Scottish Court of Session Decisions

James Ritchie, sometime merchant in San Francisco, thereafter residing in Newton-upon-Ayr, died on 27th May 1871. He left a trust-disposition and settlement, dated 6th June 1871. By this deed he appointed his brother Joseph Ritchie, Gavin Gemmell, banker in Ayr, James Bowie King, residing in Ayr, and Alexander Cuthbert, shoemaker, Ayr, his trustees. The trustees were directed to hold his estate for the alimentary liferent use of his brother Joseph Ritchie, and his wife Margaret Boyd or Ritchie, and the survivor, and on the death of the survivor for the use and behoof of Alexander Ritchie, the only child of the marriage, and any other children that might be born, in fee. The trust-deed contained a clause empowering the trustees “to invest the trust funds in any of the Government securities, or upon heritable security in Scotland, or in such other way, or on such other securities as my trustees shall think proper, and to continue the investments, or to vary or alter the same from time to time at their discretion:… And I hereby provide and declare that my trustees shall not be liable for the solvency of any person or persons to whom they may sell or dispose of any part of the trust-estate, or to whom they may lend any part of the trust-funds, further than that such person or persons were habit and repute solvent at the time of transacting.” The amount of the trust-estate was between £10,000 and £12,000. All the trustees accepted office. Joseph Ritchie died in 1876, and James Bowie King in 1877.

This action was raised in 1887 at the instance of Mrs Margaret Boyd or Ritchie and her son Alexander Ritchie, against Alexander Cuthbert, as trustee under James Ritchie's settlement, and as an individual, and Alexander King, as executor of James Bowie King. John Milligan and Thomas Gemmell, trustees who had been assumed to act under the said settlement, were also called as defenders, but the conclusions of the action were not directed against them.

The conclusions of the summons were (1) that the trustees were not entitled to make any payments to the deceased Joseph Ritchie in excess of the free income of the estate of the deceased James Ritchie, and that the trustees were liable to replace payments which had been made to him out of capital; (2) that the trustees were not entitled to lend any part of the trust funds to Joseph Ritchie, and that they were liable to replace a sum of £1000 so lent; (3) that the trustees were not entitled to invest the trust funds, or any part thereof, in the purchase of stock of the Anglo-American Telegraph Company (Limited), or to deposit the trust funds, or any part thereof, with the Scottish Amicable Heritable Securities Association (Limited), and that they were personally liable to make good to the pursuers the amount of the loss occasioned by part of the trust funds having been invested and deposited in this manner.

Defences were lodged for Cuthbert.

With regard to the first conclusion the Lord Ordinary remitted the accounts of the trust-estate for audit, by agreement of parties, and it is not necessary further to refer to this conclusion.

With regard to the other conclusions the pursuers averred—“(Cond. 6) Further, the said trustees were not entitled to lend any portion of the trust funds under their charge to one of their own number. At a meeting of the said trustees, held on 3d July 1872, an application was made by the said Joseph Ritchie, one of the trustees of the deceased, for a loan of £1000 out of the trust funds on the security of a villa in Ayr, then in course of erection. As appears by the minute of the said meeting this application was granted, and a bond and disposition in security, dated 9th August 1872, was afterwards executed by Joseph Ritchie in favour of himself and his co-trustees. No valuation was obtained of the property which forms the subject of the said security, nor any means taken by the said trustees to ascertain its true value. In point of fact it was an entirely insufficient security for the amount contained in the said bond.”

The defender in answer stated—“The said Joseph Ritchie after the truster's death determined to erect for the occupation of himself and family a house in the town of Ayr suitable to the income which, through his brother's bequest, he and they were to enjoy, and with the approval and concurrence of his wife, the pursuer Mrs Margaret Boyd or Ritchie, he applied to the trustees for an advance on the security of said house. Knowing that the trust funds had been left by the late James Ritchie for the comfort in life of his brother and his family, and believing that they would have been entitled to purchase a house for them, the trustees thought that it was their duty to comply with this request, provided the sum to be advanced was reasonable in amount, and that proper security was given therefor. Mr Joseph Ritchie erected the house known as Vancouver Lodge at a cost of £1300, and the trustees in 1872, when the bulk of the trust funds recently recovered from San Francisco were still in bank uninvested, advanced him £1000 on bond and disposition in security thereof. The said house was at the time ample security for that sum, and the defenders believe that it still is so. Mr Joseph Ritchie and his wife and family resided in it from 1872 till his death in 1876. The pursuers resided in it for some time after his death. The pursuer Mrs Ritchie has recently purchased a smaller house out of her own funds, into which the pursuers removed. Since then the pursuer Mrs Ritchie has let Vancouver Lodge at a rent of £45 a-year, which she has received and continues to receive. The house has been let for the current year at a rent of £50.”

