressly requires that the writing be subscribed, i.e., signed at the end. II. RESULTING TRUSTS.
The second class of cases, the so-called "resulting trusts, are the ones which have given most writers the greatest difficulty. Before the enactment of the statute of uses, when one was buying land and did not wish, so have the legal title vested in himself, one of the common ways, indeed the usual way, seems to have been to have the land transferred directly to another person, who agreed orally to hold it for the use of the one paying the purchase price. In such a case, Of course, the one to whom the title was thus transferred was compelled by equity to hold the same for the benefit of the one paying the money. So common did this transaction become, that if nothing else were shown except that A paid the money for the land and the title was conveyed to B, the chancellor assumed that B was to hold the property for the use of A. After the passage of the statute the legal title would in such a case, of course be vested by the statute in A, unless the use in question were one of the kinds to which, the provisions of the statute did not apply. In all the exceptional cases, the use, or trust, as it came to be called, still "resulted," as it was said, in favor of the one paying the money. The statute of frauds as does not apply to trusts that arise or result by the implication or construction of law. The use of the word "result" here seems to indicate that it was not the intention of the framers of the statute to require the oral agreement of the one to whom the title in these cases is conveyed to be put in writing, and accordingly the courts held that these "resulting trusts" were not within the provisions of the statute. This is an interesting result, for the reason that, as the foregoing account shows, these trusts are based upon an expressed intention as much as trusts based upon an express declaration of trust. The reason, however, is to be sought in the confusion of thought which fails to distinguish between an implication of fact, of actual intention, based upon acts and surrounding circumstances, and the so-called "implication of law" which is nothing more nor less than an imposition by law of an obligation and not a real implication at all. Trusts based upon the "implication of law" are, according to the classification suggested above, real constructive trusts, and not based upon any presumed intention in fact at all; while "resulting trusts" of this kind are "trusts implied in fact" and fall within the first main division of our classification. That this class of resulting trusts are to be classified as trusts based upon an expressed intention of the parties appears very clearly, when we find that the cases permit evidence to be admitted to show that although A paid the money, title going to B, it was not the intention of the parties that a trust should exist in A's favor. For example, in Cook v. Patrick, 135 Ill. 499, the facts were that one S, all his immediate family being dead, paid for various parcels of land, which he bad deeded directly to various nieces and nephews. S went into possession of the lands in question and retained possession of the same, as well as of the deeds, until his death. After his death, is heirs-at-law, who were not the same persons as the nephews and nieces, brought an action against the latter to have a "resulting trust" in favor of S established, on the ground that he had paid the money. The court held that the evidence in the case clearly showed an intention that a trust for his life only was intended to result to S, but that after that the intention was to have the beneficial interest M' the lands go to the nephews and nieces. In other words, while there is a presumption of fact in such cases, arising from the mere fact of the payment of the purchase price by one and the conveyance to the other, that a trust is intended for the one paying the money, such presumption, being only one of fact, may be upset or rebutted by evidence showing that such was not the intention. The presumption makes out a prima facie case of a trust, which will prevail unless overcome by evidence to the contrary.
Still more clearly does the real nature of this class of trusts appear when we consider cases in which B, the one to whom the title is conveyed, is a near relative to A, the one paying the money-say a son, daughter, or wife. For example, in Dyer v. Dyer, 2 Cox 92, the one in whom the title was vested was the youngest son of the one who paid the purchase money. The latter being dead, the eldest son as plaintiff sought to establish a resulting trust in favor of his father and so of himself as heir. The court held that the presumption of fact of a resulting trust was rebutted by another presumption of fact of greater weight, viz., that when the one receiving the title was a child, it was presumed, in the absence of evidence to the contrary, that a gift to the child by way of advancement was intended, and so no trust in favor of the father. The discussion by the court in Dyer v. Dyer is illustrative:
The presumption that a gift to the child is intended is, again, as stated, only a presumption of fact, which outweighs the other presumption that a trust is intended. It may be in its turn upset by evidence showing that, in spite of the relationship of father and child, no gift was intended. The surrounding circumstances, the acts of the parties at the time, and after the transfer to the child, may in a particular case show that after all a trust in favor of the parent was intended. This was the situation in a famous English case. In that case the father paid for the land, collected the rents, gave tenants notice to quit, and generally dealt with the land as his own. The father being dead, the controversy arose between the son in whom the legal title was vested, and the person who would be entitled to the property if a trust in favor of the father existed. On all the facts, the court decided that the presumption of a gift to the son was rebutted and a resulting trust in favor of the father established.
