172
FEDERAL REPORTER,
vol. 88.
under disability when their rights o/possession accrued, and have so continued. This plea is otherwise defective and bad in not showing when the adverse possession of defendant commenced. The bar of the statute of limitations does not clearly appear from the face of the plea. In Hardman v. Elfames, 2 Mylne & K. 732, it was held that a plea that the title of the ,plaintiff, or of the person through whom he claims, accrued at a particular time, and that the possession of the property, and the receipts of the,rents and profits thereof, have been adverse to him and the person through whom he claimed ever since that time, should be overruledif it did not set forth the facts and circumstances constituting such arlverse possession, because adverse possession may consist in various things; and, if none of those are specified, the plaintiff may have no precise knowledge of the defense which he is to meet. Their plea is further· more defective in stating a legal conclusion without giving all the material facts On which that conclusion rests. ' The same objections apply in all their force to the third plea of oustel and disseisin, which clearly states a conclusion of law, and is wholly wanting in any proper averments of facts or circumstances to sustain that legal conclusion; This plea does not present on its f.'lce any equitable par to the case made by the bill, and is fatally defective and bad. As to the fourth plea, that presents properly matter for demurrer; and even as a demurrer it would not present a proper ground of objectionto the bill. Our conclusion is that these pleas are all insufficient, and should be disallowed and overruled, and it is accordingly so ordered, with costs. The defendants interposing said pleas may have leave to treat them as answers in the cause, if they elect so to do, or they mftY file new an!lwers herein, and they are allowed 30 days withiu which to answer.
,
PHILAI>ELPHIA NAT. BANK .". DOWD.
(C\'rcuit Oourt, E. D. North Oarolina. 1.
.r'ebruary 16, 1889.)
BANKS AND BANKING-COLLECTIONS-INSOT.VENcy-RIGHT TO FOLLOW TRUST
FUNDS. . : Plaintiff sent to defendant's bank paper indorsed "For oollection and immediate return" to plaintiff. and the pap.er was collected. and the proceeds mingled with other moneys of the bank, instead of forwarded to plaintiff. The bill contained an uncontroverted allegation that defendant's bank. at all times subsequent to the collection and at the time of defendant's appointment as receiver, had 9n hand cash toa greater amount than that due plaintiff. The bill askep to have the balance due plaintiff paid in full on the ground that the bank by 'receiving the paper for collection and immediate return became a trustee. and that either its entire property or the money in its vaults became with the trust.. i.f t!Ie mingling o! the funds was a of trust: It was a conversIOn; and plamtl1f became a SImple contract credItor, with n.o preference at law. .,
PHILADELPHIA NAT. BANK ft. Down.
173
So SAME.
It was immaterial whether or not the bank stood in a fiduciary capacity to plaintiff. as the facts stated in the bill showed that the money collected could not be traced into any specific investment or fund, but had been indistinguishably mingled with the general assets.
In Equity. Bill to obtain a priority in the nature of an equitable lien on the assets ofan insolvent national bank. Ba,ttle &:- Mordecai, for plaintiff. F. N. Busbee, for defendant. SEYMOUR, J. The defendant is the receiver of an insolvent national bank. The plaintiff, a bank doing business in Pennsylvania, sent during the winter and spring of the present year to the bank of which defendant is receiver commercial paper indorsed, "For collection and immediate return to the Philadelphia National Bank." This paper was collected by defendant's bank, and the proceeds were mingled with the other moneys of the bank, instead of being forwarded to the plaintiff. The bill contains an allegation, which is not controverted, that the defendant's bank, at all times subsequent to making such collections, and at the time its affairs were placed in the hands ofa receiver, had on ,hand cash toa greater amount than that due to plaintiff. Plaintiff asks to .have the balance due it paid in full out of the assets of the insolvent bank on the ground that the latter, by receiving the paper for collection and immediate return, became a trustee for the transaction of the affair, and that either it!! entire property or the money in its vaults became impressed with the trust. In other words, it claims a priority in the nature of an equitable lien on either the assets of the bank or its cash on hand. The court holds that when defendant's bank mingled the money collected with its general funds, it was, if a breach