
    Elias C. Benedict and Others, as Executors, etc., of Edwin Booth, Deceased, Respondents, v. George T. Arnoux and Others, Defendants; Hannah Campbell and Others, as Executors, etc., of William Campbell, Deceased, Appellants.
    
      Power of sale—improper exercise—bona fide purchaser—notice to, and knowledge of one member of a firm binds the client—exception to the rule that a purchaser from a trustee need not concern himself with the disposition made by the trustee of the purchase price.
    
    A testator, after giving certain legacies, left the residue of his property to his executors upon certain trusts, and further provided in his will: “If at any time my executors * * * shall deem it for the best interest of my said estate that any part or parts, or all of my real estate, should be sold, then I authorize and' empower my executors, as such, and the survivors and survivor of them, to sell and dispose of any real estate of which I may die seized or interested in, and any part or parts thereof, upon such terms and in such manner as they shall deem best.” He died the owner of certain real estate on Fifth avenue, Hew York city, and left debts to a considerable amount, but no personal property.
    The executors'and trustees being pressed for the payment of a judgment entered after, upon a verdict rendered before, the testator’s death, which was not a lien upon the real property left by him, were advised by the holder of the judgment, an attorney at law and the legal adviser of the executors, that the executors could not execute a mortgage, but that the will contained an unlimited and unrestricted power of sale that would enable them to sell the property in just the same way “ as they could if it was sold by a private individual dealing in regard to his own property,” and that a piece of property could be sold and a mortgage be taken back and then assigned, or he “ could get a mortgage direct to the lender of the money asan advance on account of the purchase money.” Pursuant to this advice, the executors conveyed certain real estate left hy their testator to a brother of the judgment creditor, for the expressed consideration of §30,000; and such grantee executed a mortgage to Edwin Booth, for whom the judgment creditor’s firm was acting in this matter, for §16,500, which money Was applied- to the completion of certain houses upon a lot, the legal title to which was held by the judgment creditor without any formal agreement that could be enforced by the estate furnishing the money or which could be of benefit to that estate, and at the same time a second mortgage was given back by such grantee to the trustees for §13,500, being the balance of the purchase price.. This mortgage was not delivered to the trustees directly, but was retained by the judgment creditor or by his firm, was not recorded, and was satisfied subsequently by the trustees under the direction of the judgment creditor or his firm, no money having at any time been paid hy the mortgagor to the trustees, who continued during all these transactions in possession of the mortgaged premises.
    
      'Held, that the sale was in violation of the power of sale, which provided that a -sale should be made only in case it should be deemed for the'best interest >of the estate of William Campbell;
    That, under such circumstances, no title passed to the-grantee from the.executors, and that the property still belonged to the estate of William Campbell;
    That, as the-firm of which the judgment -creditor was a member were acting for Edwin Booth, and had full knowledge of the transaction, their knowledge must -be considered -to be the -knowledge .of Edwin Booth, and that, -consequently, neither he nor hie executors were protected by -the Recording Act;
    That while the general rule was settled that a purchaser need not concern himself ■as to the manner in which -an executor or trustee disposed of the purchase -money of the property sold by him as executor or trustee, the rule did not -apply where, the impropriety of the transaction was obvious and was within the knowledge of -the attorneys of the purchaser.
    Appeal by the defendants, Hannah Campbell and others, as ■executors, etc., of William Campbell, deceased, from a judgment ■of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York on the 2d day of January, 1896, upon the decision of the court rendered after a trial-•at the New York -Special Term. _
    This action was brought to foreclose a mortgage given by George T. Arnoux to Edwin Booth, the plaintiff’s testator, -on the 20th day of January, 1891, to secure the payment of $16,500, conveying land on the westerly side of South Fifth avenue (formerly Lawrence street) in the city pf New York.
    
      Henry B. Johnson, for the appellants.
    
