Scottish Court of Session Decisions

John M'Gregor Buchanan and his wife brought an action of declarator and reduction against the trustees under his father's trust-disposition and settlement, and against the University Court of the University of Glasgow. The trustees did not appear.

The following narrative is taken from the opinion of the Lord Ordinary ( Johnston):—“The late James Buchanan, who died on 29th September 1897, left a settlement by which he conveyed to James Eaton, clothier, Bridge Street, Glasgow, his son George Buchanan, grain miller, Glasgow, and his second wife Mrs Jane Stewart or Buchanan, and three others who declined the trust, his whole estate, heritable and moveable.

He left three children and the issue of a fourth by his first marriage, and three children, including George Buchanan, the trustee, and John M'Gregor Buchanan, the pursuer, by his second marriage. His provisions for his family, after the usual direction to pay debts, were as follows:—In the second place he gave his widow the contents of a small policy of insurance on his life. In the third place he gave her the liferent of a heritable property in Glasgow, and of another in Girvan, and his furniture absolutely. In the fourth and fifth places he gave his widow alimony at the rate of £300 a-year, and an annuity of the same amount from the first term after his death. In the sixth place he directed his trustees to pay to the said John M'Gregor Buchanan, and to his wife and the survivor of them, an annuity of £200 a-year. And in the seventh and last place he directed his trustees, as soon as convenient after his decease, ‘to assign, dispone, convey, and make over to and in favour of my son George Buchanan the whole residue of my means and estate, heritable and moveable, real and personal, including my several businesses, but that always with and under the burden of the liferent before mentioned to my said wife of my properties in Glasgow and Girvan, and also under burden of the payment of the before-mentioned annuities to my said wife, and to my son John and his wife.’ He made no provision for his three children and the issue of his deceased child by his first marriage, or for his daughter by his second marriage, and expressly declared that the children excluded should have no right to any share of his estates. At the same time he declared that the provisions which he did make in favour of his wife and children should be in full of all claims to terce, jus relictœ, and legitim.

The testator's estate as given up for duty showed net moveable estate £2400, and net heritable estate £11,633. I am not informed what the amount of the legitim fund was, but it must have been something less than £2400, and as the testator was survived by a widow, the legitim divisible among his six surviving children must at best have been something under £800.

Those of his children who were cut out of his will claimed legitim, and they and the issue of his deceased child threatened an attack on the validity of the will. A settlement was come to between them and the trustees without consent of, or apparently making any communication to the annuitants, John M'Gregor Buchanan and his wife, under which £800 each was paid to the four surviving children excluded from the will, and £500 to the issue of the deceased Mrs Ramsay.

The sum required to make the payments under this agreement was £3700, which more than exhausted the moveable estate, and made it clear that the heritable estate must in some way be encroached upon. In point of fact the trustees resorted to borrowing, and instead of applying protan to the amount of the moveable estate they borrowed £4000, being the whole sum required and something more, from the University of Glasgow, and in security of the loan they granted to the University Court a bond and disposition in security dated 10th and recorded 12th February 1898 over the principal heritable subjects belonging to the trust, and situated at West Street and Dale Street, Glasgow.

This action has been raised at the instance of John M'Gregor Buchanan and his wife against the trustees and against the University Court of the University of Glasgow for declarator ( First) that under the seventh purpose of the testator's settlement the trustees, after providing for the primary purposes of the trust, were bound to convey and make over to the said George Buchanan the whole residue of the testator's estate, heritable and moveable, but under burden always of, inter alia, an annuity of £200 to the pursuers and the survivor of them, bequeathed by the sixth purpose of the settlement; and that in particular they were bound to convey to the said George Buchanan the heritable subjects belonging to the trust situated at West Street and Dale Street, Glasgow, subject to a real burden in favour of the pursuers and the survivor of them of the said annuity of £200; ( Second) that the bond and disposition in security granted by the trustees in favour of the University Court falls to be postponed to the said annuity in favour of the pursuers and the survivor of them, and that the said trustees are bound to execute and deliver all deeds, instruments, or writings necessary to render the said annuity a first charge or real burden on the said subjects. To these conclusions the

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trustees, had they appeared, would in my opinion have had no answer.