of trust was committed thereby, a conversion of such money, and thatthereUIlon the plaintiff became a simple contract creditor, with no claim that has a preference at law over any other simple contract debt. If the money was not held by the bank as trustee, the result is the same. On the former l3upposition, however, plaintiff would have a right to follow the money into any new form into which it could be specially traced. But it is immaterial whether or not the bank stood in the relation ·of a fiduciary to the plaintiff, because, on the facts stated in the bill, it appears that the money collected cannot be traced into any specific investment.or fund, but been indistinguishably mingled with the general assets of defendant's bank. Such an opinion would have been very gl'lnerally expressed without hesitation prior to 1879, when the English court of appeals rendered its decision inRe Hallett, (KnatchbuU v. HaUett,) L. R. 13 eh.Div. 696. I do not consider it at all in conflict with the opinion of Sir GEORGE JESSEL in that case. But it is in conflict with several cases since decided in this country, most of which refer to KnatchbuU v. HaUett. I look upon these cases as introducing a new principle into an old and well-known doctrine of equity, which, with the greatest deference to the CQurts de-
t9 follow. in,advance of court. ' The cases are People v. Bank, 96 N. Y. 32; McLeod v. Evansj l 66 Wis. 401,28 N. W. Rep. 173, 214; Harrison v. Smith, 83 Mo. 210; Peak v. Ellicott, 30 Kan. 156, 1 Pac. Rep. 199; and Bank, v. Weems, 6. S. W. Rep. 802. The facts of the case first cited '(People v. Bank) are, bri'efly,as follows: Two notes made by the firm of Sartwell, Hough & Ford 'had been discounted by defendant, a state ballk, and, wishing to anticipate payment, they drew checks for the amount of the notes, which were thereupon charged to their account, and the notes were entered upon the of the bank as paid. In fact they had been sold: ; Thereafter, the bank having become insolvent, a receiver was appointed, who refused to pay the notes. The case constituted in the court ofappeals was an appeal froID an order'directing the receiver to make such payment. It appeared that at the time a smaner amount of cash than the fuce of the notes was found in the bank. The court, DANFORTH, J" delivering the opinion, (which is a brief one, and does not put the matter upon any well-defined principle,) held that the receiver must pay the notes in full out of money received by him after the bank's failure; that is to say, out or its general' assets. He cites In re LeBlanc, 14 Hun, '8, affirmed 75 N. Y. 598, and Libby v. Hopkins, 104 U. S. 303, and says: "Those cases stand upon thc' ground of a specific appropriation of a particular fund for the payment of the claim there brought in question. So does the ,one at bar." If the facts of People v. Bank showed the exist;. ence of a particular fund, tllere could be 110 question of the soundness altha decision, but it wtmld not be authority for the caset3 professing to follow it. The difficulty seems tome to be that, while there once had been such a fund, it had been misappropriated, and neither existed 1101' could 'be followed when the bank's assets came to the receiver. Peaple v. Bank' is followed in New York by two decisions of general term,-People v. Bank, 8SHun, 187, and McColl v. ftlraser, 40 HUl1, 111. ' In the for.:. Irier1 BARKER, J. ,Bays': 'H If the identical moneys collected by the bank 'did hot, pass into the hands of the receiver, it makes no difference, tor ib ii\ome shape or, form they weht to swell the assets which' fell into his bands," In& Le Blanc, 14 HUl1; 8, affirmed 'by the cotirtof appeals :withollt im opillion, and citecing: authority by JudgeDANFOR'fH, a pl'lr'fund passed into the hands of the receiver, which had been held ,boy( the 'eorporation expressly: for the payment of, petitioner's claim, so the point in conti'oversydid not a:rise. The New York case is followed bY' court of Wisconsin in McLeod Vi Evans, 'fWo of the five dissenting. As the court puts its decision on an intelligible prin. Ciple I willeite the reasoning of the prevailingopihion.Cor,E, C. J.,
piding t:4,e!l1,J, 49 ;cation by the
gya:"
, '
:('The'conclusion is irresistible trom'the fact'! that the proceeds of the trns,t property found its way into Hodges' hands, and were used by him:either to P3Y :off his debts or to, increl\$e his ussets. ,* *, * It is nut to besupposoo tru,st f'lndwas dis.sipated, altogether, \lind did ,not ,fall into the m,l;I.ils uftheasl\ignor's ,and, the,rule In equity ilJ well established that, SO 10nK as the 'tr'ust property can be traced and followed into other property into which it has been converted, that rtilnains subject to the trust. ... **
PHILADELPIU.A NAT. BANK V,. :Q0WD.
