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Central Law Journal.

ST. LOUIS, MO., DECEMBER 10, 1920.

MAY A RECEIVER PURCHASE TRUST PROPERTY WHEN SOLD BY A REFEREE IN PARTITION?

The Supreme Court of Iowa sets a dangerous precedent in the recent case of Melin v. Melin, 178 N. W. 346, when it declares that a receiver of real property may purchase the property in his possession at a sale by a referee in partition.

The facts in this case disclose clearly the sound reason that justifies the rule that a trustee can purchase trust property, neither at his own sale, nor, as we believe, at another's sale of the trust property. In this case the parties plaintiff and defendant are children of one Melin, who died leaving a farm of 200 acres to be divided among five sons and one daughter. Before the sale in partition was ordered one Challgren was put in possession of said farm as receiver to collect the rents and profits thereof for the benefit of the heirs. At the partition sale by a referee, Challgren, who was still in charge of the property, made the highest bid. It also appears that Challgren had entered into an agreement with four prospective purchasers to buy the property jointly in the name of Challgren. The trial court found no collusion in this agreement and the Supreme Court refused to follow the almost universal rule that a trustee cannot purchase the trust property, declaring that this rule was unnecessarily strict and that where the trustee takes no advantage of his position the sale is valid. The Court admitted that a receiver in such case was a trustee and that the old English rule followed in this country prevented a trustee from buying trust property, irrespective of his good faith. In refusing to follow this rule, the Court said:

"Here the receiver was not in the actual occupancy of the land, but leased the same!

to tenants, collected the rents, paid taxes and interests, and generally looked after the farm. Such relation to the parties cannot well be said to have afforded special means of knowledge nor to have conferred power to affect injuriously the interests of the tenants in common. Other bidders at the sale had the same opportunities as had he to examine the land. He owed the tenants ir common no duty with respect to the sale by the referee, even though standing in the relation of trustee toward them as cestuis que trustent, in the matter concerning the income from the land. Surely his position as trustee conferred no power with reference to the sale, and as to farm land no specia' opportunities of knowledge not enjoyed by others on examination was enjoyed. It i, not necessary to go to the extent of man decisions in upholding the right of trustee to bid at judicial sales not brought about by themselves. No general rule with referenc to these can be laid down, save that to per mit of being purchasers their relation mus not be such as to bring in conflict their indi vidual interest with that of the trustee. W think this the true test, for, even though th trustee be in charge or possession of the property, if his duties with respect theret are not such as that becoming a purchase would put his individual interests in antago nism with his duties as trustee, there could be no temptation to go wrong, and they ought not to preclude him from bidding at such a sale."

There can be no doubt about the rule that a trustee cannot purchase at his own sale. This rule is established by a multitude of cases in England and America, and this without regard to the fairness of the transaction or the adequacy of the price. See 39 Cyc, p. 366, and host of cases there cited. But is the rule changed if the property is not sold by the trustee himself but is purchased by him at a judicial sale conducted. by some officer of the court or at a sale under a mortgage conducted by the trustee therein named? This exact situation came before the Master of Rolls in England in the leading case of Nugent v. Nugent, 77 L. J. Ch. (N. S.) 271, 1 British Ruling Cases 405. In this case it appeared that the defendant in a partition action, and part owner, was appointed receiver of the rents and profits

of a house. Later a mortgagee obtained an order giving her liberty as such to take possession and exercise the power of sale by public auction. Though not taking possession, she put the house up for sale at auction, and in January, 1906, the defendant, without leave of court, instructed an agent to bid at the auction and purchase the property. On hearing, the trial court held that the receiver could not purchase the property without the sanction of the court, even though the sale was made by the mortgagee with leave. On appeal, the ruling was affirmed. The Master of the Rolls said:

"The Court, in dealing with this class of cases, does not proceed upon the footing that there has been fraud or improper concealment, or any special advantage taken by the receiver, but it proceeds upon the gen eral rule that in cases of this kind the purchase ought not to be allowed at all, because it is a dangerous thing to allow, as in most cases it is impossible to ascertain whether the receiver has or has not taken undue advantage of his position."

Some courts have held that a trustee

could purchase if the transaction is entirely free from bad faith, but these cases are few and are usually cases where the sale is for the benefit of the cestui que trust, and even in one of the states which hold to this rule (Pennsylvania) it has been held that the trustee who purchases such property may be held to have purchased the property for the cestui que trust whenever it is the latter's advantage to do so.