The doctrine which creates a presumption of fact that a trust is intended in favor of the one paying the purchase price, is, by a majority of the courts, extended to cover cases in which the one seeking to establish the trust pays a portion only of the purchase price. In one case (7) the plaintiff furnished only a portion of the purchase money, the defendant, in whose name the title was taken, paying the balance. It was held that a trust resulted in favor of the plaintiff for a pro rata share of the property. On a similar state of facts the opposite conclusion was reached in Massachusetts. McGowan v. McGowan, 14 Gray (Mass.) 119. The real question in such cases is this: Is it a fair inference, from the fact that A paid $3000 and B $2000 for the land, title being conveyed to B, that the intention of the parties was that A should have a three fifths interest and B a two-fifths interest in the land? The other possible view is that A is loaning B money and if so, is entitled to an equitable lien on the land as security for the repayment of the sum loaned. The better view seems to be that taken by the majority of the courts, viz., that there is in fact a presumption that the parties were jointly buying the property. As in all these cases, this is only an inference of fact, and so, if, at the hearing, it appears the transaction was a loan, the presumption of a trust is rebutted and effect given to.the real intention ;of the parties. The only object in finding the resulting trust, or rather the presumption of one, is to open the way to the introduction of oral evidence; for, if an express trust is relied on, it is within the provisions of the statute of frauds and may not be proved by oral evidence. NOTE: Such resulting trusts abolished in some states. In New York and in some other states that have followed New York in regulating the whole question of trusts by statute, statutory provisions exist which abolish trusts of this kind in favor of the one paying the money (9). These statutes, however, usually preserve the resulting trust for the benefit of the creditors of the one paying the money. The latter are therefore entitled, when necessary, to establish the trust in the same way that, before the statutory change, the one paying the money did (10)'. Such provisions, also, do not abolish constructive trusts which arise where one entrusted with another's money, in violation of his duty, invests it in real estate or other property in his own name, without the consent of the one entitled to the money.
In the law of contracts, it has always been recognized that where, in pursuance of a contract unenforceable because not in writing in compliance with the statute of frauds, property has been conveyed or services rendered, the one receiving the same, if he wishes to do so, may rely upon the statute, but only on condition of becoming liable to a suit in quasi-contract for the reasonable value (not the contract price) of the property or services in question. Does not the same principle govern in the cases we are now considering? Let us for a moment consider a slightly different case. Suppose A and B should agree orally to exchange real estate--A to convey Blackacre to B, and B to convey Whiteacre to A. A conveys Blackacre to B, and B then refuses to convey Whiteacre to A. Of course, since the agreement is oral, the statute of frauds applies and the oral agreement is not enforceable. It is clear that in such a case B, on a bill in equity filed by A, would be compelled to restore Blackacre to A, as any other result would permit B to enrich himself unjustly at A's expense. Now let us return to the case we are discussing--tbe conveyance to B without consideration, on B's oral agreement to reconvey on request. Granting that the oral agreement is not enforceable, does it follow that B may keep the land? Does the mere fact that the principle, which forbids one to enrich himself unjustly at another's expense, in this case happens by accident to require B to do substantially the same thing he agreed to do, furnish any basis for refusing to apply it to a case falling clearly within its scope? It would seem not, and accordingly the later English cases compel B to reconvey the property. The bottom line is "It is not honest for B to keep the land."
Whenever a court decides that a proposed trust is void for being too indefinite and uncertain in its object, and that the trustee will not be allowed by equity to carry out the testator's intention, it follows, by the simple application of the principle we are discussing, that the property must be returned by the trustee to the testator's heirs or next of kin. See § 103, below. Other cases illustrating the principle are where the intended trust is void as contravening the law, for example, the statutes of mortmain. In Strikland v. Aldridge, 9 Ves. 516, the testator devised the land to a trustee, in trust to use it for a purpose forbidden by the statutes of mortmain. The intended trust being illegal, but it also being clear that the testator did not intend the trustee to have the benefit of the property, the trustee was compelled to hand over the property to the heir at law of the testator. It is, of course, essential in these cases to find two things: (1) an intention to impose a trust obligation on the one to whom the property is left; (2) that intention cannot be carried out. If the testator did not intend to impose any obligation, but merely to express a wish, desire, or hope, that the devisee or legatee would do the thing in question, the principle in question has of course no application. It is not unconscientious for the devisee or legatee in that event to keep the property for himself, as it was the intention of the testator to leave him free to do so if he felt so inclined.
Here again the question arises: Who is to receive the benefit of the balance, the trustees, the residuary devisee or legatee (if there be one), or the heirs or next of kin? As in the previous case, it can be readily seen that if we find that the testator did not intend the trustees to have the benefit of the property, we must dispose of the property in a manner similar to that just discussed, where the intended trust failed to take effect at all. But can we as. some that such really was the intention of the testator We shall find upon investigation that the answer to that cannot be given without reading the will carefully.
