to observe all the requirements of the trust deed or the will and of the statutes if any there be, and in all doubtful cases to refrain from acting without the advice of the court.

§ 10. Trustee should not mingle trust funds with personal funds. A rule, the non-observance of which probably leads to as many breaches of trust as the violation of all other rules put together, is, that the trustee should never under any circumstances or upon any consideration, mingie the trust funds with his own personal funds. To do so is to cross the danger line, for sooner or later it will lead in many cases to the unlawful use of a portion of the trust funds by the trustee for his own purposes.

§ 11. Trustee must not make a profit out of trust business. It is fundamental that the trustee must not attempt in any way to make a profit out of the trust estate, or the transaction of business connected therewith. The only exception is where, by the deed or will creating the trust, or by statute, the trustee is allowed a compensation for his time and labor bestowed upon the management of the estate. No better statement of this rule can be given than that of Lord Brougham in the leading case of Docker v. Somes, 15 as follows: "Wherever a trustee, or one standing in the relation of a trustee, violates his duty and deals with the trust estate for his own behoof, the rule is that he shall account to the cestui que trust for all the gain which he has made. Thus, if trust money is laid out in buying and selling land, and a profit made by the transaction, that shall go not to the trustee who has so applied the money, but to the cestui que trust whose money has been thus applied. In like manner (and cases of this kind are more numerous) where a trustee or executor has used the fund committed to his care in stock speculations, though the loss, if any, must fall upon himself, yet for every farthing of profit he may make he shall be accountable to the trust estate. So, if he lay out the trust money in a commercial adventure, as in buying or fitting out a vessel for a voyage, or put it in the trade of another person, from which he is to derive a certain stipulated profit, although I will not say that this has been decided, I hold it to be quite clear that he must ac

152 M. & K. 655.

count for the profits received by the adventure or from the

concern."

§ 12. Liability of trustee for default of co-trustees. Where there are two or more trustees, any one of them is not liable to the trust estate for losses resulting from the acts or defaults of his co-trustees, unless (and note carefully the exception) by his negligence the other trustees have been enabled to make a fraudulent use of the trust property. For example in Trutch v. Lamprell 16 there were two trustees who had disposed in a suitable manner of the trust property, receiving a check for the proceeds. One trustee handed this to the other, who proceeded to apply it to his own uses and then decamped. It was held that under the circumstances the entrusting of the proceeds in this fashion to one of the trustees constituted negligence on the part of the other, and that he was liable to make good the loss.

This brief statement of the duties and liabilities of trustees is intended to suggest only a few of the more important rules with reference to the matter. In all cases of doubt, competent legal advice should be secured by the trustee.

120 Beav. 116.

CHAPTER XI.

NEGOTIABLE INSTRUMENTS.

Section 1. Negotiability.

§ 1. Bills and notes are transferable obligations. A bill of exchange or a promissory note is a kind of property which may be transferred by its owner to another. The quality of transferability is one of the qualities described when we say that bills and notes are negotiable.

§ 2. Practical consequences of bills and notes being transferable. The quality of transferability is of the greatest practical consequence, and is one of the peculiarities which makes bills and notes of value as instruments of trade and of credit. If X buys land of A, giving A his note for $1,000 in payment, and it transpires that A did not have the title so that X gets nothing, the failure of the consideration for which the note was given gives X a perfect defence against A's action on the note, because it would be unjust to allow A to enforce it. Suppose, however, A had sold the note to B, who had bought it in good faith, has X the same defence against B that he had against A? What was X's defence against A? Not that there was no note, for the intentional execution of the note by X is admitted, but that it was unjust for A to enforce the obligation. Certainly this objection cannot be raised to B's recovery. He owns the obligation of X, and, since he purchased it without notice of X's defence against A, there is no reason in law or in morals why B may not enforce the right against X he has lawfully acquired.

§3. Same: Illustrations. If X, instead of giving his note for the land, had made a simple promise to A to pay for it, the result would be different. Of course X has his defence against A, but, if A attempts to sell his right against X to B, who has no

342

notice of X's defence, what are B's rights? A common law obligation is ordinarily not transferable. Clearly then the attempted transfer vests in B no rights against X. Notwithstanding the sale, X's obligation to pay still runs to A. The only effect of the attempted transfer was to make B A's agent to collect the money, or to bring an action in A's name as plaintiff against X. Since the obligation is still A's and its enforcement is by him as plaintiff, X's defence, that it is unjust for A to proceed against him, continues available, notwithstanding the attempted transfer, the only practical consequences of which were to give B the right to use A's name, and to keep the proceeds of the debt, if any were realized. See Chapter I, § 61.

That the difference between B's positions, in the two cases just discussed, depends upon the fact that the note is transferable or negotiable property, and that the common law debt is not, is made more clear by a case where X is induced, by fraud and deceit of A, to sell A his horse or his land, and thereafter A resells the property to B, who buys in good faith. Horses and land are transferable property, and the intentional transfer of X made A the owner of the property transferred. Since he has become owner through the fraud practiced on X, the courts compel him on obvious grounds of justice to return the property. But, if B has innocently purchased the property from A and thereby become the owner, there would be no justice in depriving B of his rights of ownership, and he is allowed to keep the property. The same result is reached in this case as in the case of the bill or note, for the reason that in both cases we are dealing with transferable property.

§4. How bills and notes may be transferred. Bills and notes are unique, then, in that they represent obligations to pay money which are as transferable as goods or land. They possess, however, another quality quite as peculiar as that of transferability, which determines the manner in which they may be transferred. The usual mode of transferring title to goods is by a

1 Almost everywhere today B might bring action in his own name as plaintiff. This result is obtained by statutes, which, although they change the procedure, do not clash with the rule stated in the text that choses in action are not transferable.

voluntary delivery, i. e., voluntary actual transfer of the goods, coupled with an intention to make the transferee the owner. The common mode of transferring land is by a voluntary delivery of a deed, with an intention to vest title in the grantee. A mere delivery or an involuntary change in the actual possession of the goods or of the deed, without an intention to pass title, would be ineffective. For example, A, with force and without X's consent, takes X's horse out of his possession-steals it. The physical act of taking possession is just as complete as if X had given his consent to it, but A does not become the owner because the necessary element of intention is absent. The same would be true if A stole from X a deed reciting a transfer of the land to A. But the obligation embodied in a bill or note differs quite as completely in the manner of its transfer from other kinds of transferable property as it does from the ordinary common law debt or obligation to pay money, in being transferable at all. A bill or note, if payable to bearer, or indorsed in blank, is transferable by a mere transfer of the instrument, whether voluntary or involuntary, intentional or unintentional. Thus, if X owned such a note and A stole it from X, the title to the note would vest in A. Of course A would not be allowed to enforce the obligation, and would be compelled to return the note to X, but this is because of the manifest injustice of allowing him to keep it or assert his right upon it, not because he has not become the owner. In consequence, if A, the thief, sells the note to B, who knows nothing of the theft, B, having become the owner for value and without notice, may exercise the rights of ownership he has acquired from A, by holding and collecting it, or further negotiating it. Contrast this with a case where A steals X's horse, and then sells the horse to B, who is innocent of the theft. Here B, notwithstanding his innocence and the fact that he paid a full price to A, has no rights whatever in the horse. The reason is obvious: A by the theft of the horse did not become the owner; and the transfer of possession from X to A was involuntary and not coupled with an intention on X's part to make A owner.

*This is not true of bills and notes payable to order, unless they are indorsed. See § 64, below.