Mosser v. Darrow

1951-05-07

Headline: Ruling allows a personal surcharge against a court-appointed trustee who let employees trade trust securities, reversing the appeals court and upholding a $43,447 penalty that changes trustees’ duties and disclosure practices.

Holding: The Court held that a court-appointed trustee who knowingly allowed key employees to trade in and profit from trust securities can be personally surcharged, even without personal gain, and reversed the Court of Appeals.

Real World Impact:

Allows courts to hold trustees personally liable for permitting employee trading of trust securities.
Encourages trustees to disclose arrangements and seek court approval before risky transactions.
Pressures trustees to file regular accounts to avoid later surcharges.

Topics: trustees and conflicts of interest, securities trading, bankruptcy trusts, court oversight

Summary

Background

In 1935 a federal court appointed Darrow as trustee for two holding trusts whose main assets were securities of 27 subsidiary companies. He hired Jacob Kulp and Myrtle Johnson, who also ran Colonial Securities Corporation, and agreed they could continue personally trading the subsidiaries’ bonds. During the trusteeship they frequently bought bonds and then sold many to the trustee at a profit; Darrow sometimes paid before delivery and filed only one account in eight years. The Securities and Exchange Commission intervened, a special master recommended a surcharge, and the District Court ordered Darrow to pay $43,447.46. The Court of Appeals reversed; the Supreme Court reviewed the case.

Reasoning

The Court addressed whether a trustee who allowed employees to trade and profit could be personally liable even if he did not personally profit. The majority said yes. A court-appointed trustee must avoid any personal or adverse interests and cannot authorize others to do what the trustee himself is forbidden to do. Because Darrow knowingly permitted the trading, the Court treated the conduct as a deliberate creation of a conflict, not mere negligence, and upheld the surcharge. The Court emphasized that trustees should seek court approval, disclose such arrangements, and keep timely accounts to protect themselves and interested parties.

Real world impact

The decision makes clear that trustees who permit employees to profit from trust-related trades risk personal financial liability. Trustees will need to disclose trading arrangements, seek explicit court instructions, and maintain prompt, full accounts. The case was reversed and remanded for further proceedings consistent with the opinion, so some details may be finalized later.

Dissents or concurrances

Justice Black dissented, noting no bad faith and that the estate netted large profits; he argued that announcing a new rule should not be applied retroactively and would have affirmed the Court of Appeals.