      C. N. Bovee, Jr., and J. McG. Goodale, for the respondents.
   Ingraham, J.:

William Campbell died in the city of New York on the B'Tth day of April, 1888. the owner of two houses, numbered respectively 62 and 64 South Fifth avenue, New York city, leaving a last will and testament, by which he gave to his executors all the residue of his estate, after making three legacies aggregating $4,000 — “ in trust, however, that they shall take possession of, manage and control the same, and receive the rents, income and profits therefrom for and during the natural life of my wife Sarah; and I instruct and direct that they shall, out of such rents, issues and profits, during the life of my said wife, maintain and carry on my said household,and support my family as it now exists,” and disposing of any income not necessary to carry out this provision during the life of his wife. The will further provides that from and after the death of his wife six-sevenths of Ms estate, real and personal, shall be divided among his six children, the remaining one-seventh being given to his executors in trust, to apply the income thereof to the support and maintenance of his daughter Hannah. By the ninth clause of the will the executors were authorized to collect the rents, issues and mcome of his estate, to sell and dispose of any bonds or stock, or other personal property, to reinvest the proceeds thereof, and to make and execute leases of his real estate for a term not exceeding three years. By the tenth clause of the will a power of sale is given to the trustees in the followmg language : If at any time my executors * * * shall deem it for the best interest of my said estate that any part or parts, or all of my real estate, should be sold, then I authorize and empower my executors, as such, and the survivors and survivor of them, to sell and dispose of any real estate of which I may die seized or interested in, and any part or parts thereof, upon such terms and in such manner as they shall deem best.” No disposition was expressly made of the proceeds of this real estate, but they would clearly vest with the executors as trustees under the general trust contained in the fourth and subsequent clauses of the will, and upon the death of the testator’s wife would be divided under the seventh and eighth clauses of the will.

There can be no question but that there was here created a valid express trust by which the title of this real estate vested in the executors as trustees, with a power of sale by which they were authorized to sell the real estate if they should deem it for the best interest of the estate that it should be sold. It was unincumbered and of the value of upwards of $60,000. Thus, these defendants, trustees, were, at the time of the transactions hereafter mentioned,, in actual possession' of this real estate as the legal owners thereof, in trust, to carryout the provisions of the will, with a power of sale authorizing them to sell if -they should deem it for the best interest of the estate. The testator left no j>ersonal property, but there.were claims at the time of his death against him to an amount of about $40,000. Some of these claims were contested^ and were upon the-testator’s indorsements or guaranties of promissory notes or obligations of his son and son-in-law, constituting the firm of Phyfe &r Campbell. Upon one'of these indorsements, which had been held by the Chemical National Bank, an action had been brought in the testator’s lifetime, and & verdict had been rendered against the tes-; tator. Before the entry of judgment, however, the testator died, and judgment was entered-August 9, 1888, for $12,311.18. • Mr! William IT. Arnoux had guaranteed the payment of that note to the> Chemical National-Bank, and subsequent to the entry of the -judgment-had paid the Chemical National Bank and taken an assignment of the judgment, and subsequently commenced-proceedings in the Surrogate’s Court to compel the sale of the real estate of Campbell^, the testator, to satisfy that judgment, and that proceeding was-pending at the time of the transactions hereafter mentioned. ' At this time he, therefore, stood in the position of' a creditor of the. estate, pressingTegal proceedings to enforce the payment of his claim-It also appeared that 'he* or his firm, represented Edwin Booth,, plaintiffs’ testator, for the purpose of making loans of money foF Booth.

The executors- of this estate were Joseph Campbell, a son óf the deceased, Emma Campbell and Martha Campbell, two daughters of' the deceased. The evidence shows' that they were extremely simple people, with little business capacity or experience.

Mr. Arnoux and his firm disclaim the position of acting at. this-time as attorneys or advisers 'of the executors. It is. undisputed, however, that during all this proceeding- they were without legal, advisers at all, except for the advice that they received from Mr. Arnoux.