175
trust in any moneyor property is lost. But if, as in the present case, throughout all the trustee's dealings with the funds so mingled together he keeps on hand a sufficient sum to cover the amount of toe trust. money, we think it capable of demonstration that the trust should attach to the balance that is found to remain iIi. his hands. . * * * It is shown by evidence that after the bank received the money, amounting to about $5,000, its cash assets were never reduce<ibelow $6,000," until they went into the receiver's hands. Even admuting that in the course Qf its transactions this identicalllloney was paid out by the bank to its uttermost farthing, yet we kuo,,: tbat every dollar so expended left its representative and exact eqUivalent in the vault from which it wastakeD', and:that, when again the money soleH was expended, it· left in turn its equivalent behind. We see, therefore. that, Whatever changes may have taken place in the funds from tue receipts and expenditures oHhe bank, the balanceJe(tat the date of its failure was the result of the, proceedsof.the notes, to the extent to which such balance was thereby increased, an!i that the cash which went into the hands of the receiver should be deemed the representative of'thoseproceeds, and impressed with the trust character.'" "
We d.o not understand that it is necessary to tt:ace the trust lund into some specific pr.operty in order to enforce. the tNtst. If can be traced into the es.tate althe defaulting agent ur trustee this is sufflCtent." The which I have italicized contain a modification of the equitable doctrine of following trust property necessarily, as I suppose, underlying the decision of Peoplev. Bank, 96 N. Y. and adopteq py the supreme courtB.of Missouri and Kansas in the cas.es cited from the reports of thQse states. Bank v. Weems, 6 S. W. Rep. 802, is placed upon the same doctrine of equity,but without as wide a .departure from the form ill which it is usually enunciated. In deciding it GAINES, J. ,. says: "It may be that when the entire mass is paid away the right to clai,m a
Before proceeding to exaniine the English authorities8upposed to support this line of decisions, I will give the doctrine of trust wrongfully converted upon which they are all based, as laiq down by Justice Story and ·Prof. Pomeroy: "Wherever the property' ()f.. a·· party has been wrongfully misapplied, ora. trust fund has been wrongfully converted into another species Ofpl'operty,'if its identity can be traced it will b,e held in its new form, liable to the rights of the original ·owner or cestut que trust. The general proposition which is maintained both at law and inequity upon this SUbject is that, if any property in its original state and form is cov.ered bya trust!n favor of the prin;eipal, no change .of that state and form can divest it: of suah trllst or give the agent or it, or those who represent him in right, (not being bona fide purchasers,) any more valid claim in respect to it than they. had before such change. * ... "'The right ceases only when the means of aseertainment fail, which, of course, is the case when' the subject-matter is . turned into money, and mixed and confounded in the general mass of property {)f the same description." 2 Story, Eq. Jur. §§ 1258, 1259.. "If a trustee or other fiduciary person wrongfully disposes of hjs principal's ;gecuritiea .. * *, 'Ie equity impresses a constructive trust upon the neW (Qrm or species of property ... * as long as it can be followedal1d identified. ' * 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 ·tl'ansfel', pro·vided it can be identified as a distinct fund, and js,not 80 mingled up with (lthermoneys or property ,that it Cl1n no longer be speciaUysepal'llted." 2 Pom. Eq. Jur.§§ 1051, 1058. .
176
vol. 38.
The difference between the rule as stated by Story and Pomeroy, and as given in the Wisconsin decision, will be perceived to lie in the fact that according to the former the trust fund must be traced into some specific property, and, if this cannot be done, the right ceases; while according to the latter it exists if it can be traced into the estate of the defaulting agent or trustee, or has been used in paying his debts. Evidently this practically gives a.priority to the beneficiary over all creditors not having specific liens. The Wisconsin and Texas cases differ, in that the former gives to a cestui que trust whose funds have been wrongfully converted by an insolvent bank an equitable lien on the entire assets of the bank, while the latter gives such a lien only upon the cash coming ta the receiver, and only, at least to the whole extent of the trust money, in case such money was never reduced below the amount of the trust fund. In both cases the reason given is that the trust money has gone to swell the amount . of the property upon which the lien is given. In neither .is it held neeessary to follow a distinct fund. Before passing to the English cases, I will quote the-as it seems to me-conclusive answer given to the reasoning of Chief Justice COLE by CASSODAY t J., in his' dissenting opinion in McLeod v. Evans, far I think . it applies to the entire line of decisions. After stating that the proposition that the wrongful .conversion of a draft, of itself, gave the plaintiff a preference over all other creditors, regardless of what became of the draft or its proceeds, is supported by no adjudicated case, the judge goes on to say: ..It is probable, 8S claimed, that the draft, or the proceeds of it. were u6ed bYlIodges [the insolvent quasi trustee] prior to the assignment in payment of.some of his deuts. ....... "\ It would merely diminish the amount of his indebtedness to the extent of such payment. That' would. in a general way. benefit the estate to the extent that it increased the per cent. that the other creditors would in consequence receive. But. as this estate is uadly insolvent. the aggregate amount of such· increase would necessarily be very much less than the amount of the draft." The English cases cited in Bank v: Weems in support of the positi9n taken by the Texas supreme court are Taylor v. Plumer, 3 Maule & S. 574, Pennell v. De.D'ell,4 De Gex. M. & G. 372, and Knatchbull v. Hallett, L. R. 13 Ch. Div. 696; and the United States supreme court case is Bank v. Insur(1,nce Co., 104 U. S. 54. I will examine these decisions, Ilndattempt to discover what modification of the doctrine of following . \rust funds laid down by Story and Pomeroy, if any. is introduced in them, and whether they support the theory of either the Wisconsin or of the Texas case. . Taylor v. Plumer is one of the celebrated cases of the law, noted for a 'yeryable opinion delivered in it by Lord ELLENBOROUGH. Briefly stated, its .facts are these: A 1:>roker having in his possession bank-notes belonging to defendant, which he held for a specific.purpose, in breach of his trust purchased with them American bank stock and gold coin, and attempted to escape to the United States. He was pursued by defend· ant's agents, and stock and money taken from him. Held, in trover, in
PHILADELPHIA NAT. BANK V. DOWD.
