
    HOLMES v. GILMAN.
    
      N. Y. Court of Appeals ;
    
    
      June, 1893.
    [Rev’g 28 Abb. N. C. 288, and aff’g 27 Id. 341.]
    1. Partnership ; misappropriation of funds.j The principle which allows a cestui qtie trust to follow trust funds and to appropriate to himself the property into which such funds have been changed, together with the increased value of such property, provided the trust fund can be clearly ascertained, traced and identified, and provided the rights of bona fide purchasers for value, without notice, do not intervene, enables.the surviving partner of a firm, the deceased partner in which wrongfully took partnership moneys and applied them to obtain insurance on his own life for his wife’s benefit, to recover the entire proceeds of policies thus obtained.
    
    
      2. Trust; partnerships Equity will impress the insurance money with a trust in favor of the partnership.
    3. Husband and wife ; life insurances The right of a wife to insure her husband’s life for her own benefit, since it is not property, does not prevent equity from following insurance moneys and charging them with a trust in favor of one whose moneys were used in the payment of premiums or prevent a recovery of the entire proceeds of the insurance, at least to the extent necessary to entirely reimburse the trust fund thus misappropriated.
    Appeal from judgment of the General Term of the Supreme Court, First Department (reported in 28 Abb. N. C. 288,) which reversed a judgment for plaintiff entered upon report of a referee (reported in 27 Id. 341. Decision on motion for injunction is reported in 27 Id. 75.)
    
      
       This case is of special interest both for its bearing on life insurance and the right of the wife in insurance upon her husband’s life; and upon the fiduciary relation of partnership; and for its support of the wholesome doctrine that equity may trace the proceeds of trust funds, and the application of that doctrine to enhanced values or profits. For other recent applications of this doctrine, see N. Y. & B. Ferry Co. v. Moore, 18 Abb. N. C. 106; Valentine v. Richardt, 39 State Rep. 38 ; Hooley v. Gieve, 9 Abb. N. C. 7 ; Matter of Smyth, 2 How. Pr. (N. S.) 431.
    
   Peckham, J.

It is stated in the order which reverses the judgment herein that it is reversed upon questions of fact as well as of law. In such case it is the duty of this court to review the determination of the court below upon both questions of fact and of law (Code Civ. Pro. § 1338).. A careful review of the case convinces us that the findings of facts made by the referee are amply sustained by the evidence, and that the judgment should not be reversed on the facts. We are confirmed in the correctness of this view upon a perusal .of the opinions delivered by the learned judges at the General Term. We there find that the order reversing the judgment upon questions of fact as well as of law was formal merely, the judgment being actually reversed because the court below took a different view of the law from that adopted by the referee upon his own findings of fact.

The claim of the plaintiff to recover the moneys arising from the payments of these policies is based upon the principle which allows a cestui que . trust to follow trust funds and to appropriate to himself the property into which such funds have been changed, together with the increased value of such property, provided the trust fund can be clearly ascertained, traced and identified, and provided the rights of hona fide purchasers for value, without notice, do not intervene.

The right has its basis in the right of property, and the court proceeds on the principle that the 'title has not been affected by the change made of the trust funds, and the cestui que trust has his option to claim the property and its increased value as representing his original fund. The right to follow and appropriate ceases only when the means of ascertainment fail. It is a question of title (Van Alen v. American National Bank, 52 N. Y. 1; Newton v. Porter, 69 Id. 133 ; Ferris v. Van Vechten, 73 Id. 113, 119; Matter of Cavin v. Gleason, 105 Id. 256, 260 ; 7 St. Rep. 13 ; In re Hallet’s Estate, L. R. 13 Ch. Div. 696). It .is somewhat akin to 'the principle decided in Silsbury v. McCoon (3 N. Y. 379), where corn was wrongfully taken from its owner and converted into whiskey. The court held the property was not changed in the hands of the wrongdoer, and the whiskey belonged to the owner of the original material, no matter how much it had been increased in value. The case of Pennell v. Deffell (53 Eng. Ch. 372, 388, 389) discusses the principle as thus stated and agrees to it.

