
    In the Matter of the Judicial Settlement of the Account of The Long Island Loan and Trust Company, as Substituted Trustee under a Trust for the Benefit of Lillie G. Sloan, Created by the Last Will and Testament of Stephen Garretson, Deceased, Respondent. Lillie G. Sloan, Appellant.
    
      Trust—transfer by a trustee of a mortgage owfied by Mm, to the trust fund,— it is> against public policy — effect of a report by the trustee showing such investment — what is essential to a ratification—when a decree on an accounting by the trustee does not, nor does the denial of a motion to open it, estop the cestui que trust.
    The directors of . the Long Island Loan and Trust Company, which in its individual capacity was the owner of a bond and mortgage executed by one Donohue and was also a trustee of certain personal property for the benefit of Lillie Gr. Sloan, passed the following resolution: “ Resolved, That in consequence of the difficulty of procuring satisfactory bonds and mortgages for the uninvested funds held by this Company as Trustee, &c., the following bonds and, mortgages, being the property of the Company, shall, after the first of February next; be held for the different trusts, as named below, viz.: Bond of T. Donohue, No. 8, amount, §7,800, for the Trust of Lillie Gr. Sloan.”
    No other transfer of the mortgage was made to the trust fund created for the benefit of Lillie Gr. Sloan. Thereafter the Long Island Loan and Trust Company brought an action in, its own name for the foreclosure of the mortgage and on the foreclosure sale purchased the mortgaged property in its own name. 1 ^
    
      Held, that the transaction on the'part of the trustee in attempting to transfer the mortgage to the trust fund was contrary to public policy;
    
      That a trustee cannot deal, in his own behalf, with the funds of his cestui ■ que trust;
    
    That he can neither purchase the trust funds for himself nor exchange them for his own property;
    That the cestui que trust was entitled to an adjudication that the mortgaged property belonged to the trustee and that the trust fund be made good with interest at six per cent less any income which might have been paid to her; •
    That a statement in the report made by the trustee to the cestui que trust in which the following entry appeared: “February 1, 1893, L. I. L. & T. Co., T. Donohue Mtge. No. 3, §7,800,” did not operate as a ratification of the transaction by the cestui que trust;
    
    That where ratification on the part of a cestui que trust is set up, it must appear not only that the cestui que trust knew all of the facts, but that she had been informed of her rights under the law; that she had been told of the disposition which a court of equity would make under the known facts;
    That if the trustee claimed that a decree rendered on a prior accounting by him estopped, the cestui que trust from attacking the transaction in question upon the subsequent accounting, it was incumbent upon the trustee to show that ' the question at issue was litigated and determined on the previous accounting;
    That, in the absence of such proof, neither the previous decree itself nor the denial of a motion made by the cestui que trust to open such decree operated to estop the cestui que trust from attacking the unauthorized action of the trustee, although the cestui que trust had, on the motion to open the decree, set up .the unauthorized action of the trustee;
    That the motion to open the decree was addressed to the discretion of the surrogate, and that the denial of such motion did not affect any substantial right of the cestui que trust.
    
    Appeal by Lillie G. Sloan from a decree of the Surrogate’s Court of the county of Kings, entered in said Surrogate’s Court on the 27th day of May, 1903, settling the account of the respondent and overruling the appellant’s objections thereto.
    
      Challes D. Ridgway, for the appellant.
    
      George 8. Ingraham, for the respondent.
   Woodward, J.:

Stephen Gárretson, by his last will and testament, created a trust fund for the benefit of Lillie G. Sloan, and upon her death the trust fund was to be divided among her children. The Long Island Loan and Trust Company is the substituted trustee, and this appeal, is from a decree made in an intermediate accounting by the trustee, whereby the trustee’s account covering the period ; from June 20, 1898, to February 28,1903, was sustained “in every respect.” The life tenant objected to the account, and urged before the learned Surrogate’s Court that a certain piece of real estate known as Fo. 1459 Fulton street, Brooklyn, inventoried by the trustee in its account at $9,106.61, be adjudged to be the property of the trustee, and the trustee be adjudged to repay to the trust fund the amount at which it is inventoried, with interest at six per cent from the time of the foreclosure, less such income therefrom as may have have been paid to the appellant.