177
an action by the broker's assignee, that defendant was entitled, as against the general creditors, to the money as well as the stock, because the gold coin was the product of defendant's bank-bills. The chief justice, in commenting upon Whitecomb v. .Jacob, 1 Salk. 161, said that the difficulty of tracing money was" a difficulty of fact and not of law, and the dictum that money has.. no ear-mark must be predicated only of an undivided and indistinguishable mass of current money." Pennell v. Deffell was a case in which a trust fund was traced into bank-accounts. One Green, an official assignee in bankrupcy, kept accounts with two banks, in his own name, and had deposited in each, not only parts of the trust funds, but also hi8 private money, and had drawn from each for his individual uses. Knatchbull v. Hallett is similar to Pennell v. Deffell. A solicitor having bonds belonging to his client, sold them, and paid the proceeds to his general balance at his banker's. Afterwards he drew checks for his own purposes against, and paid other money of his own into, the account. At his death there was a larger amount to his credit in bank tha,n the proceeds of his client's bonds. It was held in this, as in the preceding case, that the beneficiary had a right to follow the money. and was entitled to a charge on the balance in bank: In the way of this conclusion stood two artificial rnles, either of which, taken literally, would have been fatal to the beneficiary's pursuitof the bank balances. The first was the rule in Clayton's Ch8e, 1 .Mer. 572; the second was supposed to be supported by a dictum of ELLENBOROUGH in Taylor v. Plumer. viz.: "The dictum that money has no ear-mark must be predicated only of an undivided and indistinguishable mass of current money." The rule adopted in Clayton's Case was that in a bank-account the first drawings out should be attributed to the first payments in. The court held as an exception to this rule, that when a person holding money in a fiduciary character mixes it with his own, and draws out of the mixed fund. it will be presumed that he is first drawing out of his own money. It is evident that the rule was adopted because it gives effect to the probable intention of one having a bank-account, and that the exception likewise gives effect to the probable intention of the trnstee. It is not likely that a trustee would use trust funds while he has money of his own idle in bank; and it would be contrary to well-established legal principle to unnecessarily assume a purpose to do a wrong. It was not necessary for the court to go further; but it may also be true that, even had the trustee such an intent, he had not carried it into effect. To convert the trust fund, not only an intent,but some unmistakable act in pursuance of the intent, would be necessary, and themere withdrawal of a part of the deposit, leaving enough to satisfy the cestui que trust. would not be such an act. As soon as, by the application of this exception, it was made to appear that the beneficiary's money ·remained in the bank-account. the only other difficulty-the fact that it was minp;led with other funds, and indistinguishable from them-was easily removed by giving to the client a charge on the balance in bank. Of course no equitable lien could have . been enforced in a case at law, and I understand the di<;tum in Taylor v.38F.no.3-12
',178
FEDERAL RlDPORTER, vol. 38.
