The principal controversy in this case is whether Maurice Smith ought to be charged in account with the estates confided to his management, with interest, and, if so, from what time, upon what sums, and whether with simple or compound interest. These questions are presented by the pleadings, and also arise upon the exceptions, and when they are determined there will probably be but little difficulty in making a full settlement between the parties. (339) Nothing can be clearer, in point of principle, than the general rule that a trustee shall not be allowed to retain to himself profits made upon the use of the property of his cestui que trust. These profits are in the nature of fruit and increase, and belong, of right, to the owners of the property. It is seldom practicable, however, to ascertain with precision when trust funds have been misapplied, the exact gains therewith made; and, therefore, it has been found necessary to adopt a general rule which substitutes, as the measure of profits, what the law or the usage of the country regards as the ordinary fruit or produce of capital. Where the breach of trust is accompanied with corruption, and *Page 277 there is abundant reason to believe that the general rule is an inadequate measure of the wicked gains actually made, the court may, and sometimes does, direct rests in taking the accounts, so as to render the trustee chargeable, in effect, with compound interest. The primary purpose is to secure to the cestui que trusts the profits on the use of their money, and the second, to discourage and prevent the application of trust funds to the private purposes of the trustee, a practice which, while it endangers the safety of the property, tempts to further faithlessness, and to ultimate dishonesty and corruption. The propriety of these principles is so obvious that they could not fail to receive the sanction of the Court of this State. Indeed, there are peculiar reasons here which have been supposed to call for a more extended and rigorous application of the rule of accountability for interest than that which prevails with respect to executors and administrators in the country of our ancestors. There the legal is above the ordinary market rate of interest; here it is below what is deemed the common value of the use of money. While, therefore, it is usual, in England, to charge trustees, made liable for interest on trust funds, but 4 per centum, although the statute rate of interest be 5, here, when interest has been charged at all, it was never charged at less than 6 per centum, allowed by law on loans of money. With us, too, there has always been such a constant demand for money, so many temptations to adventure or schemes of profit, and such a habit of rapid investments, that the presumption against its remaining (340) idle, even in the hands of executors or administrators, was deemed not an unreasonable one. Moreover, as the law here allowed compensation to trustees of this description, by commissions, there was not the same fear of discouraging persons from accepting these offices by a severe accountability, as is natural where their services are to be performed gratuitously. Certainly, therefore, with us it has been the established usage to charge interest on balances in the hands of executors and administrators whenever these have accumulated beyond the exigencies of administration, unless it appears that the fund had been kept sacred and intact for the cestui que trusts as their property, ready to be delivered over to them, so that profits could not have been made thereof.
In this case the mass of the testator's personal estate consisted of ten bonds, each for the sum of $10,000, payable in ten successive years, by Alexander Boyd and others, of Mecklenburg, in Virginia; all of which bonds, it appears, were collected by suit, and some of them after much delay. Upon examining the accounts taken by the master, it appears that after deducting a reasonable rate of commissions for the services of the executor, there was no considerable balance of money in his hands beyond what might be reasonably necessary to meet the charges of administration and pay unsatisfied demands against the estate, until *Page 278 1824, when, by reason of upwards of $23,000 then received from the Boyd debts, besides other considerable collections, there remained in his hands at the end of that year upwards of $20,000, which balance never grew less, but on the contrary went on increasing. Upon the balance at the end of this year the Court thinks that the executor ought to be charged with interest, unless he has exonerated himself therefrom by reason of the special matters set up in his answer. As we understand that answer, it alleges that he was unable to settle with the legatees, because they were then under age and without guardians; that he did not deem himself justified in lending out the money for them, or otherwise investing it for their benefit, and that therefore he kept it, making no profit thereof. The language of the answer in regard to the (341) keeping of the money is, "that he hath at all times been in possession of all the money of his testator that was collected and not disbursed, either by having the same at his own house, or about his person, or in some of the banks in North Carolina or Virginia." This statement is obviously so vague that with all its appearance of specification it amounts to little else than that he had the money somewhere, and affords to those interested very slender opportunity of ascertaining where, and still less how, it was kept. An attempt was made to obtain specific information on this subject by interrogatories administered to the executor through the master; but all thus acquired amounted to no more than this, that the only banks in which he had made deposits were the State Bank of North Carolina, the Farmers' Bank of Virginia, and the United States Branch Bank at Richmond; and that a statement of his entire account with each of those institutions was contained in certain copies of the bank books exhibited to the master. These accounts from the bank books are accounts current between Maurice Smith (individually) and the banks, and make no discrimination between the deposits as having been made otherwise than to the general credit of the depositor. The executor has not undertaken to specify which, if any of them, were an account of the moneys of his testator. Upon the answer and the examination, it must be held, therefore, that while the executor claims to be relieved from interest because of his having kept the fund for his cestui que trusts, without having derived profit therefrom, he refuses to disclose where, or how, it was kept for them. It is impossible, we think, to account for the withholding of these reasonable explanations on the part of a trustee, from his cestui que trusts, in regard to the custody and management of their money, for many years, upon any principle consistent with the fact that it has been actually and bona fide kept exclusively for their benefit.