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The pursuers also averred—“(Cond. 7) Further, the said trustees had no powers of investment beyond the ordinary common law and statutory powers of trustees. Notwithstanding, they invested large sums belonging to the trust-estate in trading companies which did not fall within their common law or statutory powers. On 20th January 1874 the defender Alexander Cuthbert and the deceased James Bowie King and Joseph Ritchie, who were the then acting trustees, resolved to invest a sum of £1000 or thereby in the stock of the Anglo-American Telegraph Company (Limited), and did actually on 30th January 1874 purchase that stock to the extent of £979, 8s. 2d. By a subsequent resolution the trustees on 29th October 1875 increased their holding in the said company to £2374, 19s. 1d. The said stock was sold on 18th February 1884 for £1182, 1s. 3d., being a nett loss of £1192, 17s. 10d. On 16th May 1876 the then acting trustees, Alexander Cuthbert and James Bowie King, lodged £1400 of the trust funds with the Scottish Amicable Heritable Securities Association (Limited) on deposit-receipt. That association is now in liquidation, and it is believed there will be a considerable loss on the said deposit.”

The defender in answer stated—“Explained that at a meeting of trustees held on 20th January 1874 Mr Joseph Ritchie, with his wife's concurrence, requested the trustees to invest a portion of the trust funds in the fully paid-up stock of the Anglo-American Telegraph Company (Limited), about which he had been making inquiries. Relying upon the advice which Mr Joseph Ritchie had obtained, and in the belief that they had power to make the said investment, the trustees complied with Mr Joseph Ritchie's request. Accordingly £1200 of said stock was purchased in January 1874 at a price of £979, 8s. 2d. In December 1874 Mr Joseph Ritchie, with the concurrence of his wife, requested the trustees to make a further investment of the trust funds in the purchase of another £2000 of the said stock. The trustees, on the same footing, complied with the request, and purchased said £2000 stock at a price of £1395, 10s. 11d., making with the previous investment £3200 stock purchased at a price of £2374, 19s. 1d. After Mr Joseph Ritchie's death, in compliance with the regulations of the company, it became necessary to transfer the said stock into a new name, and the question of retaining it was then considered by the trustees. Mrs Ritchie, who was then the liferenter of the trust funds, requested the trustees to retain the investment for her benefit, and the trustees resolved accordingly by minute of 10 th November 1876, which was signed by Mrs Ritchie in token of her request and concurrence. In 1880, there having been some depreciation in the value of said stock, the pursuers, Mrs Ritchie and her son, with her special advice and consent, executed a letter of request and guarantee, dated 26th October 1880, in which they requested the trustees (Messrs Milligan and Gemmell having then been assumed as additional trustees) to continue to retain the investment made at the request of Mr Joseph Ritchie, their husband and father, in the stock of the Anglo-American Telegraph Company, ratified and approved of the investment, and jointly and severally guaranteed the trustees against all risk, responsibility, loss, and damage thence arising. In 1883-84, the depreciation in the said stock having increased, the trustees, who were of opinion that the stock should be sold, again, in respect of their foresaia letter of guarantee, brought the matter before the pursuers, Mrs Ritchie and her son, at meetings on 30th May 1883 and 4th February 1884, the minutes of which are referred to, and obtained their consent to the realisation of the stock. The pursuer Alexander Ritchie was not present at said last meeting, but having received explanations from his mother he called some days later and signed a docquet of concurrence appended to it. He had then attained majority. The said stock was realised on 18th February 1884 at a price of £1183, 1s. 3d. The income from said stock was received by Mr Joseph Ritchie, and after his death by the pursuer, his wife, without objection.… On 16th May 1876 the investment of £1400 on deposit with the Scottish Amicable Heritable Security Association (Limited) was authorised by the trustees. This investment was within the powers of the trustees, and was selected in the exercise of their best discretion.”

