Court Opinion

ID: 6896663
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:50:29.526644+00
Date Added: 2024-06-11T16:06:01.563088
License: Public Domain

Opinion by
Mr. Chief Justice Lord.
The facts show that if the claim of the Bliss Company is preferred it will absorb the entire assets of the firm, leaving nothing for its other creditors. The case is rendered important by the nature of the question involved, and the number of other cases dependent upon its decision. Upon the admitted facts there is no pretense that the money derived from the sale of the interventor’s goods forms any part of the fund now awaiting distribution at the hands of the court. It is conceded that the money so collected has been appropriated to the payment of debts, the purchase of stock, and the payment of the running expenses of the partnership, while the firm was conducting its business. But it is claimed that where an agent or trustee has wrongfully used or appropriated the property or funds of another, it creates an equitable charge upon his whole estate, or a preferred lien upon his assets. This is put on the ground that such estate is thereby increased, or that his assets would have been less but for the wrongful use or appropriation of the trust fund, and consequently that it cannot be supposed that such fund is wholly lost, but that it exists in a substituted form as a part of such estate or assets, although it cannot be pointed out or directly traced. That there may be cases to which such argument is applicable may be conceded, as where the trust fund has gone into and remains in the assets which are sought to be charged, but its force is not perceived where such fund is dissipated, or used in the payment of debts, or the expenses of business.
The equitable right to follow and retake from the pos*127session of a trustee property wrongfully appropriated by him, or from those in privity with him, who are not dona fide purchasers for value, so long as it can be traced, whether it remains in its original or in a substituted form, upon the ground that such property, in whatever form, is subject to the trust in favor of the owner, is well established. “Formerly,” Mr. Justice Bradley says, “the equitable right of following misapplied money or other property into the hands of the parties receiving it depended upon the ability of identifying it; the equity attaching only to the very property misapplied. This right was first extended to the proceeds of the property, namely, to that which was procured in place of it by exchange, purchase, or sale. But if it became confused with other property of the same kind, so as not to be distinguishable, without any fault on the part of the possessor, the equity'was lost. Finally, however, it has been held as the better doctrine that confusion does not destroy the equity entirely, but converts it into a charge upon the entire mass, giving to the party injured by the unlawful diversion a priority of right over the other creditors of the possessor. This is as far as the rule has been carried”: Frelinghuysen v. Nugent, 36 Fed. 238. Mr. Pomeroy says: “Equity regards the cestui que trust, in all instances except that last mentioned in favor of creditors, although without any legal title, and perhaps without any written evidence of interest, as the real owner, and entitled to all the rights and consequences of such ownership. * * * No change in the form of the trust property, effected by the trustee, will impede the rights of the beneficial owner to reach it and to compel its transfer, provided it can be identified as a distinct fund, and is not so mingled up with other moneys or property that it can no longer be specifically separated”: 2 Pomeroy’s Equity Jurisprudence, § 1058. This equitable doctrine is put upon the ground *128that the real owner has the right to retake and reclaim his property, through all its transformations and forms, so long as it may be traced, whether its identity is preserved, or is merged into a mass of which it forms a part. To accomplish this end, when such trust property has been mingled into a mass of which it forms a part, but its identity is lost, equity affords relief by creating a charge or lien upon such mass for its ascertainable value. The right to such relief has its basis in the right' of property and “simply asserts,” as Andrews, J., says, “the right of the true owner to his own property”: Cavin v. Gleason, 105 N. Y. 262, 11 N. E. 504. But whether such owner seeks to recover specific property, or to create a lien upon a mass or fund, he must trace such property, and show that it belongs to him, or that it has gone into and then remains in the mass which he seeks to impress with a lien or charge. In such cases the question to be determined always is whether the trust property or fund, or the proceeds thereof, is traceable into any specific property or fund. Before, therefore, one claiming to be a trust creditor can be entitled to a lien or preference over other creditors, he must make it appear that the fund or property of the debtor which he seeks to affect with such lien or preference includes the trust property, or the proceeds thereof.