We must suppose, unless we attribute to the defendant, both in his answer and upon his examination, a deliberate purpose of equivocation, *Page 279 that some, at least, of the moneys appearing to his credit upon (342) these accounts were those of the estate of his testator. They are not all such, for the account exhibits, as he alleges, his entire dealings with the banks, some of which, therefore, must be understood to have been his individual dealings. From these accounts, then, it is to be collected that the trust funds went into the mass of the executor's property, and by no visible marks or signs were in any respect distinguished from his private moneys. They swelled the executor's personal credit at bank; upon his death they became assets in the hands of his personal representatives, and could not have been claimed as the assets of the testator by a representative of that estate; they were liable to his creditors — were, in all respects, his property; he charging himself with the amount thereof in account with his cestui que trusts. It is impossible, upon this state of facts, to hold that the executor did not use the funds of the estate. He has declared, indeed, that he did not "use them for himself, or loan them on his own account, or speculate therewith to make profits for himself," and we cannot declare his answer false unless compelled to do so by clear proofs. But it is manifest, if credit be given to the answer, that the defendant in denying all personal use of the trust funds, made the denial in a different sense from that in which we should have understood it, but for the explanations otherwise afforded.
This discovery may properly create doubts whether the denial that these funds had been loaned on his account, or employed in speculation, to make profits for himself, is to be taken in the sense which it would seem to import. And these doubts increase upon further examination into the details of the bank accounts. That with the Farmers' Bank of Virginia contains but one credit for a deposit of cash on 19 April, 1830, of $1,000; and this was drawn out on two checks of $500 each, one in favor of Webb, on 27th of the ensuing month, and the other in favor of himself, on 25 February, 1831. If this deposit were of the money of the estate (and if it were not, this account could have been presented but for the purpose of deception), why is the money thus withdrawn from its place of security — and withdrawn in two suits, at distinct times? It must have been for some purpose connected either (343) with the necessities of the estate or with the private concerns of the depositor. We have examined the account as returned by the executor, as made out by the commissioner, and no application of either of those sums at or about either of the times to the purposes of the estate appears. The account with the United States Branch Bank at Richmond contains three deposits, two of $1,000 each, made on the same day, 24 April, 1839, the whole amount whereof, $2,000, was withdrawn by "draft" on 24 April, 1830; and one of $1,000, made on 25 February, 1831, of which $500 was checked for on 29 August, 1833; and the *Page 280 remaining $500 yet remains standing to the credit of the depositor. If any of the money thus deposited were funds of the estate, the same inference arises, from the manner in which they were withdrawn, of their actual application to the private necessities or business of the executor. The account with the State Bank of North Carolina furnishes, as far as can be understood, evidence not more favorable to the positions taken here in behalf of the executor. It exhibits a deposit of $4,000 made by him in May, 1822, and withdrawn in the succeeding year by checks in favor of Willis Lewis, A. Paschall, and T. Booth; and it is shown that with regard to two of these, Lewis and Booth, they got those sums on a personal loan from the executor. On 6 and 7 October, 1824, he made deposits of $4,000 and of $2,200. Upon