That a partner occupies a fiduciary position with regard to his copartners and the funds of the firm, and will not be permitted to make a personal profit out of the use of such funds, is, I think, clearly established (1 Lindley on Part. [2nd Am. ed.] 303.; Featherstonhaugh v. Fenwick, 17 Ves. Ch. 298 ; Anderson v. Lemon, 8 N. Y. 236; Mitchell v. Reed, 61 Id. 123; Riddle v. Whitehill, 135 U. S. 621). Although partners do not in the strict sense of the term occupy the position of trustees toward each other and towards the firm funds, yet the position is oné of a fiduciary nature, calling for the maintenance and exercise of the greatest good faith between them. Such a relationship authorizes the same remedy on behalf of the wronged partner as would exist against a trustee, strictly so called, on behalf of a cestui que trust (Per JESSEL, M. R., In re Hallett’s Estate, L. R. 13 Ch. Div. 696, 712). While legally incorrect to describe the fraudulent abstractions made by Gilman of the funds of the firm as embezzlements, the description is harmless. It was a. monstrous and gross breach of the duty he owed the firm, and the right of the firm to follow the funds is not affected because the act could not be regarded in law as an embezzlement. The right to follow the funds springs from the fiduciary nature of Gilman’s position with regard to them. These general positions are not really denied by the defendant.

It is claimed, however, that the tracing and identification of the funds have not been sufficiently proved in fact, and it is also urged that there has been an actual mingling of firm funds with the private funds of Gilman • in the purchase and maintenance of the policies. • I have looked carefully through the evidence upon these questions of fact, and I think the findings of the referee are fully sustained, and that no exception can prevail on such grounds.

If these preliminary questions be decided against him, the counsel for defendant then urges that the rule clearly is, if'the trust fund has become mingled with money or property of the trustees or others, equity impresses the proceeds with a trust to an amount equal to the original trust fund and interest, and will go no further. He then ■claims that the firm funds which went to the purchase of the policies and the payment of the annual premiums were mingled with the property right of the wife, called her insurable interest in.her husband’s life, and so the policies were not wholly the result of the use of those firm funds, •and therefore, the plaintiff can have only a lien on the policies or the moneys arising from their payment to the amount of the premiums paid with the firm funds, and the interest thereon. This is really the chief question in the case.

Where moneys have been misapplied and have been used as a portion of a larger amount which has been invested in other property, the property thus acquired ■does not, as a whole, belong to the owner of the moneys misapplied. It does not belong to him because it has not been purchased or acquired wholly with his money or funds, and hence it is that such property is held charged with a lien at least to the amount of the trust' funds invested in it. It is not necessary to here decide it, because we take another view'of the facts, but I am not at all prepared to admit that under no circumstances is the cestui que trust entitled to recover back anything more than the amount of his property and interest, where there has been a mingling of funds. In case the trustee took a thousand dollars of trust funds and five hundred ■of his own, and purchased property which advanced in value to twice its original sum, I have seen no case where the point has been determined that the whole increased value belongs to the trustee, and that only the original sum wrongfully taken, and interest, can be given to the ■cestui que trust, although it w;as by reason of the- wrongful use of the trust funds that the trustee was enabled to realize such value. If, in such case, the cestui que trust-•were not allowed to at least participate proportionately in this increased value, it would appear to be a violation of the principle that the trustee cannot ever be permitted to make a profit out of-the use of the trust funds. It seems to me to be a case for the application of the doctrine that the parties became co-owners of the property at the option of the cestui que trust, in the proportion which their various contributions bore to the sum total invested.

In this case, however, the defendant is enabled to claim a mingling of funds and property only by treating the right of a wife to insure the life of her husband for her benefit as a species of property which has been mingled with the funds of the firm, the result of the combination being the procurement of the policies.

We do not regard this right as property in any such light as to bring the case within the principle of the authorities upon the subject of a mingling of funds in the purchase or acquisition of other property. The right of a wife to insure the life of her husband for her own benefit is not property. It is more in the nature of a power or a privilege to make a valid contract. It is a status and not á property right. The common, law upon motives of public policy held that there must be what was termed an insurable interest in the life which was insured or else the policy was a dangerous kind of a wager and", therefore void.

To take a policy out of such a class it was necessary to show that the insured had some interest in the continuance of the life of the cestui que vie. Who had such an interest as to give a right of insurance was frequently a. matter of some-discussion and of possible doubt. It may not even now, perhaps, be said that the precise nature, character, and extent of the interest in another’s life, which shall render that life insurable, have been formally and plainly laid down. It is'said by the Federal supreme court that one essential is that the policy shall be obtained in good faith and not for the purpose of speculating upon, the hazard of a life in which the insured has no interest (Connecticut Mutual Life Ins. Co. v. Shaefer, 94 U. S. 45 7, 460).

