Ellison v. Moses

WALKER, J. On July 6th, 1891, Moses Brothers made a general assignment of all their property for the benefit of their creditors. On the same day they conveyed to M. P. LeGrand certain property in payment of an antecedent debt due to him ; to M. P. LeGrand, Jr., as trustee, certain other property in payment of an antecedent debt due to him ; and executed to Henry C. Moses, as receiver in a cause pending in the Chancery Court, a mortgage on certain other property to secure a sum of 'money due to him as receiver. On the preceding 26th day of June they had conveyed certain other property to M. P. LeGrand, in payment of another antecedent debt then due to him; and on the 4th day of July they had transferred and delivered certain other property to Josiah Morris & Co., in payment of an antecedent debt then due to them. It is charged that the several conveyances giving preference in the payment of the debts respectively provided for were executed when Moses Brothers were utterly insolvent, and in contemplation of the general assignment; and that when the preferences were made, the several preferred creditors above mentioned well knew of the insolvency of Moses Brothers, and of their intention to make an assignment. The purpose of the bill is to have all the conveyances and transfers above mentioned declared and treated as parts of one general assignment for the benefit of all the creditors of Moses Brothers, and to avoid the preferences. The law of this State permits an insolvent debtor to make preferences among his creditors in the payment of his debts, by an absolute sale or transfer of his property in discharge of such debts. He may convey the whole or any part of his property in payment of an antecedent debt; and if the price is reasonably fair, and there is no reservation of a V — 225 — benefit or .trust in bis favor, tbe sale is valid and will be sustained, whatever may have been the debtor’s intentions, and though the preferred creditor knew of such intentions, and that the sale would leave the debtor unable to pay his other debts. That such preferences are allowable is settled by numerous decisions of this court.— Chipman v. Stern, 89 Ala. 207; Hodges v. Coleman, 76 Ala. 203; Crawfordv. Kirksey, 55 Ala. 282 ; 3 Brick. Dig. 517. The statutory prohibition against preferences in general assignments (Code, § 1737) does not operate upon an absolute and unconditional sale of a debtor’s property to his creditors in payment of the debts due to them. This question, also, is well settled' by the former decisions of this court. The general assignment, in which preferences or priorities of payment given to one or more creditors over the others are prohibited, implies the idea of a trust, under the operation of which there is a possibility of a reversion to the debtor of some interest in the proceeds of a sale of the property assigned. No such idea is involved in an unconditional sale of property in absolute payment and discharge of a debt. Here the debt is extinguished, and the debtor is stripped of all interest in the property sold. Such a sale is not within the purview of the statute, and if a preference is thereby effected, it is not such a preference as the statute prohibits. — Otis v. McGuire, 76 Ala. 295; Danner v. Brewer, 69 Ala. 191; Comer v. Constantine, 86 Ala. 492. The result is, that the law as it now stands permits an insolvent debtor to prefer one or more of his creditors over the others in the payment of debts by a sale of property in satisfaction thereof; and prohibits preferences or priorities of payment in a general assignment by the debtor for the benefit of his creditors. Only the legislature can make the prohibition against preferences equally operative in both classes of cases. The courts must recognize and enforce the law as it exists. They can not ignore distinctions created by the law-making power. It is not shown by the bill that any of the conveyances and transfers made by Moses Brothers in payment and discharge of certain of their debts had the features or characteristics of an assignment for the benefit of creditors, as distinguished from an absolute sale. If all the property of the debtors had been exhausted in the payment of the preferred debts, the creditors who were left wholly unprovided for would not have been entitled to disturb the sales merely because the preferences were thereby made. The validity of the sales was not affected by the circumstance that some other property was left to the debtors which they conveyed — 226 — by a general assignment for tbe benefit of their remaining creditors. The complainants were not entitled to have the absolute sales and conveyances treated as parts of the general assignment. The decree of the Chancery Court to this effect was correct. The conveyance to Henry C. Moses, the receiver appointed by the Chancery Court in the case of Pauli v. Knox, does not purport to be in satisfaction and discharge of a debt due to Mm as receiver; nor does it purport to come within the exception to the statute in reference to “mortgages given to secure a debt contracted contemporaneously with the execution of the mortgage, and for the security of which the mortgage was given.” — Code, § 1737. It is a mortgage executed to secure the repayment of the amount of certain trust funds which had come to the hands of Henry C. Moses as receiver, subject to the directions of the court to lend the same upon the security of real estate mortgages. He allowed the firm of Moses Brothers, of which he was a member, to use