In re J. M. ACHESON CO. GINSBURG et al. v. MEARS et al., 170 F. 427

HUNT, District Judge (after stating the facts as above).

While the claimants’ petition praying that their claim be allowed as a preferred one is defective in not setting forth with more definiteness facts as to how much of the trust funds alleged to have come into the bankrupt’s hands were used by the bankrupt in payment of its employés and its running expenses, or in paying its other creditors, or in purchasing sundry other goods and merchandise, nevertheless we think the petition is sufficient to show that there was a delivery to the bankrupt by petitioners of certain goods on consignment of the value of $4,212.25, such delivery having been made within two years prior to the filing of claimants’ petition, and that the bankrupt had disposed of the goods so delivered on consignment except goods of the value of $1,483.75, which were returned to petitioners by order of the bankruptcy court.

It also sufficiently appears that the bankrupt had only paid $500 of the money received by it from the sales of the goods so delivered to it; that the moneys received by the bankrupt were due as soon as sales of said goods were made; that all funds received by the bankrupt from the sales of said goods which were not paid over to petitioners were to be held in trust and in a fund separate from the other funds of the bankrupt, and that the bankrupt wrongfully mixed the funds so received by it with its own and used the said trust funds to pay its current running expenses, its creditors other than petitioners, and to buy merchandise, which merchandise composed the bankrupt’s assets which passed into the hands of the receiver of the court and were by him sold.

It is also to be taken as a fact that the trustee in bankruptcy is the same person who was the receiver, and that as trustee he has in his possession funds received from the sale of said assets more than enough to pay the claimants’ claim in full. The question arising then upon these allegations is, do they constitute a prima facie showing of a charge upon the funds in the trustee’s hands in favor of the owners of the goods? And, if so, to what extent does it reach? The doctrine of equity as sustained by the Supreme Court in National Bank v. Insurance Co., 104 U. S. 65, 26 L.

Ed. 693, approving the rule in Hallett’s Estate, 13 Ch. Div. 696, is that if property is intrusted to another to sell and pay over the proceeds, and sale is made, the beneficial owner is entitled to the proceeds, whatever be their form, provided only he can identify them. If the proceeds cannot be identified because the trust money is mingled with the money of the trustee, then the cestui que trust is entitled to a charge upon the new investment to the extent of the trust money traceable into it.

Justice Matthews writes of the rule as going far enough to cover not alone express trustees and agents, but bailees, rent collectors, or “anybody else in a fiduciary position,” and as making “no difference between investments in the purchase of lands or chattels or bonds or loans or moneys deposited in a bank account,” and he shows very clearly that the foundation of the doctrine rests upon the “very idea of trusts,” which can only be preserved by a strict enforcement of the principle that one who holds a relationship of trust is not allowed to make private use of trust property. “The rule in equity is ‘that, as between cestui que trust and trustee, and all parties claiming under the trustee otherwise than by purchase for a valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or altered state, continues to be subject to or affected by the trust.

This settled doctrine of equity has its «basis in the right of property. * * * But it is the general rule, as well in a court of equity as in a court of law, that, in order to follow trust funds, and subject them to the operation of the trust, they must be identified/ Andrews, J., in Cavin v. Gleason, 105 N. Y. 256, 11 N E. 504.” In re Hicks, 170 N. Y. 195, 63 N. E. 276. Application of the doctrine as stated was made by this court in City of Spokane v. First Nat. Bank, 68 Fed. 982, 16 C. C.

A. 85, where it was held that where a trustee had wrongfully mixed and commingled with his own funds moneys known to be trust funds, and thereafter wrongfully invested such funds in securities which remained in his hands, the owner of such funds was entitled to follow the same in the form in which they had been converted, and could impress a trust for his benefit.

In carrying out the rule, when it comes to proof, the owner must assume the burden of ascertaining and tracing the trust funds, showing that the assets which have come into the hands of the trustee have been directly added to or benefited by an amount of money realized from the sales of the specific goods held in trust; and recovery is limited to the extent of this increase or benefit. City Bank of Hopkinsville v. Blackmore, 75 Fed. 771, 21 C. C. A. 514; Cushman v. Goodwin, 95 Me. 353, 50 Atl. 50.

If, however, he succeeds in making requisite proof, it then devolves upon the bankrupt, or the trustee who takes the property of the bankrupt in the same relation that it was held by the bankrupt, to distinguish between what is his and that of the cestui que trust. Smith v. Mottley, 150 Fed. 266, 80 C. C. A. 154; Smith v. Township of Au Gres, 150 Fed. 257, 80 C. C. A. 145, 9 L. R. A. (N. S.) 876.

We do not mean to be understood as holding that equity will grant to a cestui que trust relief against any assets in the hands of a trustee, for it will not go farther than to give a lien when the facts are that there remain in the estate. specific funds or property which have increased the assets of the estate, and which represent the proceeds of the specific property intrusted to the bankrupt. Lowe v. Jones, Adm’r, 192 Mass. 94, 78 N. E. 402, 6 L. R. A. (N. S.) 487, 116 Am. St. Rep. 225.

Moreover, if there has been expenditure, and the funds are gone, and no specific property or money is found instead of the funds, it is inequitable that some other property found should be applied to pay one creditor in preference to another. So, funds that have been dissipated or that have been used to pay other creditors or that have been spent to pay current business expenses are not recoverable, because they are gone and there is nothing remaining to be the subject of the trust.

This qualification of the general rule is to be applied to the facts pleaded in the present case, inasmuch as it is alleged that some of the trust moneys were used by the bankrupt in paying its employés, and in the expenses of running its business, and in paying other creditors. For them there can be no recovery. Slater et al. v. Oriental Mills et al., 18 R. I. 352, 27 Atl. 443; Nonotuck Silk Co. v. Flanders, 87 Wis. 237, 58 N. W. 383.

But for the moneys represented by assets which went into the hands of the receiver under the circumstances alleged, and which the petition charges that the receiver had when claimants filed their petition, there appears to be an equitable claim, to support which petitioners should be allowed to* introduce evidence. Our conclusion is that the lower court erred in affirming the order of the referee denying claimants’ petition.

The order of the District Court is therefore reversed, and the case remanded with directions to send the matter back to the referee with instructions to overrule the demurrer interposed by the trustee and to require an answer.