these he checked in favor of himself, on 4 October, 1825, for $2,000, and of R. Dickens Co. for $1,000. It is impossible to infer from the accounts of the estate that either of the sums thus checked for was applied to the uses of the estate; and in May, 1826, he checked for the balance of $3,200 in favor of Doctor Hunt and David Mitchell, to whom he lent the money as his own. If these, or any of these, deposits were of the trust funds, then the trust funds were, to every intent, employed in his private business. One other deposit alone remains, of $3,000, which was made on 14 May, 1832, and drawn out on 31 August, 1833, by a check in favor of himself, and, probably, for the purpose of being paid in, at the then approaching September term, on account of the parties in this (344) suit. Now, if this last deposit be the only one ever made of trust funds in the banks, then these conclusions are forced upon us: First, there has been a most disingenuous mystification in respect to the place of custody of these funds, by representing that they were kept either at home, or about his person, or in some of the banks of North Carolina or Virginia. An equivocation of this kind ought to deprive the answer of all moral weight. We are not casuists enough to decide whether such an equivocation has all the guilt of falsehood; but it is decisive to show that he who uses it cannot be relied on as a guide to truth. Another conclusion, resulting from this view, is that the executor deemed it prudent to deposit his own moneys, for safe-keeping, in those public institutions established for that purpose, but kept the funds of others committed to his care, where no one knows, and where he will not disclose, when called on to account for them. And when it is remembered that he had been, before this charge was confided to him, actively employed in making loans, buying up notes, and other profitable money operations, and that these were continued with undiminished activity during the entire period when these trust funds were in his hands, there is no rational ground left for doubt, and we are bound to declare, that they were used indirectly, at least, for his personal emolument. But, *Page 281 on the other hand, if this last deposit in the State Bank was not the only one made of the funds of the estate, we shall be obliged, by these proofs, to pronounce what certainly the parol evidence tends to show, that the funds were used in his private business directly for the sake of profit therefrom. It is not necessary to decide between these two declarations. Charity should induce us to hope that the deceased may have thought that while he kept on hand, at his command, an amount of money equal to what he supposed might be found due from him on a settlement, he could say that he had not used the funds of the estate for profit. If it were so, it is a melancholy instance of the facility with which the love of gain leads an erring man into the strangest delusions.
We pursue this unpleasant inquiry no farther, but direct that (345) interest be charged from the close of 1824 on the balance then due from the executor to the estate of his testator, and that, thenceforth, it be regularly charged and credited on the subsequent items in the account.
The estate of William Smith, the younger, consists almost exclusively of his share in the estate of William Smith, the elder. It owed no debts, and interest is to be charged thereon from the date of the receipts.
On the part of the plaintiffs it has been insisted that there should be annual rests made in the account, so as to charge the executor, in effect, with compound interest. It will be seen that to some extent the persons interested will, without giving the direction for rests, get the benefit of compound interest, because the interest with which the Court directs the executor to be charged will be calculated on his receipts, whether they be of principal or interest, for his cestui que trusts.
