Scottish Court of Session Decisions

William Kerr and John Kerr, trustees and executors of James Kerr, who died on 9th September 1905 possessed of, inter alia, the farm of Shenrick in the Stewartry of Kirkcudbright, presented a petition under the Trusts (Scotland) Act 1867 (30 and 31 Vict. cap. 97), sec. 3 ( supra, in rubric), for authority to borrow on the security of Shenrick money to pay off the balance of a loan, granted by bankers in Mansfield, Nottinghamshire, to the testator in security of which they held an equitable mortgage of the said farm. At the date of the petition this balance, including interest, amounted to £1662, 11s. 7d., the amount due at the testator's death having been £1562, 2s. 6d.

The following narrative of the facts and summary of the material clauses of the trust-disposition and settlement is taken from the opinion of Lord Stormonth Darling—“This is a petition by the trustees of a gentleman who died comparatively young in possession of a small estate in the stewartry of Kirkcudbright which he had purchased for £3500. He was also possessed of certain real property in England, where he had carried on business at Mansfield, in Nottinghamshire. He died leaving a widow, a son, and three daughters. By his trust-disposition and settlement he conveyed his whole estate to trustees, and directed them to pay an annuity to his widow until the attainment of majority by his youngest child, to convey to his son on his attaining majority his farm of Shenrick in Kirkcudbright, free of the expenses of the conveyance and of succession or other duties, and on his youngest child attaining majority to pay one-third of the residue of his estate to his widow if then alive and not re-married, and the other two-thirds, or, if his wife were dead or had re-married, the whole, equally among his children other than his son who was to get Shenrick. The only other clauses to which I need refer are the first, which provided ‘That my said trustees shall from the readiest of my moveable means and estate pay all my just and lawful debts (excepting any bonds or mortgages on my heritable properties) …;’ and a clause by which he gave his trustees ‘express power to borrow money from time to time for repaying bonds or mortgages on my heritable property which may be called up, and to grant … bonds or mortgages over said heritable property for that purpose.’ The position in which the truster's estate stood at his death was this. He possessed real property in England burdened by two equitable mortgages and by no other encumbrances. He also possessed the farm of Shenrick, in Scotland, the titles to which he had deposited with a banking firm at Mansfield, executing in their favour another equitable mortgage as security for certain advances which at his death amounted to £1562, 2s. 6d. These equitable mortgages had the effect of giving the lenders power to demand at any time that they should be converted into legal mortgages. The bank which held this equitable mortgage did not demand the execution of any legal mortgage, and have now called up the money due at his death, namely, £1562, 2s. 6d. The trustees' desire is to obtain the authority of the Court to borrow money on the estate of Shenrick for the sum due under this equitable mortgage, which (we are told) was actually expended in part payment of the price of Shenrick, and the question is whether this is ‘not inconsistent with the intention’ of the trust, there being no doubt of its expediency for the execution of the trust.”

On 28th November 1906 the Lord Ordinary ( Ardwall) remitted to Arthur B. Paterson, W.S., to examine into the facts and circumstances stated in the petition, and to report as to the propriety of granting the powers craved by the trustees.

On 15th January 1907 Paterson reported that in his opinion it was expedient for the execution of the trust, and not inconsistent with the intention thereof, that the petitioners should be authorised to borrow on the security of Shenrick the sum of £1562, 2s. 6d., being the amount of the debt to the bank as at the date of the testator's death, but that, as the truster's intention was that the interest on his heritable debts should be paid out of the income of his general estate, and as the clause providing for the widow's annuity continued “and any remaining income which there may annually be I direct my said trustees to apply to the reduction of any debt which there may be secured on my heritable property,” he did not think that the interest accrued since the date of death should be included in the charge.

On 16th January 1907 the Lord Ordinary ( Ardwall) appointed The Right Honourable Lord Kinross to be curator ad litem to the pupil son, and on 1st February 1907 answers were lodged for the curator ad litem which, inter alia, stated—“The respondent avers that the question whether the equitable mortgage in question is a bond or mortgage on or over the testator's heritable property falls to be determined by the lex rei sitœ, viz., the law of Scotland, and that according to the law of Scotland such equitable mortgage is in no sense a bond or mortgage over the testator's heritable property, but merely imports a personal obligation on the part of the testator to repay the debt referred to therein, coupled with an undertaking to execute a good and effectual mortgage security of the estate of Shenrick, if called upon to do so, which undertaking the testator was never called upon to fulfil, or at all events never fulfilled. …. The respondent contends that in respect that the said loan is not secured by a bond or mortgage over the testator's heritable property, it falls to be dealt with by the trustees under the first trust purpose of his trust-disposition and settlement, and therefore to be paid out of ‘the readiest of the testator's moveable means and estate.’ …. In these circumstances the respondent humbly submits that the petition should be refused, in respect that the power

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to borrow, which the petitioners seek to obtain, is inconsistent with the intention of the trust, in terms of section 3 of the Trusts (Scotland) Act 1867.”