v. Plumer, which was an action of trover, to apply only to such a case. In the supreme court case-Bank v. Insurance Co., 104 U. S. 54-it appeared that one Dillon, an agent of an insurance company, deposited collections belonging-to ms principal with plaintiff, in his own name, as "agent," and afterwards paid other money of his own into the account, and checked against it for his private uses. The plaintiff endeavored to enforce a banker's lien upon it for Dillon's individual indebtedness to it. It was held that the descriptive word "agent" was of itselfnotice of the character ofthe deposit; and, further, that upon the facts the bank had express notice. Dillon was not, as far as appears, a party to the attempt made to appropriate the company's funds to his private debts. In speaking of the fact that the latter had to some extent mingled his own funds with those of the insurance company, MATTHEWS, J. i adopting the reasoning of Sir GEORGE JEssEL.in KnatchbuU v. Hallett, says: "As regards property dlsposed'of by persons in a fiduciary position, ... ... ... whether the disposition of it bel'ightful or wrongful, the beneficial owner is entitled to the proceeds, wbateVe'r, be their form,provided ouly he .can idl>ntify them. If they cannot be ili(mtUled by reason of .tl16: trust· money being the ,cestui t1'Ust is entitled to a mingled with that of the trustee. charge upon the new investment to the extent of the. trust money traceable into it. ... ... ... Thereis no difference between investments in the purchase of lands or chattels, or bonds, or loans, or money deposited in a bank, If< ... ... for eqUity will follow the money evenjf put into a bag. or:an indistinguishable mass, by taking out the same quantity." We are now prepared to see in if the rule announced above, and called by Sir GEORGE "the mbdelll doctrine of equity," with regard to pro'perts dispose4,0f by persons iJ1l a fiduciary capacity, diffets from that laid down in the days of Story and Ellenborough. The rule, as stated by.Story or Pomeroy in the extracts taken (supra) from . their treatises., is extended by adding a case not specially put by either of them, of the'mingling of the trust money with that ofthe trustee in the investment made by the latter. Stating the doctrine in the words of with an addition, which I have put ill italics, drawn from the late deCisions, it is .as follows: (1) "Whenever the property of a partyhas been wrongfully misapplied, or a trust fund has been wrongfully cO/1verted into anotherspecies of property, if its identity CaD be tr<\ced it will be held In its new form liable to the rights of the original owner or cestui que trust. The right ceases' only the subis turned into money. RI;ld mixed and confounded in a general mass of property ·of the same descJiiption. " . (2) If the property cannot be. idmtijied by reason of the trust money being mirtgled with that 0/' the t1'Ustee, then the cestui que t1'Ust is entitled to a charge on the new investment to the (f,Jjtent ofthe trust money traceable into it.· This will be done, eoen if the' money is mingled with that of the trustee in a bankaecount,or in a bag, 01' other mass of money. ceQtui. que trust on a new .investmentJIlade in part with his own money
As far as the addition to the rule consists in giving a charge to the
.and in part with that of the trustee, it has no novelty. In Docker v. Somes, 2 Mylne & K. 664, Lord BROUGF(A)idecided that if a trustee mixes trust
PHILj,ljELPHIJ\
B4.NK
f)··
DOWD.
·
funds. 'with his private moneys, or employa both in a trade or. adYenture of his own, the cestui que trust may, if he prefers it, insist upon having a porpQrtionate share of the profits, instead of interest on the amount of the trust fund so employed; and in Harford v. Lloyd, 20 Beav. 310, where a sum of money belonging to a trust fund was, as it seemed, used with othel: money in the purchase of po.st obit securities, the court enforced a lien on such securities for the amount of the trust money so used. Both of these caf'les are noticed by Story, Eq.Jur. §§465, 1261a. The only thing, then, which can be considered recent in proposition 2, supra, is the application of the doctrine to a bank-account, and the illustrationmade use of, of the bag of money, or the indistinguishable mass thereof. Nor do I understand the master of the rolls to announce this as a new principle ofequity, but rather as the application of an established rule toa new case. In the often-quoted case from 1 Salk. the judge, after speaking of the rights of one who employs a factor and intrusts him with the disposal of merchandise, states that there is an equity to follow 'the proceeds, attaching to the case of a factor as well as to that of a trustee: "Butt he adds, "irthe factor have money, it shall be looked upon as the factor's estate, * * * for in regard that money has no ear-mark, equity cannot follow that in behalf of him that employed the factor." Speaking of this remark, Sir GEORGE JESSEL says: "There is no distinction between a person occupying one fiduciary position or another fiduciary position as to the right of the