The pleas of the pursuers were (1) that the actings of the trustees having been ultra vires and illegal, they were personally liable; and (2) that the trust-estate having suffered loss and damage through the illegal actings of the trustees, they were personally liable.

The defender pleaded—“(5) The actings of the trustees so far as complained of having been within their powers, and in bona fide exercise of their best discretion, and separatim, being protected by the terms of the testator's settlement, the defender is not liable for any loss which has been or may be incurred thereby to the trust-estate. (6) The actings of the trustees having been homologated by the pursuers, and separatim, the trustees having been guaranteed by the pursuers against any risk or loss which might arise therefrom, the defender is entitled to be assoilzied.”

The Lord Ordinary ( M'laren) on 16th August 1887 pronounced this interlocutor—“The Lord Ordinary having considered the cause, … Finds (2) that the loan of £1000 to Joseph Ritchie, one of James Ritchie's trustees, on heritable security ought to be carried to a suspense account, and directs the trustees to call up the said loan, and, if necessary, to exercise their powers of sale under the said heritable security, reserving all questions of ultimate liability for the loss, if any, arising out of said loan: Finds (3) that the investments in the purchase of Anglo-American Telegraph Company's stock, and in the loan of money to the Scottish Amicable Heritable Securities Company, were within the powers of James Ritchie's trustees: Quoad ultra continues the cause.

Opinion.—This is an action directed against the survivor of a body of trustees and the executor of a deceased trustee for the purpose of enforcing a claim of personal liability for alleged breaches of trust or errors of administration. Two trustees who were assumed into the trust at a later period in the administration are also called as defenders, but the conclusions of the action are not directed against them.

The truster James Ritchie, who died in May 1871, left all his property to his brother Joseph

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and his spouse and the survivor in liferent, and to their child or children in fee. Joseph died in May 1876 after enjoying the usufruct of his brother's estate for five years; and the present action is instituted by his widow and his son, an only child.

The errors of administration charged against Mr Cuthbert, the surviving trustee, and Mr King, the executor of a deceased trustee, are classed under three heads—(1) Treating certain sums as income which ought to have been placed to the credit of capital; (2) lending money to the liferenter Joseph Ritchie; and (3) investing a sum of money in the purchase of stock of the Anglo-American Telegraph Company, and lending another sum to the Scottish Amicable Heritable Securities Company. …

(2) The next question is the validity of the loan to Joseph Ritchie. The trustees say that Joseph Ritchie, after his brother's death, determined to erect a house in Ayr for the occupation of himself and family, and that they, knowing that the trust funds had been left by the late James Ritchie for the comfort in life of his brother and family, lent Joseph part of the trust funds on the security of the house. The cost of the house is stated by the pursuers to be £1109, 4s. 5d., and by the defenders to be £1300. The sum lent on the security of the house was £1000. The objection to the investment is that Joseph Ritchie was a trustee.

This is a very ungracious objection, coming as it does from the widow and son of the gentleman who was accommodated. It is, however, a valid objection if properly insisted in. Now, the pursuer Alexander Ritchie has become owner of the house, which is said to be a bad security, by inheritance, and to the extent of the estate inherited from his-father he is liable to make good his father's personal obligation in the bond and disposition in security. He ought therefore to pay up the bond and to allow the trustees to invest the money in other security. He has not done so. The trustees on record propose to call up the bond, and in my opinion this is the first step to be taken. It will then be seen whether there is a resulting loss for which the two first called trustees are liable.

I proceed to consider the objection taken to two other investments, and first as to the purchase of stock of the Anglo-American Telegraph Company

The pursuers' husband and father evidently had a high opinion of the credit and prospects of this company, because it was at his request that the two investments in its stock were made. These amounted to the nominal sum of £3200 purchased at the cost of £2374, 19s. 1d. Eight years after Joseph Ritchie's death the stock was sold (at the request of the pursuers), and realised £1182, 1s. 3d., the transaction resulting in a loss of £1192, 17s. 10d., against which may be set the dividends drawn in excess of ordinary mortgage interest.

The first question is, whether the purchase of stock in a trading company is an investment in the sense of the power in the trust-deed? I think it is an investment. The word investment covers any employment of the trust money as capital—that is to say, as an income-producing fund. It is not limited to the case of a loan on security, otherwise the purchase of Government securities would not be an investment, which it undoubtedly is, according to the ordinary use of language.

