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ADAMS v. READING TRUST CO.

DISTRICT COURT, E.D. PENNSYLVANIA


January 22, 1940

ADAMS
v.
READING TRUST CO. et al.

The opinion of the court was delivered by: KIRKPATRICK

KIRKPATRICK, District Judge.

Sur Reargument.

After carefully considering the earnestly pressed argument of the plaintiff, I am still of the opinion that the present case is ruled by In re Klein's Estate 326 Pa. 393, 190 A. 882. That decision is on all fours with the present as to every material factor. It was the same trustee, the same trust (at least as to some of the beneficiaries) and the same practice of advancing interest on defaulted trust securities. The single point of distinction is that in Re Klein's Estate the Bank was attempting to recoup itself out of income subsequently received from other investments belonging to the trust estate, while in the present case, recoupment sought is from the principal of the trust estate.

 In re Klein's Estate was decided upon the theory that, as to income derived from other investments, the trustee is under an absolute obligation to collect and pay it over intact. To set off against this liability an ordinary debt which the cestui may owe the trustee, no matter how incurred, would modify the trust obligation, and, consequently, is not permitted. It seems quite clear to me that the trustee stands on no better footing with regard to the principal of the fund itself. He has just as absolute a fiduciary obligation to the beneficiary as he has to pay interest derived from other investments. A personal obligation which the cestui may owe to him cannot be used to discharge his fiduciary obligation in this respect.

 Of course, interest subsequently collected upon the same investment stands on quite a different basis. Here the fiduciary obligation is to pay over whatever interest is collected, but it extends no further. The precise time when it is to be paid is only a subordinate part of the obligation. The obligation is discharged when the full amount of interest collected is paid, and the cestui has no right to anything more. The fact that interest has been advanced does not alter this situation or affect the right of the Trustee to withhold interest coming into his hand later on to make up the advances.

 In re Nauman's Estate, 110 Pa.Super. 55, 167 A. 395, holds that advances of interest under circumstances similar to those in the present case create a debtor-creditor relationship. If so, the trustee is a creditor in its individual capacity, because it has advanced its own money. This action, however, is clearly by the trustee in its representative capacity. It arises upon its accounting, and the main relief asked for, although against the individual bondholders as well as the substituted trustee, is the declaration of a lien upon the mortgaged premises themselves. Thus the Bank's rights as an individual creditor against the individual bondholders are not involved and are not determined here.

 As to the second argument made by the plaintiff to the effect that if recoupment under the law of trusts is impossible, then the payments are ultra vires and may be recovered on that ground. This point was not discussed in the opinion of the court in Re Klein's Estate, but it was definitely in the case. As has been pointed out, if In re Nauman's Estate is to be followed, the advancements by the trustee create a debtor-creditor relationship, and therefore are not gifts of the Bank's money. Obviously they were not intended as such. In addition, the Bank had at all times the obligation of the mortgagor to pay the interest. It may have felt that the property would again earn sufficient income to recoup it wholly for its advancements, or it may have expected a benefit to itself in protecting its reputation with regard to securities which it had sold to its customers and to its trust estates. Under all the circumstances, I do not think that the Bank can escape liability for this transaction through any limitations in its charter.

 The ruling heretofore made is adhered to, and judgment may be entered in accordance with it.

19400122

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