beneficial owner to follow the trust fund." I had not understood the court to have attempted any such distinction in that case. I further suppose the judge who decided Whitecomb v. Jacob to have been speaking, not of in a bag, or of any particular mass or heap ormoney, which might conceivably have been in possession of the factor at his death, and into which his employer's money might have beentracli'd; in which case it would have been analogou.s to money mingled by a trustee with his own, ina bank-account; but rather of the ordinary case of money on hand at his death, bearing no marks of being the proceeds of the factor's trust money, any more than of any other transaction in which he might have been engaged. Of such money it might well have been said in current .proverbial phraseology thatit had "no ear-marks." Such a case does 110t come within the decision .or the reasoning in Knatchbull v. HaUett. See Ex parte Hardcastle,tdecided after, and referring to, KnatchbuU v. Hallett,) 44 Law T. 523. I do, howe¥er, conceive it to come within both decision and argument in Bank v. Wetm1.8. Taking that case to be law, I should add l;mother to the two propositions laid down as the law of tracing, viz.: (3) And in case trust money received by a trustee is not shown to have been either paid to the ce.1Jui que trust. preserved in specie, or invested, the cestui q'lU! trust shall, upon the death or insolvency of the trustee, have 3 lieft .00 alllDoneys coming to the hands of his representative or on the ground that such trust money went to swell the decedent's or insolvent's C3:lh assets. ' 0ll.e I,lecess!tr)',to beipg granted, I can no reason why the adthe Wisconsin,MisBOuri, Kansas, and
180
(as I conceive) the New York cases does not follow. I give it in the words of COLE, C. J., in his opinion in McLeod v. Evans: (4) Nor is it "necessary to trace the trust fund into some specific property. If it can be traced into the estate of the defaulting agent or trustee this is sufficient. " It is evident that 3 conflicts with Justice Story's statement that the right to trace ceases when the subject-matter is turned into money, and mixed and confounded 'with the general mass of the trustee's money, (which I have endeavored to distinguish from any particular fund or account of the trustee. into which it may be traced, according to rule 2.) Proposition 4 contradicts all previous statemeDts of the doctrine, including not only that given in KMtchbuU v. Hallett, but also that in Bank v. Weems. The judge who wrote the learned and able opinion of the supreme court of Texas in Bank v. Weems dissents in express terms from the last proposition, and declines to follow the list of American authorities cited by me in the first part of this opinion. Nor do I assert that he maintains proposition 3; but I do contend that that doctrine neces: sadly follows from the position taken by him. The decision in the Texas case relates only to the cash assets of an insolvent bank, and only to a case in which those assets never from the time of the deposit of the 'trust fund up to the suspension of the bank fell below the amount of that deposit. But neither of these facts seems to me to materially distinguish it from the proposition which I have stated to be necessarily involved in it. As JESSEL,M. R·· says: "There is no distinction between a person occupying one fiduciary position or another," as to the right to follow trust funds, and it is quite unimportant that the trustee is a bank. Nor can it make any difference whether the money coming to a receiver's hands is the general cash ofa corporation kept in its vault, or that of an individual kept by him in his pocket, his safe, or his chest, or in all or any of these receptacles, as convenience may have dictated. If, indeed, the corporation had kept a deposit with some other person or corporation, and the trust fund could be traced into it, then the rule in KnatchbuU v. Hallett would apply. But I am speaking of a case like the Texas one or the one at bar, where there is no special fund, but where the trust money goes into the general cash of the trustee. The only remaining ground of difference lies in the filet that the cash on hand never fell below the equivalent of the trust fund. But I conceive that, happened to be enough on hand at the time of the suspension to pay the amount due to the beneficiary, it can make no possible difference whether that amount was at all times kept on hand, or whether the trustee, after spending a part of the trust money j replaced it with money drawn from other sources. If, in the imaginary case ofone thousand sovereigns of trust money put in a bag, the trustee had taken out a sovereign, and afterwards put one in, there would be no doubt but that the whole amount then being in the bag would be the property of the cestui que trust; and so, had the amount taken out and replaced been one, or five hundred, soverl;igns. Certainly, in the circumstances snpposed, the reasonwhy the sum finally left in the bag is the propertyo{ the cestui que trust, is because the trus-
PHILADELPHIA NAT. BANK V.
DOwr.
