Pearson v. Haydel

GOODE, J.

The proof before us shows that the sums collected by the decedent, as attorney in fact for Sarah M. *258 Pearson and mingled with the funds of Haydel & Son, were paid out by that firm in the usual course of business. There are, too, the proceeds of the insurance policy which the administrator collected after his intestate’s death. We know none of the trust money is in that asset. Is the respondent entitled to a lien on any of the estate’s property? If so, should it extend over the insurance money? The old doctrine that the trust property must be earmarked or identified before a lien will attach, has been abandoned both in England and this country. But the applications of the more liberal and logical modem view are far from uniform. Most cases hold that positive identification of the property or fund is not necessary to afford the plaintiff a right to priority. The crux is here: Must it appear that the residuary assets, so to speak, those which passed into the hands of the assignee, receiver, administrator or other representative, are greater because the trust property or fund, or its substitute, is actually contained therein, or does it suffice to show the trustee used the fiduciary property in his business prior to becoming insolvent, so that, presumptively, the estate is thereby better off ? The rule may be applied according to either theory, but the two rest on entirely different bases. The first is simply a reasonable extension of the earmark doctrine, permitting a person to take wha.t belongs to him; the other is a preference allowed on supposed equitable grounds. The underlying principle of the equity was, originally, that the cestui que trust was entitled to his property from the hands of the insolvent to whom it had been confided as his representative. He stood, not as a creditor with a demand, but as owner; and the rights of creditors were unaffected by turning over to him his own, since their debts were only claims against what the insolvent held in his own right and not in trust for others. “The right to follow trust funds has its basis in the right of property, and the court proceeds on the principle that the title has not been affected *259 by the change made of the trust funds,” said Justice Peck-ham in Holmes v. Gilman, 138 N. Y. 369 . The doctrine is akin to the legal one that a bailor may follow the article bailed into any person’s hands and recover it, so long as its identity remains unimpaired (Hendricks v. Evans, 46 Mo. App. 313 ), and, like other equitable remedies, was invented for instances not adequately relieved at law. It was by comparison with a case of bailment of merchandise to a factor that Lord Hardwicke held money could not be followed in equity because “it had no earmark,” thus founding the eármark rule. Whitcomb v. Jacob (1711) 1 Salk. 161. But if the money was turned by the trustee into a note or other property capable of identification, this could be followed either at law or in equity. Ryall v. Rolle, 1 Atk. 165; Scott v. Surman, Willes, 400; Ex Parte Sayers, 5 Ves. 169; Taylor v. Plummer, 3 M. & S. 562. Lord Hardwicke’s authority was ultimately overruled because money can be earmarked or identified, as well as other things. Kept in a separate receptacle, it is perfectly susceptible of identification. The cases very rationally, therefore, extended the rule to include money, as well as other definitely ascertainable articles. Taylor v. Plummer, supra; Ex Parte Dale & Co., 11 Ch. D. 772. It was not long before it was ruled, in a series of cases, that the trust fund may be pursued by the cestui que trust into the hands of the insolvent’s representatives although indistin-. guishably commingled with his own; provided it is clearly shown that the fund, its product or substitute, is actually in the mass — whenever there is distinct proof that the trust property passed into the estate held by the trustee’s representatives. Pennell v. Dyfell, 4 D. M. & G. 372; Knatchbull v. Hallett, 13 Ch. D. 708; Birt v. Burt, reported in note to Ex Parte Dale, 11 Ch. D. 773; Taylor v. Plummer, supra; Ex Parte Cook, 4 Ch. D. 123; National Bank v. Insurance Co., 104 U. S. 54 . After the courts had shaken off the bondage of the *260 earmark theory, it resulted naturally that they should declare a charge in favor of cestuis que irustent on the mass of the insolvent’s assets if the trust money was commingled with them so as not to be separable, provided it was still there. Knatchbull v. Hallett, supra; National Bank v. Insurance Co., 104 U. S. 54 ; Oliver v. Piatt, 3 How. 333 . In such instances, all the assets of the trustee will be treated as trust property except what he can distinguish as his own. The burden is on him. Nat. Bank v. Ins. Co., supra. And where the party sustaining the fiduciary relationship dies, his executor or administrator takes the property subject to the same equities that existed against the decedent. Tiernan’s Ex’r v. Building & Loan Ass’n, 152 Mo. 135 .