It may be that in a given case the testator had in mind the very fact that the trust he was creating would not exhaust the property, and that his intention, as gathered from the will, was that the trustee should have what was left after discharging the other trusts. For example, in In one English case the testator left his personal property to H "subject to the payment of my debts, personal and testamentary expenses, and legacies, and to the trusts hereinafter contained, " the will then enumerating various trusts which did not exhaust the estate. It was at once clear to any one reading the will that the testator had in mind a gift to H, who [Was his grandson, but wished to obligate him to provide out of the estate for certain others, leaving him the balance. The court accordingly held that in such a case the mere fact that the trusts enumerated did not exhaust the estate did not make H a trustee for the next of kin, although of course in such a case the one receiving the property holds it subject to an equitable "lien" or "charge" in favor of the persons named in the will.
On the other hand, if the testator provides clearly, that he gives the property, to E, to and for the several uses, intents, and purposes following; that is to say," enumerating the trusts, or in similar language, it is clear that he does not expect E to derive any benefit from the property. If we find that to be the case, then of course if it turn out that, contrary to the testator's expectations, a residue is left after all trusts have been carried out, equity will not permit the trustee to keep what is left for himself, but will raise a trust in favor of the heirs or next of kin, as the case may be. This trust, usually again called a resulting trust, is also a trust imposed by equity on principles of justice, and so should be classified as a constructive trust. Now there is no magic in language and it is purely a question of the fair meaning of the words of the testator, whether he intended the trustee to get a beneficial interest in the property or not. The use of any particular words is not necessary, though usually a gift "subject to" certain things means a gift of the beneficial interest to the devisee or legatee, while a gift "in trust for" certain purposes means the opposite. The context, in any particular case, however, may show this not to be the case. III. CONSTRUCTIVE TRUST
Suppose now a testator makes a will, leaving property to a person on the face of the will as an absolute gift, but actually on an oral agreement to hold in trust for others; or, as in some cases, on trusts to be communicated orally, or by writing to be executed later, without the formalities required by the statute governing the validity of wills. Suppose further that before the testator's death the intended trustee be informed of the trusts orally or by means of the letter or other writing, and that he assents to them. This writing, if it exist, cannot operate as a present declaration of trust, for the gift in the will is not a present gift, but is revocable at any time before the death of the one making it; and so the provisions as to the trust cannot take effect until the will does. Here we have a very obvious attempt to reserve the right to make a testamentary disposition of property, i. e., a disposition to take effect only on one's death, without complying with the statute of wills, which requires in addition to a signed instrument, other formalities, such as witnesses, etc. May the persons, for whom the devisee or legatee has thus orally agreed to hold the property in trust, compel him, after testator's death, to keep his agreement? One thing is obvious: to allow him to keep the property would work fraud upon the testator. On the other hand, to. enforce the trusts leads to a violation of the statute of wills. The courts have chosen the latter alternative, and how they came to do it will be shown below
In the case of these secret but illegal trusts it was held that no resulting (constructive) trust arose in favor of the heirs or next of kin, unless the proposed trustee was informed of the trust during the lifetime of the testator, and either expressly or tacitly consented to carry out the illegal purpose (23). The reason of course is that otherwise the testator does not make the apparently absolute gift in reliance on the other's promise to carry out his wishes, and so the latter will be guilty of no fraud or anything unconscientious if he keeps the property for himself. The basis for the constructive trust therefore fails. So also, in the case of secret but legal trusts, if the trust be not disclosed to the proposed trustee at the time of the making of the will, or at least before the death of the testator, so that it can be said the latter relied on the promise of the former, it cannot be said to be unconscientious for the devisee or legatee to keep the property for himself, and the intention of the testator cannot be carried out.
