268 U.S. 121
45 S.Ct. 451
69 L.Ed. 876
DUNN et al.
Argued March 13, 1925.
Decided April 13, 1925.
Messrs. W. A. Ledbetter, of Oklahoma City, Okl., and W. W. Dyar, of Washington, D. C., for the United States.
Mr. Geo. S. Ramsay, of Muskogee, Okl., for appellees Dunn and others.
Mr. Wm. G. Davisson, of Ardmore, Okl., for appellees Gillam.
[Argument of Counsel from pages 122-125 intentionally omitted]
Mr. Justice STONE delivered the opinion of the Court.
This is an appeal from the United States Circuit Court of Appeals for the Eighth Circuit from so much of its decree as affirms a decree of the District Court of the United States for the Eastern District of Oklahoma dismissing the bill of the plaintiff—the appellant here. 288 F. 158.
Suit was begun to cancel an oil and gas lease of 40 acres of land, given to appellees Dunn and Gillam, by Thomas, guardian, and signed by Eaves, curator of Allie Daney, a minor full-blood Choctaw Indian. Both Thomas and Eaves claimed the right to represent the minor and to lease her land. Eaves was appointed curator of the minor by the United States Court for the Southern District of the Indian Territory in November, 1905, and on admission of the territory of Oklahoma and the Indian Territory to statehood as the state of Oklahoma that court transmitted the curatorship record to the county court of Love county. Thomas was appointed guardian by the county court of Le Flore county in July, 1911. On August 18, 1913, Eaves executed a lease of the premises in question to one Mullen, which lease was approved by the county court of Love county. On the same day Thomas, as guardian, executed a lease of the same premises to Dunn and Gillam, which lease was approved by the county court of Le Flore county. The two leases came to the Indian superintendent for his recommendation for approval by the Secretary of the Interior at about the same time. This developed a controversy between Mullen, on the one hand, and Dunn and Gillam, on the other, as to whether Thomas or Eaves properly represented the minor and had legal authority to enter into a lease of the minor's lands. A compromise was finally effected between the contesting parties, whereby Eaves added his signature as curator to the lease which had been given by Thomas to Dunn and Gillam and acknowledged it. At the same time the Bull Head Oil Company, a corporation and one of the defendants, was organized. The Thomas lease was assigned to it, under an agreement that the lessees would take for their respective interests in the leasehold equal shares of stock. The capital of the Bull Head Oil Company was fixed at $18,000, of which 8,000 shares of the capital stock of the company, having a par value of $8,000, were issued to Mullen, the lessee under the Eaves lease, and 8,000 shares were issued to Dunn, as trustee, for account of the lessees under the Thomas lease and those claiming under them. The remainder of the capital stock was reserved and issued for other corporate purposes.
The bill of complaint joined as defendants the Bull Head Oil Company, Dunn and Gillam and their wives, and Mullen and others, who were stockholders of the company. It charged that the Thomas lease was voidable because, as alleged, Thomas, the guardian, had been induced to execute the lease by a secret agreement with Dunn and Gillam to the effect that a one-fourth interest in the lease was to be transferred by them to a third person for the personal benefit of Thomas. The bill prayed that the minor, Allie Daney, be decreed to be the owner in fee of the lands described in the Thomas lease; that the defendants be adjudged to have no interest therein, and that they be required to account for the oil and gas taken from the land and for the money received by them as the proceeds of the oil and gas so taken, and in the alternative, if for any reason the court should adjudge that the lease of the premises could not be canceled, then that the defendant stockholders be adjudged the holders of said stock respectively in trust for the minor, and that the plaintiff be awarded the custody thereof for her use and benefit, and that the defendants who are or at any time have been stockholders of the Bull Head Oil Company be required to account for all money received by them respectively either as dividends or as proceeds of sale of their stock.