The foregoing propositions are supported by practically all the authorities, but most of them stop at this point. Where is is found the fund was dissipated by the insolvent and did not reach his representative, or sufficient proof to trace it there is lacking, relief is commonly denied. Slater v. Oriental Mills, 18 R. I. 352; Gavin v. Gleason, 105 N. Y 256 (1887) ; Steamboat Co. v. Locke, 73 Me. 514 (1882); Goodell v. Buck, 67 Id. 514 (1887) ; McLarren v. Brewer, 51 Id. 402; Thompson v. White, 45 Id. 445; Appeal of Hopkins Ex’r (Pa.), 9 Atl. Rep. 867 (1897) ; Thompson’s Appeal, 22 Pa. St. 16 (1853) ; Cunningham’s Est., 2 Am. L. Reg. (O. S.), 120 (1885) ; Jeffris’ App., 33 Pa. St. 39 (1859) ; Abbott v. Reeves, 49 Id. 494 (1865) ; Wylie’s and Quail’s App., 92 Id. 196 (1879) ; People’s Bank App., 93 Id. 107 (1880); Williams’ App., 101 Id. 474 (1882) ; Seguin’s App., 103 Id. 139 (1883) ; Neely v. Reed, 54 Mich. 134 (1884) ; Bank v. Weems, 69 Texas 489 ; Bank v. Russell, 2 Dill. 215, 217 (1873) ; In re January, 4 N. B. R. 100 (1874) ; In re Coan, etc., Mfg. Co., 12 Id. 203 (1875); Knatchbull v. Hallett, Pennell v. Deffel, Ex Parte Hardcastle, Bank v. Insurance Co., all supra; Frith v. Cartland, 2. H. & M, 417; In re *261 Mason, 44 L. T. (N. S. 523) ; Philadelphia Nat’l Bank v. Dowd, 38 Fed. R. 172; Commercial Nat’l Bank v. Armstrong, 39 Fed. R. 684. The doctrine is based on a fiduciary relationship — a trust. But there can be no such thing unless there is property held in trust. If it is gone, on what shall the trust subsist ? If, in such case, a charge is declared in favor of the plaintiff, despite the fact that there is no trust property left, it is necessarily allowed him in some other capacity than as a cestui que trust. It must then be on' a principle somewhat analogous to that on which compensation is granted to an ejected purchaser of land for improvements made on it in good faith. The trust money having gone to the betterment of the insolvent’s estate, he is afforded compensation. Such is the only plausible, consistent théory to justify the relief. This doctrine was announced in Meyers v. Board of Education, 51 Kan. 87 ; McLeod v. Evans, 60 Wis. 401 ; District v. King, 80 Iowa 497 ; Bank v. Hummel, 14 Colo. 259 ; San Diego Co. v. Bank, 52 Fed. 59 ; Peaks v. Ellicott, 30 Kan. 156 . These authorities hold that enrichment of the estate by trust money suffices, and some of them that its use in the bankrupt’s business warrants the conclusion of enrichment. The Wisconsin decisions to that effect were subsequently overruled. Nonotuck Silk Co. v. Flanders (Wis.), 58 N. W. 383 . It is obvious these cases do not, in fact, whatever they may assume to do; treat the question according to the law of trusts. They simply allow a preferential equity on other grounds. While that is a departure from the original principle on which relief was granted, it is not necessarily unjust if the charge is allowed for no more than it clearlv appears the estate was benefited. Creditors will be no more damaged by taking that sum out of the assets, although the trust money is not shown to be there, than they are by subtracting the amount of the original fund from them when it is shown to be there. But if it is carried further an injustice arises; which consists *262 in assuming tbe estate was enriched, increased or benefited merely because trust property was received by the insolvent. It is at once seen that this presumption is unwarranted. The fiduciary fund may have been squandered, lost or destroyed.

When we inquire what the rule is in this jurisdiction, the answers given by the opinions which treat of it are fluctuating. A departure from the earmark rule was recorded in Harrison v. Smith, 83 Mo. 210 . The trust fund in that case was probably untraceable into the residuary assets taken by the bank’s assignee; but those assets were increased by it, because it had been received by the bank only a few days before the assignment was made and mingled with its other funds. The decision is authority for the doctrine that it is sufficient if the residuary assets are benefited although the fund is not among them; but is not authority that the mere reception and conversion to his own use by an insolvent of trust money, entitles its owner to priority. It is wholly inconsistent, of course, with the theory that the cestui que trust was recovering his own property, which he was bound to identify. In other words, it departed from the principle that title was necessary in the plaintiff and from the equitable doctrine of trusts. The trust property was entirely gone.

The same observations may be made concerning Stoller v. Coates, 88 Mo. 514 , where the facts were not materially different. The bank got the money a few days before failing and paid it out in the course of business; but the estate taken by the assignee was bettered by its use.