An excellent example of a secret illegal trust is found in a New York case (24). In that case the testatrix gave to three persons, who were her priest, her lawyer, and her doctor, the bulk of her property. On the face of the will, the gift to these persons was absolute. A letter of instructions, addressed to these persons, was produced, from which it appeared that they were to devote the property to certain charitable purposes, which she had been advised she could not legally do by inserting the provisions in her will. She therefore resorted to the expedient of the absolute devise to persons in whose honorable, action she could confide, and it was proved that these three legatees agreed to carry out her wishes. This being so, the court held that the legatees were constructive trustees for the next of kin. An example of enforcement of a secret legal trust is found in a case where the testatrix left the property to B, "to be distributed by him according to the private instructions I give him." B was present when the will was made and received,verbal instructions to distribute the property among certain persons. The court enforced the oral trust in favor of the beneficiaries mentioned, saying that in such a case a "court of equity will raise a constructive trust in favor of the beneficiaries intended by the testator, and will charge the legatee as a constructive trustee for them, upon the ground that the legatee will not be countenanced in perpetrating a fraud by encouraging the testator to make a bequest, which would not otherwise have been made, and then refusing to execute his promise. The courts apply the principles underlying the enforcement of oral trusts to prevent fraud with a considerable degree of consistency. For example, where defendant requested his daughter not to make a will in plaintiff's favor, agreeing to hold for the plaintiff the property in question, which would, by operation of law on his daughter's death, come to him, the court, after the daughter's death, enforced the agreement as an oral trust of the kind we are considering (26). In another case, one who, by a will already made, was the residuary legatee, promised the testator that if no alteration were made in the will, he would pay the plaintiffs the amount they sought to obtain. In consequence of this promise on defendant's part, the testator omitted to alter the will in favor of the plaintiffs as had been his intention. The court compelled the defendant to pay the amounts in question to the plaintiffs (27). The doctrine, however, is limited by some courts to wills as distinguished from deeds. For example, in one case the defendant received a deed of property from one L, promising orally to hold it in trust f or the son of L. On a bill filed by the son, the court refused to enforce the -oral trust, limiting the doctrine to the cases of wills; except that, in the case of deeds, the court said, if the defendant had taken active steps to have the deed made to him, as distinguished from merely agreeing to hold in trust, they would enforce the trust. This distinction, however, seems not to be a valid one, and is not followed by all courts.
When a trustee, in breach of trust, misappropriates the trust-res by selling it or exchanging it for other property, we have seen that the beneficiary may follow the original trust-res into the hands of its new owner, in all cases except where it passes into the hands of an innocent purchaser for value (§ 14, above). This however, does not exhaust the list of the remedies of the cestui in such cases. As has been incidentally suggested at various points in our discussion, he may, if he prefers, require the trustee to devote the proceeds of the trust-res to his, the beneficiary's benefit. In other words, equity imposes upon the trustee a constructive trust obligation to hold the proceeds of the misappropriated trust-res for the benefit of the defrauded cestui (29). To apply this doctrine, it is necessary for the cestui to be able to point out the specific proceeds received in exchange for the trust-res, otherwise there can be no constructive trust. Whenever the proceeds cannot be specifically pointed out, there ceases to be a trust and all that the cestui has left is a right in equity to be compensated by the trustee for the breach of trust. The measure of such compensation, however, will be not only the value of the misappropriated trust property, but the value of the proceeds, if that be greater than the value of the original res. Our legal system, while it restricts the use of the word trust to the strict equitable relationship which forms the subject of this article, recognizes other relations of trust and confidence, using those words in a broader and less technical sense. If I lend my watch or my carriage to you, the relationship between us is that of bailor and bailee. The title remains in me, the bailor; the possession however, vests in you as bailee. Instead of returning the property your possession and misappropriate the article by selling it or exchanging it for other property. In such a case, the buyer gets no title, whether he buys as an innocent purchaser or not. I am permitted, however, following the analogy of the trust cases, to elect to let the original property go, and to hold you as a constructive trustee of the money or property received in exchange for mine (30). Another fiduciary relationship is that exist. ing between partners, and the principle applies to that also. The doctrine of constructive trust applies to misappropriation by non-fiduciaries. Equity has, however, not been content to apply the doctrine we are discussing to misappropriation of property by persons occupying a fiduciary position, but has, especially in the more recent cases, expanded it into a sweeping principle covering all misappropriation of property of whatever kind. In all the cases discussed down to the present point, the defendant came into the possession of the property with the consent of the plaintiff. We come now to a class of cases in which that is not true, those in which the defendant simply takes the plaintiff's property without plaintiff Is consent, and sells it or exchanges it for other property. Does the thief hold the proceeds in trust for the owner of the stolen article? 'Upon this point there is, it must be confessed, a conflict of authority; some cases, usually decided at a relatively early date, holding that the thief does not hold the proceeds in trust, applying the principle of follow.
Suppose that a trustee, after wrongfully mingling the trust fund with his own funds in his personal account at the bank, bought certain shares of stock in a corporation with the first money which he drew out of the bank. Later he checked out and so spent all the rest, leaving no proceeds of the same. When he bought the shares of stock, he did so with his own money, and when he spent the remainder of the fund, he spent the trust funds. Confronted with such facts a court has held, however, that the cestui was entitled in equity to have enough of the shares of stock to reimburse him for the amount of the misappropriated funds. The simplest view is that in these cases the beneficiary of the trust is entitled to an equitable lien or charge upon the whole bank account. Being so entitled, when any money is drawn out, the lien-the whole lien-attaches to that part as well as to the other. When he buys anything with any portion of the fund, the lien attaches to that also. In one case, the lien attached to what was left in the bank; and in another case, to the shares of stock. This accomplishes the equitable result of securing to the cestui reimbursement, without indulging in any violent and untrue presumptions about the fraudulent trustee's intention. The chances are that he intended to spend all the money for himself, but the equitable charge is not based on any intention, real or presumed, on his part, but upon the equity and justice of the situation.
