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"What is the right of indemnity? I apprehend that in equity, at all events, it is not a right of the trustee to be indemnified only after he has made necessary payments ... but that he is entitled to be indemnified, not merely against the payments actually made, but against his liability. . . . It seems to me, therefore, that a trustee has a right to resort in the first instance to the trust estate to enable him to make the necessary payments to the persons whom he employs to assist him in the administration of the trust estate; that he is not bound in the first instance to pay those persons out of his own pocket, and then recoup himself out of the trust estate, but that he can properly in the first instance resort to the trust estate, and pay those persons whom he has properly employed the proper remuneration out of the trust estate.”
He may apply the trust income to the discharge of such a liability. He may use the principal of the trust fund in discharging the liability; he may, if authorized by the will, sell or mortgage a part or the whole of the corpus to raise funds wherewith to discharge the liability; or, if not so authorized by the will, he may generally obtain an order from the court giving him such authority; and certainly, he will not be compelled to turn over the estate to the cestui que trust while outstanding obligations properly incurred by him as trustee are unsatisfied. He may, indeed, in cases where he is entitled to reimbursement by the cestui que trust personally for liabilities discharged, bring a bill in equity to compel the cestui que trust himself to discharge such liabilities.31 An agent or a surety has a similar right to exoneration which equity will specifically enforce. Similarly, equity will specifically enforce a contract to indemnify. It is immaterial that the trustee is insolvent; he still has a right to be exonerated. If the trustee has died insolvent, his executor may compel the cestui que trust to pay the creditor the whole amount of his claim, and not merely the amount of the dividend which the creditor could get out of the trustee's estate.32
It is clear, then, that the creditor has a right against the trustee, and that the trustee has a right against the trust estate and, in some cases, against the cestui que trust personally. Has the creditor himself any right against the trust estate or the cestui que trust?
The right of the trustee to exoneration is an asset of the trustee's. The creditor may, by a bill in equity, reach this asset and compel the application of it to his claim against the trustee. 33 Tort creditors, as well as contract creditors, may in this way reach the trust estate.34 In most jurisdictions such a suit does not lie where the debtor has assets which can be reached at law.35 In some cases it is held that the creditor must first obtain judgment against the debtor and have the execution writ returned nulla bona before he can bring a bill for equitable execution.36 But equity should not compel the creditor to do a useless thing, and should allow him to sue in equity to reach the debtor's equitable assets without having first obtained a judgment at law against the debtor, where the debtor has no assets which could be reached by execution at law.37 If the trustee resides outside the jurisdiction and has no property within the jurisdiction, it has been held that the creditor may reach and apply the trustee's right to exoneration; the legal remedy against the trustee in such cases is as inadequate as in the case where he is insolvent.38 The creditor can probably, also, when the trustee is insolvent or a non-resident without property in the jurisdiction, reach the trustee's right to be exonerated by the cestui que trust personally.39
31 Cruse v. Paine, L. R. 6 Eq. 641, L. R. 4 Ch. 441 (1869); Lacey v. Hill, L. R. 18 Eq. 182 (1874).
32 Cruse v. Paine, L. R. 6 Eq. 641, L. R. 4 Ch. 441 (1869).
33 Fairland v. Percy, L. R. 3 P. & D. 217 (1875); In re Pumfrey, 22 Ch. Div. 255 (1882); Moore o. M'Glynn, (1904) 1 I. R. 334; Mason v. Pomeroy, 151 Mass. 164, 24 N. E. 202 (1890); King v. Stowell, 211 Mass. 246, 98 N. E. 91 (1912); Laible o. Ferry, 32 N. J. Eq. 791 (1880); Paul v. Wilson, 79 N. J. Eq. 204, 81 Atl. 835 (1911); Wells-Stone Mercantile Co. v. Aultman, Miller & Co., 9 N. D. 520, 84 N. W. 375 (1900); Cater v. Eveleigh, 4 Desaus. Eq. (S. C.) 19 (1809); Braun v. Braun, 14 Manitoba 346 (1902).
In Strickland v. Symons, 26 Ch. Div. 245 (1884), the court said that the creditor could not reach the trust estate unless the object of the trust was the carrying on of a business. But this seems wrong on principle, and inconsistent with the later English case of In re Richardson, (1911) 2 K. B. 705, stated infra, p. 733.
