John V. Farwell & Co. v. Kloman

Ragan, C.

On and for three years prior to January, 1890, John Y. Farwell & Co. (hereinafter called “Farwell & Co.”) were wholesale merchants domiciled and doing business in the city of Chicago, in the state of Illinois, and W. H. Cline was a retail merchant resident and doing business in the city of Broken Bow, Nebraska. Farwell & Co. brought this suit in equity in the district court of Custer county against Charles Kloman, the assignee of said Cline. Far-well & Co., in their petition, alleged that for three years prior to January, 1890, they had been in the habit of selling goods on credit to Cline; that on January 31, 1890, Cline made a statement in writing to them, Farwell & Co., setting forth his assets and liabilities, representing to them that he was at that time possessed of property beyond all his debts of the value of $16,000; that Farwell & Co., believing this statement to be true, and relying thereon, on the 27th of June, 1890, and at divers times between that date and November 20,1890, sold and delivered merchandise on credit to Cline to the extent of $8,500; that on the 10th of January, 1891, Cline made an assignment, under the statute of Nebraska, for the benefit of his creditors; that said Charles Kloman was the assignee of said Cline; that the inventoried value of the estate turned over by said Cline to his said assignee was $29,000; that said assets consisted of merchandise, real estate, notes, and book accounts, and that his scheduled liabilities were about $60,000 ; that the statement made by Cline to them, Farwell & Co., on January 31, 1890, was false, and known by Cline to be false; that Cline, at the time he made the statement, was insolvent; that in selling said goods upon credit to Cline, Farwell & Co. relied entirely upon the truth of the statement made by him, and which statement Cline made for the purpose of obtaining credit; that only a very small portion of the goods, if any, which Farwell & Co. sold to Cline between June and November, 1890, now remain in the possession of Cline’s assignee; that if any of said goods now remain they are in broken lots and cut pieces and so mixed and confused with goods of a like character that their distinct identity cannot be ascertained; that Cline, prior to the time he made an assignment, had sold all or nearly all the goods purchased of Farwell & Co. and invested the proceeds thereof either in real estate or other goods or in paying for goods previously bought by him and now on hand, or said proceeds are now represented by outstanding notes and accounts due him; that by reason of the fraud of Cline in procuring and in confusing said goods he never acquired any valid right or title, to the same or to the proceeds thereof as against Farwell & Co.; that about the 4th of February, 1891, they, Farwell & Co., discovered for the first time that the statement made to them by Cline was false, and thereupon they at once elected to and did rescind the contract of sale of said goods to him ; that a large number of creditors of Cline have filed their claims with said assignee, the amount of said claims greatly exceeding in amount the value of Cline’s estate. The prayer of the petition was for a decree that Cline held the property which he purchased and the proceeds thereof in trust for Farwell & Co., and that they might be decreed to have a first lien upon the entire estate of Cline to secure the amount due them. The district court sustained a general demurrer to this petition, and Farwell & Co. refusing to plead further, the petition was dismissed; and to reverse this order they have prosecuted to this court a petition in error.

The case amounts to this: A vendor of merchandise parts with the title and possession of his goods on credit to his vendee, induced to do so by the fraud of the latter. The vendee disposes of the fraudulently acquired property for money and other property, but no particular' property remaining in the hands of the vendee can be identified as having been purchased with the property fraudulently acquired. The vendee makes a general assignment for the benefit of his creditors. The vendor discovers the fraud practiced upon him by the vendee, rescinds the contract of sale, and asks a court of equity to decree that the property which the vendee fraudulently acquired and its proceeds is a trust fund in his hands, of which the vendor is the beneficiary, though the identical property fraudulently acquired has been by the vendee disposed of, and the identity of the property acquired by the vendee with the fraudulently acquired property or its proceeds cannot be ascertained, and that the vendor be given a first lien upon the entire estate of his vendee to secure the amount due for the property fraudulently parted with. It is not doubted that where goods are sold upon credit induced by the fraudulent representations of the vendee, the vendor may rescind the sale upon the discovery of the fraud and replevy the goods. (Tootle v. First Nat. Bank of Chadron, 34 Neb., 863; McKinney v. First Nat. Bank of Chadron, 36 Neb., 629.) And if the identical property cannot be found by the officer, the action will proceed as one for damages, and a judgment for the value of the goods fraudulently obtained would be rendered in favor of the vendor. But this doctrine does not proceed upon the theory that the original contract of sale, although induced by fraud, was absolutely void, but merely voidable at the election of the vendor within a reasonable time after discovering the fraud. In the case at bar, Earwell & Co., after discovering that Cline had obtained their goods by fraud, had the right to rescind the contract of sale within a reasonable time and to replevy the goods parted with; and it may be that a court of equity, a fraud being established, would give to Earwell & Co. any particular property, or a lien thereon, which could be clearly shown to have been purchased solely with the proceeds of the property fraudulently acquired by Cline from them. But does it follow, because Cline obtained goods from Farwell & Co. by fraud, that a court of equity will give them the entire estate of Cline, or a lien thereon, when it appears that such estate was not entirely acquired with the property or its proceeds fraudulently acquired from them?