The lessor, on the expiration of the lease, refused to renew it for the benefit of the infant. Thereupon the trustee took a renewal of the same for his own benefit. It was held that the trustee held the new term of years, thus obtained in entire good faith, for the benefit of his original cestui. This apparently harsh doctrine is based upon sound public policy. In order to keep trustees out of temptation, as well as to prevent the necessity of inquiry in each case into the motives or purposes of the trustee, equity has established the rule that a trustee absolutely cannot acquire a renewal of the lease, except for the benefit of the cestui. Were it not so, he might very easily conspire with the lessor and so get the benefit of the opportunity for renewal which usually comes to a tenant.
In Lone case the defendant was employed by the plaintiff to act as agent for him in the purchase of a certain piece of property. Without having given up his agency, defendant purchased the property for himself. On this state of facts he was charged as a constructive trustee of the property purchased for the plaintiff, who of course had to pay the purchase price. Similarly, in another case agents for the sale of certain hands pretended to sell to others, but actually bought the lands themselves. At the time, their principal expressed herself as satisfied with the sale, but, on learning that they were the purchasers, brought a bill to charge them as constructive trustees of the land, and succeeded in doing so. Like that of the trustee, the incapacity of the agent to act for himself is an absolute one, and good faith is no defence.
In one case a leasehold interest in the land was vested in A for life, and after A's death to B absolutely. The lease being about to expire, A, tenant for life, obtained a renewal of the same for his own benefit. A devised the lease by her will, so that on her death it passed to the, devisee. The latter was, on a bill filed for that purpose, charged as constructive trustee for B -of the remaining portion of the lease. The reason given for this rule is that the one who gave the lease to A and B, on the above terms, did not intend A to have more than a life interest, and so, in order to carry out that intention, equity refuses to allow A to get the benefit of a renewal so as to extend his interest in the property beyond his own life.
The same principle is applied where the relationship is that of mortgagor and mortgagee of a leasehold. For example, in one case A mortgaged a leasehold to B. The lease being about to expire, B had it renewed. On paying off the mortgage, A is entitled to the leasehold interest.
A partner who obtained a renewal of the lease of the premises occupied by the firm, and of which the partnership held the original lease, was charged as constructive trustee for the other partners. The same doctrine was applied in American cases. It seems, however, that here the incapacity is not an absolute one, but that the partner, if acting openly and above-board, informing the other partners of the activities, may obtain "implied permission" to renew the lease for. IV. THE PARTIES TO A TRUST.
Thus far the trusts which we have been considering have been of the kind known as private trusts, trusts for the benefit of a particular person or number of persons. Another kind of trust exists when property is vested in trustees for the benefit of a class of persons, the individual members of which are not specifically named or described in the instrument creating the trust. Such trusts are known as public or charitable trusts, and for many purposes require separate treatment from ordinary private trusts. Examples of such trusts are: gifts to trustees to build a public library; for the relief of the poor of a particular community; for the promotion of science, learning or useful knowledge, and other similar purposes. In the space at our command we cannot go into the details of the law as to just what are held to be objects for which such public or charitable trusts may be created. Limitations are, however, placed upon one who would create such trusts, as to the purposes be may thus seek to promote. The matter is largely affected by a statute known as the statute of 43 Elizabeth, c.4, which describes many of the purposes for which such trusts may be created, but, as Mr. Justice Gray said in one of the leading cases on the subject: "It is well settled that any purpose is charitable in the legal sense of the word, which is within the principle and rea son of this statute, although not expressly named in it; and many objects have been upheld as charities, which the statute neither mentions nor distinctly refers to."' He adds: "A precise and complete definition of a legal charity is hardly to be found in the books.
Later on in the same case the learned justice attempts a definition of a charitable trust, as follows: "A charity, in the legal sense, may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, -either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering, or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works, or otherwise lessening the burdens of government. It is immaterial whether the purpose is called charitable in the gift itself, if it is so described as to show that it is charitable in its nature.
It is of course clear that gifts for purposes prohibited by or opposed to law cannot be held to be valid, even though they fall within classes of objects which otherwise would be held to be charities. For example, a bequest "towards the political restoration of the Jews to Jerusalem" was held void on the ground of public policy, as tending to create a political revolution in a friendly country (2a). So also in England a gift for the support of the Roman Catholic religion, before such gifts were legalized by act of Parliament, was held bad (3). One other general rule may be laid down, viz., the intention of the one seeking to create a trust, usually a testator in his will, must be sufficiently definite and certain, so that the trustees will be bound to use the property for some of the objects recognized by the law as charities. It is not sufficient that they may so use the property; they must be bound so to use it. If they may, in their discretion, without violating the terms of the gift, use it for other purposes, the gift fails. In such an event, the property is held by the trustees in trust for those who by law would have taken it if the testator had died intestate (4).
