I dissent in this case from what I deem to be an erroneous decision.
There are, in my opinion, three fundamental principles which govern the situation here presented. The first *Page 495 is that, in the absence of some contractual obligation, a cestui que trust does not forfeit his interest in the trust res by failing to loan money to the trustee, even though the purpose of the loan be to preserve the trust property and even though others of the cestuis que trustent may choose to make such a loan. The second is that, while a fiduciary has the power to abandon any part of the trust property provided in so doing he exercises reasonable prudence, he cannot, under any circumstances, make a donation of such property. The third is that, when one deals with a person whom he knows to be a fiduciary, he is bound to know the limitations of the fiduciary's power and therefore cannot invoke against him or the cestui que trust the doctrine of estoppel.
Let us consider the application of these principles to the present case.
1. In order to keep the policies of insurance alive it was necessary for the trustee (Pearlman having defaulted) to pay the premiums. The creditors had evidently realized that there might be such a default (it is referred to in Article XI (b) of the trust agreement), and, doubtless with this and similar contingencies in mind, gave the trustee the power "to borrow money as Trustee . . . for any purpose connected with the management of the trust which he may deem proper". The trustee could have exercised this power by borrowing the money needed to pay the premiums either from a bank or from any individual or individuals who might have been willing to lend it to him, the loan thus contracted becoming a debt of the trust estate payable, with interest, before any distribution in liquidation to the creditors. But, in the absence of any agreement to that effect, there was no obligation on the part of the William B. Hackenburg Building and Loan Association or of any of the other creditors to make such a loan; if some of them chose to make it they were acting, in so doing, in a capacity wholly distinct from their position as beneficiaries *Page 496 of the trust estate. Any creditors joining in such a loan obtained the same rights thereby — no more and no less — as abank would have obtained if it had loaned the money, and certainly it would not have gained, nor the creditors have lost, any property rights in the trust res by virtue thereof. It seems too clear, therefore, for extended discussion that because some of the creditors were either more able or — perhaps with a greater interest at stake — more eager than others to make a loan to the trustee, the non-lending creditors did not forfeit thereby any of their vested property rights in the trust res; the only consequence was that the lenders became entitled to repayment, with interest, of the money loaned by them before distribution of the net proceeds of the trust res among the beneficiaries of the trust. The cases cited in the majority opinion, Appeal of Yeager Grim, 100 Pa. 88, andAppeals of Fidelity Insurance Trust and Safe Deposit Co. Lennig, 106 Pa. 144, were simply cases where several persons agreed upon a joint purchase but one of them reneged and did not put up his share of the purchase money; naturally the defaulting party, having failed to meet his obligation, never acquired any interest in the property. There is not the slightest analogy between those cases and the present one.
The Commercial National Bank, which was a creditor of Pearlman and a beneficiary under the same trust instrument as the Building and Loan Association, also failed on one occasion to join with other creditors in a loan to the trustee designed to pay the insurance premiums. It was thereupon contended by the trustee, just as here, that the Bank had forfeited its right to participate in the proceeds of the policies. The District Court of the United States for this district held to the contrary (Reed v. Hardt, 46 F. Supp. 984), and refused to penalize the Bank as a cestui que trust merely because it had not joined in the loan. This decision was unanimously *Page 497 affirmed by the Circuit Court of Appeals: Reed v. Hardt,137 F.2d 705.
2. This brings me to the next question here involved: What effect did Lieberman's letter to Hardt of April 18, 1940, "waiving" the right to participate in any distribution under the policies, have upon the rights of the Building and Loan Association in the trust res? In other words, did Lieberman have the power, as liquidating trustee of the Association, to make such a waiver, or declare such an abandonment, of the Association's property?
In considering this question two facts must carefully be borne in mind. The first is that these insurance policies were of great potential value. In the letter from the officers to the stockholders of the Association of October 13, 1937, referred to in the majority opinion, it was pointed out that the Association's interest in the policies was a contingent asset, although, Pearlman still being alive, of nopresent recovery value. The letter further stated that there were no other assets remaining in the Association except this and a certain other claim, but that the State Department of Banking insisted that a liquidating trustee be elected and that the Association be placed in formal liquidation "to await the outcome of these two contingent rights". Thus Lieberman'sappointment as liquidating trustee was for the very purpose,indeed the sole purpose, of looking after the rights of theAssociation with regard to its interest in these policies andthe other contingent claim referred to. That that interest was a valuable one, even though at the time contingent, is shown by the fact that at Pearlman's death in 1941 there was realized on the policies over $265,000., of which the Association's share was in excess of $15,000.