An interest which is insurable must be an interest in favor of the continuance of the life, and not an interest in its loss or destruction. If any person could be thought to have an interest in the continuance of the life of another, it would be a wife -in the life of her husband. Judge Allen, in Baker v. Union Mutual Life Ins. Co. (43 N. Y. 283), regarded the question as decided that a wife had at common law-an insurable interest in the life of her husband. Judge ANDREWS held to the same effect in Brummer v. Cohn (86 N. Y. 11, 14). These cases favor the view that the statute upon the subject of the insurance of the husband’s life in favor of his wife, while it regulates, does not create the right. I do not intimate that if the statute created the right it would in any way alter its-nature. That such a policy was valid at common law simply makes it clearer that it is the nature of the relationship between man and wife that makes the policy valid and relieves it from the objection that it is a wager policy. That relationship is not property in any fair sense of the term. It creates an insurable interest in the life of another, of a nature the same as a parent has in a child or a child in a parent, that is, an interest in the preservation of the life and not in its destruction. Being so circumstanced, a policy of insurance upon such life is not a wager policy, and is, therefore, a valid policy. It is the same question, but it may perhaps appear a little clearer when it is asked whether the power or privilege of a parent or child or creditor to insure the-life of his parent or child or debtor is property ?

A man has an insurable interest in his own life. If betake trust funds and procure such insurance, has he thereby mingled those funds with other property, i. e., with his right to insure his own life ? And can it be said that the policy is the product of such mingled funds and property so that nothing but the original amount of the trust funds and interest can be recovered back from the estate ? The fact is apparent that a policy of insurance upon a life is-not a policy of indemnity. The sum named in the policy is to be paid when the insured life has ceased, no matter how really valueless such life may have in the meantime become. The power of the wife to procure insurance is not in the least unfavorably affected by the fact that insurance in her favor has already been secured. As was said by Shaw, Ch. J., in Loomis v. Eagle Life and Health Ins. Co. (6 Gray, 396), the amount of the insurance is immaterial. The premium is computed upon the law of averages to be the exact equivalent for the risk. So, if insurance had been taken out by the husband on his life in the wife’s name, she could herself take out more upon just as favorable terms and just as expeditiously as if none had been taken. No one company might desire to go above a certain amount upon any one risk, but the ability to procure further insurance is practically unrestrained. The wife has, therefore, suffered no loss by the original procurement of this insurance and its subsequent maintenance unknown to her, so long as the premiums have not been paid with her moneys or in any way from her estate. In other words, her property has not been used for any purpose. Her power to obtain valid insurance upon his life remained wholly unimpaired and unaffected by the insurance already obtained.

The fact that she had what is termed an insurable interest was only material for the purpose of upholding the validity of the insurance in question. I cannot see how it can be regarded as property in any event. That a life insurance policy has not the features of a contract of indemnity, and is not such a contract, has been unquestioned for a number of years (Rawls v. American Mut. Life Ins. Co., 27 N. Y. 282 ; Olmsted v. Keyes, 85 Id. 593).

The case of these policies is very much like that in Baker v. Union Mut. Life Ins. Co. (supra), where Judge ALLEN said the insurance was effected by the husband for the benefit of his wife and as a provision for her in case of his death. It was there stated that the case would not be changed if the policy were regarded as having been procured by the wife, because the husband was, in truth, the actor and represented the wife and she, in claiming the benefits of the policy, necessarily ratified and confirmed the compact as it was made, and with all its terms and conditions. Therefore this case is to be looked at with reference to the fact that every dollar of the moneys which procured and maintained these policies inexistence belonged to the firm represented by the plaintiff, and that Gilman had no more right to invest or use these funds in the manner he did than would any third person who had procured them without any right or title.

" It has been said that the husband, when he procures an insurance for his wife’s benefit, acts as her agent or represents her, and that she has a vested interest in the policies- the moment they are delivered, by force of the statute permitting them to be made in this form (Whitehead v. New York Life Ins. Co., 102 N. Y. 143; 1 St. Rep. 344).

This is doubtless true in the case of the husband procuring the insurance with funds which belong to him orto his wife, but where the premiums are paid with moneys which in truth do not belong to him, and which the husband misapplies in so paying, and by which he violates his obligation to the true owners of the moneys thus used, the wife, in such case, must claim the policy subject to the means by which the husband procured it, and she must adopt all his methods. The moneys in the hands of the company could not be recovered back by the cestui que trust if received by the company in good faith, because it would stand in the position of a bona fide purchaser, yet the policy itself would stand as the representative of these trust moneys, and the right of the wife would be to that extent subordinate.

This principle has, in effect, been decided in New Jersey in the case of Shaler v. Trowbridge (28 N. J. Eq. 595).