Inasmuch as the beneficiaries of the public or charitable trust are an indefinite number of unidentified persons, the due administration of the trust obviously must be enforced at the suit of someone else. The government is regarded as being interested in such cases, and the suit is brought by the appropriate law officer of the government, i. e., usually the attorney-general. If the trustees of such a trust are in doubt as to what should be done in administering the trust, they may institute a suit in equity asking the court to construe the deed or will, or give them instructions concerning what should be done. In such a case, the attorney-general must be made a party to the suit, as the government is interested and the court should have the aid of the advice of the law officer of the government in determining what should be done. In Oregon, the Charitable Trusts Division is administered by the Oregon Attorney General's office. Certain charitable organizations and trusts have reporting requirements, and the state may sue to enforce the obligation so charitable trustees.
Where the trust is a private one and so not for charitable purposes, the suit for the enforcement of the trust is of course brought by the cestui. This being so, it seems to follow that no private trust can exist unless there be a cestui. If it is not a charity, the government has no interest in the matter and so the attorney-general cannot be plaintiff; and, if there be no cestui who can sue I Let us for the sake of clearness take a concrete ease. In one case in the books, the testator, Dean, left money to certain persons, called in the will "trustees," and provided that the "trustees" should apply the money to "the maintenance of the said horses and hounds for the time being living, and in maintaining the stables, kennels and buildings . . . in such condition of repair as my trustees shall deem fit I' (6). The next of kin of testator sought to have the provision for the horses and dogs declared invalid, as no cestui was named. Of course the animals could not be regarded as cestuis, as they did not possess legal personality, and so could not have rights. As we have seen, a cestui is a person who has against his trustee the right that the latter shall use the property for the benefit of the former.
It follows from the results in these cases that, provided the object be not too indefinite, the gift is valid even though there be no person as cestui. Further, it is well settled that if there be a person named as cestui, equity recognizes the validity of the trust, even though the legal capacity of that person be limited by the rules of the common law courts. If the person have the capacity to hold property, equity recognizes that he or she may be the beneficiary of a trust. Equity, for example, recognized trusts for the separate use of married women, even before the modern acts altering the husband's common law rights over the wife's property (9). The result was that the married woman might dispose of her II separate estate in equity" without the husband's consent, either by gift inter vivos or by will, whenever the terms of the trust did not prohibit such transfer.
Who may be a trustee? Any person capable of holding property today is capable of holding the same in trust for others. Supposed exceptions to this rule no longer exist. In other words, any one owning property may in equity be under a duty to use it for the benefit of one or more other persons, and, if so, he is a trustee of it for those other persons.
Originally, it seems, it was held that corporations, although they could hold property, could not be trustees for others. The idea back of this seems to have been that a corporation was a "dead body, although it consist of natural persons; and in this dead body a confidence cannot be put, but in bodies natural" (16). But as early as 1743 it was held that corporations could be trustees (17), and the rule thus established is universally recognized (18).
At common law an alien could by transfer to him acquire title to property, but the government might by a proper proceeding deprive him of it. Accordingly, if property were transferred to an alien in trust for others, the government might step in and deprive the trustee of the title. Whether the government would hold the Property in trust we shall discuss in the next subsection. Today, however, this disability on the part of an alien to hold property has in nearly all jurisdictions been done away with, so that an alien may therefore be a trustee, and an alien has even been appointed a trustee by an English court (19).
It is commonly said that the crown in England, or a state in this country cannot be a trustee. This seems to mean simply that, since the government cannot be sued without its consent, the cestui cannot file a bill in equity against the crown or the state (20). That this is true appears clearly from the fact that if the sovereign grant the title to a private person, the latter takes the same subject to the trust (21).
Since persons of unsound mind could own property, they might be trustees of the same for others. In the absence of statute, however, the court of equity apparently could not deprive the insane trustee of the title to the trust property, but had to content itself with decreeing that he convey when he became legally capable of so doing (22). Here again, both in the mother country and in the United States, this unfortunate situation has been relieved by statutes which authorize the courts of equity to vest the title of a lunatic trustee in a suitable person. These statutes today usually apply to all trusts (23). A trustee who is of unsound mind is never liable for breach of trust, but again, as in the case of the infant, holds any property acquired through the maladministration of the trust as constructive trustee.
Where there are several beneficiaries of the trust, it is apparent that to appoint the husband of one of them, or a near blood relative, as trustee, might lead to a breach of trust. 'While therefore, the one creating the trust may do this if he pleases, the courts, when called upon to do so, as a rule refuse (24). In the case just cited, Sir John Romilly, in refusing to appoint a relative of one of the cestuis, said:
However, in exceptional cases, such appointments are made, especially if there be other trustees not related to the cestuis.
