
    GOTTBERG v. UNITED STATES NATIONAL BANK.
    
      N. Y. Supreme Court, First District, Special Term;
    
    
      November, 1890.
    I. Executors and administrators ; advance to executor on securities of estate.] Although one who purchases securities which show upon their face that they are trust property, is put upon inquiry as to the power of the trustee to vary or change such securities, yet, in the case of a sale or pledge by an executor, this power is presumed as a necessary incident to the performance of his duties, and the purchaser or pledgee is protected, if he pays or advances his money in good faith and without any knowledge of any intended misapplication by the executor.
    
      2. The same / case stated.] Where an executor procured an advance from a bank upon the collateral security of testator’s bonds, registered in the names of himself and his co-executor, giving a note for the loan signed by himself individually, and receiving a check for the loan payable to himself individually, but the bank had no actual knowledge that the securities belonged to the estate, or of the purpose for which the loan was procured by such executor,— held, in an action by the co-executor of the pledgor to recover the bonds that, assuming that the bank was bound to notice the manner in which the bonds were registered, it was protected to the extent of its loan.
    Trial by the court.
    Action by Julius Gottberg, as executor, etc., of Mendlich Gottberg, against the United States National Bank and John J. Louth, as executor of Menlich Gottberg and in his own right, to recover the value of certain bonds of the St. Paul and Sioux City Railroad Co. which had been wrongfully pledged by Louth to the bank to secure a loan made to him individually.
    The court found that upon Louth’s application to the bank for a loan upon the bonds in question, it agreed to make the loan upon his procuring a registered transfer thereof to the bank, and that upon his having done so the bank paid the loan by check to the order of Louth ; that the bank had no knowledge that Louth was executor of any estate, and did not see the bonds until they had been- registered in its name, and knew nothing of any irregularity in the transfer of the bonds or the registration thereof. The bonds were apparently indorsed with the names of the executors, followed by the indorsement of the executors to the bank, but the transfers, while purporting to be in the name of both executors, were made without the knowledge or authority of the plaintiff; and the court also found that if the defendant bank or its officers had made inquiry before the loan was made, they would have found that the bonds had been delivered to said Louth by the New York Life Insurance and Trust Company, as Bailee, charged with the duty of holding them and delivering them only to the party entitled thereto, and that they would have been informed that the bonds had been regularly transferred to the bank by the transfer agent of the railroad company ; and that the bank made the loan on the bonds in good faith and without any knowledge or information sufficient to put them upon inquiry as to Louth’s authority to procure the loan.
    
      Emmet & Robinson, for the plaintiff.
    
      Butler, Stillman & Hubbard, for the defendants.
   Barrett, J.

Where one purchases property from a trustee, knowing that the subject is trust property, he is put upon inquiry as to the trustee’s power to change or vary the securities. But one who purchases property from an executor is not necessarily put upon even this inquiry. “ On the death of a testator,” says Mr. Perry in his work on trusts (§.809), “ the personal estate vests wholly in the executor, and in order that he may execute his office, the law permits him, with or without the concurrence of any co-executor, to sell or mortgage, by actual assignment or equitable deposit, with or without a power of sale, all or any part of the personal assets, legal or equitable.” For this proposition numerous authorities are cited in the notes to the fourth edition, and the principle may be said to be well established.

The distinction between a trustee and executor was referred to in Duncan v. Jaudon (15 Wall. 175). In the former case, namely, that of a trustee, Justice Davis observed that “ There is no presumption of a right to sell, as there is in the case of an- executor.” And in the same case below, reported under the name of Jaudon v. The National City Bank (8 Blatch., 438), Justice Blatchford observed that “ a trustee stands on a different footing from an executor or administrator, or even a guardian, in many respects. A trustee presumptively holds his trust property for administration and not for sale.”

