For reversal and remandment -- Chief Justice Weintraub, and Justices Heher, Wachenfeld, Burling, Jacobs, Francis and Proctor. For affirmance -- None. The opinion of the court was delivered by Proctor, J.
This is an appeal by Catherine Dorn, substituted administratrix of the estate of John Mild, and the Hartford Accident and Indemnity Company, her surety, from a judgment of the Bergen County Court sustaining objections to her final accounting and surcharging her for the sum of $32,164.70, which was embezzled from the estate by her attorney, Charles Halstead. The case was certified by this court on its own motion before consideration by the Appellate Division.
John Mild died intestate in Bergen County on August 11, 1950, leaving an estate of approximately $40,000. Upon the application of a creditor of the decedent, the Bergen County Court on September 22, 1950 appointed the United States Trust Company of Paterson and George Winne, Esq., as co-administrators of the estate. Shortly thereafter the co-administrators learned that Charles Halstead, an attorney who had represented the decedent during his lifetime, was in possession of some of the decedent's assets, and on October 5, 1950 they informed their attorney of this fact and suggested that a full investigation into Halstead's activities be instituted. On October 6, 1950 the attorney wrote to Halstead and requested that he turn over any of the decedent's assets in his possession to the co-administrators. On October 25, 1950 Halstead delivered a writing to the attorney which acknowledged that he was holding estate assets worth $4,325, consisting of a mortgage executed by Alexander Thompson and his wife to decedent in the amount of $1,700; cash in the amount of $2,500 which had been deposited with Halstead by the decedent, prior to his death, to be invested in a mortgage; and cash in the amount of $125 representing
interest on a mortgage from Anthony Varcadipane and his wife to the decedent. Halstead refused to turn these assets over to the co-administrators who, consequently, filed a motion with the Bergen County Court returnable on December 4, 1950 for an order directing him to surrender the estate assets in his possession.
Halstead's reaction was immediate and direct. He conceived an ingenious scheme designed to forestall any judicial inquiry into his activities by filing a cross-motion returnable on the same day for an order substituting Catherine Dorn, a niece of the decedent, for the co-administrators. Halstead had located Mrs. Dorn through a cousin of the decedent and told her that since she was the nearest relative she, rather than the co-administrators, should administer Mild's estate. Mrs. Dorn was a foreign born woman over 60 years of age, who was employed as a domestic in New York City. She could read and write very little English and had practically no business experience. She had no reason to suspect Halstead, who had been a reputable member of the New Jersey bar for 16 years, and who had represented the decedent during his lifetime. It is entirely clear that she acted in good faith in consenting to act as administratrix and in retaining Halstead to represent her in that capacity.
Upon the return date of the above-mentioned motions the court issued an order dated December 20, 1950, which directed that the co-administrators show cause on January 25, 1951 why Mrs. Dorn should not be appointed substituted administratrix. The court also ordered that the co-administrators' motion directing Halstead to turn over the estate assets be deferred until January 25, 1951, and further ordered that the co-administrators be restrained from proceeding with the administration. The return date was later adjourned until April 13, 1951.
However, despite Halstead's success in obtaining the restraining order, the co-administrators continued to investigate the extent of Halstead's control over the estate assets, and on December 27, 1950 they uncovered evidence of the possible misappropriation by Halstead of other estate assets.
They discovered that Anthony Varcadipane and his wife had in February 1950 executed a mortgage to the decedent to secure a loan of $5,000 and that this mortgage was still open of record. But in answer to an inquiry made by an officer of the United States Trust Company the Varcadipanes stated that they had paid this mortgage in full by making payments directly to Halstead during the decedent's lifetime. On January 19, 1951 the attorney for the co-administrators wrote to Halstead and demanded an explanation of the highly suspicious circumstances concerning the Varcadipane mortgage and stated that the co-administrators felt "duty bound" to clarify this situation. A copy of this letter was sent to the judge who had issued the restraining order and order to show cause. It appears from the record that after these letters were dispatched the co-administrators apparently abandoned their efforts to expose Halstead as a possible embezzler and instead adopted a completely passive role in an apparent effort to effect a safe and painless withdrawal from any further involvement in the administration of the estate. Consequently, on April 13, 1951 the co-administrators seemingly abandoned their pending motion to compel Halstead to turn over the assets in his possession and tendered their resignation to the judge who had issued the order to show cause. In response to their offer, on May 3, 1951 the court issued an order which not only made no mention of the motion pending against Halstead, but also provided that the co-administrators would be discharged upon their submitting a formal or informal account to Mrs. Dorn and upon the delivery of any of the estate assets "as they may now have" to her. The order also provided that Mrs. Dorn be appointed substituted administratrix upon the giving of a bond with approved sureties in the sum of $40,000.
It should be observed at this point that in view of the court's knowledge of Halstead's activities it was, to say the least, quite peculiar that the court's order provided for an informal accounting. But when one refers to N.J.S. 3 A:6-58, which provides:
"A fiduciary removed or discharged by any court shall, within 60 days after removal or discharge or within such shorter or longer period as the court may direct, state and settle his account before the superior court or county court, as the case may be, for all the assets of the estate in his charge."
it is apparent that the court did not have discretion to permit an informal accounting in this situation and that the order was not only contrary to the provisions of the statute but also against the dictates of common sense in this type of situation.