If there be several cestuis, the same remark made concerning near relatives of a cestui as trustee apply to the appointment of one of the cestuis. While the one creating the trust may make such an appointment if he wishes, and it will be valid (26), the courts in filling vacancies will ordinarily refuse to make such an appointment, but in exceptional circumstances may depart from the usual rule, as they have done in a few cases (27). However, this is never done except where there are other trustees and then the beneficiary so appointed is required to undertake to apply at once to the court for the appointment of a new trustee, if, by death of the other trustees, he becomes the sole trustee (28). This latter is also usually required in the case of the appointment of a husband or near relative.
Ordinarily a trustee who becomes a bankrupt or insolvent will be removed by the court of equity, the ground being the danger of misappropriation of the trust-funds by a person so situated (29). However, the rule is not an absolute one, and, under special circumstances, if it seems best not to remove the bankrupt, he will be allowed to continue as trustee (30). It need hardly be stated that one who creates a trust may, if he wishes, make a bankrupt the trustee, and if he does so the court will not interfere (31). Other grounds for removing trustees are old age (32), and habitual intemperance (33) ; but not mere poverty or limited financial means (34), or permanent removal from the jurisdiction (35).
Originally, before the enactment of the statutes referred to below, the removal by equity of a trustee did not divest him of title to the trust property or vest title in the new trustee who took his place. It required a conveyance from the old to the new trustee to bring this about (36). By statute, however, in many if not most jurisdictions today, the appointment of a new trustee by the proper court vests the title in the new trustee without any further action (37).
A will does not take effect until the death of the one making it, and is revocable until that time. Suppose a will leaves property to X and his heirs, in trust for Y, F, and others, and X dies before the testator. Under such circumstances the legal title fails to pass under the will, but descends to the heirs of the testator. Is the proposed trust thereby defeated By no means. Equity considers that it would be unconscientious. for the heirs of the testator under these conditions to keep for their own use the property to which they have thus acquired the legal title, and so renders them constructive trustees for the proposed beneficiaries. This is one case to which the equitable maxim that "equity will not permit a trust to fail for want of a trustee" properly applies. We must, however, beware of applying this maxim too broadly. If the instrument were a deed instead of a will, the result would be different. Suppose in that case, that P, the proposed trustee, had been dead at the time A placed the deed upon record. No trust would have been created, as the title never would have left A, and equity would not compel him to carry out the ineffective attempt at a gift. On the other hand, if A, having executed and recorded the deed in the belief that P was alive, had died in that belief and without knowing of his failure to create the trust, it seems that equity would compel the heirs of A to carry out their ancestor's intention.
This brief statement of the duties and liabilities of a trustee is intended to suggest only a few of the more important rules with reference to the matter. In all cases of doubt, competent legal advice should be secured by the trustee.
Every trustee is of course bound by all the provisions of the instrument creating the trust, provided those provisions are not illegal or for some other reason held to be invalid and not binding. For this reason, the first thing that one who accepts the position of trustee under a will or other instrument should do, is to acquaint himself with the terms of the trust. He should of course obtain a correct and full copy of the instrument containing the trust, and, if it be at all long or complicated, he should also have prepared for him, at the expense of the estate, an epitome of the chief provisions, which latter will be convenient for more ready reference (1). Having obtained the copies and epitome, the trustee should read them carefully, and always keep them in mind in dealing with the trust estate. "How often does it happen that the newly-fledged trustee, provided though he may have been, either in consequence of his own prudence or by the zeal of a solicitor (not unmindful of costs), with both a copy, and an epitome of the will or deed under which he acts, forthwith and after but a hasty perusal, proceeds to bury these documents at the very bottom of a tin box, which is shoved away in some rarely visited corner and locked with a key not always forthcoming. There they remain for years, unconsulted and unthought of, until, it may be, complaint is made and action threatened for breach of trust. The wise trustee keeps these informing documents in the same drawer as his cheque-book, and thus secures himself from forgetting their existence; whilst not infrequently, in those idle moments which will occur in the life of the busiest man, he refreshes his memory by glancing over their contents" (2). The purpose of all this is of course to put the trustee in a position such that he may in all respects whatever carry out the provisions of the trust. It will not be safe to depart from them, even ' in seemingly unimportant matters. If he does so, he does it at the risk of having to make good to the estate any resulting loss.
