Miller & Co. v. Gibbs , 161 Ga. 698 ( 1926 )

Hines, J.

(After stating the foregoing facts.)

There are but two questions presented for decision in the main bill of exceptions in this case. One is, whether the trial judge erred in refusing to dismiss the exceptions of law and fact filed by the administratrix of Agnes L. Malcom; and the administrator of B. H. Malcom, to certain findings of law and fact made by the auditor. The trial judge did not err in refusing to dismiss these exceptions, under the propositions laid down in headnote 3 preceding this opinion.

The other and more serious question for decision is whether the claim of the administratrix of Agnes L. Malcom is entitled to priority of payment out of the assets of the firm of B. H. Malcom & Brother, over the general creditors of that firm. In 1913 B. H. Malcom as administrator of his wife, Agnes L. Malcom, collected a policy of insurance on her life, payable to her estate. The proceeds of this policy, amounting to $5,019, were deposited with the firm of B. H. Malcom & Brother, of which the administrator was a member, and were used by the firm in the conduct óf its business. The administrator died in 1920. The business of the firm was continued by the surviving partner until December 1922, when the latter filed the present petition to marshal the assets of the firm, on the ground of its insolvency. In this proceeding the administratrix de bonis non of Agnes L. Malcom seeks to trace this fund into the general assets of the firm, and to have the assets of the firm impressed with a trust for its payment, in preference to the unsecured creditors of the firm. The auditor found that the 'administratrix had failed to trace this fund into any particular fund or property of the partnership, and that for this reason she was not entitled to priority of payment out of. the firm assets over the unsecured creditors of the firm. The trial judge held, that, if this fund went into the assets of the firm and remained there until the assets of the firm were put into the hands of the receiver, she was entitled to such priority.

In a case where trust assets are misapplied and can be traced into the hands of a person affected with notice of the misapplication, the trust attaches still to the assets, and equity will aid in restoring them to their legitimate purpose. Civil Code (1910), § 3785. The beneficiary of a trust may always follow the trust funds wherever they can be traced. Johnston v. Janes, 48 Ga. 554; Gray v. Perry, 51 Ga. 180; Morgan v. Marshall, 62 Ga. 401; Planters’ Bank v. Prater, 64 Ga. 609; Chamblee v. Atlanta Brewing &c. Co., 131 Ga. 554, 557 (62 S. E. 1032). The right to trace trust funds is undeniable, and is undisputed. The method of tracing them is in dispute. What essential factors must exist before a beneficiary can successfully trace misapplied trust funds? Is it essential that the funds remain in the form in which they existed when the misapplication took place; or, if such form is changed, is it necessary, before they can be traced, to show that they exist in some specific fund or property? Let us put the concrete case involved in this litigation. If an administrator wrongfully turns over assets of his intestate to a firm of which he is a partner, and the same are used in the business of the firm and mingled with its assets, in which shape they remain until his death, when a surviving partner becomes possessed of the firm assets and conducts the partnership business until' the firm becomes insolvent, will a court of equity impress upon the firm assets a trust in favor of the beneficiary, to the extent of the trust funds so invested in the business, if such funds remain among the general assets of the firm when taken over by the receiver appointed in a proceeding to wind up the firm’s business ?