On trial the court found that a part of the consideration moving Thomas, as guardian, to execute the lease to Dunn and Gillam, was a one-fourth interest in the lease transferred by them pursuant to a secret agreement with the guardian to a third person for the personal use and benefit of Thomas. The trial court further found that Eaves, as curator, by subscribing his name to the Thomas lease, with the approval of the county court of Love county and with the approval of the Secretary of the Interior, gave legal validity to that lease; that such action of Eaves was free from the legal effect of the fraud of Thomas and of Dunn and Gillam; and that by the transfer of the lease to the Bull Head Oil Company in exchange for its issue of capital stock, the full legal ownership of the lease was thereupon vested in the Bull Head Oil Company free from any legal effect of the fraud in the execution of the original lease by Thomas, the guardian. The court also found that, of the shares of stock acquired by Gillam as a result of the compromise entered into with Dunn and Gillam by Mullen, 3,266 2/3 shares, of which his wife, Mrs. Gillam, a party defendant, held 1,266 2/3 shares, were sold by them to one Hamon, a party defendant, for the sum of $75,000, and that Hamon was an innocent purchaser for value of the stock; that the defendant T. H. Dunn still retained his holdings in the stock of the company. There was also finding that certain shares of the Dunn and Gillam stock, transferred by them respectively to Mrs. Dunn and Mrs. Gillam, were so transferred without consideration. Upon the basis of these findings the court entered its decree in favor of the defendants and dismissed the case.
After the entry of the decree of the District Court, the plaintiff, acting by the Secretary of the Interior, entered into an agreement, approved by the Secretary and an Assistant Attorney General, with all the defendants other than the defendants Dunn and his wife and the defendants Gillam and his wife, whereby it was stipulated that, in any appeal which the United States should take from the decision of the District Court in this cause, 'the United States would neither ask nor insist upon a reversal of the said cause, or a recovery against the Bull Head Oil Company or against any of the defendants in said cause, save and except T. H. Dunn, N. E. Dunn [wife of T. H. Dunn], J. Robert Gillam, and Mrs. J. Robert Gillam, and that it will not insist upon any judgment impressing a trust upon any of the stock in the Bull Head Oil Company heretofore owned by J. Robert Gillam or Mrs. J. Robert Gillam and assigned to Jake Hamon, but will insist upon a money judgment against them for whatever amount the testimony may show should be awarded.'
Both the District Court and the Circuit Court of Appeals found, and the appellees do not question the correctness of the finding, that the Thomas lease to Dunn and Gillam was procured by fraud; nor can it be questioned on this record that the claim of Dunn and Gillam to rights under the Thomas lease was the only basis and consideration moving from them for the compromise agreement by them with Mullen, claiming under the Eaves lease, which resulted in Dunn and Gillam together receiving in exchange for their interest in the lease, 8,000 shares of the capital stock of the Bull Head Oil Company as the fruits of their fraudulent enterprise. Of this stock Dunn and his wife still hold a substantial amount. Gillam and his wife have converted the stock held by them into cash by sale of it to an innocent purchaser, and the leasehold itself, by the action of Dunn and Gillam, has been transferred to the Bull Head Oil Company, and has been adjudged by the decree of the District Court to be beyond the reach of the plaintiff and the plaintiff's ward, and the plaintiff in error has abandoned its appeal from that part of the decree.
There is thus presented the narrow question whether the appellees, Dunn and wife and Gillam and wife, against whom this appeal is now prosecuted, may retain the fruits of this fraudulent course of conduct, immune from attack in a court of equity. The court below rested its decision on the ground that the compromise settlement entered into with the defendants, some of whom were stockholders of the Bull Head Oil Company, other than the appellees against whom this appeal is prosecuted, had the effect of confirming the Thomas lease and if the appellant had the right to continue the litigation against Dunn and Gillam, that right is based on their alleged fraudulent conduct and is a claim for damages on account of the fraud, and since there was no evidence that the lease was granted for an inadequate return, there was no basis for an award of legal damages to the appellant.