As to the loan to the Scottish Amicable Heritable Securities Company, it is not disputed that this was an investment in the proper sense of the term; and then as to both investments the main question is, whether they are in excess of the power given by the truster to his trustees.

The power is quoted in answer 2. It purports to empower the trustees ‘to invest the trust funds in any of the Government securities, or upon heritable security in Scotland, or in such other way, or on such other securities, as my trustees shall think proper.’ Now, here it is at once seen that the trustees are not limited to what are called legal investments, but have a discretion given to them. Is there any limit to that discretion? There is none that I can see. If I were to say that under these words the trustees might invest in one class of stocks—railway stocks for example—but were not entitled to invest in telegraph stocks, I should not be interpreting the power, but would be setting up a power or a new order of legal investments, different from the recognised order, and not corresponding to anything written in the will.

I find in the will an absolute reference to the judgment of the trustees in the matter of the choice of investments outside those which the law has recognised as suitable investments for trust money. Such a reference to the judgment of persons selected by the truster, as good managers, is neither an illegal nor a senseless thing. Being legal and rational, the power ought in my opinion to receive effect. The trustees exercised their judgment by investing in Anglo-American Telegraphs and Scottish Amicable Debentures, which they deemed good investments, yielding somewhat higher interest than heritable securities; and in my opinion the truster's authority is an indemnity to them against such a claim as the present.

Of course if a trustee or a body of trustees were to abuse a power of this description—if, for example, they were to invest money in an undertaking which they knew to be bad, or which they had no reason to suppose to be good—the clause would not protect them. But no such charge is made in the present action. It would be unfortunate if powers of investment were interpreted otherwise than according to the natural meaning; because a testator ought not to be allowed to lay a trap for his trustees, inviting them to do something which the beneficiaries may either accept or repudiate according to the degree of success of the speculation. I am therefore for assoilzieing the trustees from this branch of the action.”

The pursuers reclaimed, and argued—The trustees had acted ultra vires in investing the trust funds in a trading company such as the Telegraph Company was. Under a general power of investment such as that in the trust-deed trustees had only power to invest in the manner authorised by law. Under no circumstances did the law allow them to invest in a trading company. It had been decided that trustees investing trust funds in a, trading company the liability of which was inlimited exceeded their powers, and investment in a limited liability company was subject to the same rule as it was merely a question of degree. In such an investment as this

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there was no one who was bound to repay loss, and that was essential in the case of investment by trustees. The depositing of the funds in the Heritable Securities Company was merely an advance upon personal security. It was decided by the Lord Ordinary that the loan to the deceased Joseph Ritchie was ultra vires, and that was right, but the loan ought not to be carried to a suspense account—Lewin on Trusts, 306, 316, 319; Grant v. Baillie, Oct. 27, 1869, 8 Macph. 77; Cochrane v. Black, Feb. 1, 1855, 17 D. 321; Brownlie v. Brownlie's Trustees, July 11, 1879, 6 R. 1233; Bon Accord, Marine Insurance Company v. Souter's Trustees, Dec. 11, 1850, 13 D. 295; Stewart v. Sanderson, Jan. 13, 1870, 10 L.R. Eq. 26.

The respondents argued—As regarded the loan of £1000 to Joseph Ritchie, even assuming that the loan of trust funds to a trustee was ultra vires, could this transaction be said to be of that nature? It was rather an investment by the trustees in the purchase of a house for the residence of the liferenter and his family. It would have been quite within the powers of the trustees to have purchased a house for that purpose, and this was just the same thing. In regard to the purchase of the telegraph shares, it came within the discretionary power given in the trust-deed. The word investment included the laying out of money to profit. There was no prohibition in the common law against trustees making such investments. The putting of the money into the Heritable Securities Company was just the same transaction as if it had been deposited in a bank, and that was lawful— Sanders v. Sanders' Trustees, Nov. 7, 1879, 7 R. 157; Grainger's Curator, Feb. 23, 1876, 3 R. 479; Seton v. Dawson, Dec. 18, 1841, 4 D. 310; Lamb v. Cochran and Others, March 23, 1883, 20 S.L.R. 575.

At advising—