Baker v. Schofield

Background

John W. Schofield, the court-appointed manager (receiver) of the failed Merchants’ National Bank, sued to recover a twelve-acre block of Seattle tide lands and an adjoining harbor lease. The bank had applied to buy the land before it failed in 1895. Charles H. Baker, who served earlier as the bank’s receiver, assigned the purchase contract to S. G. Simpson, then the property passed to Norton and finally to the Seattle Water Front Realty Company, whose stock largely benefited Baker.

Reasoning

The courts below found that Baker secretly arranged for Simpson to hold the purchase for Baker’s benefit, a fraud and breach of his duties as receiver. The Supreme Court agreed with the lower courts’ factual finding and explained that a trustee or receiver cannot profit from a secret self-dealing transaction and then claim the property. Defenses based on the bank’s authority, the approval of officials, delay (laches), or a seven-year possession statute failed because the current receiver and his predecessors had no knowledge of the fraud.

Real world impact

Because the transfers were set aside, the defendants must convey the land and lease interests to the bank’s receiver and the receiver must pay the sums found due for payments and taxes. The decision confirms that court-appointed managers cannot keep property obtained through secret deals and that courts will undo such transfers to protect the bank’s estate.