Some courts permit a trustee to purchase the trust property with the Court's consent. Tennant v. Trenchard, L. R. 4 Ch. 537; Hayes v. Hall, 188 Mass. 510, 74 N. E. 935; Corbin v. Baker, 167 N. Y. 128, 60 N. E. 332; Carson v. Marshall, 37 N. J. Eq. 213. But it appears, strangely enough, that the Jowa Supreme Court, which rendered the decision in the principal case, declined to indorse such a practice. Linsley V. Strang (Iowa 1910), 126 N. W. 941. We see no objection to this exception to the general rule, for there may be cases where

it would be for the benefit of the cestui que trust for the trustee to bid at the sale of the

trust property. But this benefit oughtclearly to appear and the interest of the trustee disclosed in advance of the sale so that the beneficiaries of the trust shall have ample opportunity to protect their own interest. If in such a case the beneficiaries should offer any sincere objections, it is quite likely the Court would refuse to permit the trustee to bid at the sale.

The Iowa decision in the Melin case, in our opinion, is also a dangerous departure from a very sound rule of evidence. For, the burden of proof in cases where a fiduciary is a party is, by this decision, thrown on the cestui que trust. In every case where a fiduciary is charged by the beneficiaries of the trust with fraud or unfair dealing, the general rule that the one who charges fraud or unfair dealing must prove it, is reversed and the burden placed on the trustee to show that the transaction is fair and reasonable. (Jones on Evidence, Sec. 190.) in spite of the apparently collusive agreement of the receiver in the principal case to share with prospective bidders the benefits of his purchase, the Iowa Supreme Court gravely announces that the cestui que trust did not produce "evidence sufficient to warrant the inference that there had been any improper competition." The decision cannot be justified on any just principle of law or on any sound rule of public policy.

NOTES OF IMPORTANT DECISIONS.

LEGALITY OF CONTRACT TO PAY WIFE MONTHLY STIPEND TO RETURN TO HUSBAND WHO GAVE WIFE GROUND FOR DIVORCE.-Are married women to become so independent that it will be necessary for the husband to hire his wife to live with him? While a recent decision of the New York Court of Appeals does not go so far as to justify such contracts it comes very near to doing so. Rodgers v. Rodgers, 128 N. E. 117. In this case the wife, it appeared, had brought suit for di

vorce against the husband in 1909 on ground of his adultery. In order to get her to dismiss the suit the husband and his father entered into a written agreement with her to pay her $300 per month during the remainder of her married life. From that date until the death of the husband in 1917 she was paid $1900 and there was due and owing on the contract at that time $29,600, for which amount she is suing her father-in-law, who was a party to the contract. The trial court sustained a demurrer to the petition which judgment the Court of Appeals reversed on the ground that the complaint stated a cause of action. The Court said:

"We think that the complaint is sufficient. The agreement set forth therein is not on its face against public policy. It is for the resumption of marital relations between husband and wife separated for cause. In the absence of proof, it may not be presumed that the wife's grievance was unsubstantial. It rests on a valuable consideration. The wife condoned the alleged adultery of the husband. That was a detriment to her. She surrendered a right. The husband got rid both of the action and the cause of action for divorce. He might have been successful in his defense, but it was a substantial benefit to him to have the case ended and his wife again under his roof. The performance of marital duty should not be made the subject of bargain and sale, but it does not appear that reconcilem nt was plaintiff's duty in this case. Rather it was her right to refuse to condone an offense against the marriage relation and to insist on a divorce, with separate support and maintenance. The husband was not hiring a discontented wife, separated from him without good cause, to return to him. She was to be paid to give up her right to live apart from him. She did not return until she was assured of proper treatment as a wife, and the court will not say to her that she sold her forgiveness, and that 'conjugal consortium is without the range of pecuniary consideration.' To apply such a rule to cases like this would be to discourage the reunion, which the law should favor, of couples unhappily parted. We are dealing with the contract that was executed by plaintiff, and not with unexecuted possibilities based on subsequent separation of husband and wife."

