Weideman v. Newton Arms Co.

HOUGH, Circuit Judge (after stating the facts as above). The basis of the lower court’s holding is that the moneys sent to the insolvent company constituted “a trust estate in the custody of the receiver, who occupies the same position in respect to such moneys” as did the corporation itself. The foundation, however, on which such trust estate must stand, is the fraud of the corporation, which in this case could only have been the fraudulent representations of the advertising matter above referred to. But in order to establish such a trust on the part of a wrongdoer it is necessary to show that the fraudulent representations were relied upon, so that it may fairly be said that the cestuis qui trustent, in this case the ready money customers, lost their money by relying upon the representations. There is absolutely no proof on this point in the record before us, and accordingly the basis of fact implied in the cases cited below (American Sugar Refining Co. v. Fancher, 145 N. Y. 552, [304] 40 N. E. 206, 27 L. R. A. 757; Jaffe v. Weld, 203 N. Y. 593, 102 N. E. 1104), does not exist. But even if the trust relation be established, if the trustee is in bankruptcy or insolvency, it is absolutely necessary to trace the money covered by the trust into some particular property or fund. It is just as necessary to trace as it is to prove the trust relation. There is no pretense of tracing this money into the receiver’s hands in any other sense than that the money was spent in carrying on a business or procuring certain articles of machinery and the like, which ultimately passed into the receiver’s hands. This is not enough; cash is never traced merely by showing that it went into a general estate. This subject we have recently treated in Re Bolognesi, 254 Fed. 770, 166 C. C. A. 216, Re Matthews, 238 Fed. 785, 151 C. C. A. 635, and Re Jarmulowsky, 261 Fed. 779. Inasmuch, therefore, as the creditors preferred below have (1) failed to prove in point of fact a trust relation, and (2) have (assuming such relation) failed to trace their money, the order under review is reversed, because the appellees are not entitled to any preference over other and general creditors.