This cause comes here on an interlocutory appeal from an order of the circuit judge of the circuit court of the first judicial circuit, sitting in equity, overruling the demurrers of appellants to appellees' bill of complaint. The purposes of the suit were to enforce a trust and for other relief. *Page 27
Elvira May McNally Lord, hereinafter referred to as "Mrs. Lord," the divorced wife of Edmund Joseph Lord, hereinafter referred to as "E.J. Lord" or "the settlor" and Mary Virginia Lord, hereinafter referred to as "Mary Lord," his minor daughter, brought in the court below a suit to enforce a trust created by E.J. Lord in a deed executed by him dated December 22, 1930. The respondents are: E.J. Lord; Thomas Desmond Collins, successor trustee under said deed of trust; Albert Edmund Lord and George Marion Lord, sons of the settlor and the petitioner Mrs. Lord, who, together with the petitioners, are named beneficiaries under the deed of trust; a minor granddaughter of the settlor and Mrs. Lord; the New York Life Insurance Company, which holds, by assignment, a policy of insurance issued by it upon the life of the settlor as security for a loan; John S. Grace, trustee under an assignment made by the settlor for the benefit of himself and certain of his creditors; the board of water supply of the City and County of Honolulu, trustee, hereinafter called "the board," which holds certain property conveyed by the trust deed as security for obligations of settlor for the faithful performance of two public contracts entered into with the board; D.L. Conkling, treasurer of the City and County of Honolulu, who claims a lien upon certain of the trust property to secure payment of certain improvement district assessments; the City and County of Honolulu, the petitioner in a proceeding in eminent domain involving certain of the trust property; Patricia Lord, the present wife of settlor; and sundry judgment creditors of the settlor.
The bill recites that on April 27, 1926, Mrs. Lord procured a divorce from the settlor; that the decree of divorce directed the settlor to pay to her $500 per month as alimony and for the support and education of her daughter Mary, *Page 28 then a minor; that on December 22, 1930, the settlor conveyed to the Hawaiian Trust Company, Limited, as trustee, certain real property, and, by supplemental trust indenture dated December 26, 1930, conveyed to the trustee certain additional property to be held and administered as a part of the trust estate under the trust deed of December 22, 1930, the trust property being described in the two documents named, which documents are appended to the bill of complaint.
The terms, purposes and conditions of the trust deed which substantially bear upon the present controversy are as follows: "That the settlor, in consideration of his love and affection for his former wife, Elvira May McNally Lord, sometimes referred to herein as May Lord, and of her children by the settlor, to-wit, Albert Edmund Lord, George Marion Lord and Mary Virginia Lord, hereinafter called the `Beneficiaries,' and also in consideration of the terms, covenants and conditions in this instrument expressed on the part of the trustee to be observed and performed, does hereby grant, assign, transfer, set over and deliver unto the said Hawaiian Trust Company, Limited [here follows description of property transferred], * * * TO HAVE AND TO HOLD the same and all proceeds thereof and all property whatsoever into which the same, or any part thereof, at any time or times may be resolved by investment, reinvestment, exchange or otherwise, unto the said trustee and its successors in trust hereunder subject to the terms, conditions, charges and powers hereinafter mentioned and upon the following uses and trusts, namely: (1) To hold and manage the trust estate and to receive the rents, profits and income thereof and to pay from said property and from said rents, profits and income, all expenses and disbursements properly chargeable thereto respectively and to deal with and dispose of *Page 29 the remaining rents, profits and income in the manner and for the uses and purposes hereinafter set forth. (2) On behalf of the settlor to perform, pay and discharge the obligations of the settlor required and imposed by the provisions of the decretal order of divorce on, to-wit, April 27, 1926, entered in the Division of Domestic Relations of the Circuit Court of the First Judicial Circuit in the matter of May Lord vs. Edmund J. Lord, Divorce No. 10638, in respect to alimony payable the libellant, May Lord, and support, maintenance and education of the beneficiary, Mary Virginia Lord, as the same now exists, or may hereafter be duly amended. (3) In the event of said decretal order of divorce in respect to alimony and/or support, maintenance and education of the said beneficiary, Mary Virginia Lord, becoming unenforceable or inoperative in whole or in part in respect to either the said Elvira May McNally Lord or to the said Mary Virginia Lord for any cause whatsoever, or the provisions thereof becoming insufficient for the purposes thereof in the judgment of