Undoubtedly in an action at law for fraud or deceit, since the action sounds in damage, the plaintiff must prove damage to establish a right to recover. If Dunn and Gillam had retained the lease which they fraudulently obtained from Thomas, as guardian, the plaintiff could, at its option, either have brought suit in equity against them for the cancellation of the lease or for damages against the guardian, or possibly also at law for damages against Dunn and Gillam, and on familiar principles any relinquishment of plaintiff's right to cancel the lease would necessarily have limited plaintiff to a right of recovery for damages. But such is not the situation here presented. The grant of the lease by Thomas, the guardian, to Dunn and Gillam, with a secret agreement that the guardian should be jointly interested in the lease with Dunn and Gillam, was a fraud upon the ward, rendering the whole transaction voidable at the option of the ward or those legally representing her. It is not necessary in such a situation, in order to establish the right to relief to show that the beneficiary was damaged by the fraudulent conduct of the trustee. It is sufficient to establish that the fiduciary has exercised his power of disposition for his own benefit without more. Michoud et al. v. Girod et al., 4 How. 503, 533, 11 L. Ed. 1076; Wardell v. Railway Co., 103 U. S. 651, 658, 26 L. Ed. 509; Thomas v. R. R. Co., 109 U. S. 552, 3 S. Ct. 315, 27 L. Ed. 1018; Burns v. Cooper, 140 F. 273, 277, 72 C. C. A. 25; Mastin v. Noble, 157 F. 506, 509, 85 C. C. A. 98; New York Central & H. R. R. R. Co. v. Price, 159 F. 321, 323, 86 C. C. A. 502, 16 L. R. A. (N. S.) 1103, and Lane & Co. v. Maple Cotton Mill, 232 F. 422, 423, 146 C. C. A. 415.
Dunn and Gillam did not retain their interest in the lease which they had fraudulently acquired. They transferred it, together with the secret interest of Thomas, the guardian in the lease, to the defendant, the Bull Head Oil Company in exchange for stock in that corporation. They then acquired, by purchase from Thomas for the sum of $3,500 and an automobile, his interest in the stock of the corporation. Some of the stock which they acquired by this transaction was turned over to their wives, who, the court found, took as donees, and some of it was retained and is now held by appellees, and some of it has been transferred by them to innocent purchasers for value. In such a situation equity adopts the salutary rule that he who fraudulently traffics with a recreant fiduciary shall take nothing by his fraud. The ward or the beneficiary of a trust may, at his option, follow the trust res fraudulently diverted until it reaches the hands of an innocent purchaser for value, or he may, at his option, claim the proceeds of the sale or other disposition of the trust res in the hands of him who fraudulently acquired it of the fiduciary.
The legal principles governing the right to follow trust funds diverted in breach of the trust were succinctly and accurately stated by Turner, L. J., in Pennell v. Defell, 4 De Gex, M. & G. 372, 388, as follows:
'It is an undoubted principle of this court that as between a cestui que trust and trustee and all parties claiming under the trustee, otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruits of such property, whether it is in its original or its altered state, continues to be subject to or affected by the trust.'
To the same effect are Oliver et al. v. Piatt, 3 How. 333, 401, 11 L. Ed. 622; Lane v. Dighton, Amb. 409; Ex parte Dumars, 1 Atk. 232, 233; Taylor v. Plummer, 3 Maule & S. 562, 571; Cobb v. Knight, 74 Me. 253; People v. California Safe Deposit & Trust Co., 175 Cal. 756, 167 P. 388; Hubbard v. Burrell, 41 Wis. 365.
The rule is the same as against a fraudulent vendee who has exchanged the property purchased for other property. American Sugar Refining Co. v. Fancher, 145 N. Y. 552, 40 N. E. 206, 27 L. R. A. 757.
The rule is the same with respect to the proceeds of property tortiously misappropriated and found in the hands of the tort feasor or his transferee with notice. Newton v. Porter, 69 N. Y. 133, 25 Am. Rep. 152.