On 12th February 1907 the Lord Ordinary ( Guthrie) refused the prayer of the petition.

Opinion.—“The parties are agreed that the truster's domicile was Scotch, and the petitioners do not maintain any argument founded on English law. They claim that, on a sound construction of the late Mr Kerr's trust-disposition, the powers to borrow on the security of the truster's property of Shenrick which they ask are not inconsistent with the intention of the trust. No question is raised as to the powers asked being expedient for the execution of the trust.

The clause in question runs thus—‘I hereby give power to my said trustees to sell for the purposes of the trust all or any part of my said estate, and also power to feu and excamb lands, and express power to borrow money from time to time for repaying bonds or mortgages on my heritable property which may be called up, and to grant bonds or mortgages over said heritable property for that purpose.’

The powers asked are to be used in borrowing to pay off a sum of £1662, 11s. 7d. due to the Union of London and Smith's Bank, Limited, for which an equitable mortgage was executed by the deceased in favour of the bank on 15th February 1900. If the clause above quoted expressly authorises the trustees to borrow on Shenrick to pay off equitable mortgages in general, then the petitioners do not require the powers asked. If, on the other hand, the power to borrow to pay off mortgages is so expressed as to exclude equitable mortgages, it would appear to follow that to grant a power to borrow to pay off equitable mortgages would be inconsistent with the intention of the trust.

On the question of the true construction of the clause as argued before me, it was scarcely maintained that, apart from the special circumstances, the word ‘mortgages’ used in a clause conferring power to borrow to repay mortgages on heritable property would cover equitable mortgages. These are deeds which may be made to affect heritable property by the subsequent granting of legal mortgages, but until that is done there is nothing but an undertaking to execute a legal mortgage. If so, it is obvious that such deeds cannot, in the absence of special intention, be included in the expression ‘mortgages on heritable property’— Kennard v. Futroye, 1860, 29 L.J. Ch. 583.

But the petitioners argue that there is sufficient evidence within the trust-disposition and in the admitted facts to show that the truster intended the above expression to include the particular equitable mortgage in question. They found on these facts (1) the money borrowed under this equitable mortgage was used for the purchase of Shenrick; (2) the deceased had no other mortgages except equitable mortgages. The first point does not carry the petitioners far, and the force of the second point is destroyed by the fact that while he provides for repaying bonds on his heritable property, he never had any such bonds. The words of the will do not seem to me to imply the existence at its date either of bonds or mortgages, but only that at his death such deeds may exist.”

The petitioners reclaimed.

The question as to the interest accrued on the loan since the testator's death was not referred to in the Inner House.

Argued for the petitioners—An equitable mortgage by deposit of deeds was a good security according to the law of England, and where as here accompanied by an agreement to execute a legal mortgage entitled the equitable mortgagee to either sale or foreclosure— Underwood v. Joyce, 1861, 7 Jur. (N.S.) 566; James v. James, 1873, L.R. 16 Eq. 153; Backhouse v. Charlton, 1878, 8 Ch D 444; York Union Banking Company v. Artley, 1879, 11 Ch. D. 205. The testator must be presumed to have known that equitable mortgages were good securities by the law of the country where they were granted. There was a strong presumption that he intended to include equitable mortgages in the expression “bonds or mortgages,” for they were the only mortgages he had granted; they contained an express obligation to give a legal mortgage if called upon, which was transmissible against executors; the particular equitable mortgage in question was granted for the purpose of borrowing money to pay for Shenrick, and the result of the contrary being held would be that the son would get a disproportionate amount of his father's estate. The question was not whether the equitable mortgage on Shenrick was by the law of Scotland a valid hypothecation, but whether the testator intended to include in “bonds or mortgages on my heritable property” the equitable mortgage on Shenrick.

Argued for the respondent—-The question whether any heritable subject is validly hypothecated fell to be determined by the law of the country where it was situated. By the law of Scotland infeftment was necessary for the hypothecation of immovables— Christie v. Buxton, June 27, 1862, 24 D. 1182. The personal obligation in the equitable mortgage transmitted against the executors and not against the heir, and the position was analogous to that if a portion of the price had remained unpaid. Even by the law of England the obligation here was not a mortgage— Kennard v. Futroye, 1860, 29 L. J. Chan. 583.