Smith v. Township of Au Gres, Michigan

• Decision Date: 07 November 1906
• Docket Number: 1,544.
• Citation: 150 F. 257
• Parties: SMITH v. TOWNSHIP OF AU GRES, MICHIGAN.
• Court: U.S. Court of Appeals — Sixth Circuit

150 F. 257

SMITH v. TOWNSHIP OF AU GRES, MICHIGAN.

No. 1,544.

United States Court of Appeals, Sixth Circuit.

November 7, 1906

M. L Courtright, for appellant.

T. A E. & J. C. Weadock, for appellee.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

SEVERENS Circuit Judge.

This is an appeal from an order of the District Court allowing a petition of the township of Au Gres, a municipality of Michigan, praying for the establishment of a lien on certain assets of the bankrupt and an order for the satisfaction thereof from the proceeds arising from the sale of said assets.

The bankrupt had for several years prior to the proceedings in bankruptcy against him been engaged in the business of a retail merchant in Au Gres. At an election held in said township in April, 1903, he was chosen treasurer of the township, and thereupon he qualified as such, the United States Fidelity & Guaranty Company becoming surety on his bond. He received into the township treasury from his predecessor in office the sum of $3,191.26, and served for the ensuing year, collecting the taxes assessed for all purposes and disbursing and paying over the moneys in the treasury, except as next stated. At the close of his official year in April 1904, he was short in his accounts $4,474.87, which sum he failed to refund to the township. On April 9, 1904, he gave a mortgage on his stock of goods to one Chamberlain as trustee to secure the township, or his surety, if it should be compelled to pay his shortage, for the amount thereof, reciting therein 'that during his incumbency of that office he received funds belonging to such township aggregating a large sum, which moneys he has invested in his business, instead of keeping them separate and apart as required by law, and there is now invested in his business and property funds belonging to the township of Au Gres, Arenac county, Mich., aggregating the sum of, to wit, $4,400,' and that it was his intention to treat the moneys which came into his hands as treasurer as trust funds. Chamberlain, the trustee, was an agent of the bonding company. On May 4, 1904, a petition in bankruptcy was filed against him by his creditors. At that time he was owing more than $5,000 to various parties of whom he had bought goods. He was adjudged a bankrupt, and Smith, the appellant, was chosen trustee. The trustee sold the stock of merchandise for the sum of $4,179.77. On September 3, 1904, the township filed a petition in the bankruptcy proceedings, alleging that the bankrupt had used the funds of the township in the purchase of the goods and merchandise which, or the proceeds of which, had come to the hands of the trustee, and that the township claimed a lien on the proceeds of the sale for the amount of its funds so converted, the sum claimed being $4,460.

On December 9, 1903, the bankrupt gave a mortgage on his stock of merchandise to secure Cole & Petty for a debt he owed them, which amounted, at the time when they filed their petition as next stated, to the sum of $1,094.29. Cole & Petty filed their petition in the bankruptcy court to enforce the lien of their mortgage on the proceeds of the sale by the trustee. While these petitions of the township of Au Gres and of Cole & Petty were pending, it was stipulated by those parties that they would share in their recoveries upon a footing of equality; that is to say, in the proportion of their respective interests, as the amount of those interests should be established. Upon the hearing, the lien of Cole & Petty was held valid by the referee and was allowed in the amount of $1,124.49. But the lien of the township was disallowed, and it was allowed as a claim of a general creditor. This was not what the petitioner asked. From the referee's opinion it appears that he accepted the recitals in the the mortgage of the bankrupt to the township as proof 'that the funds of the township were invested by the bankrupt in his business and property. ' But it is also to be noted that it recited that there was then invested in his business and property funds of the township aggregating the sum of $4,400. The ground of the referee's decision was, as stated by him, that:

'There is no testimony and no evidence that any of the goods, wares or merchandise taken possession of by the receiver were purchased and paid for with moneys of the township of Au Gres.' There was other evidence touching the presence of the township's money in the assets, which we shall refer to later. The decision of the referee was taken before the district judge for review. So far as it related to the claim of Cole & Petty it was affirmed, but in respect to that of the township it was reversed and the lien held valid. The sum of the two claims of the township and of Cole & Petty amounting to more than the proceeds of the sale, it was ordered that they should be paid upon the basis of their stipulation. The order sustaining the lien of the township is the order appealed from.