Then the summons craves further declarator that the disposition of said heritable subjects contained in the said bond and disposition in security is accordingly of no force and effect, at least in so far as it purports to affect or prejudice the rights of the pursuers and the survivor of them as annuitants foresaid, and is invalid to defeat their prior rights. And there is added a conclusion for reduction, so far as necessary, of said bond and disposition in security. In these latter conclusions the University Court is interested and they have appeared to defend.

Their defence is that the truster's settlement contained an ample power to borrow, and declaration that lenders should not be concerned with the application of the sums borrowed. The actual terms of the settlement in this respect are—‘and to enable my trustees to carry out the purposes of this settlement and of any codicils thereto, I confer upon them all requisite powers and particularly, but without prejudice to the said generality I empower them to sell my heritable estate in such lots, at such prices, and with such warrandice as they may think proper, and also from time to time to lend out the trust funds or any part thereof on such property, stocks, or securities, heritable or personal, as they may think proper, and to call up and change the said investments from time to time, to borrow money on security of the trust estate or any part of it, declaring that parties paying moneys to my trustees, whether on the realisation of my means and estate or otherwise, shall not be entitled to inquire into or see to the application of the same.”

The pursuers averred—“( Cond. 10) The whole transaction embodied in the bond and disposition in security was ultra vires of the trustees. They had no power under the trust—disposition and deed of settlement to borrow money on the security of the trust estate for the purpose of paying the extortionate claim of the testator's first family and of the said Mary Buchanan or M'Dougall whom he had disinherited. The power to borrow conferred on the trustees was subject to the proviso that it must be exercised in order to enable the trustees to carry out the purposes of the settlement. The said sum of £4000 was not borrowed in order to be applied to any of the purposes of the trust. On the contrary, it had the effect of defeating certain of these purposes, in respect that the disposition in security of the subjects at West Street and Dale Street to the University Court made it impossible for the trustees to convey that property to George Buchanan, as they were directed in the settlement to do under a primary burden of the annuity to the widow and the annuity to the pursuers. The transaction was therefore greatly to the prejudice of the annuitants. The transaction was accordingly an invalid one and the bond and disposition in security null and void. In any event, if the settlement with the testator's first family had been a proper one for the trustees to make, which it was not, it was the duty of the trustees to exhaust the moveable estate left by the testator, which as stated amounted to about £1600, before borrowing upon the security of any part of the heritable estate. They failed in the exercise of this duty, and the bond and disposition in security should in any event be reduced to the extent of the said sum of £1600. ( Cond. 11) It was the duty of the other defenders, the Glasgow University Court, before lending money to the trustees, to satisfy themselves by an examination of the settlement under which the trustees acted or otherwise, that the trustees had power to borrow on the security of the heritable estate of the trust for the purpose for which they proposed to apply the money borrowed. It was also the duty of these defenders, in view of the terms of the power to borrow in the settlement, to satisfy themselves that any moneys lent by them to the trustees upon the security of the heritable estate were applied in the carrying out of the purposes of the trust and not to a purpose which would greatly prejudice them. They entirely failed to perform their said duty. In point of fact the loan in question was arranged for and consented to by the University Court, and the bond and disposition in security was prepared without any warrant from the trustees at all. It is believed that the agents for the University Court, Messrs Mitchells, Johnston, & Company, writers, Glasgow, were not informed of the proposed transaction until a very short time before its completion, and that the trustees’ title and the titles of the property were only sent to them the day before the bond and disposition in security was engrossed for signature. The transaction was really carried through on behalf of both the trustees and the University Court by Dr Colquhoun, who was at that time a member of the Court. Had the University Court fulfilled their said duty they would have seen that the trustees had no power to borrow in the circumstances, and the transaction would not have been carried through. Further, the University Court took no steps whatever to see to the application of the money lent by them to the trustees. Had they done so they would have seen, as was the fact, that the money was not borrowed in order to be applied towards carrying out any of the trust purposes, but for the ostensible purpose of settling the claims of the testator's disinherited children, and further, that it was not so applied until months after the money was lent.”

The defenders, Glasgow University Court, pleaded—“(1) The pursuers' averments being irrelevant and insufficient to support the conclusions of the summons so far as directed against these defenders, the action should be dismissed as against these defenders. (2) The said bond and disposition in security having been granted by the deceased's trustees within the powers conferred upon them by his trust-disposition and deed of settlement, and these defenders having no duty to see to

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the application of the money lent by them thereunder these defenders are entitled to absolvitor.… (4) The said bond and disposition in security being valid and effectual, and constituting a first charge on the subjects thereby conveyed in security, the defenders are entitled to decree of absolvitor.”