The second and controlling fact is that Lieberman, like Hardt, was himself a fiduciary, and, as such, limited in his powers. The real owner of the interest of the *Page 498 Building and Loan Association in the policies was, not Lieberman, but the stockholders of the Association of which Lieberman was merely the liquidating Trustee. What right, then, did Lieberman have to surrender the Association's rights in the policies? That a fiduciary may abandon trust property is, of course, beyond question, the only requirement being that in so doing he exercise "reasonable prudence" (Restatement, Trusts, § 192), and indeed Lieberman was expressly given that right in the plan of dissolution adopted by the stockholders of the Association on November 3, 1937. But it is just as elementary that a fiduciary cannot give away any of the trust property (65 C. J. 702, § 568). What, then, is the difference between apermissible abandonment and a non-permissible donation? Simply that an abandonment by a fiduciary is permitted when, and onlywhen, there are relative advantages and disadvantages whichpresent themselves to him and call for judgment on his part asto whether the trust will be better off if he retains theproperty or surrenders it. The cases cited in the majority opinion exemplify this principle. Thus in Provident Life andTrust Co. v. Fidelity Insurance, Trust Safe Deposit Company,203 Pa. 82, 52 A. 34, an assignee for creditors held an insurance policy which he could preserve as an asset only if he kept paying the premiums thereon out of the trust funds; his judgment was that the assigned estate would lose in the end by keeping up the policy, and the court held that he was justified in abandoning what "was manifestly a burdensome asset". InReynolds v. Cridge, 131 Pa. 189, 18 A. 1010, an executor was held to have acted properly in abandoning a bond belonging to the estate because it was pledged and could be preserved only by payments made by the estate, the court saying (p. 194, A. p. 1011): "That an executor may abandon property pledged, or subject to assessment, if there is no value over the debt or the assessment to be preserved for the estate, was *Page 499 ruled by Chief Justice SHAW in Ripley v. Sampson, 10 Pick. 373". In Hartje's Estate, 320 Pa. 76, 181 A. 497, and inCoates's Estate, 273 Pa. 201, 116 A. 821, a fiduciary was excused from proceeding against one who was indebted to the estate because, in the one case, the fiduciary, in the exercise of his judgment, reasonably believed by so doing he might destroy the debtor's ability to make further payments, and, in the other, the claim was apparently uncollectible and the costs of suit would therefore have been wasted. Thus it will be noted that in all these cases, as in every other that I have been able to find, the fiduciary was confronted with the alternative either of expending trust funds that in the end might prove to have been more than the asset which they were intended to preserve was worth, or of abandoning the trust asset altogether as the lesser of two evils. Only in such cases, if the trustee, in the exercise of his honest judgment as to which is the better course to pursue, decides to abandon the trust asset, is he acting within his legitimate powers as a fiduciary.