“If it appears,” said Andrews, J., “that trust property has been wrongfully converted by the trustee, and constitutes, although in a changed form, a part of the assets, it would seem to be equitable, and in accordance with the equitable principles, that the things into which the trust property has been changed should, if required, be set apart for the trust, or, if separation is impossible, that priority of lien should be adjudged in favor of the trust estate for the value of the trust property or funds, or proceeds of the trust property, entering into and constituting a part of the assets ”: Cavin v. Gleason, 105 N. Y. 262, 11 *129N. E. 504. See also Atkinson v. Rochester Printing Company, 114 N. Y. 168, 21 N. E. 178; Holmes v. Gilman, 138 N. Y. 369, 34 Am. St. Rep. 463, 20 L. R. A. 566, 34 N. E. 205. Hence, .so long as the trust property can be traced and followed into the hands of the debtor, his estate is subject to the trust; but when it has been dissipated, and is no longer traceable, there remains nothing to be the subject of the trust, and the equitable right of the cestui qué trust to follow it fails. “When trust money,” said Allen, J., ‘ ‘ becomes so mixed up with the trustee’s individual funds that it is impossible to trace and identify it as entering into some specific property, the trust ceases. The court will go as far as it can in thus tracing and following trust money; but when, as a matter of fact, it cannot be traced, the equitable right of the cestui que trust to follow it fails ”: Little v. Chadwick, 151 Mass. 109, 23 N. E. 1005, 7 L. R. A. 570. To the same effect are Englar v. Offutt, 70 Md. 78, 14 Am. St. Rep. 332, 16 Atl. 497; Thompson’s Appeal, 22 Penn. St. 16; Columbian Bank’s Estate, 147 Penn. St. 422, 23 Atl. 625-8; Sherwood v. Milford Bank, 94 Mich. 78, 53 N. W. 923; National Bank v. Insurance Company, 104 U. S. 54; Peters v. Bain, 133 U. S. 670, 10 Sup. Ct. 354; Union National Bank v. Goetz, 138 Ill. 127, 27 N. E. 907; Goodell v. Buck, 67 Me. 514; Story’s Equity Jurisprudence, §§ 1258, 1259; 1 Lewin on Trusts, 241. From these authorities we draw the conclusion that when the trust property has been dissipated by the trustee, and forms no part of his estate, the cestui que trust has no longer any remedy in equity to fix a charge upon the estate of such trustee, but must come in and share with the general creditors. Nor do we find anything in Hallett’s Estate, 13 L. R. Ch. Div. 696, to the contrary. In that case Jessel, M. R., said: “The guiding principle is that a trustee cannot assert a title of his own to trust property. If he destroys a trust fund by dis*130sipating it altogether, there remains nothing to be the subject of the trust; but so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust. ”
Within the principles announced by these authorities the petitioner is not entitled to relief upon the facts stated in his petition, because it is not shown that the fund paid into the court by the receiver and awaiting distribution includes any of the proceeds of the trust property, or forms any part thereof. The admitted facts show that the moneys derived from the sale of the interventor’s property has been used in the payment of debts, and otherwise dissipated, so that such moneys can no longer be traced, or shown to form any part of the fund which is sought to be charged with a preferred lien. The cases in conflict with this doctrine, and mainly relied upon in support of the interventor’s contention, are McLeod v. Evans, 66 Wis. 401, 57 Am. Rep. 287, 28 N. W. 173, 214; Francis v. Evans, 69 Wis. 115, 33 N. W. 93; Bowers v. Evans, 71 Wis. 133, 36 N. W. 629; Davenport Plow Company v. Lamp, 80 Iowa, 722, 20 Am. St. Rep. 442, 45 N. W. 1049; Peak v. Elicott, 30 Kan. 156, 46 Am. Rep. 90, 1 Pac. 499; Harrison v. Smith, 83 Mo. 216, 63 Am. Rep. 571: Stoller v. Coates, 88 Mo. 514; Smith v. Combs, 49 N. J. Eq. 420, 24 Atl. 1. It is enough to say that none of the Wisconsin cases received the consent of the entire court, and have recently been overruled in Nonotuck Silk Company v. Flanders (Wis.), 58 N. W. 383. The recent cases of Slater v. Oriental Mills (R. I.), 27 Atl. 443, and Shields v. Thomas (Miss.), 14 So. 84, ably review and criticise the doctrine of the cases cited in support of the contention for the interventor, and reach conclusions adverse to it. The distinction between funds remaining in the estate, and which go to swell it, and funds which have been dissipated, or used in the payments of debts, and do not remain in the estate, is made clear and applied. *131To the argument that the relation of debtor and creditor does not exist between the trustee and cestui que trust, whose property he has wrongfully converted or appropriated, Stiness, J., in Slater v. Oriental Mills, 27 Atl. 443, says: “The fact that the cestui que trust has not entered into the relation of debtor and creditor with the trustee does not affect the question. So long as he seeks to recover what he can show to be his own he is in the position of an owner, but when he cannot do this, and seeks to recover payment out of the trustee’s general estate, he is in the position of a creditor.” Unless, therefore, he can show the specific property claimed is his, or that the trust fund has gone into, and forms a part of, the estate he seeks to charge, he is entitled to no lien or preference, but must prove his claim and share with the other creditors. It results from these views that there was no error, and the decree must be affirmed.
Affirmed.