On 23rd July 1908 the Lord Ordinary allowed a proof before answer.

Opinion—[ After the narrative above quoted]—“Unless the University Court is absolutely protected by the provisions of the trust-deed, the pursuers set forth a state of circumstances which in my opinion calls for inquiry. The transaction of borrowing was the work of the notorious James Colquhoun, LL.D., who was in 1898 the trustees' agent and at the same time a member of the University Court, and in point of fact chairman of the meeting of the finance committee of the Court, which on 8th February resolved to grant the loan of £4000 over the trust property. It would not be appropriate that I should say more—though I have read the correspondence and the minutes of the trustees and of the finance committee of the University Court produced—than what I have already stated, viz., that unless the terms of the trust settlement are absolute protection to the University Court, there is ample justification for inquiry into the circumstances under which the loan was granted.

There is not much authority in Scotland on the subject of what is incumbent on lenders who make advances to trustees on security of trust property. I think that there is a distinction drawn between heritable and moveable estate, and that though trustees have inherent power to realise moveable property, they have no inherent power to realise heritage belonging to the trust. As regards borrowing, they may have express power to borrow. If they have not express power to borrow, it is not very easy to define their position. But I think that it may be deduced from the case of Binnie's Trustees, 15 R. 417, and 16 R. (H.L.) 23, that where there is a direction to pay debts and no power to borrow, a power to borrow on heritable estate, after the moveable estate is exhausted, must be implied; and from the case of Macmillan v. Armstrong, 11 D. 191, that if trustees borrow in such circumstances the lender is concerned in the application of the money borrowed, for it was there held that the security will only be held good to the extent to which it can be shown that the money lent has been profitably applied for behoof of the beneficiaries, and will be reduced quoad ultra. I am not satisfied that the last cited judgment would now be repeated if it must be applied as I have applied it. But I am bound to accept it as an authority, and I think its necessary result is as I have stated it. But this does not help to solve the question—What is the responsibility upon a lender to trustees where the latter have express power to borrow? That they have no responsibility to follow the money and see it applied to the trust purposes where it has been properly borrowed, but afterwards misapplied or embezzled, there can be no doubt. But have they any responsibility for inquiring and satisfying themselves whether there is a trust purpose which justifies the borrowing? As matter of first impression I should say that the natural if not necessary course of business requires that lenders to trustees should have no further duty than to inquire whether the trustees have power to borrow, and should have no further concern to inquire into the trust management and the purposes for which it is proposed to apply the money any more than into its actual application. Yet when I look to the circumstances of the present case so far as disclosed, it would be with the utmost reluctance that I should apply such rule de plano, and without regard to circumstances. A fraud has been perpetrated upon beneficiaries, in that the security which the truster directed they were to have for their annuity has been postponed to a debt incurred by the trustees for money borrowed after the moveable estate had disappeared, and which was not required for a proper trust purpose. I think that there is much to lead to the inference that the transaction was made possible only because the agent of the trustees was at the time a leading and trusted member of the lenders' finance committee. He appears to have concluded his arrangement for borrowing with his finance committee after, to say the most, a very curt inquiry, two days before his proposal to borrow was placed before the trustees.

I accept what was said by the Master of the Rolls in the case of Elliot v. Merryman, 2 Atk. 43, quoted in Corser v. Cartwright. L.R., 7 E. & I. App. at p. 737—‘If there be a charge on the divisee in fee, taking an estate charged with the payment of debts alone, or debts and legacies, if he sells, the great convenience of mankind requires that it should be just as if an executor sells when property comes to him, unless it can be shown that the purchaser knew that the purchase money was not going to be so employed, and that he was ancillary to something like a fraud. It is to be presumed, because he may presume that the sale has taken place in the ordinary administration of the duties which were imposed upon the executor by the will.’ Applying this expression of opinion to the case of borrowing by trustees, I think that where trustees have express power to borrow—and personally I would add, notwithstanding the judgment in Macmillan v. Armstrong, supra, where they have implied power to borrow arising from the direction to pay debts—a lender may presume that the borrowing has taken place in the ordinary administration of the duties imposed upon the trustees by the settlement, unless it can be shown that the lender knew that the money borrowed was not going to be so employed, and so that he was ancillary to something like a fraud.

