Myers v. Board of Education

The opinion of the court was delivered by

Johnston, J.:

There is no doubt or question about the character of the moneys, amounting to $3,055.71, sought to be recovered in this action. They were school funds, collected and held for specific public purposes, and the bank, its owners, and manager, all knew of. the trust character of the funds, and hence there is no excuse for their misappropriation. The treasurer of the board of education, who placed these trust funds in the bank, was its manager, and without authority from the board of eduсation he mingled them with the funds of the bank, and used them in paying the creditors of that institution. At one time, subsequent to the last deposit of school money, the total amount of cash on hand in the bank was $544.15, and subsequent to that time $1,236.08 was drawn from the funds of the bank upon the order of the board of education. When the bank closed, the whole amount of cash on hand was $1,535.57. It is said that no portion of this sum was the identical money received from the board of education, and that neither the money nor any sрecific property into which it had been converted can be clearly traced to the hands of the assignee. Under these circumstance, has the board of education a preferred right over general creditors to the аssets in the hands of the assignee? It is not denied that the school funds were impressed with a trust, and, if susceptible of identity, could be followed and reclaimed from the assignee. It is also admitted that, if they could be traced into any other specific property, the cestui que trust might claim such property or a lien upon it; but it is insisted that, unless the trust funds can be traced and identified, the cestui que trust is to be treated as a simple creditor, and not entitled to an equitable preference in the distribution of the assets of the еstate. The view of the plaintiff in error is not without support; and many of the older cases, while holding that a trust fund wrongfully converted into another species of property of whatever form will be held ‍​​‌​‌‌​‌‌​‌‌​‌‌‌​​​​‌‌​​​‌​​‌‌​‌‌​​​‌​‌‌‌‌‌‌‌‌‌‌‍liable to the rights of the beneficial owner in its nеw form, if its identity can possibly be traced, still adopt the old doctrine, stated by Judge Story, as follows: “The right to follow a trust fund ceases when the means of ascertainment fail, which, of course, is the case when the subject-matter is turned into money and mixed and confounded in a general mass of property of the same description.” (Story, Eq. Jur., §259.) The modern doctrine of equity, and the one more in consonance with justice, is, that the confusion of trust property so wrongfully converted does not dеstroy the equity entirely, but that, when the funds are traced into the assets of the unfaithful trustee, or one who-has knowledge of the character of the funds, they become a. charge upon the entire assets with which they are mingled. This principle was fully rеcognized, and the question in the present case was substantially decided, in Peak v. Ellicott, 30 Kas. 156. In that case it was said:

“As the money was a trust fund, and never belonged to-the bank, its creditors will not be injured if it is turned over by the assignee to its owner. Even if the trust fund has been mixed with other funds of the bank, this cannot prevent the plaintiff from following and reclaiming the fund; because, if a trust fund is mixed with other funds, the person equitably entitled thereto may follow it, and has a charge on the whole fund for the amount due.”

It would seem to be immaterial whether the property with which thе trust funds were mingled was moneys or whether it was bills, notes, securities, lands, or other assets. The bank which assigned in this case appears to have been engaged in a general business, and its assets consisted of moneys, securities, and lands; and, as the estаte was augmented by the conversion of the trust funds, no reason is seen, under the equitable principle which has been mentioned, why they should not become a charge upon the entire estate. In McLeod v. Evans, 66 Wis. 401, an unfaithful trustee made an assignment, and among thе assets there was a small amount of cash, and it was not shown that it was a part of the proceeds of the draft or trust fund. The question was whether the owner of the trust fund stood upon the same ground as the ‍​​‌​‌‌​‌‌​‌‌​‌‌‌​​​​‌‌​​​‌​​‌‌​‌‌​​​‌​‌‌‌‌‌‌‌‌‌‌‍general creditors of the trustee, or whether he had a paramount right to be first paid out of the assets of the estate. It was found that the proceeds of the- trust property were used by the trustee either to pay off his debts or to increase his assets, and it was held to be unnecessary to trace the trust fund into any specific property in order to enforce the trust, and that, if it could be traced into the estate of the defaulting agent or trustee, that was sufficient. It was further decided, that whether the trust funds were used to increase the assets or to pay off the debts, in either case it would be for the benefit of the estate, and, having been so used, it was held that a trust attached to the entire estate which came into the hands of the assignee. The court in that case cites Peak v. Ellicott, supra, and expressly approves the doctrine of that case.

In Independent District v. King, 80 Iowa, 497, the treasurer of a school district, as in this case, wrongfully deposited the funds of the district in a bank, which knew the character of the funds. Subsequently the bank failed, and made an assignment for the benefit of its creditors. It was there insisted that, as none оf the identical money deposited went into the possession of the assignee, no trust could be enforced against the estate of the assignor, to the prejudice of other general creditors. Speaking of the bankers, the court sаid that they

“Were fully advised as to the material facts, and therefore could acquire no title to the deposit adverse to the plaintiff. As to them, the money constituted a trust fund, which they had no right to convert to their own use; and the fact tha they mingled it with other money, so that the identity of that deposited was lost, would not destroy the trust character of the deposits, nor prevent the enforcement of the trust against property to which they had contributed. To hold otherwise would be to ratify a willful violation of law, at the expense of an innocent party, and thus perpetrate a wrong. The defendant (who was the assignee) acquired no property rights as against plaintiff which the Cadwells (the bankers) could not have enforced, and he had no special interest which requires protection. The same is true of the general creditors. They are entitled to only so much of the estate of the insolvents as remains after liens paramount to their claims and other рreferred charges are satisfied.”