It appears from the record that neither the court nor the co-administrators attempted to inform Mrs. Dorn of the facts concerning Halstead's suspicious activities at this time. Therefore, without any inkling of the gathering clouds of suspicion which surrounded Halstead's handling of the decedent's assets, on June 5, 1951 Mrs. Dorn obtained a surety bond in the amount of $40,000 and undertook the administration of the estate. However, the co-administrators retained possession of the assets which they held until October 2, 1951, when Mrs. Dorn approved their informal account. This account did list on its face the aggregate value of the estate assets as $40,609.08. However, it appears that this account was not designed to inform Mrs. Dorn of the true nature or location of the assets listed. For example, despite their knowledge of the alleged payment in full to Halstead of the Varcadipane mortgage, the account merely listed it as a mortgage open of record without any disclosure of the facts that their investigation had revealed. The last items in this account were set forth as follows:
Accrued Interest Joseph Federico
Accrued Interest Nancy Varcadipane
Bond and Mortgage 113.89 4,555.76
TOTAL PRINCIPAL ASSETS $40,609.08"
Thus, under the heading "SUNDRIES: Other Assets . . . 4,325," the co-administrators purported to account to their successor fiduciary for $2,625 in cash and the $1,700 Thompson mortgage which they knew were in Halstead's possession, as evidenced by his receipt of October 25, 1950, and which they had failed to recover from him despite their initial effort in that direction.
At the same time Mrs. Dorn approved the "informal account" she also signed a document acknowledging the receipt by her of all the estate assets listed therein. This statement listed the Varcadipane bond and mortgage as an asset, without mention of the fact the mortgagors had asserted that it had been discharged by payment in full to Halstead. This statement of assets did not include the $4,325 listed in the informal account. Although Mrs. Dorn acknowledged receipt of these assets, she did not actually obtain physical possession of them. Instead, the co-administrators turned them over directly to Halstead and received a release executed by Mrs. Dorn which purported to relieve them from all liability in the estate of John Mild.
It is readily perceivable at this point that by a series of clever maneuvers Halstead was successful in forestalling any investigation into his activities by securing the substitution of an innocent pawn as administratrix without any opposition from the prior administrators, who, as a result, were ostensibly relieved from all liability to the estate and Halstead remained in complete control of the estate assets.
From the moment Mrs. Dorn undertook her duties as administratrix, until Halstead disappeared in 1954, she relied entirely on his advice and direction in the administration of the estate. She made no attempt to marshal the assets of the estate and entrusted all responsibility to him. With the exception of occasionally calling Halstead on the telephone over the years and occasionally meeting him on the street in New York City to sign papers, she did nothing to supervise the administration. She signed any documents Halstead put in front of her, without reading them or questioning
the reason for their execution. Bank accounts were opened in her name on behalf of the estate, but she did not even know in what banks such accounts were opened and she never saw the bank statements or the bank books. She signed blank forms for Halstead and even affixed her signature to a blank transfer inheritance tax form. She also endorsed government bonds for Halstead so that they might be redeemed. Two Treasury checks as payments for the bonds were issued to her and endorsed by her to Halstead who cashed them. The estate never received any of the proceeds. At the trial below Mrs. Dorn denied endorsing these checks, which totalled $18,827.50, and in support of her denial testified that she had filed a claim against the Federal Government alleging that her signature had been forged by Halstead. However, the government rejected her claim and at the trial there was unequivocal testimony by a handwriting expert that Mrs. Dorn's signatures were genuine. This testimony was not controverted.
Halstead absconded in June 1954 with over $32,000 of the estate's funds and more than $100,000 of other clients' funds, and although many indictments have been found against him they have never been tried because he has never been located.
Mrs. Dorn immediately retained another attorney who, upon ascertaining the extent of Halstead's peculations, filed an intermediate account with the surrogate in Bergen County on March 2, 1955. This account disclosed the assets embezzled by Halstead. No exceptions were filed and a judgment settling the account was entered on May 23, 1955.
In February 1956 Mrs. Dorn filed a final account in which she charged herself with a balance brought forward from the intermediate account of $34,829.32 and then prayed for an allowance of the sum converted by Halstead. Exceptions to the allowance of this sum were filed by five nephews and nieces of the decedent, who asserted that this loss was due to the negligence of Mrs. Dorn. The trial court found that Mrs. Dorn was negligent in the administration of the estate and surcharged her for the full amount converted by Halstead.
On application of her counsel, the trial court agreed to hear additional testimony on the issue of Mrs. Dorn's liability for any embezzlements which were committed before she was appointed administratrix. After the rehearing, the trial court affirmed the surcharge for all of Halstead's embezzlements, including those which were committed before her appointment.
On this appeal appellants contend (1) that the judgment approving the intermediate account is res adjudicata and bars the exceptants from relief; (2) that the court erred in surcharging the administratrix for the estate assets embezzled by her attorney; (3) that the proofs fail to establish that the alleged negligence of the administratrix was the proximate cause of the losses sustained by the estate and (4) that the administratrix should not be surcharged for the amount of any peculations which were committed prior to her appointment.
The appellants assert that since the complaint filed in the intermediate account fully disclosed the peculations by Halstead and since that account was allowed by the court, without any exceptions being raised, N.J.S. 3 A:9-8 bars the exceptions to the final account and renders the judgment allowing the intermediate account res adjudicata on the ...