Under the ancient rule on this subject, the equitable right to follow and recover property misapplied by one holding it in trust for another depended upon the ability of the owner to identify it in the form in which it existed when misapplied. This rule was subsequently so extended that the equitable right would attach to whatever was obtained in exchange for the property or its proceeds. Ober & Sons Co. v. Cochran, 118 Ga. 396 (45 S. E. 382, 98 Am. St. R. 118). It is not, however, indispensably necessary for the beneficiary, in order to trace trust funds, to show that they have been invested in specific property by the' trustee or the person aiding the trustee in the misapplication of the funds. If it be shown that the trust property or its proceeds have gone directly into the estate of the trustee or the person misapplying the trust funds, that the trust property or its proceeds are found to reside in the assets of such trustee or person at the time when the claim is asserted, and that the same have not been expended or dissipated for any purpose in the business of the trustee or of such person, then equity will impress the estate of the trustee or such person with a trust in favor of the beneficiary of the trust property, to the extent of the trust funds so misappropriated. It is well settled that, in order that a trust fund or trust property which has been misapplied or wrongfully dissipated may be followed in equity and the trust enforced as against the trustee or one who has acquired the property with knowledge of its character, it is necessary that it should be clearly traced and identified either in its original or substituted form. If the trust funds are put in a specific fund or in specific property, such fund or property will be impressed with a trust in favor of the beneficiary of the misapplied funds; and the latter can recover such fund or property, or enforce a lien thereon for his funds so wrongfully used and misapplied. This principle was recognized and enforced in the case of Carter v. Lipsey, 70 Ga. 417. In that case a guardian turned over to a firm, of which he was a member, the assets of his ward. The guardian died, and the business of the partnership was conducted by the surviving partner. The surviving partner afterwards made an assignment for the benefit of creditors. The jury returned a special verdict finding the facts. This special finding showed the amount of the funds of the ward which went into the partnership, the amount of these funds that went into the hands of the surviving partner, and the amount of these funds embraced in the deed of assignment made by the surviving partner for the benefit of the creditors of the firm. Under these circumstances this court held that the ward was entitled to recover from the assignee the amount of this fund which was embraced in the deed of assignment, in preference to the creditors of the firm. This is in accordance with the principle which we have announced above. In Ober & Sons Co. v. Cochran, supra, there is nothing to the contrary of what we have ruled above. In that case Mr. Presiding Justice Fish used some language which at first blush might seem to conflict with our ruling in this case. That language is: “In order to recover a trust fund which has been misapplied by the trustee or person holding it in a fiduciary character, it must be clearly identified or distinctly traced into the property, fund, or chose in action which is to be made subject to replace it.” This does not mean that the trust fund can not be traced into the general property or funds of such trustee or person holding it in a fiduciary capacity. If the funds can be traced into the general property or funds of such trustee or person, the trust will be enforced. Carter v. Lipsey, supra; Slater v. Oriental Mills, 18 R. I. 353 (27 Atl. 443); Bradley v. Chesebrough, 111 Iowa, 126 (82 N. W. 472); Hopkins v. Burr, 24 Colo. 502 (65 Am. St. R. 238, 52 Pac. 670); Pearson v. Haydel, 90 Mo. App. 264; Lincoln v. Morrison, 64 Neb. 822 (57 L. R. A. 885, 90 N. W. 905); 26 R. C. L. 1355, § 219; Frelinghuysen v. Nugent, 36 Fed. 229, 239; National Bank v. Ins. Co., 104 U. S. 54, 67 (26 L. ed. 693); Peters v. Bain, 133 U. S. 670, 693 (10 Sup. Ct. 354, 33 L. ed. 696).

There are authorities which hold to the doctrine that there must be a specific fund or specific property into which the trust funds went, before such a trust will arise in favor of the owner of the misapplied trust funds. We see no good reason why, if trust funds are mingled with the general funds of a firm, and exist among the same when they go into the hands of a receiver, a trust will not be impressed upon such general funds to the extent of the trust funds remaining in the firm's general assets. In Carter v. Lipsey, supra, the decision was also put upon another ground; that is, that upon the death of the guardian our statute gave to the ward a priority of payment of the trust fund from the assets of the firm, in the hands of the surviving partner, over the unsecured creditors of the firm. This principle thus ruled is now binding. As an original proposition much can be said in favor of its soundness; and undoubtedly when the administrator turned over these assets of his intestate to his firm, the latter became a trustee for the beneficiaries thereof. This was so because “Whenever the circumstances are such that the person talcing the legal estate, either from fraud or otherwise, can not enjoy the beneficial interest without violating some established principle of equity, the court will declare him a trustee for the person beneficially entitled.” Civil Code (1910), § 3780. The partnership thus becoming the trustee of this fund for the beneficiary, it .became subject to all the liabilities of a trustee to the beneficiaries of the trust. “The estate of a trustee, dying chargeable with trust funds in hand, shall be appropriated first to the payment of such indebtedness, after the funeral expenses, in preference to all other liens and claims whatever.” Civil Code (1910), § 3773. The same principle is again announced in § 3332. A partnership is dissolved by the death of one of the partners. § '3162. A dissolution of the partnership ends all the powers and rights growing .out of the partnership to the partners, except for a general accounting and winding up of the business. § 3164. In other words, the dissolution of the firm is the death of the firm. The firm being a trustee of this trust fund, and thus becoming dead, our law fixes a lien upon its assets prior in dignity to the claims of its unsecured creditors. This is the logic upon which the decision in Carter v. Lipsey, supra, rests. Whether this logic is sound and impregnable, the decision in that case, that in these circumstances the beneficiary has a lien upon the firm assets superior to the claims of its unsecured creditors, is binding upon us. So we are of the opinion that the judge below did not err in his ruling upon-this subject, and in holding that a trust was impressed upon the assets of the firm for the payment of this trust fund to the beneficiary, and that it should be paid prior to the claims of the unsecured creditors of the partnership.

Judgment on the main bill of exceptions affirmed; cross-bill of exceptions dismissed.

All the Justices concur, except Gilbert, J., disqualified.