Dunn and Gillam, when they fraudulently acquired the Thomas lease by the corrupt action of the guardian, which action they actively induced, became trustees ex maleficio of the lease, and as such trustees they became equitably bound to hold the lease for the benefit of the ward or, in the event of a sale or other disposition of it, to hold its proceeds upon a like obligation. Any other rule would enable the fraudulent recipient of trust property acquired through a breach of trust to render himself immune to the remedial action of equity by the simple expedient of transferring the trust res thus acquired, to an innocent purchaser for value, or otherwise placing it beyond the reach of the defrauded beneficiary of the trust. Nor are they in any better situation with respect to the stock which they acquired by purchase from Thomas with full knowledge that it was a part of the proceeds of the lease fraudulently acquired from the guardian and by them fraudulently transferred to the oil company. Not being innocent purchasers, they took it impressed with the trust to which the lease itself was subject. Newton v. Porter, supra.
The plaintiff's bill was framed in conformity to the rule as we have stated it. It prayed cancellation of the lease in the hands of the Bull Head Oil Company, the transferee of Dunn and Gillam, 'but if for any reason the court shall hold' that the lease could not be canceled, then it prayed that the stockholders be adjudged to hold the stock in trust for the plaintiff. The District Court having decreed that the leasehold itself could not be followed into the hands of the Bull Head Oil Company, the plaintiff was not barred from claiming the proceeds of the lease in the form of stock or money in the hands of those stockholders who were not innocent purchasers for value and the pleadings were appropriately framed to that end. Suit to establish an equitable claim to specific property does not bar a recovery of the proceeds of that property, if it develops in the course of the trial that the defendant has conveyed it away in violation of his equitable obligation to the plaintiff. Taylor v. Kelly, 56 N. C. 240; Haughwout v. Murphy, 22 N. J. Eq. 531-547; Valentine v. Richardt, 126 N. Y. 273, 27 N. E. 255; Sugg v. Stowe, 58 N. C. 126; Siter's Appeal, 26 Pa. 178; Frick's Appeal, 101 Pa. 485; Bartz v. Paff, 95 Wis. 95, 69 N. W. 297, 37 L. R. A. 848. See also Jarvis v. Smith, 1 Hoffman's Ch. 470; Daniels v. Davison, 16 Vesey, 249; and 1 Sugden on Vendors, 277.
In Valentine v. Richardt, supra, suit was brought in equity to cancel a conveyance of real estate for fraud. The alleged fraudulent grantee and his grantee and a subsequent mortgagee were made parties defendant and the relief demanded was that the two conveyances and the mortgage be declared void and that they be surrendered up and canceled and for such further and other relief as might be just. On the trial the court found that the first conveyance was procured by fraud, but that the second conveyance and the mortgage were taken in good faith for value and the complaint was dismissed as to them. It was held that the first grantee was a trustee of the property ex maleficio, that the bill might be retained against the first grantee and that the plaintiff might, in equity, secure a money judgment for the value of the land, not as damages, but as a substitute for the land it self, and that, under the frame of the bill and prayer, the court had power to render any judgment consistent with the facts alleged and proved; a principle of decision which we think is exactly applicable to the present case. See, also, Mooney v. Byrne, 163 N. Y. 86, 57 N. E. 163.
The compromise agreement entered into by plaintiff with defendants other than Dunn and Gillam was not technically a confirmation of the lease. It was both in form and in substance only an abandonment of an appeal from a decree of the court, adjudging an indefeasible title to the lease to be in the defendant corporation. The practical effect was to enable the other stockholders, at a price, to weaken the danger of being involved in the fraud by their probable guilty knowledge of it. But, even if it were deemed to be a confirmation of the lease, such a confirmation is not inconsistent with a recovery of the proceeds of the lease from Dunn and Gillam and those claiming under them, nor, as has been pointed out, does it bar a recovery of the proceeds. Indeed, a recovery of the proceeds of the assignment of the lease by Dunn and Gillam could be predicated only on a confirmation of the transfer which would bar a recovery of the leasehold itself. Bonner v. Holland, 68 Ga. 718; Cadieux v. Sears, 258 Ill. 221, 101 N. E. 542; Bettencourt v. Bettencourt, 70 Or. 384, 396, 142 P. 326.