34 In re Raybould, (1900) 1 Ch. 199; In re Hunter, 151 Fed. 904 (1907); Miller 0. Smythe, 92 Ga. 154, 18 S. E. 46 (1893).
35 Owen v. Delamere, L. R. 15 Eq. 134 (1872); Dantzler v. McInnis, 151 Ala. 293, 44 So. 193 (1907) (semble); Johnson v. Leman, 131 Ill. 609, 23 N. E. 435 (1890); Stern Bros. v. Hampton, 72 Miss. 555 (1895).
36 Blackshear v. Burke, 74 Ala. 239 (1883). See Henshaw v. Freer, 1 Bailey Eq. (S. C.) 311 (1831).
37 In Massachusetts it is not necessary even to show that the trustee is insolvent. Mason v. Pomeroy, 151 Mass. 164, 24 N. E. 202 (1890); King v. Stowell, 211 Mass. 246, 98 N. E. 91 (1912) (semble).
38 Gates v. McClenahan, 124 Ia. 593, 100 N. W. 479 (1904); Norton o. Phelps, 54 Miss. 467 (1877); Field v. Wilbur, 49 Vt. 157 (1876).
39 In Poland v. Beal, 192 Mass. 559, 78 N. E. 728 (1906), the cestuis que trust expressly promised the trustee to furnish money to pay for certain property which they requested him to purchase for the benefit of the trust estate. It was held that the person from whom the property was purchased by the trustee could maintain a bill in equity against the cestuis que trust. The creditor is here by equitable execution reaching a right to exoneration arising out of an express contract. See an article on “Contracts for the Benefit of a Third Person," by Professor Williston, in 15 Harv. L. REV. 767, 775. The result should be the same when the right to exoneration arises, not out of an express contract, but out of the relationship of the parties.
The right of the trustee to exoneration from liability for a debt properly incurred by him in the administration of the trust cannot be reached by the personal creditors of the trustee. In the case of In re Richardson,40 a leasehold estate was held in trust. At the expiration of the lease the landlord sued the trustee and obtained judgment against him for £711 for rent and damages for breach of covenant. Before the amount was ascertained the trustee was adjudicated a bankrupt. The landlord, by leave of the court, the question of the ultimate disposition of the fund being reserved,
brought an action against the cestui que trust in the joint names of the landlord and the trustee in bankruptcy for a declaration that the cestui que trust was bound to indemnify the bankrupt against the £711, and for an order for payment of this sum. The action was compromised, the cestui que trust paying £520 to the landlord. An application to the judge in bankruptcy was then made by the landlord to determine who was entitled to the money so recovered. The judge held that it formed a part of the bankrupt's estate and was divisible among his creditors, and ordered the landlord to hand over the money to the trustee in bankruptcy. The landlord appealed and it was held by the Court of Appeal that the appeal should be allowed. In the course of the decision, Buckley, L. J., said:
“This is an obligation to indemnify. How can effect be given to an obligation to indemnify? Only in one of three ways. If B. (the trustee] has paid the money to A. (the creditor), he may get it back from C. (the cestui que trust) and may put it into his pocket. If B. has not paid the money to A., but calls on C. to pay the money to A., then if C. pays the money to A., B. is never out of pocket at all. In either of those cases B. is indemnified. But lastly, if B. has not paid the money to A. but calls upon C. to pay the money to him, B., in order that he may pay it to A., then B. is not indemnified if the money is paid, not to A. alone, but to A. and others.”
40 (1911) 2 K. B. 705.
The decision seems clearly right. The asset of the trustee is not a right to receive money; it is a right to be saved harmless, to be exonerated by having his liability to the creditor discharged. The obligation of the cestui que trust is an equitable obligation, and equity acts specifically. The specific enforcement of the obligation results in payment to the trust creditor, not to the trustee or his private creditors. If the cestui que trust should, instead of paying the creditor, put the trustee in funds in order that he might pay the creditor, the trustee would have no right to use the funds in paying his private creditors. In no case, therefore, where the trustee has not paid the trust creditor, can his private creditors reach the trust estate or the cestui que trust.41 Any other result would clearly allow the private creditors of the trustee to make a profit out of the trust. The situation is quite different where the trustee out of his private assets has paid the creditor. His right to reimbursement which arises thereby is a right which any of his private creditors can reach, just as they could have reached those assets if they had moved in time.42
If a testator bequeathes a business to a trustee and directs that he continue to carry it on, the testator's creditors may insist, nevertheless, that the business be not carried on, but that it be wound up and that their claims be paid from the proceeds. If the trustee continues the business without their consent, they may insist on being paid out of the assets so bequeathed, in priority to the claims of persons to whom liabilities have been incurred by the trustee in carrying on the business after the testator's death; for debts take precedence over legacies. But if the testator's creditors have consented to the carrying on of the business, they consent to the postponement of their claims to the trustee's right of reimbursement or exoneration; and the creditors whose claims arose after the testator's death and are against the trustee, by proceeding through the trustee's rights of exoneration, obtain priority
41 Askew v. Myrick, 54 Ala. 30 (1875) (semble); First National Bank o. Thompson, 61 N. J. Eq. 188, 48 Atl. 333 (1901) (semble). Compare the remarks of Professor Williston as to the right of a creditor on a promise by a third person to the debtor to pay the debt, in 15 Harv. L. Rev. 777.