The claim thus advanced by the plaintiffs is rested on several grounds. In the first place, it is insisted that according to the declarations of Maurice Smith his dying brother had charged him with the special care of the deceased's children, the said Maurice became their guardian, and ought to be held accountable as such. This ground cannot be maintained. The power of a father to appoint a guardian to his children can be exercised only in the mode prescribed by law, and that is express "that it shall be by deed, executed in his lifetime, or by his last will and testament, in writing." Act 1762, Rev., ch. 69, sec. 2 (1 Rev. Stat., ch. 54, sec. 1). It is then insisted that in and by the clause where the testator disposes of the residue of his estate among his wife and children, other than Mrs. Nuttall, he constitutes his executors guardians to these children, by imposing upon them the duties of guardians. The Court admits that when it can be clearly collected from the will of a father that certain persons are thereby appointed to have the custody of the persons and of the estates of his children until they arrive at age, such an appointment will be held to constitute them guardians, as though the appropriate term had been used. But where a term so well known and *Page 282 (346) of such universal use to describe the office is not employed by the testator, there ought to be unequivocal indications of a purpose to confer the office before the court will declare it conferred. In the clause in question there are no indications warranting such a conclusion. Certainly the clause itself is not very perspicuous, but according to our construction it directs that the use of his property shall be with his wife for the support of her and the children, subject to the supervision of his executors, until a division of it can be conveniently made, either in kind or in the form into which the executors may convert it, between the wife and the children. This division necessarily means an equal division, and this division, between the wife and these children, is to be repeated from time to time until their shares respectively shall be made equal to the special provision made for Mary Nuttall, after which, should there be a residue, the division — equal, of course — is to proceed between the wife and all of the testator's children. If the supervision which the testator directs to be exercised by his executors constituted them guardians, they were appointed such, not only to his children, but his wife.
But it is further contended that he ought to be thus charged because he caused the guardian of his infant cestui que trusts to be removed; and thereby getting the unlimited control, not only over the property of his testator, but over the persons of the testator's children, he exercised the powers of guardian, and must be held to the responsibilities of a guardian. If the case were established that, after the appointment of Thomas Hunt as guardian, the executor, for the fraudulent purpose of preventing his being called to an account for the management of the estate, and of keeping the moneys thereof in his own hands, caused the said guardian to be removed or to resign his office, we might feel ourselves justified in exacting from him the most rigorous measure of accountability which the law will permit. But this case, we are decidedly of opinion, has not been made out; nor anything shown in relation to that transaction for which the executor merits censure. It appears from the records that at February Court, 1819, John R. Eaton, who had been nominated by the testator as an executor, but declined the appointment, the maternal uncle of the children was appointed (347) their guardian; and so far from its appearing that this was done in opposition to the wishes of Maurice Smith, he declares in his answer (and if the declaration were untrue it might have been contradicted) that he refused to qualify as executor until Mr. Eaton promised to take the guardianship. Besides, this allegation derives some support from the fact that Smith's qualification as executor did not take place until November Term, 1818, although the will was proved at the preceding August term. It also appears that in November, 1819, Alexander Smith, the brother of the testator, became guardian to Charles, one of *Page 283 the plaintiffs, and remained guardian until February, 1824. Besides, it does appear that although Thomas Hunt, when he received the appointment, was in good credit, and generally deemed solvent, a very short time justified the apprehensions of Maurice Smith in regard to his embarrassments, and proved that, on this subject, he had that more minute information and keen-sighted sagacity which are ordinarily found in pursuing habitually the business of lending money and buying in notes. Besides, when Thomas Hunt resigned the guardianship there was no money of the testator in hand, and no immediate temptation to make Maurice Smith desire that the children should be without guardians. And, upon the proofs, it does not appear that after the resignation of Thomas Hunt he executed any of the duties of the guardian except those necessarily devolved on an executor for infant cestui que trusts, of furnishing the means for their support and education. It is lastly contended upon this point that these rests ought to be directed because by the will the executor was expressly charged with the duty of putting out the balances in his hands from time to time at interest, for the purposes of accumulation, and that his gross breach of duty in utterly disregarding this injunction deserves such severe visitation. We are saved the necessity of ascertaining what ought to be the rule of interest in the case supposed — in the performance of which duty there would be a difficulty in reconciling decisions that apparently clash with each other — because we do not find any such injunction in this will. The only power given to the executors is that of converting the property for the purpose of a division, and the testator seems to have contemplated such a division whenever the administration of his estate could be (348) conveniently closed.