the trustee, the following provisions in respect to the said Elvira May McNally Lord and/or the said Mary Virginia Lord shall respectively apply in lieu of and/or in addition to the provisions of said decretal order of divorce. (a) Out of the net income of the trust estate, to pay to the said Elvira May McNally Lord for and during the term of her natural life all sums necessary for the proper maintenance and support of the said Elvira May McNally Lord with full power and discretion vested in said trustee as to what may be necessary for her proper maintenance and support in so far as the same relates to the trust fund hereby created. (b) Out of the net income of the trust estate, to pay to or for the account of the said Mary Virginia Lord all sums necessary for the proper education maintenance and support of the said Mary *Page 30 Virginia Lord for the joint lives of her mother, Elvira May McNally Lord and the settlor and the survivor of them, with full power and discretion vested in said trustee as to what may be necessary for the proper education, maintenance and support of the said Mary Virginia Lord in so far as the same relates to the trust fund hereby created. (4) In the event of any net income remaining after the observance, performance and discharge of the directions contained in paragraphs two (2), three (3), three a (3a) and three b (3b) hereof, to pay to or for the account of the said Albert Edmund Lord and to or for the account of the said George Marion Lord for the joint lives of their mother, Elvira May McNally Lord and of the settlor and the survivor of them, all sums necessary for the proper maintenance and support of the said Albert Edmund Lord and the said George Marion Lord with full power and discretion vested in said trustee as to what may be necessary for the proper maintenance and support of the said Albert Edmund Lord and the said George Marion Lord in so far as the same relates to the trust fund hereby created. In the event of any of the beneficiaries, Albert Edmund Lord, George Marion Lord or Mary Virginia Lord predeceasing their mother and the settlor and the survivor of them, leaving child or children him or her surviving, to pay to or for the account of such surviving child or children of such deceased beneficiary all sums necessary for the proper maintenance, education and support of such child or children with full power and discretion vested in said trustee as to what may be necessary therefor in so far as the same relates to the trust fund hereby created. The trustee shall not be obligated to keep payments made to a class equal between members of the same class. Any surplus income shall be accumulated and become part of principal. * * * (7) The Settlor *Page 31 hereby especially reserves to himself the rights (a) from time to time to change, modify or amend the provisions of this trust deed but not to revoke the same or to so change it that he will receive back any of the trust estate or any interest or income therefrom; (b) by written instrument to change the trustee under this instrument, whether named or appointed by virtue of this instrument or otherwise, and to appoint a new trustee in the place and stead of the trustee so relieved; and (c) to appoint a successor trustee to fill any vacancy which may occur in the office of trustee. Upon every appointment of a new trustee, the trust property and all interest thereof shall immediately become vested in the new trustee, and every such new trustee shall thereupon have all the powers, authority and discretion to perform the trust of these presents as though originally named in this instrument, and without necessity of any conveyance to it, him or her by the retiring trustee, if any. * * * (11) * * * (d) Upon the death of the said Elvira May McNally Lord and of the settlor, or the survivor of them, the trustee hereunder shall transfer and convey absolutely and in fee simple the remaining trust principal subject hereto and any unapplied income therefrom to those who shall be then surviving of the beneficiaries, Albert Edmund Lord, George Marion Lord and Mary Virginia Lord, and of the children and issue of deceased children of any of said beneficiaries who shall then be dead, said children and issue taking per stirpes by right of representation the share their parent would have taken if then surviving; provided, however, that in case any one or more of said beneficiaries, Albert Edmund Lord, George Marion Lord and Mary Virginia Lord, shall predecease their mother and the settlor and the survivor of them and leave no issue of his or her body him or her *Page 32 surviving, then and in every such case the trustee hereunder shall transfer and convey the portion of the trust principal and unapplied income, if any, which such issue would have received if in being or surviving, to those persons who would have been the heirs at law of such decedent in accordance with the laws of descent then obtaining in the Territory of Hawaii if he or she had died domiciled in said Territory at the time of said death of said Elvira May McNally Lord and of the settlor, or the survivor of them."