42 See Mannix o. Purcell, 46 Oh. St. 102, 19 N. E. 572 (1888).
43 Re Millard, 72 L. T. N. S. 823 (1895); Willis v. Sharp, 115 N. Y. 396, 22 N. E. 149 (1889) (semble); Morrow v. Morrow, 2 Tenn. Ch. 549 (1875).
over the testator's creditors.44 When a business is carried on by an executor for a short time until it can be sold as a going concern, whether the testator's creditors have consented or not, the executor has a right of indemnity for liabilities incurred by him, and is entitled to priority over the testator's creditors; and through the executor's right, the persons to whom he has incurred such liabilities have priority over the testator's creditors. 45
This derivative right of the creditor against the cestui que trust and the trust estate, through the trustee, is available only when and to the extent that the trustee has a right to exoneration. When the liability was not properly incurred by the trustee in the administration of the trust, the trustee has usually no right to exoneration and the creditor has no right through him against the estate; 46 but where the trustee acted in good faith and did benefit the estate, he has a right to exoneration to the extent of the value of the benefit, and to that extent the creditor can recover against the estate.47 Where the trustee has a right to exoneration only out of a part of the trust estate, the creditor can reach only that part of the estate. 48 If the trustee is in default to the estate, his claim to exoneration, like his claim to reimbursement, is reduced by the amount that he is indebted to the estate, and the creditor's right against the estate is reduced accordingly; and if the amount of the trustee's indebtedness exceeds the amount of the creditor's
44 Ex parte Garland, 10 Ves. 110 (1804); Dowse v. Gorton, (1891] A. C. 190; In re Hodges, (1899) 1 I. R. 480 (1899); In re Frith, (1902) 1 Ch. 342.
45 Wright v. Beatty, 2 Alberta 89 (1909).
46 Farmers' & Traders' Bank v. Fidelity & Deposit Co., 108 Ky. 384, 56 S. W. 571 (1900); Bauerle v. Long, 187 Ill. 475, 58 N. E. 458 (1900); Lucht v. Behrens, 28 Oh. St. 231 (1876); Tuttle v. First Nat. Bank, 187 Mass. 533, 73 N. E. 560 (1905); Dunham v. Blood, 207 Mass. 512, 93 N. E. 804 (1911); Welsh v. Davis, 3 S. C. 110 (1871).
47 Thomas v. Provident Life & Trust Co., 138 Fed. 348 (1905); Deery v. Hamilton, 41 Ia. 16 (1875); In re Estate of Manning, 134 Ia. 165, 111 N. W. 409 (1907); De Concillio v. Brownrigg, 51 N. J. Eq. 532, 25 Atl. 383 (1893); Stillman v. Holmes, 9 Oh. N. P. N. S. 193 (1909). But see Hallock v. Smith, 50 Conn. 127 (1882). For the Scotch law, see Menzies, TRUSTEES, 2 ed., 227.
48 Ex parte Richardson, 3 Madd. 138 (1818); Ex parle Garland, 10 Ves. 110 (1804); Cutbush v. Cutbush, i Beav. 184 (1839); Burwell ». Mandeville's Ex'r, 2 How. (U. S.) 560 (1844); Pitkin v. Pitkin, 7 Conn. 307 (1829) (semble); Wilson v. Fridenburg, 21 Fla. 368 (1885); Laible v. Ferry, 32 N. J. Eq. 791 (1880); Willis v. Sharp, 113 N. Y. 586, 21 N. E. 705 (1889) (semble); Lucht v. Behrens, 28 Oh. St. 231 (1876).