This being the condition of affairs, Mr. Phyfe, a son-in-law of the testator, went to see Mr. Arnoux and had a conversation with him, at which he- said that the family were greatly distressed over the .matter of his (Arnoux’s) claim; that if this claim was prosecuted it would probably ruin them; and Phyfe asked Mr. Arnoux what rcould be done in regard to it. , Mr. Arnoux testified that at this interview with Phyfe the first question put to him was whether or not the estate could make a mortgage, and that he looked at the will .and said no., Thus, it is not disputed that, at the commencement of the negotiations which resulted in the execution of these papers, .Mr. Arnoux was acquainted with the terms of the will, and must be presumed to be familiar with the legal obligations of these' defendants. as trustees. He advised Mr. Phyfe that these trustees could not execute a mortgage. Mr. Phyfe then wanted to know whether .the property cqüld be sold, and on what conditions; and was told that it was “ an- unlimited and unrestricted power of sale that would enable them tq sell in just the same way as they could if it was sold by a private individual dealing in regard to his owii property,” As to this advice in regard to the first proposition, as to whether the property .could be mortgaged; we can find no fault, but the same cannot, be said as to the advice given- to the second question. And it “is., because of this advice, namely, that these trustees .could rise this property and deal with it as if it was their own property, as if it belonged to them to do with as they wished, that the conveyances were made and, the mortgage given which is attempted to be ■ foreclosed in this action. Other questions were asked by Mr. Phyfe -—whether a loan could be made on the deed or conveyance which Was to be given if a sale was- effected, and they did not realize sufficient money from such sale; and to this Mr. Arnoux replied: “ Certainly ;■ that a person could sell a piece of property and take a mortgage, and assign the mortgage, or could get a mortgage direct to the lender of the money as an advance on account of the purchase money.”

It seems that certain property known as the Ninety-eighth street property was or had been owned by the wife of Mr. Phyfe, who had instigated this negotiation; and about this time Mrs. Phyfe had offered to convey to Mr. Arnoux the title to the Ninety-eighth street property as security for this judgment, which had been assigned to him by the Chemical National Bank, and that a conveyance of such property was executed and delivered to Mr. Arnoux. So that at the time of this negotiation between Mr. Arnoux and the executors, he held the legal title to the Ninety-eighth street property which he says was held as. security for this'judgment, which was against Phyfe & Campbell, as well as against the executors of the estate, but which "title was absolute on its face. The Chemical Bank judgment was not a lien upon the property.

After this interview between Mr. Arnoux and" Mr.- Phyfe, Mr. Arnoux wrote a letter to Mr. Joseph Campbell, one of the trustees, as follows:' “ Dear Sir: Mr. Phyfe has made' me a proposition which, if you join in, I will carry out, and, I believe, it. will relieve your property from the lien of my judgment.” In response to- this lettéí Mr. Campbell called Upon Mr. Arnoux and advised with him. about the proposition discussed between , Mr. Arnoux and Mr. Phyfe; and subsequently the other executors- had interviews with Mr. Arnoux. The proposition which had been discussed between Phyfe and Mr. Arnotix was discussed with the- executors,- and the defendants swore that they relied entirely Upon the advice given by Mr. ArUoUx as to What was- proper and legal for them to do at any rate under the direction and management of Arnoux or his firm the conveyances were made,- and the mortgage to foreclose which this action was brought was- executed. What' Mri Arnoux advised these executors fo do, and what, under his advice, they did do, was as follows-: The executors and trustees executed a deed conveying the property covered hy this mortgage to one George T. Arnoux, a brother of Mr. William H. Arnoux, expressing a consideration, of $30,000. Mr. George T. Arnoux at once executed ,a mortgage to the plaintiffs- testator to secure the sum of $16,500. Four checks aggregating that amount Were drawn hy Arnoux, Bitch & Woodford .to the order of George T. Arnoux. One for $7,521.47 was indorsed hy George T. Arnoux to the defendant Joseph Campbell, executor, and by him indorsed to Arnoux, Riteh .& Woodford.. One for $8,000 was indorsed by George T. Arnoux to Joseph Campbell, executor, and by him indorsed to William H. Arnoux. One for $300 was indorsed by George T.- Arnoux .to Joseph Campbell, executor, and by him indorsed to Arnoux, Pitch & Woodford. At the same time there was executed a mortgage to secure to the defendants, trustees, the balance of what was called the purchase money specified in the conveyance, viz., $13,500. That mortgage was not delivered to the trustees directly, but was retained by Mr. William II. Arnoux, or by Arnoux, Bitch & Wood-ford, was not recorded, and subsequently appears to have been satisfied by the trustees under the direction of Arnoux, Bitch & Woodford, or Mr. Arnoux, no money, however, having at any time been paid by George T. Arnoux to the trustees. George T. Arnoux at the same time executed an instrument by which he formally gave possession of the premises to the trustees, although it appeared that the trustees were in possession at the time of the execution of these conveyances, and such possession continued without interruption and hate continued down to the time of the trial. During all this time the only legal adviser of the parties, the plaintiffs’ testator, Phyfe, Mrs. Phyfe and the Campbell trustees, was Mr. William H. Arnoux or Messrs. Arnoux, Bitch & Woodford. They acted as agents for the plaintiff in the making of the loan. They certainly advised with Phyfe and the trustees under the will of Campbell as to the form of making this sale or what upon its face was a sale and as to the disposition to be made of the proceeds realized.