In addition to the recital by the bankrupt in the mortgage to the township in respect to his disposition of the township's money, it was testified before the referee by Chamberlain, the trustee in the mortgage, that on the occasion of the giving of the mortgage the bankrupt 'said he had used it in connection with his business in paying for stock,' and that he was engaged 'in the mercantile business.' And an affidavit of the bankrupt made September 16, 1904, was produced in which he stated that of the township's funds he expended $4,640 in the general store business which he was conducting for the purchase of goods, wares, and merchandise. About one month after making this affidavit the bankrupt died. It was objected to the testimony of Chamberlain above recited that he was an incompetent witness in regard to the transactions between himself as agent of the bonding company and the bankrupt, because of a statute of Michigan excluding the testimony of one who has acted as an agent for one party to a transaction, where the other party has since deceased, relative to any matter equally within the knowledge of such other party. This objection is renewed here. But this proceeding was in a federal court, and, as the statute of the United States relating to the competency of witnesses as affected by their interest covers the subject and is paramount, the state statute is not the test, as the district judge rightly held. Rev. St. Sec. 858 (U.S. Comp. St. 1901, p. 659). The case of Hobbs v. McLean, 117 U.S. 567, 579, 6 Sup.Ct. 870, 29 L.Ed. 940, cited by him, is directly in point. Tested by the federal statute, the witness was competent. The trustee is privy with the bankrupt, and the admissions concerning his estate while he was yet the owner were competent evidence on the hearing.

With regard to the statements made by the bankrupt in his affidavit, we have some doubt. They were made after the trustee had succeeded to the title of the bankrupt, and it is a close question whether the conditions which permit the declarations of a deceased witness existed. But this testimony was in line with other evidence which was competent, and was of no new or other fact. Laying it aside, we should agree with the district judge on the essential facts.

Where, as in this case, a wrongdoer knowingly mingles the property of another with his own in such manner that it becomes undistinguishable, the true owner may claim the whole mass, or if it has been disposed of, may follow it, or its proceeds, as the case may be, as long as he can trace them, for the purpose of fastening an equitable lien for the property of which he has thus been dispossessed. National Bank v. Insurance Co., 104 U.S. 57, 26 L.Ed. 693; Kantchbull v. Hallett, 13 Ch.Div. 696; Holder v. Western German Bank, 136 F. 90, 68 C.C.A. 554;

Erie R. Company v. Dial, 140 F. 689, 72 C.C.A. 183. When the commingled property is of more value than that wrongfully taken, it is equitable that the excess should go to the creditors of the wrongdoer, although by the strict rule of the common law the whole mass might become the property of the innocent owner of the portion misappropriated. Justice requires that the rights of innocent third parties having acquired the property, or some interest in it, for value, should be protected, and against such the rule is not enforced. But here the trustee stands in the shoes of the bankrupt and has only his rights. Of course, we are speaking of the general rule, and do not need to notice the instances of conveyances and preferences fraudulent as against creditors. And the question is: What were the respective rights of the township and the bankrupt when the creditors filed their petition against him? The bankrupt's trustee says that it is impossible to find out what parts of the stock of goods contain the money of the township, and this was the difficulty which the referee found and which controlled his decision. But it was not for the township to make the distinction. As said by Chancellor Kent in Hart v. Ten Eyck, 2 Johns.Ch. 62, at page 108:

'If a party having charge of the property of others so confounds it with his own that the line of distinction cannot be traced, all the inconvenience of the confusion is thrown upon the party who produces it, and it is for him to distinguish his own property, or lose it.'

That case presented a state of facts which in this respect was quite similar to those which existed here. The fair inference is that the bankrupt took the money from time to time purchased goods and mingled them with his stock, and out of his stock he sold parcels which were not distinguishable in respect of the means with which they were bought. From the beginning of his fraudulent intermixture of his own money and that of the township, or of goods which may have been...