these funds, without furnishing the security upon which he was authorized to lend them. It does not appear how long they had had the use of these funds before the mortgage in question was executed. The plea on the subject does not allege that, at the time the funds were appropriated and used by the firm, there was any express agreement on their part to give the proper real estate security for the repayment thereof. The averments of the plea show no more than that the receiver’s permission of the use of the funds by his firm, and their acceptance of them with notice of the requirements of the court in reference thereto, raised an implied agreement on their part to give the proper real estate security ; and that the execution of the mortgage by Moses Brothers, after they had received. and used the funds, was merely the performance of the duty imposed upon them in the premises. The mortgage in question and the instrument which is a general assignment on its face were executed on the same day, and the bill alleges that they were parts of one and the same transaction. The property conveyed by the mortgage is, by the terms thereof, redeemable on the payment of the debt thereby secured — by the express terms of the instrument a trust results to the debtors, of any surplus which may remain after satisfying the debt. It was merely a provision for payment by the appropriation of certain property, or the proceeds of the sale thereof, to that end, and not a payment itself. These are distinguishing characteristics of the transfer in which preferences are avoided by the statute, if — 227 — substantially all of the debtor’s property is covered thereby; and though' the mortgage, if standing by itself, would be regarded as only a partial assignment, and not within the operation of the statute; yet, if when it was executed, other and successive transfers or conveyance's of a kindred nature were contemplated, covering all the debtors’ property, the several conveyances, when executed, must be taken together as forming a general assignment, upon which the statute operates, unless, by reason of some special feature or circumstance, the mortgage is withdrawn from the influence of the statute. — Danner v. Brewer, 69 Ala. 191; Holt v. Bancroft, 30 Ala. 93; 3 Brick. Big., pp. 49, 50. What was the character of the liability incurred by Moses Brothers by their appropriation and use of the funds entrusted to the receiver, without furnishing him the security which, by the order of the court, he was required to take upon a loan of the money ? Is there anything in the mortgage subsequently executed as security for the liability thus incurred to exempt it from the operation of the statute prohibiting preferences or priorities in general assignments? It is clear that the receiver, in permitting and allowing the use of the trust funds by his firm, and in parting with the control thereof, without requiring the execution of a mortgage or mortgages on real estate to secure the loan, as directed by the order of the court, was guilty of a conversion, which imposed a personal liability upon him and upon his firm, who received the money with notice of the breach of trust.- — DeJarnette v. DeJarnette, 41 Ala. 708 ; Henderson v. Henderson, 58 Ala. 582 ; Malone v. Kelly, 54 Ala. 549. It is equally clear that the trust funds could be followed into the hands of any one who received them charged with notice of the trust, or into any unauthorized investment of them by the trustee, to which they could be traced. — Reed v. Bank of Mobile, 70 Ala. 199; Whaley v. Whaley, 71 Ala. 159; 3 Brick. Dig., p. 796. Here, there is no question of tracing and identifying the funds in the hands of Moses Brothers. There is no pretense that they had invested them in the property upon which the mortgage was given. They had simply converted the money, mingled it with their own funds, and used it in some way which is not disclosed. The consideration of the mortgage was the personal liability incurred by the unauthorized use of the trust funds. Moses Brothers having used the funds with notice of their trust character, and of the directions of the court as to the mode of their investment, their liability was similar to that incurred by the trustee himself by his breach of trust. In — 228 — reference to tbe liability in snob case of tbe trustee to tbe cestui que trust, it was said in Lathrop v. Bampton, 31 Cal. 23: “Where a trustee, in violation of bis trust, invests tbe trust property or its proceeds in any other property, tbe cestui qtie trust may elect to bold tbe substituted property subject to tbe trust, or to bold tbe trustee personally liable to him for tbe breach of the trust. Tbe former be can do, however, only when be can follow and identify tbe property, either in its original or substituted form. ... If this can not be done, tbe right of tbe cestui que trust to elect is gone, because its exercise has become impossible, and he is therefore forced to rely upon tbe personal liability of tbe trustee. . . . When thus forced to rely upon tbe personal liability of tbe trustee, a cestui que trust occupies a position towards tbe estate of tbe trustee which is no better, but is identical with, that of a simple-contract creditor. He has no special lien upon tbe general estate of tbe trustee which is superior to that of any other creditor; for tbe specific -property covered by tbe trust is gone, and nothing is left to tbe cestui que trust except a naked claim for damages generally, on account of tbe breach, to be obtained through an action