The situation in which Lieberman, as liquidating trustee, purported to waive the interest of the Building and Loan Association in the policies held in the Pearlman trust was entirely different from those in which, as thus stated, a fiduciary has the right to abandon trust property. Lieberman was not faced with the necessity of choosing between alternatives, or of adopting the lesser of prospective evils. He was not called upon to weigh relative advantages or disadvantages to the Association in the retention or the abandonment of a property asset of the Association. The Association was not under an obligation to do anything. It did not have to pay out any of its funds to keep the policies in the Pearlman trust alive. It was not required, either by any contract or by law, to loan money to Hardt for that purpose. It could have refrained from taking any action whatever without thereby forfeiting its interest in the policies. *Page 500 If Hardt borrowed money to pay the insurance premiums, whether from a bank or from some of the Pearlman creditors or from any other persons, the Association would still have been entitled to participate in the distribution of the trust assets after Hardt had repaid the loan, just as it was held by the United States Circuit Court of Appeals that the Commercial National Bank was so entitled. Therefore, in voluntarily "waiving" the Association's interest in the policies, Lieberman, as liquidating trustee, was simply giving away property belonging to his cestuis que trustent (the stockholders of the Association), and without any necessity for so doing. By it he lost all of its value for those for whom he was acting as fiduciary, whereas by not surrendering the Association's property he could not have lost anything for them nor subjected them to any possible expenditure or disadvantage; the worst that could happen would have been that, if Hardt were unsuccessful in borrowing money to pay the premiums, the Association, like all the other creditors, would have realized nothing from the policies, but if he should succeed (as he did) in borrowing the money elsewhere, the Association would have obtained its share of this ultimately valuable asset. It may be argued that to allow the other creditors, or some of them, to advance the money to Hardt while Lieberman, as liquidating trustee, did not contribute, and nevertheless permit the Association to retain its rights in the trust property, would be to give support to an unsportsmanlike proposition. But a fiduciary must protect the rights of those for whom he is trustee; he is not to show sportsmanship by making a donation of the property of his beneficiaries. In short, while Lieberman undoubtedly had the right, as stated in the majority opinion, properly to abandon assets of the Association, it is clear that he had no power, either by law or under the plan of dissolution adopted by the Association, to give away its property withoutany possible advantage accruing to it thereby. *Page 501
3. We come, finally, to a consideration of the assertion in the majority opinion that "the elements of equitable estoppel are present and exclude the appellant." This statement overlooks the fundamental principle that if one deals with a person known to him to be a fiduciary he is bound to know, and to have corresponding regard to, the limitations of his power. In none of the cases cited in the majority opinion — Fried v.Fisher, 328 Pa. 497, 196 A. 39; Commonwealth v. Moltz, 10 Pa. 527; Antone v. New Amsterdam Casualty Co., 335 Pa. 134,6 A.2d 566; Stewart v. Parnell, 147 Pa. 523, 23 A. 838 — was the person who was held to be estopped a fiduciary. I know of no case which holds that a cestui que trust can lose his property rights in the trust res through an estoppel by reason of an ultra vires act or representation by the trustee, where the person seeking to assert the estoppel knew that he was dealing with a fiduciary and not with a person acting in his own right. If such were the law, persons would be under no greater restrictions in transactions with fiduciaries than with individuals, and the rights of a cestui que trust would be wholly at the mercy of his trustee. Hardt, knowing that Lieberman was the liquidating trustee of the Building and Loan Association, was bound to know the limitations on Lieberman's power to surrender any of the property rights of the Association in the Pearlman trust; therefore he cannot invoke the doctrine of estoppel.* It is true, as the majority opinion points out, that the trust agreement provided that in case of Pearlman's default the trustee could sell any part of the trust estate and purchase the same as the representative of *Page 502 creditors who might wish to join therein; from this it is contended that if Hardt had not been advised by Lieberman of the latter's waiver of the interest of the Association in the policies he could have put the policies up for sale and they could then have been bought in by the creditors choosing to participate in the purchase and thus the interest of the Building and Loan Association could have been effectually eliminated. The answer to this proposition is that, if the trustee desired to accomplish such a result (instead of borrowing money and keeping the policies in the trust), he was bound to pursue the course prescribed in the trust instrument and cannot claim to have been diverted therefrom by a waiver, which, he was bound to know, did not, and could not, bind the Association. Only by such a sale of the policies, which would have taken them out of the trust altogether, could the Association, if unable or unwilling to be one of the purchasing creditors, be deprived of its property interest therein, and even in that event it would have received its proportionate share, as one of the cestuis que trustent, of the proceeds of the sale.
I file this dissent, therefore, not only because of my conviction that the case is being wrongly decided, but also because the decision seems to me to establish as the law of this State what I believe to be gravely questionable doctrines. The decision of the court is erroneous, in my opinion, not because of the misapplication of correct principles, but — what is of greater importance — because of the incorrectness of the principles themselves upon which it purports to rest. This makes it the more imperative that it should not go unchallenged.
Mr. Chief Justice MAXEY concurs in this dissenting opinion.
* This is especially true because it was Hardt himself who mistakenly represented to Lieberman that by failing to contribute to the loan the Association would forfeit its property rights in the policies, and actually induced Lieberman to write a letter waiving such rights. Therefore, so far from Lieberman misleading Hardt, it was Hardt who misled Lieberman. *Page 503