That Dr Colquhoun must be charged with that knowledge there can be little doubt. But it is a question how far the University Court are made responsible by

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their actings for the fraud to which he was ancillary.

I think therefore that there is sufficient ground to require that the facts should be definitely ascertained before the defenders' plea is disposed of.”

The defenders reclaimed, and argued—There was no relevant averment to go to proof. The case could be disposed of on consideration of the terms of the settlement, and on such consideration the defenders were entitled to be assoilzied. In general there was no obligation on a party lending to trustees to see to the application of the money lent—M'Laren on Wills and Succession (3rd ed.), sec. 1812. The case was all the more clear where there was an immunity clause in the settlement. The immunity clause here provided that parties paying money to the trustees should not be “entitled” to inquire into the application thereof. The power to borrow here was not conditional, except in the sense that every power given to trustees is conditional, i.e., only for the purposes of the trust. The annuity in favour of the pursuers, and the obligation to convey the estate subject to the annuity were no more than general obligations of the trust, and did not in the least affect the power to borrow in question with lenders. A lender or purchaser was entitled to presume that the money paid by him to the trustees was going to be applied in pursuance of the trust purposes. Even if the law of England had any application, it had been held there that there was no liability on the lender in respect of the misapplication of the money advanced by him, unless he could be shown to have known that the money was not to be applied to trust purposes— per Lord Cranworth in Colyer v. Finch, 5 H.L.C., cited in Corser v. Cartwright, 1875, L.R., 7 E. and I. App. 731 at p. 736. There was here no relevant averment of such knowledge on the part of the defenders. The knowledge of Dr Colquhoun could not be construed as knowledge of the defenders, but in any event the pursuer had laid his case on the defenders' failure to know. The cases of M'Millan v. Armstrong, December 6, 1848, 11 D. 191, and Binnie v. Binnie's Trustees, August 8, 1889, 16 R. (H.L.) 23, 26 S.L.R. 794, had no application because there there was no power to borrow, and the question was between trustees and beneficiaries; while the case of Galletly v. Ross, July 20, 1881, 18 S.L.R. 718, was a question as to whether trustee or beneficiary was vested so as to give a title to a third party.

Argued for the respondents—The case could not be disposed of without inquiry. It was the duty of a party lending to trustees on the security of trust estate, to satisfy himself as to the power to borrow. Macmillan v. Armstrong, cit. Even when there was unlimited power to borrow, express or implied, the trustees might be liable for loss, consequent on his exercise of his power. Binnie v. Binnie's Trustees, cit. Here the power to borrow was not absolute; it was limited. The clause conferring the power was introduced by the words “to enable my trustees to carry out the purposes.” The effect of that was that the obligation to convey, contained in the seventh purpose of the settlement, constituted a very material restriction on the power to borrow— Galletly v. Ross, cit. A general power could not override express direction— Galloway v. Campbell's Trustees, July 11, 1905, 7 F. 931, 42 S.L.R. 712, per Lord Stormonth Darling. Any lender making such examination of the power to borrow as he ought to have done would have seen that the loan in question was ultra vires without the concurrence of the annuitants. In England where the purposes of the will were specific, and not merely general, there was a duty on the lender to see to the application of the money. In re Rebbeck, 1894, 63 L.J. Ch. 596, 71 L.T.R. (N.S.) 74; Horn v. Horn, 1825, 2 Simons & Stuart 448, Lewin on Trusts, p. 532. Further, if the lender knew that the money was not to be applied to trust purposes, then he was liable for its misapplication— Corser v. Cartwright, cit.; Howard v. Chaffer, 1863, 32 L.J. Ch. 686. It was sufficient if the solicitor of the lender knew— Watkins v. Cheek, 1825, 2 Simons & Stuart 199. Here Dr Colquhoun, who acted as chairman of the finance committee of the University Court, knew that the sum to be borrowed would not be applied to trust purposes. The effect of the immunity clause was only to safeguard the lender if the money had been properly applied— Steven, Glen, &c., February 19, 1811, F.C.

At advising—