Nor do we find it necessary to consider the question whether Eaves, the curator, or Thomas, the guardian, properly represented the minor or whether either of them possessed exclusively the power to dispose of the property of the minor, or to determine the precise legal effect of the addition of Eaves' signature to the Thomas lease. Thomas, under whom Dunn and Gillam claim, assumed to act as guardian in the disposition of his ward's property. Dunn and Gillam dealt with him in that capacity. On common-law principles they cannot deny the legal capacity in which their lessor purported to act in executing the lease under which they claim. Terry v. Ferguson, 8 Port. (Ala.) 501; Pouder v. Catterson, 127 Ind. 434, 26 N. E. 66; Wolf v. Holton, 92 Mich. 136, 52 N. W. 459; Id., 104 Mich. 108, 62 N. W. 174; Parker v. Raymond, 14 Mo. 535; Steel v. Gilmour, 77 App. Div. 199, 203, 78 N. Y. S. 1078; Steuber v. Huber, 107 App. Div. 599, 95 N. Y. S. 348; Shell v. West, 130 N. C. 171, 41 S. E. 65; Caldwell v. Harris, 4 Humph. (Tenn.) 24; Tiffany, Landlord & Tenant, § 78(h) and (j). This is the rule adopted by the statute of Oklahoma. See section 5247, Compiled Statutes of Oklahoma 1921; Avey v. Van Voorhis, 42 Okl. 232, 241, 140 P. 615. In a suit founded upon the very existence of the lease and praying relief from its execution and legal operation because procured by the fraud of the lessees, the lessees cannot claim under the lease, hold the benefits derived from it, and, at the same time deny the power and authority of the lessor to execute it.
We can perceive no reason why a doubtful or uncertain claim of Dunn and Gillam to the leasehold, sufficient nevertheless to constitute the consideration for the compromise contract with Mullen, (Blount v. Wheeler, 199 Mass. 330, 85 N. E. 477, 17 L. R. A. [N. S.] 1036; Zoebisch v. Von Minden, 120 N. Y. 406, 24 N. E. 795; Dredging Co. v. Hess, 71 N. J. Law, 327, 60 A. 362), could not become the subject-matter of a trust arising ex maleficio from the fraud of Dunn and Gillam and upon principles already referred to, it follows that, if Dunn and Gillam could not resist a bill to compel the cancellation of the lease, they cannot now resist the prayer that they account for the proceeds of the lease acquired by their sale of it and which are the direct fruits of their fraud.
A period of about six years elapsed between the giving of the Thomas lease and the filing of the bill. The defendants neither pleaded nor have they urged laches as a defense; nor do we find in the record any adequate basis for denying relief on that ground. One who claims the benefit derived from a breach of trust in which he actively participates, and who shows no prejudice resulting from the delay in bringing suit to compel him to account, cannot complain of laches. See Insurance Company v. Eldredge, 102 U. S. 545, 548, 26 L. Ed. 245.
We hold that Dunn and Gillam were constructive trustees of whatever interest they acquired in the Thomas lease, and of the proceeds derived from the transfer thereof to the Bull Head Oil Company, whatever its form, whether stock or money, and that they and all defendants claiming under them, other than innocent purchasers for value, may in equity be compelled to account to the plaintiff for such proceeds, for the benefit of the minor.
The decree of the Circuit Court of Appeals, with respect only to the defendants T. H. Dunn, N. E. Dunn, J. Robert Gillam, and Mrs. J. Robert Gillam, is reversed, and the cause remanded to the District Court for further proceedings in accordance with this opinion; as to the other defendants, the appeal was barred by the agreement entered into by appellant with them, and as to them the decree of the Circuit Court of Appeals is affirmed.