181
tee, in replacing the sovereigns, intended to restore to the bag coins to fill the place of the ones. taken from it. But, if it is permissible to suppose that the bank officers in paying out the money of their beneficiary intended that the money of their depositors should take its place, I see no difficulty or difference in supposing this to be the case when such money comes in after the amount on hand sinks below the total of the trust fund. And if, instead of being a question of actual intention, the intent is assumed. on the ground that it was the duty of the bank to keep the trust fund on hand. and that the corporation cannot allege that it did not perform this duty, then it may be said that it was just as much the duty of the bank to replace any part of, the fund withdrawn from its vaults as it had originally been to keep it there, and the court can as well assume one intent as the other. As I have already said, I do not consider the doctrine (2) formulated from the opinion of JESSEL, M. R., as any departure from that always held. He calls the money deposited in bank or put in a bag "a new investment," upon which he allows the beneficiary a charge, and goes upon the idea that there is thus something specific into which he traces the fund. But the proposition (3) resulting from the Texas case seems to entirely depart from the idea of a new investment of the trust money, or following it into anything specific. The money in the vaults of a bank, carrying on its ordinary business, cannot properly be said to be the result of anyone or more of the deposits put in it. If at the time of the insolvency of a bank a thousand dollars are found in its safe, and half a dozen deposits of that amount are shown by its books to have been paid in, it is unreasonable to attribute the fund-as is done in Bank v. Weems-to a particular one ofthetn which happens to have been trust money. If, indeed, the suspension of business by the bank should immediately follow the placing the trust money in its vaults, the case would come within the money would as a fact be a part rule as given by JESSEL, M. R., for of the mass of money in the bank, and equity would give a charge upon it for the amount of the trust fund. It is upon this ground that I understand the court to have disapproved in Knatchbull v. HaUett of the ruling of FRY, J., in Ex parte Dale, L. R. 11 Ch. Div. 772. Dale & Co., on December 5th, sent paper for collection to a branch of the West of England Bank. The bank made the collection, and deposited its amount in its vaults, in which it was mingled with other moneys. On the 7th it sent a letter to D. & Co., incorrectly stating that the money had been remitted. The 8th was Sunday, and the bank did not open on the 9th, but instead went into liquidation. It is probable, that the collection was made on the 7th, when the letter was sent to D. & Co., and may be assumed as true that the very money collected went into the hands of the liquidators. The Texas case is put entirely upon the proposition that the trust fund is traced into specific property that came to the receiver. I wish to examine a little more in detail than I have yet done whether this is true. It would have been impossible, even with access to the books of the bank, to have followed the money which came into its vaults by reason
182
FEDERAL S,EPtlR'I!ER,
vol. 38.:
of thecollections in'litigation j; but it is possible to put suppdsititious(}ases which would cover every probable use of the money. There is one which is clearly inadmissible,: viz. , that the precise money collected remained in the vault. If that had been the case it would have been found separated from the other funds, and marked as plaintiff's money. If the bills collected were mingled with the general mass in use for current business, the probability that they remained in the safe for anum ber of weeks is so infinitesimal ,that it may be en tirely dismissed from consideration. We can su ppose that the $5,000 collected by the Texas bank consisted of five packages of $1,000 each. One of them may be supposed to have been used in purchasing a safe, or some other article of furniture. At the same instant we may suppoSe that a depositor paid into his acc(mnt$1,000. On the theory of the Texas case, that $1,000 took the place of the $1,000 paid out. Why? On the idea Man intent on the part of the bank officers' to replace the money paid out? Clearly there was no such intent. Will equity assume, in contradiction of the evident fact, that the bank intended to pay, A.with B. 's money? Is the idea of tracing the money the one adopted? But the cestni que trust's money was invested in the purchase of a safe, and on the doctrine as laid down in all the books his right was to consider himself either the owner of the safe, or, if he preferred, the holder of a lien upon it, or a simple contract creditor of the trustee to the amount of the money misapplied. There is no authority to be found for the statement that he had, in addition, the right to take a different $1,000 in the possession of the trustee, but not appropriated by the latter to the trust, on the gronnd that it ought to have been so appropriated. :Another $1 ,000 package we may suppose used to pay a check drawn by a depositor. To that extent it diminished the indebtedness of the bank,. and increased the dividend to be paid to the other depositors. The plaintiff, on the doctrine of following trust funds, would be entitled to be subrogated to what would have been such depositor's dividend. Let us suppose now, what did not happen in Bank v. Weems, but did in Peoplev. Bank, and also in the case at bar, that the officers of the bank made away with the greater part of the cash on hand, leaving just enough to enable business to be carried on until they ('QuId reach a place of safety. It may be sltpposed that they carried away the remaining $3,000. It would not, in that case, have been true that :, every dollar expended left in turn its equivalent behind," or that the trust money went to swell.the general assets of the bank. This last, perhaps more completely than any other. supposition shows the artificial character of the assumption that the bank officers may be supposed, as long as they left enough to satisfy the trust fund, to have intended to use only the money which the bank had a right to use.. I think, then, that it must be evident that at the times of the failures the trust fund was not either in the Texas bank, or in the one whose case is at bar, unless considered in the banks by reason of Bome artiticialrule. The exception to the rule in' Clayton's Case, Illade in PenneU v. Dej'elland KnatchbiLll v. Hallett, was- not,as I have shown', artifiolal, but in consonance with the facts of these cases. To apply it or any rule analogous to it to the case
PHI,I,ADELPIHA NAT·. BANK V. DOWD.