We have thus disposed of the main subject of dispute in this cause, and of the matters embraced within the 1st and 2d of the exceptions taken by the plaintiffs, and within the 5th, 7th, and 8th of the exceptions of the defendant. The report must necessarily be recommitted, in order that the accounts may be made out in conformity with the principles thus declared.
The 3d exception of the plaintiffs is for that the master hath credited the said Maurice with sundry small items for expenses, amounting together to the large sum of $1,110.98, without vouchers therefore, and without proof that the expenses so alleged were actually incurred, or, if incurred, for the benefit of the estate of his testator. According to the practice which has heretofore prevailed in this Court, and which must continue until one more suited to the convenience of suitors can be established, this exception must so far be allowed as to direct the master to revise this item, and in his report thereupon to set forth the grounds of *Page 284 his allowance, so that the Court may be enabled to decide, if made the subject of an exception, upon the correctness of his judgment.
Exception 4 of the plaintiffs, and 6 and 10 of the defendant's exceptions, relate to the quantum of commissions allowed to the executor, to the subject-matter of commissions and the mode of its computation. It is so difficult for this Court to ascertain by any means in its power what is the reasonable rate of commissions called for in any case, by the nature of the services, labor, and responsibility of the trustee, that it is much disposed, in general, to rely in this respect on the judgment of the master. In this case, however, the Court perceives a safer guide for the exercise of its discretion and will follow that guide. It appears that on one occasion when the accounts of the executor were audited in the County Court of Warren, and when the auditors recommended that there should be allowed to the executor a commission (349) of 5 per centum on his receipts, and 5 per centum on his disbursements, the court, nevertheless, ordered that his commission should be limited to 4 per cent on each. The Court, therefore, overrules the allowance of 5 per cent as made by the master, and sanctions the rate established by the county court. It is made a question by the 10th of defendant's exceptions whether the money paid to the widow of the testator as and in lieu of the distributive share to which she became entitled by reason of her dissent from the will, is a disbursement, on the payment whereof the executor can claim a commission. The Court holds very clearly that it is not. Here the payment was not made on an adjudication, but as on a purchase of the widow's right. But if it had been made on an adjudication, or in any other form, still the claim was in the nature of a distributive share, and comes within the reason of the decisions which forbid commissions on the payment of legacies and distributive shares. Potter v. Stone, 9 N.C. 30; Clarke v. Cotton, 17 N.C. 51. The Court is also called upon by the other of defendant's exceptions above stated to correct an alleged error of the master in the mode of computing the commissions. As the account itself is to be taken on a new principle with respect to the calculation of interest, the object of this exception will be best attained by directing the master, after ascertaining the amount of the receipts, as swollen by the addition of the interest thereon and of the amount of the disbursements as so increased, to make the allowance of commissions on the aggregate.
The 5th and 6th exceptions of the plaintiffs are either disproved or unsupported by proof, and the small matter embraced in the 7th exception is left by the expectants so completely in doubt that those exceptions are overruled.
Exceptions 8, 11, 14, 15, and 16 of the plaintiffs were abandoned in the argument as untenable. *Page 285
Exception 9 must be overruled. The Court can discover no reason why a tenant in common of land has not a right to charge his cotenant with a just proportion of expenses incurred in relation to the common estate, and upon the proofs sees no room to doubt that the payments made to James W. Smith therefore were in all respects (350) proper.
Exception 10 must also be overruled. Upon the answer and the testimony of James W. Smith, which furnish all the evidence in relation thereto, it appears that the sum, for not collecting which it is sought to charge the executor of William Smith, was not, in fact, due to the said William.
