*221
Williams, J.,
¶1
dissenting. This case is governed by well-known principles of the common law. The relation between the owners of the land trust certificates and the trustee arose out of contract. When did the confidential relation begin and what was its scope? In buying the certificates the buyers and seller dealt at arm’s length and the doctrine of
caveat emptor
applied. From the time the buyers acquired the certificates a trust relation existed and the buyers, the
cestuis que trustent,
were entitled to have the trustee perform faithfully all duties and discharge all obligations resting on it as trustee under the trust agreement. With respect to the performance of that particular contract of trust there was no breach of trust whatsoever and no self-dealing. The fact that the trustee previously had an indebtedness chargeable on the land which became the trust
res
is beside the question, for one owning land or an interest therein may sell it or participate in its sale under an agreement to hold the land thereafter under a trust arrangement by which he collects rents, manages the property and distributes the proceeds to the
cestuis
and the trust relation does not arise until the sale agreement is complete. Such a contract of trust so long as it is not tainted by fraud or other illegality is binding. The contract of trust herein was not so tainted. The difficulty seems to lie in an endeavor to extend the responsibility of the trustee beyond the terms of the contract of trust. The trust company in the selling of the land which it held as security for a debt was not acting as a trustee but in its own right and there was no self-dealing by the trustee in so doing since such malfeasance could only occur in connection with performance of duties imposed by the trust agreement.
¶2
For these reasons the judgment should be affirmed.
Day, J., concurs in the foregoing dissenting opinion.
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Case posture Posture APPEAL from the Court of Appeals of Cuyahoga county.
Harry W. Haggerty, as the holder of land trust certificates of The General Outdoor Advertising Company land trust, of which The Union Trust Company of Cleveland was trustee, brought this action on behalf of himself and other holders of similar certificates against the Superintendent of Banks in charge of the liquidation of The Union Trust Company in the Common Pleas Court of Cuyahoga county to recover a judgment for $226,745, to declare the trust void, to set aside the sale of the property to the trust, and to hold the money invested in the property for the benefit of the certificate holders.
The Common Pleas Court held the trust invalid and granted the relief prayed for. The Court of Appeals appointed a master who, upon the instruction of the court, heard the evidence de novo.
He made a report consisting of a finding of facts and conclusions of law, likewise holding that the trust was invalid and that the plaintiff was entitled to the relief sought.
Upon motion to confirm this report, the Court of Appeals of the Ninth Appellate District, sitting by designation in the Eighth Appellate District, made an independent finding of facts and found as a conclusion of law that the report of the master should not be confirmed and that the plaintiff was not entitled to the relief prayed for in his petition. ( 63 Ohio App. 300 .)
This case is now in this court on appeal by reason of an allowance of a motion requiring the Court of Appeals to certify its record to this court for review and final determination.
Upon examination of the Court of Appeals' finding of facts it is to be observed that such finding is in the nature of meager conclusions of fact without detail as established by the evidence. Since the facts are substantially undisputed, this court has, in reaching its conclusions, considered the entire record.
Between the years 1923 and 1926, The Ontario Street Land Company, hereinafter called the land company, and The Union Trust Company, hereinafter called the bank, collaborated in creating land trust issues. The land company found the property, while the bank loaned the money for its purchase, took title in its name, and later declared itself trustee for the issue of securities, the sale of which furnished the money to repay its loan.
Pursuant to this plan of operation, between June 30 and August 17, 1923, the land company purchased four contiguous parcels of real estate on Sumner avenue in Cleveland. The land company did not take title in itself but had the deeds made direct to the bank from which it borrowed, on a 90-day note, $130,000 to pay the purchase price of the parcels in a total sum of $126,990. This was all done under a holding title agreement between the land company and the bank.
In February, 1924, the loan of $130,000 was paid off, but the bank continued to hold title to the property. In June, 1924, at the instance of the land company, the bank leased the four contiguous parcels of land to Thomas Cusack for 99 years for an annual rental of $14,000, the lessee agreeing to construct on the land a $100,000 mercantile building, with the right on the part of the lessee to assign the lease as soon as the building was completed. This property comprising the four parcels of real estate above referred to will hereinafter be designated as the Cusack tract. Cusack assigned the lease to the Carnegie-Twelfth Company which spent $100,000 in erecting buildings on the land, upon which it placed a bond issue of $110,000 secured by its
leasehold estate. The Carnegie-Twelfth Company, a subsidiary of The General Outdoor Advertising Company, then sublet the premises to the latter company.
Commencing July, 1924, other loans, for which the Cusack parcel was held by the bank as part security, were made to the land company aggregating at times $150,000. On July 21, 1926, payment of these loans in the aggregate just mentioned was effected by making a new loan from the bank for $240,000 on a 90-day note secured by the Cusack property and two other parcels of real estate which likewise had been deeded by the land company to the bank. The bank's own appraisement of these three properties was as follows: Cusack tract $164,520; vacant lots on Oregon avenue $92,000; vacant lots on Sumner avenue $110,000, or a total of $366,520. It was a rule of the bank that the maximum loan to be made on real estate was 60 per cent on the value of improved property and 40 per cent of the value of unimproved property, the application of which rule would have permitted a maximum loan on these properties of $179,521, or a maximum loan of $98,712 on the Cusack parcel.