We can now consider just what proposition was discussed between Phyfe and Mr. Arnoux which Mr. Arnoux has referred to in his letter to Campbell as a proposition which Mr. Phyfe had made to him, and “ which, if you join in, I will carry out, and, I believe, it will relieve your property from the lien of my judgment.” This proposition was that the sum of $16,500 was to be raised by the mortgage to be made by this “.purchaser,” and .that that money was to be applied to 'the improvement or completion of the unfinished houses upon the Ninety-eight street property, the title to which was in Mr. William TI. Arnoux.

We fail to find any testimony tending to show that any agreement existed, either verbal or written, by which, as between Mr. Arnoux and the estate, the estate could enforce any obligation of Arnoux to hold this property as security for the payment of this judgment, or as security for the repayment to. the estate of the amount which the estate had paid to Mr. Arnoux to be used in the completion of these buildings. Mr. Arnoux did not agree to repay to the estate that sum of money, the proceeds of this mortgage. The proceeds were largely in excess of the sum due to Mr. Arnoux on this judgment, the amount of. the judgment being slightly over $12,000, while the amount which was paid to Hr. Arnoux of the money of the estate was in the neighborhood of $Í6,500. Nor was there any evidence of any agreement by Hr. Arnoux or any one else by which this Ninety-eighth street property could be held as security for the payment of' any debt of Phyfe & Campbell, or of this estate, or that upon the completion -of the Ninety-eighth, street houses they would be sold and the proceeds applied in any way to the benefit of the. estate, except so far as this verbal agreement before - mentioned, if carried out, would relieve the estate from the. .payment of ;Hi’Arnoux’s judgment. Thus there was what appeared, to be a sale of this property by the defendants as trustees,, in the execution of a power of sale which ' provided, If at any time my. executors- * * * shall deem it for the best interest of my said estate that' any- part or parts of all of .my real estate should be sold, then I authorize and empower my executors as. 'such * * .-* to sell ánd- dispose of any real estate * * * and .any part or parts thereof,” from which the sum of $16,500 was realized by a mortgage upon the premises. That money was applied to'the completion pf houses upon property of another, without any formal agreement which could be enforced by the. estate furnishing the money, or which.could be of. benefit to the estate; all done under the advice of the person in whom is vested the legal title to the property which was to be improved; and a court of equity is asked to say that this is an exercise of the power of sale by these trustees and a sale of the-property thereunder. .

■ It seems to us entirely clear that there was no sale; that no, sale was ever contemplated or attempted between the parties; that no possession of the premises was ever delivered, and that it was known to every party connected with the transaction' that this was to be a mere conveyance which would apparently execute■ the power of sale,but which would in reality be a mortgage to secure this $16^500 to-be'expended upon this property owned by Hr. Arnoux. "We think, -therefore, on this uncontradicted evidence, there-' was -never an ■exercise of the power of sale ; - that ho title passed, to the grantee.in ■the deed from the executors, and that the property.is still the 'property of this estate. .