It is alleged in the bill that in June, 1932, the settlor ordered and directed the trustee named in the deed to deliver all of the property then comprising the trust to Thomas Desmond Collins; that shortly thereafter the trustee complied with these directions; that on August 19, 1932, by written instrument recorded in the office of the registrar of conveyances and filed in the office of the assistant registrar of the land court, the settlor, with the intent and as a preliminary step in a plan which he then had to change said deed of trust so as to cheat and defraud the petitioners out of any and all rights acquired and then held by them under said trust deed and to receive back all of the property then comprising the trust estate, purported to change said deed of trust, pursuant to the power reserved to him for that purpose, by naming and designating Thomas Desmond Collins as successor trustee to Hawaiian Trust Company, Limited, and purported to modify and amend said trust deed in such manner that petitioners were excluded from all benefits thereunder and all further interest in and to the property then comprising the trust estate and purported to authorize and direct the successor trustee to pay all of the net income of said trust estate to settlor's son, Albert Edmund Lord, during his life and upon his death to distribute all *Page 33 of said trust estate to such persons as the settlor's said son may by his will direct and appoint; that on August 19, 1932, Albert Edmund Lord did not have, and that the settlor well knew that he did not have, sufficient mental capacity to understand the meaning of said written instrument, was under the absolute control and direction of the settlor and did not have, as the settlor well knew, the mental capacity to exercise the power of appointment which the settlor had purported to vest in him by said written instrument; that at said time, for a number of years prior thereto and at all times hereinafter mentioned, Albert Edmund Lord was mentally incompetent, lived with and was dependent upon the settlor for support and maintenance, had no experience nor ability to conduct business, looked to and relied upon the settlor for advice and counsel in business matters, had no independent advice from counsel and was under the absolute control and direction of the settlor; that on the 16th day of September, 1932, within one month after the purported change in said trust deed making Albert Edmund Lord the sole beneficiary of said trust, with the intent and in furtherance of the plan to change said deed of trust so as to cheat and defraud petitioners out of all benefits thereunder and to receive back all of the property then comprising the trust estate, the settlor caused and compelled Albert Edmund Lord to execute a written instrument by which he purported to convey to the settlor all of the right, title and interest, whether legal or equitable, to which he was or might be entitled by virtue of said trust deed as changed and modified, and directed the successor trustee to assign and convey to the settlor all of the property then comprising the trust estate, in consideration of which the settlor agreed to pay to the said Albert Edmund Lord $100 per month for the term of his natural life; that the successor *Page 34 trustee, purporting to act pursuant to the authorization aforesaid and acting with full notice and knowledge of all of the provisions of the trust deed of December 22, 1930, transferred and delivered to the settlor all of the personal property then forming part of said trust estate and by a written instrument, dated September 16, 1932, recorded in the office of the registrar of conveyances and filed in the office of the assistant registrar of the land court, purported to convey to the settlor all of the real estate then forming a part of the trust estate and at the same time and as part of the same transaction, for a recited consideration of $10, Albert Edmund Lord purported to release, remise and quitclaim unto the settlor all of his estate, right, title and interest, both legal and equitable, in and to said property and that no consideration whatever was paid therefor by the settlor; that Albert Edmund Lord acted without knowledge and understanding of the effect of his acts and under the absolute control and direction of the settlor; that by reason of the execution and delivery of the instruments and the performance of the acts aforesaid by the settlor, Albert Edmund Lord, and the successor trustee the settlor acquired the possession and control of and the legal title to all of the real and personal property comprising the said trust estate and that on and after September 16, 1932, the petitioners were deprived of and since said date have received no income or benefit whatever from the trust estate; and that petitioners have been informed and believe and upon such information and belief allege that during a considerable period of time immediately preceding the date of the bill the settlor has failed to pay to Albert Edmund Lord the $100 per month or any other sum of money whatsoever and that the said Albert Edmund Lord is now destitute, *Page 35 incapable of self-support and wholly dependent upon his mother, one of the petitioners, for maintenance.
It is further alleged by Mrs. Lord that the settlor has failed and refused to make the payments which became due and payable to her by the terms of the divorce decree aforesaid for a period in excess of one year prior to March 31, 1937; that on March 31, 1937, she filed an action against the settlor in the circuit court, law number 15360, in which she asked, and on May 4, 1937, was granted, a judgment against the settlor for all installments which were then overdue and that the settlor has failed and refused to pay said judgment or any part thereof and has failed and refused to pay all or any part of the installments which became due by the terms of said decree from and after May 4, 1937, to the date of the bill.