It was there held upon almost identical facts that there was no public policy which favored the wife at the expense of the principle that trust funds could be followed, and that no profit could in any way arise in favor of the trustee who used them. It also held that the wife could not "be permitted to avail herself of the proceeds of policies paid for her by her husband with trust funds. It is true in that case the policies were originally taken out in the name of the husband and subsequently made payable to the wife, and it is urged that there is a difference in the two cases, because in the New Jersey case it was the husband’s insurable interest which was insured and then assigned, and that in this case it is the wife’s interest which was originally insured. But we hold upon the facts in this case that the taking out of the policies in the name of the wife does not alter the principle as to trust funds. The cestui que trust is entitled to follow his funds and to take the moneys or the policy at his option.

The case of Central Bank of Washington v. Hume (128 U. S. 195), is not in point. The moneys there used were in truth the property of the husband, although he was insolvent, and he used some of his property to purchase insurance for the benefit of his wife and children.

The supreme court held that a policy of insurance taken out by the husband in the name and for the benefit of the wife made the contract a contract with the wife, and that even though the premiums were paid by the insolvent husband with moneys which, or some part of which, ought to have been used for the payment of his debts, yet if there were no fraud as between the wife and the company, the wife could hold the policy as against the creditors of the husband, except the amount which had been wrongfully used in the payment of premiums. If the amount of the husband’s estate used to pay premiums were no more than reasonable and moderate under the circumstances, it was further held that the creditors could not recover back the moneys so paid for. them, although the husband was, at the time of their payment, insolvent. It was said the "interest insured did not belong to the husband or his •creditors; that the contracts were not payable to the hus■band, his representatives or his creditors; that no fraud on the part of the wife, the children or the insurance company was shown or pretended ; and that there was no gift ■or transfer óf the debtor’s property, unless the amounts paid for premiums were to be held as excessive.

That is a very different case from the one under consideration. It was no trust fund (within the meaning of ■ that term when used to authorize the following thereof) which went to pay for the policy in that case. The moneys belonged to and were the property of the husband. They might, under certain circumstances, be reached in proceedings after judgment and return of execution, but the title was in the husband and he used his own property to procure the insurance. Having done so, the policy thus procured became a contract with the wife, and her insurable interest in her husband’s life was thus •made effectual. The creditors could not follow the ■moneys into other property and demand such property. No principle of following trust funds was involved.

In this case, however, there is the fact which alters .and colors the whole transaction and is fundamental and controlling in its nature, and that fact is that the moneys which procured the insurance were trust moneys, and although invested in the policies, they were subject at the very moment of such investment to the right of the ■owner of the funds to follow them into whatever change of form they might assume, and- to claim the thing into which they- were changed as if it were the original fund. In the case in the Federal court the whole matter was discussed with reference to the violation of the statute of Connecticut, based upon the statute of Elizabeth (13 Eliz. Ch. 5), prohibiting the transfer of the property of an individual, in fraud of his creditors. We have a statute to the same effect (2 R. S. 137, § 1). The learned chief justice said that the statute was passed to prevent debtors from dealing with their property to the prejudice of their creditors, but dealing with that which creditors, irrespective of such dealing, could not have touched, was within neither the letter nor the spirit of the statute. This was spoken of the insurable interest of the wife. And it was spoken in regard to creditors as that term is generally used. In this case it is not in the simple' character of a creditor of Mr. Gilman, or of the defendant, Mrs. Gilman, ■ that the plaintiff asks relief. He seeks the aid of a court of equity to enable him, in the character of a cestui que trust, to follow his property which was • wrongfully converted by one bearing towards him the obligations of a trustee, and by such trustee invested in these policies, and such cestui que trust now asks in substance for his own property, or for the property into which his trust funds were wrongfully converted, and we think he has the right to recover the property which represents and stands in the place of the original trust fund.

The case in the Federal court is not at all parallel, and is, therefore, no authority against our contention. Whether at common law or under the provisions of our statute, the procurement of policies of insurance in the wife’s name, under the facts developed in this case, does not prevent the cestui que trust from following and claiming the trust funds or their proceeds. If the proceeds of these policies had been greater than the whole amount of the indebtedness of the husband to the cestui que trust, arising out of the husband’s breach of trust, we do not decide what might in equity be the different rights of the wife and such cestui que trust in the balance,.or whether any different rule could be logically applied. The husband in this case converted over $200,000 of what stood in the nature of a trust fund, and the plaintiff recovers only a little over one-fourth thereof in case the judgment on the referee’s report be affirmed.

We simply decide the case now before us. As to other.questions discussed in the defendant’s brief we have carefully considered them, and we think there was no error in the result arrived at by the referee.

The order of the General Term is, therefore, reversed and the judgment entered upon the report of the referee is affirmed, with costs to the plaintiff at General Term and in this court.

All the judges concurred.

Judgment accordingly.  