So in Bank v. Sandford, 62 Mo. App. 394 ; Leonard v. Latimer, 67 Mo. App. 138 ; Bircher v. Sheet Metal Ornament Co., 11 Mo. App. 509 ; Evangelical Synod v. Schoeneich, 143 Mo. 652 ; Pundmann v. Schoeneich, 144 Mo. 149 ; Brick Co. v. Schoeneich, 65 Mo. App. 283 ; Tiernan’s Ex’r v. Building and Loan Ass’n, 152 Mo. 135 ; Wittich v. Zumbalen, not yet reported. The Schoeneich cases, which grew out of the fail *263 ure of S. EL Merton & Co., of St. Charles, Missouri, discuss this question exhaustively, particularly the Evangelical Synod case, 143 Mo., supra. In that instance, the insolvent firm had the use of the trust deposits in their business; but no portion of them had passed into the hands of the assignee, either as distinctly earmarked or mingled with a mass of money on hand at the time of the failure, for there was practically no money on hand. This is true of most of the cases just cited and excludes the belief that the trust assets could be traced into the estate of the trustee. But it was positively shown in the Evangelical Synod ease that the money had been used in the course of the insolvent firm’s business, and not lost, destroyed nor wasted; so the inference was fair that the estate was larger on account of the use of the trust fund.

There is another line of cases in which priority has been denied the trust claimant, among which may be noticed Midland Nat’l Bank v. Brightwell, 148 Mo. 358 ; Paul v. Draper, 158 Mo. 197 ; Ulrici v. Boeckeler, 72 Mo. App. 661 ; Meystedt v. Grace, 86 Mo. App. 178 .

In Midland Nat’l Bank v. Brightwell, 118 Mo., supra, the Midland Bank’s paper had gone into the Slater Savings Bank, of which Brightwell was assignee, only five days before the failure. The opinion approves all the previous cases, holding such preferences to be sound in principle, but contains this expression which harks back to the older theory. “The creditors of an insolvent person or corporation are entitled to subject his estate to their demands, but justice and equity give them no right to appropriate the estate of another which he holds in trust.” The plaintiff was refused a recovery because no funds had actually been received by the Slater Savings Bank, as the whole claim grew out of an exchange of credits on the books.

There are recent decisions on the subject: Paul v. Draper, 158 Mo. 197 ; Bircher v. Walther, 63 S. W. 691 . The *264 last case reversed the judgment of this court decreeing a preference. Bircher v. Sheet Metal Ornament Co., 77 Mo, App., supra. There, as here, the fund intrusted to the insolvent by the plaintiff appeared to have been paid out in the course of business and a lien was refused because there was no evidence to show that any part of it passed to the trustee under the company’s deed of trust. The opinion undertakes to collect the true doctrine from all the cases and states it as follows: “The rule is, as we understand it, that if trust property has been mingled by the trustees with his own property, so that one can not be distinguished from the other, and he transfers his property to a trustee or' assignee for the benefit of his creditors, a court of equity, as between the cestui que trust and the personal creditors of the trustee, will follow the trust property or its proceeds, cmd if the same can he traced into the property or assets transferred to the trustee or assignee, will impress upon such property or assets a lien in favor of the cestui que trust to the extent that the property or assets transferred havd been swelled by the trust property or its proceeds. This equitable lien is based upon the idea that the trust property or its proceeds, though not distinguishable, is in the assigned property or its proceeds, in some shape, and not upon the fact that the trustee wrongfully commingled the trust property or its proceeds with his own, and the proceeding in equity is not to charge the property or assets in the hands of his trustee or assignee with his wrongdoing. But is in fact, though not in form, a proceeding in equity between the cestui que trust and the personal creditors of the trustee for an equitable separation of the trust property or its proceeds, which should go to the cestui que trust, from the debtor’s own property or its proceeds which should go to his personal creditors; or, rather, for an equitable adjustment on that basis.” '

The rule thus enunciated requires the trust fund or its proceeds to be still mixed with the mass of the insolvent’s *265 estate in the hands of his assignee, trustee or other representative, in order for a preferential lien to be declared, and holds that the fact that it was at one time wrongfully mingled with it, is insufficient to authorize a preference. Whether this view, which was also taken in Paul v. Draper, 158 Mo., supra, is strictly consistent with all that was said in some of the other cases, need not be discussed. It is the law as declared in the latest decisions.of our Supreme Court and must control the determination of the present controversy adversely to the prayer of the petition as to the decedent’s general estate and, a fortiori, as to the insurance policy.

The judgment of the lower court is, therefore, reversed and the bill dismissed.

All concur; Bland, P. J., in a separate opinion.