Exceptions 12 and 13 of the plaintiffs will be considered together. Maurice Smith, who was the administrator of William Smith, the younger, purchased at a certain sum, and while a suit was pending therefor, the interest of his intestate's mother in and to a distributive share of the estate, and it is alleged by the other next of kin that he paid too little therefore, and that the profit made on the purchase should result to them; and if not, then the estate is not chargeable with any part of the costs which had been incurred in the litigation. Courts view with jealously such contracts made by a trustee with his cestui que trust. Whether the purchase in this case ought to stand or not is exclusively a matter between the parties to that contract. As to all others it must be understood as transferring the right which it professes to sell; and the price paid by the purchaser is a matter which concerns none but the parties. The purchase is not shown to have been made for the other next of kin, and the allegation that it was so made has been peremptorily denied. The representatives of Mrs. Pugh are not before the Court. We see no ground on which to overrule the judgment of the master on the main matter of these exceptions. But it is equally clear that it was an error to allow the executor for the costs paid by him in resisting this claim of Mrs. Pugh. To the extent of these the account must be corrected.
The matters disclosed in the affidavit of Samuel W. Smith, connected with the fact that the payment in question does not appear to have been claimed by M. Smith in the account rendered by himself, render it so questionable whether an error was not committed by the master in charging the said Samuel with the sum of $1,500, as paid on 25 December, 1827, that the Court sustains the 17th and last exceptions of the plaintiffs, so as to direct the master to revise his report in relation thereto.
The Court also sustains the 1st exception on the part of the defendant so far as to require of the master to review his report in relation to the payments claimed by said exception to have been paid to Charles Smith. The conveyance of the shares of the said Charles (351) *Page 286 in the estates of his father and brother is regarded by the Court but as a security for the sums actually paid to him; and the master will ascertain fully all that has been received by him on the account thereof.
The Court is of opinion that the 2d exception of the defendant is irrelevant. The representatives of Mrs. Pugh are not before the Court, and the Court does not understand that the report finds the late Maurice Smith is liable to any person because of her share in the estate of William Smith, the younger. The value thereof is set forth, partly for the purposes of elucidation and partly that the Court might be enabled to decree in relation thereto, if it held that the profits on the purchase of that share accrued to the other next of kin of the said William. But the report does not charge the said Maurice, in account with any of the parties to this suit, therewith.
The matter of the 4th exception, the claim of the late Maurice Smith on account of his share in the Killingsworth debt, has not been passed on by the master, and it is against the usage of this Court to act upon matters of account originally. The subject-matter of this exception is, therefore, recommitted to the master.
The 9th exception of the defendant is overruled. It appears that on 9 June, 1830, Maurice Smith made a large payment to Samuel Smith, in cash, and at the same time bound himself by bond to make a further payment of $2,000; that this bond was not taken up until some time afterwards, when it amounted, with interest, to $2,165. The master having credited the while account of M. Smith with cash and the principal of the bound as a payment of 9 June, 1830, it is clear that the defendant is not entitled to credit for the interest which Maurice Smith paid for the use of the $42,000.
The matter contained in the 11th of defendant's exceptions is not properly brought before the Court by way of exception. If material, the proper time to urge it will be when a decree is prayed for by (352) the plaintiffs. In the meantime as the matter will be necessarily before the master, upon the recommitment of his report, any of the parties who deem the inquiry suggested a proper and necessary one may direct the attention of the master thereto, and have a more specific report concerning the matter thereof.
Our attention was called during the argument to the sum of $483.74, mentioned in the order of September Term, 1833, to have been retained out of the moneys paid into office, subject to the further order of the court. The counsel for the legatees has prayed of us that this money may be decreed to be paid to them. This prayer is not granted. The money is stated to be the one-third of the rents, which had been received by Maurice Smith, of Tennessee lands, whereunto the wife of the late William Smith was entitled to dower; and if so, as an accessory, it ought, *Page 287 in equity, to follow its principal. The money, upon this representation, belongs to the representatives of Mrs. Pugh, and they are not before us.
The decretal order will be drawn in conformity to the principles laid down and the matters declared in this opinion. *Page 288 PER CURIAM. Order accordingly.
Cited: Spruill v. Cannon, post, 402; Hale v. Aaron, 77 N.C. 373; Pickens v. Miller, 83 N.C. 549; Green v. Barbee, 84 N.C. 73; Summers v. Reynolds, 95 N.C. 413; Bank v. Bank, 126 N.C. 539. *Page 289