It seems that the principal of this trust fund amounts to $28,556.63, and that when it came into the hands of the present trustee in 1889 it was all invested in bonds and mortgages. On the 4th of June, 1888, the present trustee, in pursuance of its own business, had made six mortgage loans of $8,000 each to Thomas Donohue on six four-story houses, erected on lots twenty by one hundred feet, situated on the southerly side of Fulton street, just east of Brooklyn avenue. With these mortgages in its possession, the executive committee of the board of trustees of the Long Island Loan and Trust Company in 1893 adopted the following resolution: “ Resolved, That in consequence of the difficulty of procuring satisfactory bonds and mortgages for the uninvested funds held by this Company as Trustee, &c., the following bonds and mortgages, being the property of the Company, shall, after the first of February next, be held for the different trusts, as named below, viz.: Bond of T. Donohue, No. 3, amount, $7,800, for the Trust of Lillie G. Sloan,” etc.

There appears to have been no other transfer of this mortgage to the trust fund created for Lillie G. Sloan, and the life tenant urges with great force that, assuming this to have been a sale to the trust by the trustee, it is in violation of the public policy of this State, which forbids a trustee dealing with the trust estate both as buyer and seller. Subsequent to this resolution, which did not convey the mortgage to the trustee, and on the 7th day of August, 1894, the Long Island Loan and Trust Company began an action for the foreclosure of, this mortgage in its own name and not as a trustee. Judgment of foreclosure and sale was entered Fovember 12, 1894, and on the 11th day of December, 1894, the mortgaged premises were sold at public auction by the sheriff of Kings county, and purchased by the Long Island Loan and Trust Company, and the same were transferred to the said company in its own right in fee simple and not as trustee. What the life tenant demands, and what she is entitled to if she is not estopped to assert her rights, is that this ' piece of property shall be adjudged to belong, as it .does, to the-trustee, and that the trust fund shall be made good, with interest at six per cent, less any income which may ha.ve been paid to the life tenant. The transaction on the part of this trustee, no matter what degree of good faith may have been back of the resolution of 1893, is counter to public policy. Trustees cannot be permitted to deal with trust funds in the dual capacity of buyer and seller. It has long been settled, and upon principles which cannot be controverted, that a trustee cannot deal in his own behalf with, the funds intrusted to Ms charge fbr the benefit of another. He, can neither purchase the trust funds for himself, nor exchange them for his own property. (Ackerman v. Emott, 4 Barb. 626, 649 ; Smith v. Howlett, 29 App. Div. 182.)

It does not appear to be seriously contended that the trustees had a right to deal with the trust fund in the manner which it is agreed was done, but it is urged that the life tenant has ratified the action of the trustee, or has been estopped by a former decree. It appears that in 1893 the trustee made a report to her in which appears this entry: “ February 1, 1893, L. I. L. & T. Co., T. Donohue Mtge. No. 3, $7,800.” Just how this was calculated to give the life tenant notice of the state of facts which is now developed, it is difficult to understand, and we are clearly of the opinion that it did not serve any such purpose. Where ratification on the part of a eestui que trust is set up, it must appear not only that the eestui que trust knew all of the facts, but that she had been informed of her rights under the law; that she had been told of the disposition which a court of equity would make under the known facts. (Smith v. Howlett, supra, 190, citing Adair v. Brimmer, 74 N. Y. 539, 554.) There was no ratification on the part of the life tenant, and we are persuaded likewise that the decree of June 21, 1898,. is not a bar to this appeal.

The trustee accounted in 1898, but none of the questions here raised was put in issue in that proceeding, and the decree on that accounting discharged the trustee only as to the assets directed to be distributed thereunder and the amount of the trust estate. As the trustee claims this decree to have worked an estoppel,, the burden of proof is upon the trustee to show clearly that the question in issue in this case was litigated and determined in the former proceeding (Rudd v. Cornell, 171 N. Y. 114, 127, and authority there cited), and having failed to show this, the life tenant is not estopped to assert her rights at this time. Kor is the position of the trustee changed by the fact that the life tenant made a motion in May, 1903, to open the decree of August, 1898, in which the matters here involved were set up as a reason for opening the former decree. The opening of the former decree rested in the discretion of the learned surrogate, and as the former decree did not attempt to settle any of the questions which were urged on this motion, the denial of the motion did not affect any substantial right of the life tenant, and, under well-established rules, it could not ■ work an estoppel on this accounting. (Dutton v. Smith, 10 App. Div. 566.)

The decree should be reversed and the life tenant should be given the relief demanded.

All concurred, except J enks, J., taking no part.

Decree of the Surrogate’s Court of Kings county reversed and proceedings remitted to that court for settlement of the estate in accordance with the opinion of Woodward, J.  