U.S. Supreme Court
Duncan v. Jaudon, 82 U.S. 15 Wall. 165 165 (1872)
5 Wall. 165
Duncan v. Jaudon
82 U.S. (15 Wall.) 165
1. A person lending money to a trustee on a pledge of trust stocks, and selling the stocks for repayment of the loan, will be compelled to account for them if he have either actual or constructive notice that the trustee was abusing his trust and applying the money lent to his own purposes.
2. The lender will be held to have had this notice when the certificates of the stocks pledged show on their face that the stock is held in trust and when apparently the loan was for a private purpose of the trustee and this fact would have been revealed by an inquiry.
3. The duty of inquiry is imposed on a lender lending on stocks where the certificate of them reveals a trust.
4. These principles are not affected by the fact that the stocks pledged may be such as the trustee under the instrument creating his trust had no right to invest in, as ex. gr., stock of a canal company, when he was bound to invest in state or federal loans.
5. Notice to the cashier of a bank or of bankers that the stock pledged is trust stock is notice to them.
In 1833 Commodore William Bainbridge, a resident of chanroblesvirtualawlibrary
Philadelphia, died leaving four daughters, one of whom was Mary T. B., subsequently the wife of Charles Jaudon. By his will he left to two trustees a considerable sum of money, directing them to invest the same in the stocks of the United States or the stocks or funds of any individual state and to hold the same in trust for his several daughters, one-fourth for his daughter Mary, the interest to be paid to her,
"for her sole use and benefit during her natural life, and at the end of her natural life, the amount so invested to be equally divided between her children."
The property left by the Commodore was invested by his trustees as the will directed, chiefly in five percent loans of Pennsylvania, and the interest was properly paid to the daughters. The interest received from the Pennsylvania loans, five percent, was less than the cestui que trusts were content with, but the trustees appointed in the will would not depart from the directions imposed on them by it as to the class of investments in which they could invest, and becoming thus unacceptable to the cestui que trusts, they were discharged in 1835, at their own request, from their trust and surrendered the estate under their care to Samuel Jaudon, whom, on the consent of Mrs. Jaudon, the court appointed, without security, to be trustee, in the place of the trustees named in the will. [Footnote 1]
The Pennsylvania five percent stock was now soon sold and the proceeds invested by Samuel Jaudon in the stock of the Delaware & Raritan Canal Company according to an arrangement previously made with the cestui que trusts, the new stock being one of a high character in its class and which has paid for many years with great regularity ten percent a year dividend, with occasional large extra dividends. Mrs. M. T. B. Jaudon got thus finally 117 shares of this stock. The certificates, of which there were several, all ran thus:
"This is to certify that S. Jaudon, trustee for Mrs. Mary T. B. Jaudon, is entitled to seventy shares in the capital stock of the
Delaware & Raritan Canal Company . . . transferable on the books of the Company and on surrender of this certificate only by him or his legal representative."
This investment was made very soon after the new trustee was appointed. A similar one was made for all the sisters, and was perfectly agreeable to them all. Mrs. Jaudon considered that the trustee was "acting very judiciously, and was very glad of it."
In this state of things, Samuel Jaudon, who had been dealing largely on his own account in a stock known as "Broad Top Coal Stock," a speculative stock of no established value, applied in 1865 to the National City Bank of New York to lend him money on 47 shares of this canal stock. They agreed to do so, and he delivered to the cashier of the bank the certificates standing in his name as trustee, executing also a power of attorney to sell in case of nonpayment of the loan, the power describing him as "S. Jaudon, trustee for Mrs. M. T. B. Jaudon," and he signing himself in the same way. This dealing of Jaudon with the City Bank, based on the stock in question and commencing in 1865, extended through a term of two years. During this time, ten separate loans were made to him on the pledge of the 47 shares of the canal stock. The securities were returned to Jaudon whenever he paid up the amount of a loan, and redelivered to the bank each time a new loan was effected. In December, 1867, when the last loan matured, the bank, being unwilling to renew it and Jaudon unable to pay it, sold the stock by the direction of Jaudon and applied the proceeds of the sale to the payment of its debt.
A few months prior to this sale -- that is to say in July, 1867 -- Jaudon, wanting more money, applied to Duncan, Sherman & Co., bankers of New York, with one of which firm, William Butler Duncan, he had had ancient relations and with whom alone he spoke in the matter, for a loan of $7,000 at 90 days, telling him that he had securities to offer and naming them -- the remaining 70 shares of the canal stock, like that pledged to the bank, declared on its face to be "in trust for Mrs. M. T. B. Jaudon." "Upon the faith of chanroblesvirtualawlibrary
the collaterals," and "to oblige" Jaudon, the proposition was accepted by Mr. Duncan, who told his cashier to attend to the matter. The cashier accordingly lent Jaudon the money, taking the certificates for the 70 shares and a power to sell like those in the other case in which he both described and signed himself as "trustee of Mrs. M. T. B. Jaudon." Jaudon failing on the maturity of the loan to pay it, the stock was sold. There was no evidence that any of the principals of the house of Duncan, Sherman & Co. had seen the certificates or powers or had any personal knowledge of the fact that Mrs. Jaudon claimed any interest in them. But their clerk did see the certificates, and it was testified by Mr. W. B. Duncan, that "without the collaterals he certainly would not have made the loan."
Mrs. Jaudon was absolutely ignorant of all that was done until after the stock was sold, when Samuel Jaudon disclosed the history to her.
There was no doubt that every one of these loans, whether by the City Bank or by Duncan, Sherman & Co., were to Jaudon in his personal character and for his individual use, and that the money obtained was applied to discharge liabilities incurred in the purchase or carrying of the Broad Top coal stock, in which he was at the time dealing on his own account, taking in his own name and without the exhibition of any trust whatever certificates for what he bought.
Jaudon being insolvent, Mrs. Jaudon now filed a bill in the court below against him, Duncan, Sherman & Co., and the National City Bank, to reach the proceeds of the property which he had disposed of. Jaudon was himself examined as a witness, and narrated with apparent general candor the history of the transaction. He stated, however, in reply to questions inviting such answers, that from his conversations with his sister-in-law (the complainant), it was his general understanding that any changes in investment which he deemed advisable would be approved by her, and that if the investmen