Hartman v. Hartle
125 N.J. Eq. 218 (1923)
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Rule of Law:
A trustee or executor is prohibited from purchasing property from the estate they administer, and this prohibition extends to their spouse, unless prior court approval is obtained. If such a sale occurs and the property is later sold to a bona fide purchaser, the trustee and their spouse are liable to the beneficiaries for any profits gained from the transaction.
Facts:
- Dorothea Geick died, and her will directed her executors, her two sons-in-law, to sell her real estate and divide the proceeds equally among her five children.
- On February 9, 1922, the executors held a public auction and sold a farm belonging to the estate.
- The official buyer was Lewis Geick, one of the testatrix's sons.
- Lewis Geick was secretly acting as an agent for his sister, Josephine Dieker, who was the actual purchaser.
- Josephine Dieker was the wife of one of the executors who was administering the sale.
- On April 11, 1922, approximately two months after the auction, Mrs. Dieker sold the farm to an unrelated party, Mike Contra, for $5,500, realizing a profit of $1,600.
Procedural Posture:
- One of Dorothea Geick's children filed a bill in the Court of Chancery of New Jersey, the trial court for this matter.
- The complainant sued the estate's executors and her sister, Josephine Dieker, seeking to set aside the sale of a farm.
- The Court of Chancery held a hearing on the matter.
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Issue:
Does an executor's sale of estate property to their own spouse, without prior court authorization, constitute a breach of fiduciary duty that entitles the estate's beneficiaries to the profits from a subsequent resale of that property?
Opinions:
Majority - Foster, Y. C.
Yes. An executor's sale of estate property to their own spouse without prior court approval is a breach of fiduciary duty. It is settled law that a trustee cannot purchase from himself at his own sale, and his wife is subject to the same disability unless leave to do so has been previously obtained from the court. Because the property was subsequently conveyed to an innocent purchaser, a resale cannot be ordered. As an alternative remedy, the executors and the purchasing spouse will be held to account for the profit made on the resale, and the complainant is entitled to her one-fifth share of that profit.
Analysis:
This case reinforces the strict fiduciary duty of loyalty that a trustee owes to beneficiaries. The court applies the 'no-further-inquiry' rule, meaning the transaction is voidable based solely on the trustee's conflict of interest, without considering the fairness of the price or the trustee's intent. The decision illustrates the court's equitable power to craft a remedy when the property cannot be returned because it has been sold to a bona fide purchaser. By ordering the disgorgement of profits, the court protects the beneficiaries' interests while also protecting the title of the innocent third-party buyer.
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