Having accepted the trust, and, having obtained the papers described familiarized himself with the terms of the trust, the trustee should, if the estate has been already in the hands of previous trustees, make an examination of the condition of the trust estate. If it consists in whole or in part of funds invested in various securities, be should see to it that those securities are of a suitable and proper kind. What are proper investments is considered in § 128, below. If the trustee fails to exercise reasonable diligence to discover the condition of the trust-estate, and so fails to learn of breaches of trust committed by the prior trustees, or of the investment of the funds on insufficient or hazardous securities, be will become liable for any loss which results, and this although he himself did not have any band in making the original investments (3).
In the ordinary management of the estate entrusted to his care, the trustee is required to exercise reasonable care, the care which an ordinarily prudent and reasonable man would use in his own affairs (4). Certain exceptions to this rule will be pointed out below. As the circumstances of no two cases are exactly alike, and as the "ordinarily prudent and reasonable man" does not exist as an objective fact, but is an ideal standard, different judges are apt to disagree in any given case as to whether the conduct of the trustee measures up to the standard or not. In one of the leading cases, it is pointed out that judges and lawyers, looking at a case after losses have actually resulted from the trustee's conduct are apt to think business men rash," and, in doing so, overlook the fact that conduct of the kind in question in a very large number of other cases resulted not in loss, but in saving trouble, inconvenience, and expense (5). To do what the business community generally are in the habit of doing seems to be the exercise of ordinarily reasonable prudence and care, and in general it is. For example, at a time when Confederate money, during the Civil war, ,was circulating freely among people of ordinary prudence, it was no breach of duty on the part of a trustee to receive the same in payment of claims due the trust estate (6). Had the Confederate money been not circulating freely, but in bad standing in the community, the trustee would of course have been liable for any loss resulting from its acceptance (7).
The duty of a trustee is not to take such care only as a prudent person would take; the duty rather is to take such care as an ordinary prudent person would take, if he were minded to make an investment for the benefit of other people for whom he or she felt morally bound to provide. That is the kind of business the ordinary prudent person is supposed to be engaged in, and, unless this is borne in mind, the standard of a trustee Is duty will be fixed too low. Of course it is not possible for a trustee to transact personally all the business connected with the administration of a trust of any magnitude. A trustee is accordingly entitled to employ agents to aid the trustee and, if using reasonable care in so acting, the trustee he is not responsible for any loss which may result from the default of the agents thus selected.
Very often the instrument creating the trust describes the manner in which the trust fund is to be invested. In that event the trustee is bound by its provisions and must not invest in other securities. In many jurisdictions there are statutes specifying the investments trustees are permitted to make, but of course they may not invest in all of these, if the terms of the instrument creating the trust forbid. If there be no statute, and the trust deed or the will contain no directions as to investment, the rule as to exercising ordinary diligence applies (10). Investments in government securities and good first mortgages of real estate, based upon a conservative proportion of the valuation, are in some jurisdictions the only safe investments for a trustee to make, unless in pursuance of an order of court (11). The real estate on which a mortgage is taken should ordinarily not be situated in another jurisdiction, though the trustee may be safe in making such an investment at times. The subject is too large a one for us to set forth the details here, but the only safe rule @'or the trustee to follow is to observe all the requirements the trust deed or the will, of the statutes if any there be, and in all doubtful cases to refrain from acting without the advice of the court of equity.
A rule, the nonobservance of which probably leads to as many breaches of trust as the violation of all other rules put together, is, that the trustee should never under any circumstances or upon any consideration, mingle the trust funds with his own personal funds. To do so is to cross the danger line, for sooner or later it will lead in many cases to the unlawful use of a portion of the trust funds by the trustee for his own purposes.
It is fundamental that the trustee must not attempt in any way to make a profit out of the trust estate, or the transaction of business connected therewith. The only exception is where, by the deed or will creating the trust, or by statute, the trustee is allowed a compensation for his time and labor bestowed upon the management of the estate. A statement of this rule can from British cases is as follows: Wherever a trustee, or one standing in the relation of a trustee, violates his duty and deals with the trust estate for his own behoof, the rule is that he shall account to the cestui que trust for all the gain which he has made. Thus, if trust money is laid out in buying and selling land, and a profit made by the transaction, that shall go not to the trustee who has so applied the money, but to the cestui que trust whose money has been thus applied. In like manner (and cases of this kind are more numerous) where a trustee or executor has used the fund committed to his care in stock speculations, though the loss, if any, must fall upon himself, yet for every farthing of profit he may make he shall be accountable to the trust estate. So, if he lay out the trust money in a commercial adventure, as in buying or fitting out a vessel for a voyage, or put it in the trade of another person, from which he is to derive a certain stipulated profit, although I will not say that this has been decided, I hold it to be quite clear that he must account for the profits received by the adventure or from the concern.
Where there are two or more trustees, any one of them is not liable to the trust estate for losses resulting from the acts or defaults of his co-trustees, unless (and note carefully the exception) by the trustee's own negligence the other trustees have been enabled to make a fraudulent use of the trust property.
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