The proceeds of the $240,000 loan of July 21, 1936, were disbursed as follows:
To The Ontario Street Land Company ........ $46,003.37 To the mortgage loan department of the bank $150,000 plus interest in the sum of $2,708.33, or a total of ................ 152,708.33 To the corporate trust department of the bank .................................... 1,592.30 To the bank as discount on the $240,000 note 3,600.00 To pay notes of the Commercial Credit Cor- poration, which was indebted to the bank in the amount of ........................ 36,096.00
As early as December, 1925, the bank conferred with the land company with reference to a land trust certificate issue on the Cusack parcel, and trust certificates
were prepared, but the proposed purchaser of the issue failed to take them and the deal fell through. On or about July 30, 1926, arrangements were made to put out a new issue of certificates through The Philip H. Collins Company, as brokers. There were to be 456 certificates having a stated value of $228,000 for which the broker was to pay the sum of $216,000 plus accrued interest to the land company. The certificates were ultimately sold to the public for $230,280 or $505 per certificate. The bank became the escrow agent under this arrangement and received the purchase money for the certificates as they were surrendered to the purchaser. The bank disbursed the funds including the payment of $150,000 to itself on its loan.
A declaration of trust for this issue was dated August 1, 1926, and recorded August 23, 1926. The property was deeded by the bank to itself as trustee by special warranty deed, and the land company, to release its equitable interest in the property, executed a quitclaim deed to the bank which was not recorded. By the declaration of trust, the trustee was authorized to issue and there was issued to the land company a transferrable option certificate which entitled it to repurchase the fee title of the Cusack parcel subject to the 99-year lease, for an amount equal to $525 per trust certificate then outstanding.
An officer of the bank, who was also a lawyer, performed the legal service for the bank and had charge of the issuance of the certificates for the bank. He conferred with counsel for the broker in the preparation of the legal documents. On August 18, 1926, the land company requested the bank to take steps necessary for the issuance of the land trust certificates.
The trust certificates bore the heading Land Trust Certificates of Equitable Ownership in Carnegie-Twelfth property located in Cleveland, Ohio, subleased to The General Outdoor Advertising Company, the name of the latter, a nationally known company of high
repute, appearing in large type in a prominent position on the certificate. The significance of this form of certificate appears in the fact that the bank previously had had certificates printed under the name Carnegie-Twelfth Company but these were cremated and new certificates bearing the name of The General Outdoor Advertising Company were substituted in the form above stated.
A delay occurred in order to reinstate the corporate charter of the Carnegie-Twelfth Company, lessee, whose real estate taxes were also in default. On October 13, 1926, the certificates were issued to the land company and by it immediately turned over through the broker to the bank for reissuance. Thirty of these certificates were sold to the plaintiff. From the proceeds of such sales the bank paid on its own loan of $240,000, the sum of $150,000 and released the Cusack parcel. It also paid its own fee, attorneys' fees and $61,465.45 to the land company.
The proceeds of a loan of $40,000 made by the bank to the land company under date of May 25, 1926, which was one of the predecessor loans to the consolidated loan of $240,000, did not go into the purchase of additional real estate as additional security for the loan, but went into the bank to the account of J.R. Nutt, president of that bank.
In December, 1925, Mr. Nutt made a verbal agreement to sell his home in Florida to Jay E. Latimer, president of The Ontario Street Land Company, for $40,000 and gave immediate possession. The deed for this property was made on May 24, 1926, to J.E. Latimer, Jr., at the dictation of Jay E. Latimer. On May 25, Jay E. Latimer, as president of the land company, gave written instructions to the bank to pay to Mr. Nutt the proceeds of the $40,000 loan from the bank to the land company, and a check for that amount was deposited by the bank to Mr. Nutt's amount. The deed remained in Mr. Nutt's hands for some months thereafter
and was recorded in Florida on October 26, 1926. Mr. Nutt, as president of the bank, had from time to time approved the various loans of the bank to the land company.
A circular and prospectus issued by the broker for the purpose of selling land trust certificates on the Cusack parcel, stated that the property was under sublease to The General Outdoor Advertising Company at $36,000 a year, more than two and one-half times the amount necessary to pay the rental to be distributed to the holders of these certificates, when it was known to the bank that this sublease, which it had been advised in writing by its counsel to record but which it did not record, had only four years to run. On February 17, 1927, the bank consented to an assignment of the underlying lease from the Carnegie-Twelfth Company to The General Outdoor Advertising Company. In May, 1929, The General Outdoor Advertising Company assigned the lease to Central Outdoor Advertising Company, which latter company in February, 1932, assigned the lease to a corporation without financial responsibility, after which no rentals were paid and in August, 1932, the bank accepted a quitclaim deed from this corporation, releasing it from future obligations to pay rent, with the result, it is claimed, that The General Outdoor Advertising Company was absolved from the further payment of rentals.
The plaintiff in his petition alleges that the bank attempted to create a trust in which it had a substantial interest and for which it received a substantial portion of the proceeds of the sale of land trust certificates, and that the entire conduct of the bank in attempting to create and administer the purported trust was illegal, without authority and void, because the statutes of Ohio did not authorize it to act in the dual capacity of settlor and trustee by creating a trust out of its own property and selling interests therein to the public. Source: CourtListener
Court Parallel citations 28 N.E.2d 554 17 OhioOp. 556 