It is hardly necessary to cite authorities to sustain this proposition. What was said, however, by Judge Finch, delivering the opinion of the court in Scholle v. Scholle (113 N. Y. 261), applies: “ The power of sale given by the will was to sell at times or in a. manner which the executors should deem for the best interest of the estate. The authority contemplated first a sale, and second the exercise of a judgment as to the best interest of the estate. Here there was, in truth, no sale such as the will contemplated. That was one for the purpose of realizing proceeds to be invested as the source of income and interest, and at a time when such values could be realized as Would justify a sale instead of further delay for an appreciation of value. Nothing of that kind took place. No proceeds were realized. The land was appropriated to pay a debt chargeable primarily upon the personal property without an order of the surrogate or proof that' the personal assets were insufficient to pay the debts. The authority to sell was given for one distinct and definite purpose, and not at all to enable a disputed debt to be compromised. The .deed, therefore, passed no interest of the remainderman, and the surrogate was powerless to take it away and appropriate it to the payment of debts except in the statutory method.” And in Harris v. Strodl (132 N. Y. 396) it ivas said: “ The power is to sell and convey whenever they may deem it best to do so, and upon such terms as they deem desirable. It is contended that they deemed it best to convey to the defendant for the purpose of vesting in him the remnant of the title which remained unconveyed after the conveyance of the Widow and children, and that they deemed the confirmation of that conveyance upon the consideration expressed in it desirable terms. This may meet the letter of the power, but does not satisfy the spirit. * * "x" Clearly they ought to have so sold these as to secure the proceeds to the grandchildren in the event of the contingency happening, making them the ultimate devisees of the testator. But as the case is presented the executors made the conveyance to the defendant so as to enable the takers of the defeasible estates to keep and convert to their own use the full price of the whole estate, as if their children had no contingent future estate in it. The plaintiff has full knowledge of all these facts.” .

But in what position do the defendants stand? For it is quite clear that if the plaintiffs’ testator, without notice, made a loan, relying upon the title of the property in George T. Arnoux, which upon its face was valid,, under the Recording. Act he should he protected. The plaintiffs’' testator, however, so: far as appears* was. entirely ignorant that any mortgage was ever given. Mr. Arnoux, or his firm of Arnoux, Ritch & Woodfordy represented' him in the transaction. They made the loan for him; and as- the execution of the deed was to- make.a title in a third, party in order to procure this loan, and as Arnoux, Ritch & "Woodford and Mr, William EL Arnoux,. acting as the agent- or representative of plaintiffs’ testator,, had full knowledge of the- understanding under which the deed and mortgages were given, it is- quite- evident that the -plaintiffs’ testator could not claim-to have advanced the $16^.500 upon- the faith of this-, title without notice, of the: circumstances under which the deed was-given.- Notice’ to Mr.. Arnoux,, or to the firm of Arnoux,. Ritch & Woodford, was notice acquired hy them in the very act of making-the loan and examining the title to>’ the property.. And the plaintiffs’ testator having left the question of this investment to them, the knowledge they had of the transaction must be considered to- be his. knowledge. While the general rule ■ is- settled that a purchaser is-relieved from any concern as to the-' disposition- hy the executor' or trustee of the purchase money of property purchased from the executor or trustee, this rule- does not apply where the- purchaser knew that the transaction was not within the usual course of administration* and had notice of the fact that, the property of the estate- and the- rights- of the beneficiaries of the testator were put in jeopardy by the negligent, if not fraudulent, co-operation- of the purchaser or -mortgagee. (Moore v. American Loan & Trust Co., 115 N. Y. 79.) The language used in that case seems entirely applicable- to-the present case : “ The impropriety of the transaction was obvious-enough, and its conduct a clear violation of' that perfect good faith which the law exacts from persons dealing with an executor or other trustee, respecting trust property The defendant, therefore, comes directly within the rule which requires the person taking it for an object, other than the general purposes of the- trust or such, as may reasonably be supposed to he witlii-n its scope, or in. any manner contrary to the duty of the office of executor, to look to the authority of the trustee, or he will act -at his.peril.”

He, therefore, acquired no interest in the property in cpnsequence of his having loaned the money relying upon this paper title and with notice of its inherent defects.

It seems to us clear, therefore, that the sale and conveyance to' George T. Arnoux was not a- valid exercise of the power conferred by this will; and the deed by which the executors purported to exercise that power was not a valid deed by which any property of the estate was conveyed to George T. Arnoux; that George T. Arnoux never thereby acquired any title to this property; and that the plaintiffs’ testator, being chargeable with full knowledge of all the facts when the mortgage was executed, did not acquire as against these defendants, the trustees and beneficiaries of the estate,, any lien upon the property.

The judgment must, therefore, be reversed, and judgment entered, dismissing the complaint as to these appellants, with costs of this court and in the court below.

arrett and Rumsey,. JJ., concurred; Williams, J., concurred in result.

Judgment reversed, and judgment entered dismissing complaint as to appellants, with costs of this court and in the court below.  