The bill of complaint further avers that subsequent to September 16, 1932, the settlor, pretending to be the owner of the trust res, by sundry conveyances made at different times prior to the institution of the present suit, purported to sell, transfer, assign or hypothecate all of the trust property to the respondents the New York Life Insurance Company, the board of water supply of the City and County of Honolulu and to John S. Grace, trustee, for the benefit of the settlor and certain of his creditors. It is further alleged that the respondents, in dealing with the settlor in relation to said trust property, did so with full knowledge and notice of the rights of petitioners in and to all of the property described in the trust deed of December 22, 1930, and with full knowledge and notice of all of the terms and conditions of said trust deed, including the provisions of paragraph seven thereof. It is further alleged in the bill that Grace Brothers, Limited; Honolulu Iron Works Company; the Hawaiian Electric Company, Limited; Honolulu Construction and *Page 36 Draying Company, Limited; Lewers Cooke, Limited; Island Welding and Supply Company, Limited; Ready-Mix Concrete Company, Limited; Hawaiian Bitumuls Company, Limited; Oahu Railway Land Company; Walker Olund, Limited; Tidewater Associated Oil Company, associated division, successor by merger to Associated Oil Company; Ralph E. Woolley; Rudolph W. Benz; Rodney T. West and T.T. Tanaka claim to have some interest adverse to the interests of petitioners in and to the real and personal property conveyed and assigned to the said board as beneficiaries under certain trust indentures executed by the settlor to said board and that some of the respondents above named and the Standard Oil Company of California; J.C. Hardy; L.T. Abshire; Frank Nichols; David A. Alama and Solomon Kam claim to have some interest adverse to the interests of petitioners in and to the property described in and conveyed by the deed of trust of December 22, 1930, by virtue of judgments that they have secured and docketed against the settlor or by virtue of the aforesaid assignment to John S. Grace, trustee, and that the respondent Patricia Lord claims to have some interest adverse to the petitioners in and to all of said property but that all of said respondents claim by, through or under the settlor and that none of them are innocent purchasers for value.
D.L. Conkling, treasurer of the City and County of Honolulu, is alleged to claim a lien upon certain of the trust realty for improvement district assessments and the City and County of Honolulu has pending a proceeding in eminent domain to acquire by condemnation a part of the lands in question.
The language of paragraph seven of the trust instrument is not entirely free from ambiguity. It reads in part: "The Settlor hereby especially reserves to himself the *Page 37 rights (a) from time to time to change, modify or amend the provisions of this trust deed but not to revoke the same or to so change it that he will receive back any of the trust estate or any interest or income therefrom."
The appellants urge that while the settlor could not have entirely revoked the trust deed he had the reserved power to revoke the provisions thereof granting benefits to the appellees. The appellees do not so construe the effect of the trust instrument. They assert that paragraph seven prohibits the revocation of the grant to them of sufficient of the trust net income for their proper maintenance, etc., as provided for in paragraph three of the trust deed during the life of the trust.
The trial judge held that Mrs. Lord and Mary Lord took a vested right in the annuity granted to them by the settlor which was indefeasible through any act of the settlor during the period of the trust as fixed by the trust document.
The leading cases coming to our attention which deal with the powers of a settlor to shift the economic benefits of a trust estate from the original donees to others, as well as the power of a donor to terminate a trust, are: Porter v. Commissionerof Internal Revenue, 60 F.2d 673 (affirmed 288 U.S. 436);Cross v. Nee, 18 F. Supp. 589; Brady v. Ham,45 F.2d 454; Cover v. Burnet, 53 F.2d 915; Faulkner v. IrvingTrust Co., 246 N.Y.S. 313.
It is clear from the language employed by the settlor that his primary and dominant purpose in creating the trust was to provide maintenance for his former wife, maintenance and education for his daughter Mary, and maintenance for his two sons Albert and George. He acknowledged the financial obligation to his divorced wife as fixed by the decree of the circuit court in the divorce *Page 38 proceedings already adverted to and expressly declared that the moving consideration for the establishment of the trust was his love and affection for his former wife and his three children.
But regardless of whether the trust deed in question conferred upon the appellees a vested annuity of which they could only be divested upon the termination of the trust pursuant to the provisions of the trust deed as held by the trial judge or whether the settlor possessed the reserved power to revoke the provisions of the deed conferring beneficial rights upon the appellees, and upon entirely different grounds, the demurrers should have been overruled and the order appealed from must be sustained.