In Plow Works v. Lamp, 80 Iowa, 722, the supreme court of Iowa considered the ‍​​‌​‌‌​‌‌​‌‌​‌‌‌​​​​‌‌​​​‌​​‌‌​‌‌​​​‌​‌‌‌‌‌‌‌‌‌‌‍same question, in a case where the trust funds had been used, as in the present case, by the trustee for the payment of debts. The trustee having become insolvent and made an assignment, the assignee contended that the estate in his hands was not chargeable with the trust funds, but that the owner of the funds should be placed on an equal footing with general creditors, and only receive a pro rata payment out of the estate. The court said:

“The money was used by the Globe company in its business, and in payment of its debts. It became liable to the plaintiff to replace the trust funds with other money in its possession, or with money realized out of other property. Of course, the Globe company and its stockhоlders can urge no equity nor reason against the enforcement of these rules. Can its creditors? We think not, for these reasons: The money was wrongfully mingled, as it were, with the assets of the company. The money did not belong to the Globe compаny. The creditors, if permitted to enforce their claims as against the trust, would secure the payment of their claims out of trust moneys. If they are not permitted to do this, they are simply denied the remedy of enforcing their claims against property acquired by the use of trust money. They are deprived of no rig'ht, for the property acquired by the trust money became subject to the trust, and, therefore, could not have been subject to the claims.”

In Harrison v. Smith, 83 Mo. 210, where trust money was wrongfully mingled with the funds of a bank whiсh became insolvent and subsequently made an assignment, it was held that, although the trust money was not clearly traceable to any particular asset of the bank, the fact that it went into and swelled the volume of its assets gave the beneficial оwner an equitable right to have his demand first paid out of the assets of the estate and before distribution was made, to the general creditors. The same court in a later case held, that while it might

“Be impossible to follow the fund in its diverted uses, it is always possible to make it a charge upon the estate of assets to the increase or benefit of which ‍​​‌​‌‌​‌‌​‌‌​‌‌‌​​​​‌‌​​​‌​​‌‌​‌‌​​​‌​‌‌‌‌‌‌‌‌‌‌‍it has been appropriated. The general assets of the bank having received the benefit of the unlawful conversion, there is nothing inequitable in charging them with the amount of the converted fund as a preferred demand.” (Stoller v. Coates, 88 Mo. 514.)

This principle of equity was approved by the supreme court of the United States in National Bank v. Insurance Co., 104 U. S. 54, where it was held that—

“If a man mixes trust funds with his, the whole will be treated as trust property, except so far as he may be able to •distinguish what is his. This doctrine applies in every case of a trust relation, and as well to moneys deposited in bank, and to the debt thereby created, as to every other description of property.”

See, also, Knatchbull v. Hallett, 13 Ch. Div. 696; People v. Bank, 96 N. Y. 32; National Bank v. Hummel, 14 Colo. 259; Smith v. Combs, 24 Atl. Rep. 9; County v. Bank, 52 Fed. Rep. 59. These authorities are in line with Peak v. Ellicott, supra, and fully sustаin the ruling of the district court in this case making ‍​​‌​‌‌​‌‌​‌‌​‌‌‌​​​​‌‌​​​‌​​‌‌​‌‌​​​‌​‌‌‌‌‌‌‌‌‌‌‍the trust, fund a charge on the assets in the hands of the assignee.

The court below held that the fact that the board of education sought and obtained some security from H. G. Higinbotham, who had been the treasurer of the board, for the payment of the money which he had misappropriated, did not prevent the board from following and recovering the trust fund. In this we see no error. As treasurer of the board, he was personally liable for the wrongful conversiоn of the money intrusted to him. The collateral security for the payment of the money was taken soon after the assignment was made, and before it was known whether the trust money could be reclaimed; and, probably, it was not then known whether therе were sufficient assets against which the trust might be enforced. The taking of collateral security for the whole of the trust fund which the board was seeking to find, or for that part which they might ultimately fail to recover, does not appear to us to be inсonsistent with the remedy sought in this action, and should not prevent it from insisting upon its equitable lien against the assets of the estate. The rights of no creditor of the bank have beeen prejudiced by the taking of the security, and it does not appear thаt any-proceeding to enforce the same has been begun.

Another point made by plaintiff in error is, that the board, having failed to present its claim to the assignee for special allowance, is precluded from availing itself of its еquitable lien against the assets of the estate. This contention is based on the provisions of § 21 of the assignment act. It provides that, the assignee shall give certain notice to the creditors of the estate of the time for the presentаtion and allowance of demands; and further, that all creditors who, after being notified, fail to attend and present the nature and amount of their demands, shall be precluded from any benefit in the estate. This point cannot be sustained. Under the viеw which we have taken, the board of education can hardly be regarded as a “creditor,” within the meaning of the statute. The funds sought to be recovered, were never the property of the bank. The title and beneficiary interest in the samе remained in the board of education, so that the relation of debtor and creditor never in fact existed between the bank and the board. (National Bank v. Hummel, supra.) But even if the board was to be treated as a creditor under this statute, (which we need not dеcide now,) it is not concluded by its failure to present a claim for the trust money to the assignee. No written notice as required by § 21 was given to the board of education, or any officer or member thereof, of the time when claims would be heаrd and allowed by the assignee. A notice was sent to H. G. Higinbotham, but at that time he was not the treasurer of the board. If the board of education is to be regarded as an ordinary creditor, it should have been notified; and, as the notice was not given, there can be no claim that it is estopped to avail itself of the remedy which it is now seeking.

The judgment of the district court will be affirmed.

All the Justices concurring.

Case Details

Case Name: Myers v. Board of Education

Court Name: Supreme Court of Kansas

Date Published: Jan 15, 1893

Citation: 51 Kan. 87

Court Abbreviation: Kan.