Counsel for Earwell & Co., in their argument here, say : “ The contention of plaintiffs is that by-reason of the facts recited in the petition, all of Cline’s property, including his stock in trade, notes, and book accounts, became impressed with a trust in favor of plaintiffs for the value of the goods thus fraudulently obtained; that the assignee took them subject to that trust, and that plaintiffs are entitled to a preferential lien upon the whole fund for the amount of such value.” To support this contention counsel have furnished us an able and ingenious argument and cited us to a large number of authorities. These authorities we do not regard as in point; and if any authority cited supports the contention of counsel, with all due respect, we decline to follow it. Among the authorities is Sherwood v. Central Michigan Savings Bank, 61 N. W. Rep., 352, in which the supreme court of Michigan held, where a mortgagee, who was also a depositor in a bank, gives the bank a mortgage for collection with instructions not to place the amount collected to his credit but to notify him of the collections, as he has a place for it, the money, when collected, belongs to the mortgagee and is held for him in trust by the bank. It is the duty of the bank under such circumstances to collect and pay over to the mortgagee the money, and in doing so it acts as his agent. If it takes checks in payment, the money received upon such checks belongs to the mortgagee, notwithstanding it may be mingled with other money belonging to the bank. Where in such a case the money of the mortgagee is mingled by the bank with its funds, he has a lien upon the entire fund for the amount belonging to him, and the law presumes that the trust fund remains intact so long as the entire fund is not reduced below the amount of the trust fund. In this case the mortgagee claimed a preferential lien upon the entire assets of the insolvent bank, and the court awarded it to him. A similar rule was announced by this court in State v. State Bank of Wahoo, 42 Neb., 896. These authorities have no application to the facts of the case at bar. In the case cited from Michigan, and in the Wahoo bank case, the relation of debtor and creditor, or banker and depositor, never existed between the bank and the claimant of a preferred lien, but rather the relation of principal and agent. In other words, it was always a trust fund and was by the trustee misapplied. In the case at bar the relation between Earwell & Co. and Cline at the time the former parted with their goods was that of vendor and vendee. Earwell & Co. did not put these goods or any part of them in the hands of Cline as their trustee or agent. True it is that Cline having obtained the goods fraudulently and Farwell & Co. having ascertained the fraud and rescinded the contract of sale within reasonable time, from that moment Cline held the identical goods which he had purchased as Earwell & Co.’s trustee, and these goods they might retake or reclaim; and any specific property in Cline’s hands which he had acquired with the goods fraudulently obtained from Farwell &Co. a court of equity might decree theirs, held in trust by Cline. But in the case at bar the goods fraudulently obtained of Earwell & Co. by Cline have been disposed of, and it is averred in the petition that no particular part of his estate can be identified as having been acquired by Cline with the property, or its proceeds, which he fraudulently acquired from Farwell & Co.

In 2 Story, Equity Jurisprudence [13th ed.], 1259, it is said: “The right [to follow the trust fund] ceases only when 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.” A great part of the argument of counsel for Earwell & Co. here is devoted to a vehement assault upon this rule. For our part we think the rule a sound one. To overthrow it and adopt the contention contended for by the learned counsel would lead to endless litigation and confusion and work injury and injustice to the innocent. But the rule assailed has received the sanction of this court. In Wilson v. Coburn, 35 Neb., 530, Coburn was the assignee of the Bank of Omaha, which had made an assignment, under the statute, for the benefit of its creditors. Wilson filed a petition in the county court, alleging that he had deposited with said bank a sum of money prior to the bank’s making an assignment; that at the time he made such deposit the bank was insolvent; to the knowledge of its officers, and that such deposit was received with the intention of cheating and defrauding him. He prayed for a judgment declaring him a preferred creditor, and for the payment of his claim in full out of the assets of the insolvent bank. Post, J., speaking for the court, said: “Under the allegations of the petition, is the claimant entitled to preference over other creditors of the insolvent bank, or, in other words, does the petition state a cause of action? We think not. * * * The fact that a bank is insolvent within the knowledge of its officers, and receives the money of a depositor under circumstances which amount to a fraud upon him, is not of itself sufficient to entitle the latter to preference from the funds of the bank in the hands of an assignee. He-may follow his money while he can trace and distinguish it, or the proceeds thereof, but not after it has passed inte the hands of the assignee, mingled with the other funde of the bank.” This case was decided upon the correct principle that the relation of creditor and debtor, or banker and depositor, existed between Wilson and the bank at the time the former parted with his money, and that as the money he had deposited had become mixed and miDgled with the other funds of the bank, the money and its proceeds were incapable of specific identification, and could not therefore be recovered in specie; nor would a court of equity decree that the assignee of the insolvent bank held its entire estate in trust for the security and payment of the creditor so defrauded. The rule laid down in this case controls the case at bar. The judgment of the district, court was right, and is accordingly

Affirmed.

Harrison, J., not sitting.