The settlor, by the most clear and explicit language, put it beyond his power to revoke the trust or to take back to himself the trust corpus or any income therefrom. However he did both with thoroughness and dispatch. On August 19, 1932, he named Collins successor trustee to the Hawaiian Trust Company, Limited, removed Mrs. Lord and Mary Lord as beneficiaries and designated his son Albert Edmund Lord, an imbecile, sole beneficiary of the trust estate. On September 16, 1932, he and his son Albert executed a joint document by the terms of which Albert conveyed all of his interest in the trust property to his father and directed Collins to convey to the latter the equitable estate therein and E.J. Lord agreed to pay to his son the sum of $100 per month during his lifetime. Thereafter, and on the same day, Collins transferred to E.J. Lord, for a nominal consideration, his equity in all of the trust property, Albert joining in the conveyance of the trust realty, so that within a period of thirty days and as a result of these several transactions E.J. Lord not only became the owner of the entire trust res but completely revoked and terminated the trust. He attempted *Page 39 to do by circuity that which he could not do directly. Where a person does an act he is presumed in so doing to have intended the natural consequences thereof. Or, stated differently, where the probable and ordinary consequences of a man's act will be to benefit himself to the injury of others his intention to produce the result may be legitimately inferred. (Holmes, et al. v.Holmes, et al., 37 Conn. 278.) It is proper to infer from the circumstances divulged by the bill of complaint in the case at bar that E.J. Lord, in August, 1932, deliberately and by a preconceived scheme and device and in defiance of the plain terms of his trust document, set about, through the medium of a facile donee, to reinstate himself as owner of the entire trust property as well as to destroy the trust itself. Equity, therefore, will inquire whether the limitations on the power of the settlor, as defined in the trust document, have been transcended and the rights of third parties violated. It is a maxim that equity regards the substance rather than the form. The parties are not to be sacrificed to the mere letter but the intent or spirit of the transaction will, at least in equity, be the paramount consideration. Equity goes behind the form of a transaction in order to give effect to the intention of the parties and to impose a liability as against an evasion by a formal concealment of its true character. (19 Am. Jur. 318; 21 C.J. 204; Texas v.Hardenberg, 77 U.S. 68, 89.)
In Brady v. Ham, supra, a case where the settlor reserved the right to designate other beneficiaries than those named in the trust instrument except herself, the court held that "she [the settlor] could not take it [the trust property] back, eitherdirectly or indirectly." (Italics supplied.)
The opinion in Faulkner v. Irving Trust Co., supra, is strongly relied upon by appellants. The federal circuit *Page 40 court of appeals of the second circuit, in an opinion written by Judge Learned Hand, in Porter v. Commissioner of InternalRevenue, supra, commented upon the Faulkner case in the following significant language: "In Faulkner v. Irving Trust Co.,231 A.D. 87, 246 N.Y.S. 313, the settlor could not revoke until he was thirty-five years old, but by changing the beneficiary and getting the consent of the substitute, he avoided the limitation. The Court of Appeals of that state has not, however, passed upon the point, and we are not entirely satisfied that the rights of existing beneficiaries can be circumvented by such a device. It may eventually be held that while the donee of the power is at liberty to revoke and reappoint at his pleasure, his choice must not violate the condition upon its exercise, either directly or indirectly. If so, the original interests are defeasible only when the settlor does not profit by the change, and equity will inquire whether this limitation has been observed, or whether the whole contrivance is in violation of the trust." The opinion of the State court of New York in theFaulkner case is supported by neither authority nor reason and we not only share the federal circuit court of appeal's skepticism of the doctrine announced but refuse to adopt it as the law of this jurisdiction.
All of the several documents mentioned were promptly placed of record and it is alleged in the bill that the appellants dealt with E.J. Lord with full knowledge and notice of the rights of the appellees in the trust property and of the limitations upon Lord's power to deal with the trust property as set forth in his trust deed. In the light of these facts the appellants could not have been innocent purchasers without notice but on the contrary dealt with the settlor and the trust property with notice and at their peril. We think it would savor of extreme and unwarranted *Page 41 technicality to refuse to see in the bill of complaint sufficient to entitle the appellees to a trial upon the facts.
Assuming, as we must in the consideration of the demurrer, the truth of the allegations of the bill of complaint, it is obvious that the document executed by E.J. Lord on August 19, 1932, and the transfer by Collins to Lord and the joint document executed by Lord and his son on September 16, 1932, were void and the trust property must be administered under the provisions of the original trust executed by E.J. Lord and dated December 22, 1930.
The remaining issues, which may be termed the secondary questions raised by the demurrers of appellants, have all been carefully and fully considered with the result that we deem them to be without merit.
The order appealed from is sustained and the cause is remanded to the lower court for further proceedings.