at law, attended by all tbe incidents of a like action on behalf of one who is not tbe beneficiary of a trust.” What was there said is in harmony with tbe former decisions of this court. Tbe rule is well settled, that tbe cestui que trust is entitled to have tbe trust visited uj>on any property into which tbe trust funds have been invested by tbe trustee in breach of bis duty, or by any third person with notice of tbe trust, so long as such funds can be satisfactorily traced and identified. But, in case of a mere money trust, when tbe money has been -mingled with tbe funds of tbe trustee, or of another person, so that it can not be distinguished and identified, and can not be traced into any particular property, there is no longer any specific thing upon which tbe trust may attach; and, in such case, nothing is left to tbe cestui que trust but tbe monej^ed liability in bis favor of tbe trustee, or of tbe third person who has used tbe fund with notice of its trust character; and such liability stands upon tbe same footing as a mere debt, and tbe cestui que trust has no advantage over a general creditor. — Parker v. Jones, 67 Ala. 234; Goldsmith v. Stetson, 30 Ala. 164; Stewart v. Fry, 3 Ala. 573; Maury v. Mason, 8 Porter, 211. Indeed, tbe trustee’s personal liability to make compensation for tbe loss occasioned by a breach of trust, is a simple-contract equitable debt. Vernon v. Vaudry, 2 Atk. 119; Benbury v. Benbury, 2 Dev. & — 229 — Bat. Eq. (N. 0.) 235; 2 Pomeroy’s Eq. Jur. § 1080 ; 2 Lewin on Trusts (Flint’s eel), *906. It may be conceded that a promise by Moses Brothers to give a mortgage on real estate, to secure the amount of the trust funds which came to their hands and was converted by them, may be implied from their acceptance and use of the funds, with notice of the direction of the court that such security should be taken by the receiver upon a loan of the funds by him. There is, however, nothing upon which to raise an implication of an agreement by Moses Brothers to give a mortgage upon all their real estate, or upon any particular real estate. If they had entered into a written agreement to give a mortgage on certain land, this would have fixed an equitable lien thereon, and the giving of the mortgage could have been regarded as the performance of an executory agreement to furnish that specific security. 2 Pomeroy’s Eq. Juris. § 1237; Kirksey v. Means, 42 Ala. 426; Mobile & C. P. R. Co. v. Talman, 15 Ala. 472. Upon such a state of facts, liens which, otherwise, would have been invalid, were sustained in several cases, which were referred to in the argument for the appellees. —Paulding v. Chrome Sleel Co., 94 N. Y. 334; Castle v. Lewis, 78 N. Y. 131. In the absence, however, of any agreement to secure the repayment of trust money by a lien or charge upon property which can be identified, if the money has been received and dissipated, or so mingled with other funds that it can no longer be distinguished, then no particular property can be arbitrarily selected and treated as the trust estate in a substituted form. The mere personal obligation of the debtor to repay the money, or to secure its repayment by a lien upon property not identified, can not operate to fix a lien upon any specific property, or to stamp upon the legal title thereto the qualities of a trust, so as to give the cestui que trust an equitable interest therein, or claim thereon. In such case, there is no specific property as to which the cestui que trust can be regarded as the equitable owner, or as the beneficiary of an equitable lien or charge. His available claim is narrowed to a mere debt, and he has only such right to reach and subject the debtor’s property as any other general creditor has. Upon no part of the debtor’s property is there a special charge for the payment or security of the personal claim against him, growing out of the breach of trust. In the present case, when the receiver surrendered the control of the trust money, and permitted it to be mingled with the funds of his firm, the only recourse left to him for indemnity by the firm was the — 230 — personal liability incurred by tbeir participation in tbe breach of trust. The debtor firm had no more right to provide for a perference or priority of payment of such claim in a general assignment of their property, than they had to provide for such preference or priority of payment in favor of any other one or more creditors over their remaining creditors. Under the averments of the bill as amended, the mortgage to Henry C. Moses, receiver, and the instrument which is a general assignment on its face, must be taken together as constituting one transaction, by which provision was made for the payment of the debts of the grantors, but which did not by itself effect a payment and discharge of such debts- — in other words, the transaction was a general assignment. And as the mortgage undertakes to give a preference or priority of payment of the debt therein provided for, the other creditors are entitled to have that attempted preference avoided, and to have the security of the mortgage enure to the benefit of all the creditors of the grantors alike. The Chancery Court erred in sustaining the plea of Robert Goldthwaite as the receiver appointed to succeed Henry C. Moses. Because of that error the decree must be reversed. The costs of the appeal in this court and in the Chancery Court to be paid, one half by the appellants, and one half by the appellee Goldthwaite as receiver. Reversed and remanded. ThoRING-ton, J., not sitting.