183
at bar would be to make use of a legal fiction. The officers of the bank had no intent to make any difference between the money collected for their correspondents and that passed over the counters of the bank by depositors. 'It would be equally objectionable, because equally a false to say that the money, having been traced into the banksafe, and not accounted for, must be presumed to remain there until the contrary can be proved; and that, the contrary not having been proved, the court will presume the money in, the safe to contain that of the beneficiary.' The contrary is proved to a moral certainty by all the facts of the case. To say that it does not lie in the trustee's mouth to assert that it had been wrongfully paid out would be to invoke a doctrine of estoppel not applicable to a receiver who represents creditors, as well as the delinquent trustee, and who must therefore be allowed to show the very truth of the matter. I have treated this case as one in which the plaintiff is entitled to be considered as a cestui que trust. ' I think that it is not entitled to be so considered, but, that it ought to be treated as an' ordinary creditor, because the money collected, or at least a large part of it, was allowed to remain for several months with the defendant's bank. ' As I understand the course of business among banks, in regard to collections of this kind, it is p.ot expected that the same moneys that are cOllected shall be for)Va1'9..ed. '. On the contrary, they are uniformly treated as is the inoney of ordinary depositors, and are· remitted by means of the system of exchanges of fprms a part of the gen,eral mercantile business ,,of the country The result of giving suchcollectiol1s a preference over , the ordinary debts of a hank will be to make national banks preferred The statcreditors in every case of insolvency of other national ute (Rev. St. § 5242) forbidding. preferences in the distribution of the assets of insolvent national banks is not believed to prevent aberieficiary from following money held for him by a bank into any new 'investmehtthereof made by the bank. If, however, the doctrine could be carried to the extent claimed in the Wisconsin or even in the Texas case, it would seem to be an unlawful preference uuder thaact ofcongress. Since writing the foregoing, my attention has been called toa case not accessible when the case at bar was argued. In Cavin v Gleason, 105 , N. Y. 256; 11 N. E. Rep; 504, one in whose hands money had been placed to be invested used the entire amount .excepting $30 in paying his personal debts, and made an assignment. Held, that the creditor was not entitled to a preference, except as to the. $30. which, as it apcame into the hands of the assignee. ANDREWS, J., delivering' the of the court, says: "It is clear, we think, that upon an accounting in bankruptcy or insolvency a trust m;.editor is not entitled to a preference overgeneral creditors of the in,'solvent merely on the ground of the nature of his claim. * * * We know ,of no anthority for such a contention. * * * If it appears that trnst 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 that the things into which the trust property has been changed should. if required. be
184
set apart for the trust, or, if separation is impossible, that priority of lien should be adjudg-ed in favor of the trust-estate for the value of the trust propperty or funds, or proceeds. of the trust property, entering into and constituting a part of the assets. This rule simply asserts the right of the true owner tobis own property. But it is the general rule '" '" '" that, in order to follow trust funds, ... '" '" they must be identified. ... '" '" The courts below seem to have proceeded upon a supposed equity springing from the circumstance that, by the application of the fund to the payment of White's creditors, the assigned estate was relieved pro tanto from debts which otherwise would have been charged upon it, and that thereby the. remaining creditors ... '" ... will be benefited. We think this is quite too vague an equity for . Judicial cognizance." Bill dismissed without prejudice.
WALLACE
et al.
'V. MYERS,
Comptroller.
(Oi'l'cuit Oourt, S. D. Nf/lD York. March 28,1889.)
1.
CONSTITUTIONAL LAw-INHERITANCE TAX.
Act N. Y. 1885, as amended by Laws 1887, Co 713. imposes a tax of IS per cent. apon the value of property passing to any person not within certain degrees of consanguinity to the decedent. by will or the intestate laws. from any person who may die seised or possessed of the same while a resident of the state. or which IS within the state at the time of his death. Held, that as the law operates alike on all property and persons similarly situated, and the assessment is made by a judicial officer. after due notice and opportunity to be heard. it does not conflict with the fourteenth amendment to the federal constitution. Where the property of the decedent includes United States bonds, the tax may be assessed upon the basis of their value. The tax is. not imposed upon the bonds, but is merely a tax upon the privilege of acquiring property by inheritance. On demurrer to bill.
S.
SAME-TAX ON UNITED STATES BONDS.
In Equity.
Bill for injunction. Cornelius Jiliske, for complainants.
Oha'l'le8F. Tabor, Atty. Gen., for defendant. WAUJACE. J. This is a suit to restrain the defendant, as comptroller of the city of New York, from collecting certain taxes assessed under the provisions of the act of the legislature of the state of New York of 1885, entitled "An act to tax gifts, legacies, and collateral inheritances in cer. tain cases," as amended by chapter 713 of the Laws of 1887. These laws impose a tax of 5 per centum upon the value of the property passing to any person not within certain degrees of consanguinity to the decedent by will or the intestate laws of the state, from any person who may die seised or possessed of the same while being a resident of the state, or which is within the state at .the time of his death. The bill of complaint shows that ill the present case there was included in the property of the decedent, upon which the tax was assessed, $28,000 of