The contract in this case is not a contract to induce a wife to perform her duties as wifesuch a contract would be void for want of consideration, for in such a case the wife would be agreeing to do no more than she ought to do. It is more in the nature of a post-nuptial settlement with this difference that unlike most postnuptial settlements, there is a consideration to support it. Ordinarily an agreement after marriage to pay the wife a certain sum of money is good only when executed. Such an agreement has not the marriage to support it as in the case of an ante-nuptial settlement, and if there is no other consideration the agreement so far

as it is executory, fails. But in the principal case, although this settlement is post-nuptial, there is a valuable consideration-the giving up by the wife of a right of action against the husband for divorce and alimony. If the plaintiff's father-in-law saw fit to promise plaintiff $300 a month for the rest of her married life if she would drop her suit for divorce and continue to live with his son as his wife, he ought to be compelled to keep his agreement.

There is a Texas case which holds that a post-nuptial promise of the husband to pay money to his wife in consideration that the wife would continue to live with him rests on an invalid consideration. Roberts v. Frisby,

38 Tex., 219. Courts should be careful to make a distinction between agreements which attempt to determine the obligations attached to the marriage status, of which consortium is of course one, and agreements which affect the property or personal rights of the spouses. Agreements of the former character are void since the law does not permit the parties either by ante-nuptial or post-nuptial contracts to change or affect their marital obligations. But agreements either before or after marriage, resting on a valuable consideration, may affect or change the financial obligations and property rights of the spouses. While a husband and wife could not by their contract affect their duty to live together, yet where either spouse is relieved of this duty by law and is given a right of action against the other as for divorce and alimony, this purely personal right may be given up as a valid consideration for an agreement by the husband or his father to make a settlement upon the wife.

RIGHT OF TELEGRAPH COMPANY TO CHANGE AN INTRA-STATE TO AN INTERSTATE MESSAGE BY THE ROUTE OF TRANSMISSION.-The Supreme Court has made it possible for telegraph, companies to evade the law of certain states making them liable for mental suffering alone apart from other damage suffered at the same time by permitting the company to route an intrastate message through an adjoining state and thus Western making it an interstate message. Union Telegraph Co. v. Speight, 41 Sup. Ct. 11.

In this case the plaintiff, Speight, sought to recover for mental suffering caused by a mistake in delivering a telegraphic message. The message handed to the defendant was "Father died this morning. Funeral tomorrow, 10:10 a. m." and was dated January 24. As delivered to the plaintiff on January 24 it was dated

January 23 and thus caused her to fail to attend the funeral which otherwise she would have done. The message was from Greenville, North Carolina, to Rosemary in the same State and was transmitted from Greenville through Richmond, Virginia, and Norfolk, to Roanoke Rapids, the delivery point for Rosemary.

"REASONABLE"- USE OF THE TERM IN RECENT BRITISH CASES.

This word is extremely common in our contracts and statutes. Possibly there is no other word which occupies so prominent a position. Such phrases as "reasonable notice," "fair and reasonable," "reasonable and proper" and others similar, occur fre

It is the rule in the federal courts to follow the common law rule that no recovery can be had for mental suffering alone. Southern Express Co. v. Byers, 240 U. S. 612, 36 Sup. Ct. 410, L. R. A., 1917 A, 197. The trial court set aside a verdict for plaintiff in which the jury quently and in every case in court, refer

found that the message was sent out of the state for the purpose of evading state liability. The Supreme Court of North Carolina reinstated the verdict which is the judgment which the Supreme Court reverses. Chief Justice Holmes concisely and bluntly states the rule as follows:

"We are of opinion that the judge presiding at the trial was right and that the Supreme Court was wrong. Even if there had been any duty on the part of the Telegraph Company to confine the transmission to North Carolina, it did not do so. The transmission of a message through two states is interstate commerce as a matter of fact. Hanley v. Kansas City Southern Ry. Co., 187 U. S. 617, 23 Sup. Ct. 214; 47 L. Ed. 333. The fact must be tested by the actual transaction. Kirmeyer v. Kansas, 236 U. S. 568, 572, 35 Sup. Ct. 419, 59 L. Ed. 721."