Where, then, the securities show upon their face that they are trust property, the purchaser is put upon inquiry as to the power of the trustee to vary or change such securities. In the case of an executor, however, this power is presumed as a necessary incident to the performance of his duties, and the purchaser or pledgee is protected if he pays or advances his money in good faith and without knowledge of any-intended misapplication by the executor. What neither a trustee nor an executor can do, without peril to the purchaser or pledgee, is to dispose of or pledge his cestui que trust’s or testator’s assets in payment of or as security for a debt of his own (Field v. Schieffelin, 7 Johns Ch. 150; Shaw v. Spencer, 100 Mass. 382; Petrie v. Clark, 11 S. & R. 377). In Field v. Schieffelin, Chancellor Kent examined all the English cases up to that date (1823), and his conclusion was that they all agreed that the purchaser is safe if he is no party to any fraud in the executor, and has no knowledge or proof that the executor intended to misapply the proceeds, or was, in fact, by the very transaction, applying them to the extinguishing of his own private debt.” “ The great difficulty has been,” continued the chancellor, “ to determine how far the purchaser dealt at his peril, when he knew, from the very face of the proceeding, that the executor was applying the assets to his own private purposes, as the payment of his own debt. The latter and the better doctrine is that in such a case he does buy at his peril; but that, if he has no such proof or knowledge, he is not bound to inquire into the state of the trust, because he has no means to support the inquiry, and he may safely repose on the general presumption that the executor is in the due exercise of his trust/’

The rule was stated by Chief Justice Taney, in Lowery v. Commercial Bank (Circuit Ct. Dec. 310), as follows ; “ If a party, dealing with an executor, has at the time reasonable ground for believing that he intends to misapply the money, or is in the very transaction applying it to his own private use, the person so dealing is responsible to the persons injured.” And the same rule was put in another form by the House of Lords, in 1861, in Walker v. Taylor (21 Law T. N. S. 845) : “ Where an executor parts with any portion of the assets of the testator, under such circumstances as that the purchaser must be reasonably taken to know that they were sold, not for the benefit of the estate, but for the executor’s own profit, the result is that the purchaser holds the assets, as if he were himself, in respect of those assets the executor.” (See also Leitch v. Wells, 48 N. Y. 585 ; Goodwin v. American Nat. B’k. 48 Conn. 550; Cook on Stock and Stockholders, § 474, and cases there cited.)

The present case is analogous to McLeod v. Drummond (14 Ves. 352 ; 17 Ves. 152), which was carefully analyzed by Chancellor Kent in Field v. Schieffelin. There was, in McLeod v. Drummond, a pledge by the executor of the testator’s bonds upon advances of money. The bill, as here,. was by a co-executor, and it was dismissed by the Master of the Rolls and the decree was affirmed on appeal to the Lord Chancellor. The Master of the Rolls said he had found no case where the money had been advanced at the time to the full value of the assets, that it was ever called back. Lord Eldon, on the appeal, declared that, on a sale by the executor for money advanced at the time, the vendee could never be affected by proving the executor’s intention at the time to misapply the money. The third person, if there was no more in the transaction, would be justified in assuming that the sale was for those purposes for which the law gives the executor the power of sale. The conclusion, in substance, was that, to charge the purchaser, he must have had direct evidence that the advance was not for a purpose connected with the administration of - the assets, but for a different purpose, and that the executor was going to misapply the fund.

Both upon principle and authority, then, the plaintiff in the present case must fail. We will assume that the bank was bound to notice the manner in which the bonds were registered. What then? It simply advanced money to one of the executors upon the collateral security of the testator’s bonds registered in the name of the two executors. There was absolutely nothing more than this in the transaction. It is true that in form the advance was to John J. Louth, personally. That is, he did not add the descriptive word “ executor ” to his signature to the stock note, nor did the bank add such word to the name of Louth as the payee of its check, nor did Louth inform the bank that he desired the loan for the purposes of the estate. But all this was implied upon the face of the transaction, and the bank is certainly not .chargeable because its president supposed that he was dealing with Louth personally, when, if he had noticed the manner in which the bonds were registered, what transpired need not have been changed even in matter of detail. For the debt contracted by Louth as executor was in law personal, and it would have been just as much personal whether he added to his signature to the stock note his executorial description or not. The form of the transaction, therefore, was unobjectionable. It appropriately effected a loan to the estate, and, so far as it spoke at all, it spoke of a loan to the executor for the purposes of the estate. It did not of itself effect a misappropriation of the funds of the estate, and it certainly gave no hint to the bank of an intended misappropriation.

On the main question there should be judgment for the defendant, but as the bonds have been sold by the bank to pay the loans made to Louth, and as upon such sales there remains a surplus in the hands of the bank, the plaintiffs may have judgment therefor, without costs.  