Drovers' & Mechanics' National Bank v. Roller

McSherry, C. J., delivered the opinion, of the Court. There are two questions to be disposed of on this appeal and they both arise upon exceptions to an Auditor’s report. One involves quite an interesting question of law, the other chiefly a question of fact. The circumstances out of which the first question grows are these : The firm or copartnership of Sheeler and Ripple had for a number of years been engaged in the live stock commission business in Baltimore.

Qn the seventeenth day of January, 1895, D. & W. Roller, of Tennessee, consigned to Sheeler and Ripple for sale a quantity of live hogs which when received by the consignees on January the twenty-first, were sold in several lots for the consignors ; and on January the twenty-fourth ⁴⁹⁷ an account of sales, together with a check for the net amount of the proceeds after deducting commissions and freight charges, was mailed to the consignors. On the thirty-first of January Sheeler and Ripple being then and apparently having been for some months anterior thereto hopelessly insolvent, executed a deed of trust for the benefit of their creditors, and when the check given to D. & W. Roller reached in due course on the second of February the Drovers’ and Mechanics’ National Bank upon which it had been drawn, there were no funds in bank to the credit of the drawers — they having previously overchecked their account — and the check was dishonored. The funds actually received by Sheeler and Ripple for the hogs sold had been paid out on other checks given for other demands. Most of the hogs were sold for cash and the proceeds, without ear-mark or identification, were placed to the credit of Sheeler and Ripple intermingled with funds of their own in the Drovers’ and Mechanics’ National Bank where the partnership bank account was kept; but a portion of the hogs had not been paid for by the purchasers of them when the deed of trust was made, and afterwards the trustees collected and now have in their hands these particular proceeds of sales.

D. & W. Roller filed their claim in the trust estate for the whole nett proceeds of sale and insist that they are entitled to a priority over other creditors to the extent of the whole nett proceeds of the sales of their hogs. The assets in the hands of the trustees consist of collections made by them, but except as just stated, do not represent the proceeds of the sales of Roller’s consigned hogs, or the proceeds of the sale of any other property in which the proceeds of the sales of those hogs had been invested. The first question is: Are D. & W. Roller entitled, under these circumstances, to a preferential lien upon the general assets of Sheeler and Ripple in the hands of the trustees, for the full amount of the claim they have against the insolvent firm for the proceeds of the sales of the consigned hogs ? ⁴⁹⁸ With respect to the proceeds of sale which actually went into the hands of the trustees after their appointment there can be and there is no difficulty whatever. When goods or chattels are consigned to a commission merchant or broker for sale, the title does not vest in the latter, but remains in the consignor and the money arising from a sale of them is the money, not of the agent, but of the owner of the consigned property.

Hence, whenever the money can be traced it may be claimed by its owner, and upon an assignment being made for the benefit of creditors, the trustee can have no greater right to the money than his grantor, the consignee, possessed. The proceeds of the sales of Rollers’ hogs that have actually gone into the possession of the trustees and which are capable of identification, belong to the Rollers and must be paid ovér to them ; but quite another and a different condition exists in regard to the proceeds received by the insolvent firm and spent or dissipated by them before the trustees were appointed. The general doctrine in relation to the right of the owner of property or the cestui que trust to follow and reclaim his property is, we think, thoroughly settled. The early English cases only went to the extent of holding that the owner of property intrusted to an agent, factor or trustee could follow and retake his property from the possession of such agent, factor or trustees or others in privity with him, whether such property remained in its original, or had been changed into some different or substituted form, so long as it could be ascertained to be the same property or the product or proceeds thereof unless the superior rights of bona fide purchasers for value and without notice had intervened; but that such right or reclamation ceased when the means of ascertainment failed, as when the subject of the trust was money or had been converted into money and then mixed and confounded in a general mass of the same description, so as to be no longer divisible or distinguishable.

The more recent rule, however, in England as to following trust moneys is broader and goes to the extent of holding that if ⁴⁹⁹ money held by a person in a fiduciary character has been paid by him to his account at his bankers, the person for whom he held the money can follow it and has a charge on. the balance in the bankers’ hands ; and that if a person who. holds money in a fiduciary character pays it to his account at his bankers’ and mixes it with his own money, and afterterwards draws out sums by checks in the ordinary manner,, the drawer must be taken to have drawn out his own money in preference to the trust money. Knatchbull v. Hallett, 13 Ch. Div. 696. This Court in Englar v. Offutt, 70 Md. 78 ,, following closely the Supreme Court of the United States in Cent.

Nat. Bk. v. Commercial Ins. Co., 104 U. S. 54 , has announced the same principles. But it is now insisted that the doctrine has been expanded and amplified, and that though the funds cannot be traced or identified, a lien still exists upon the debtor’s general assets in the hands of his trustee, in favor of the owner or cestui que trust whose property or money has been mingled with that of the fiduciary, and has been used by him in liquidating other claims against himself; and that this lien is a preferential one over other creditors of the debtor.

The theory upon which this supposed enlarged doctrine rests, is that inasmuch as the wrongful application of the trust funds reduces the general indebtedness of the fiduciary, his assets, swelled to the extent of that reduction, ought to be impressed with a trust or lien in favor of the person whose money or property has been improperly employed and used to discharge the individual indebtedness. There are some cases which support this view. People v. City Bank, 96 N. Y. 32 ; McLeod v. Evans, 66 Wis. 401 ; Francis v. Evans, 69 Wis. 115 ; Brown v. Evans, 71 Wis. 133 ; Harrison v. Smith, 83 Mo. 210 , and some others. But it is obvious, even if these cases were not opposed to the general principles already alluded to, and even if they had not been questioned and some of them flatly overruled, that they proceed upon a wholly fallacious and untenable theory.

They are founded upon the assumption that the misapplication of the trust funds by the ⁵⁰⁰ Fduciary to the payment of his own debts actually swells the volume of his assets. This is the introduction of a .new and unsound principle into an old and well known doctrine of equity. But instead of such a misappropriation .swelling the volume of the debtor’s assets, it would merely •diminish the amount of his indebtedness, and this would benefit the estate only to the extent that it increased the percentage that the other creditors would receive provided the amount of the misappropriation were not deducted as a preferred demand. The case of People v. City Bank, 96 N. Y. 32 , which was followed in McLeod v. Evans, 66 Wis. 401 , if it can be held to support this new doctrine (for it is a. brief opinion resting on no well defined principle), is in •.conflict with the more recent case of Cavin v. Gleason, 105 N. Y. 256 , wherein it was expressly decided in disposing of ‘«this very contention, that it was “ quite too vague an equity for judicial cognizance;” and that there was “no case, justifying relief upon such a circumstance.” McLeod v. Evans, supra; Francis v. Evans, supra; Brown v. Evans, supra, determined by a bare majority of the Court, were subsequently overruled in Nonotuck Silk Co. v. Flanders, 87 Wis. 237 — the opinion of the Court being delivered by one of the Judges who dissented in McLeod v. Evans — and those cases are consequently no longer authority even in the State of Wisconsin.

In Slater v. Oriental Mills, 18 R. Is. 352; Shields v. Thomas, 71 Miss. 260 ; Ferchen v. Arndt, 26 Or. 121 ; (S. C., 29 L. R. A. 664); Philadelphia National Bk. v. Dowd, Receiver, 38