The company justified its action by some evidence that its wires were strung in such a way as to make the route chosen the easiest and quickest. But Justice Holmes pays little attention to the question of motive, saying:

"The court below did not rely primarily upon the finding of the jury as to the purpose of the arrangement but held that when as here the termini were in the same State the business was intrastate unless it was necessary to cross the territory of another State in order to reach the final point. This, as we have said, is not the law. It did however lay down that the burden was on the Company to show that what was done 'was not done to evade the jurisdiction of the State.' If the motive were material, as to which we express no opinion, this again is a mistake. The burden was on the plaintiff

to make out her case. Moreover the motive would not have made the business intrastate. If the mode of transmission adopted had been unreasonable as against the plaintiff, a different question would arise, but in that case the liability, if it existed, would not be a liability for an intrastate transaction that never took place but for the unwarranted conduct and the resulting loss."

ence probably is made to the "reasonableness" of the arguments submitted. It has been well remarked that an appeal to reason is an appeal sometimes to an objective standard and sometimes to judicial discretion. As an instance of the former, there is the case of Smith v. Boon,' a prosecution under the Light Locomotives and Highways Order 1896, in which it was held that the "reasonable and proper" speed of a motor on a highway has to be judged apart from the actual inconvenience caused. The argument of the accused in that case was that his speed could not, in the circumstances do any harm and therefore that it was not "unreasonable or improper." The magistrates found as a fact that his speed of eighteen miles an hour was not "reasonble," and on appeal the conviction was upheld. On the other hand, in cases of contracts which stipulate for performance within a "reasonable" time, it is well-known that the phrase is interpreted according to the circumstances of the case and with particular reference to the means and ability of the person by whom the contract is to be performed or the duty discharged. Three very recent cases discuss the term. Attwood v. Lamont,2 related to a restrictive covenant between an employer and an employe, as to the latter not trading within a certain area after leaving the employment. In a lengthy judgment, Lord Justice Younger discussed the "reasonableness" of such agreements. An important element in

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such agreements pointing to "unreasonableness" is their restraint of trade, a fact which indeed operates in determining the "reasonableness" of all agreements and, as we shall see later, by-laws or subsidiary legislation of that kind. In another case3 the railway company's ticket conditions were attacked as not being "reasonable" but the court pointed out that these formed part of a contract and like every contract conditions the element of "unreasonableness" did not enter into them unless they were so grossly extravagant as to the amount of fraud or were wholly irrelevant. "Reasonable" conditions in that case were defined

as being "such as no honest man would try

to insert or no reasonable man would dream of looking at it.". The third case was in the Scottish Court of Session, in which it was held that where lenders on mortgage agreed that the loan should not be called up for fourteen years so long as interest at 4 per cent was punctually paid at quarterly terms, payment six days after a term was not punctual payment in the sense of a contract and the lenders were entitled to call up their money. The Lord Ordinary by whom the case was tried was of opinion that in the sense of the agreement which had to be read reasonably, payment had been made in accordance therewith, and on appeal this was the view taken by one of the judges in the Inner House, but the majority of the appellant judges found that payment had not been punctually made and that the pursuer was entitled to the finding asked for.

Dealing first with the minority opinions, they emphasized the fact that to refer the word "punctual" to the exact day would be a judicial and not a "reasonable" construction of the contract; and that at previous terms there had been delay even on one occasion the difference of twelve days, but there was nothing to show that plaintiff considered this unpunctual payment. Weight was also given to the circumstance, that the

(3) Gibaud v. Great Eastern Railway Co., 1920. 86 T. L. R. 84.

(4) Gatty v. McLaine, 1920, 57 S. L. R. 334.

proprietor of the estate was on active military service.

The effect of the judgment of the majority of the Court is really to hold all these arguments as irrelevant. They find that punctual payment means payment made punctually on the day fixed for payment and that the word is not open to any interpretation. As the Lord President put it "payment made six days later than the day fixed for payment is not punctual payment. If a payment six days later is to be considered punctually made, where is the line to be drawn between punctuality and unpunctual"reasonably" his Lordship thought that ity." With regard to construing the word

reasonable construction in "law meant to take the words used by the parties in their plain and natural sense and not in the sense which a judge may think fit to put upon the

term."

This is a just doctrine led by Lord Chancellor Westbury" that in interpreting a statute the clearness and certitude of the law are for a judge sufficient reason "rules which govern the transmission of property. are the creators of positive law and when once established and recognized their justice or injustice in the abstract is of less importance to the community than the fact that the rules themselves shall be constant and invariable" and Lord Halsbury similarly remarked, "a court of law has nothing to do with the reasonableness or unreasonableness of a statutory provision excepting so far as it may help in interpreting what the legislature has already said."

A field of law, however, in which the element of "reasonableness" plays an important part is the validity of by-laws made by local authorities, railway companies or other statutory incorporations. Courts of law have the power to determine whether a bylaw is a reasonable one, upon the principle that delegated legislation is only permitted

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