
    Julia A. Dayton, Appellant, v. The H. B. Claflin Company, Substituted in the Place of The Mutual Life Insurance Company of New York, Respondent.
    
      Payment-of insurance premiums in pa/i't with’.stolen money and in pa/rt by the beneficiary—-.proceeds of the policy impressed with a trust in proportion to the money thus paid. ' ■ ■
    Where premiums upon a policy bf life insurance,- issued u, on the life of a husband and payable to his wife, are paid, in part, by money which the husband has embezzled from his employers, and, in part, by money furnished by the w-i-fe, the latter is entitled, in an action brought by the employers' to impress the proceeds of the policy with a trust in their favor, to receive, not only the sum expended by her in the payment of premiums, but a share of the entire proceeds of the policy proportioned to the amount of such payments made by her.
    Appeal by the plaintiff, Julia A. Dayton, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the-'county of New York on the 25th- day of August, 1896, upon the report of a referee.
    
      Abel E. Blackman, for the appellant.
    
      John L. Wilkie, William Burton Goodwin and Henry W. Becm, for the respondent.
   Williams, J. :

The action was originally brought against the Mutual Life Insurance Company to recover the sum of $10,000 upon two - policies of insurance issued upon -the life of Henry W. Dayton, the husband of plaintiff. One policy for $5,000 was issued November 24, 1890, •payable directly to the plaintiff; the other policy for - $5,000 was issued- September 10, 1891, payable to the husband himself, and was assigned to the plaintiff December. 4, 1891. After the commencement of the action an order was entered directing the $10,000 to be deposited- in court, awaiting the determination of the claims thereto; and the defendant, H. B. Claflin Company, was substituted for the insurance company in the action. The defendant claimed that it was entitled t-o the whole insurance fund, and its claim was based substantially upon the allegation that the. assured had, for many years before his death, been one of the employees of the firm of II. ¡B, Claflin & Co., and of the defendant company; and that from time to time since early in 1890, the defendant had stolen and embezzled from the firm and the defendant company large sums of money, and that all the premiums upon the two policies of insurance had been paid from the moneys so stolen and embezzled. The referee decided that the whole fund, ten thousand dollars, belonged to the defendant, subject to a lien thereon in favor of the plaintiff for the sum of seventy-six dollars, with interest from November 21, 1891, and that the plaintiff had no other claim to any part of the fund. And the referee in his opinion stated the ground thereof to be that the fund was the product of the defendant’s moneys, so used as to impress the fund with a trust, in favor of the defendant, and the same was both in law and equity the property of the defendant; and that the seventy-six dollars declared to be a lien on the fund in favor of the plaintiff was for such sum loaned by plaintiff to the assured, and by him used for the payment of one of the premiums going to produce the fund. It seems, therefore, that the referee found that all the premiums on both the policies were paid from the moneys stolen and embezzled by the assured from the firm and the defendant company, except the one premium of seventy-six dollars, which • was paid with moneys furnished by the plaintiff, and which the ■referee found were loaned by plaintiff to the assured for the purpose of making such payment, and were in no way the moneys of the firm or the defendant company. The decision of the referee was apparently intended to be based upon the principles of law laid down by the Court of Appeals in Holmes v. Gilman( 138 N. Y. 369). That action was brought by a partner of the assured against the wife and children of the latter, to reach insurance moneys collected upon policies issued upon, the life of the assured, and to have a trust impressed thereon in favor of the partnership, on the ground that, the premiums on the policies had all been paid from partnership funds wrongfully abstracted by the assured The policies were all payable directly to the wife, but none of the premiums had been paid by the wife, or from her funds. All of them had been paid by the assured from ■ the moneys wrongfully abstracted from the partnership. Upon these facts the whole fund was awarded to the plaintiff.

A few quotations from the opinion of Peckham, J., will show just what"was held in that case: “ 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 . such' property, provided the trust fund can be clearly ascertained, traced .and identified, and provided -the' rights of Iona 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.. * ? * 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 increases 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 ©f 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 j>aid 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 circumstance's is the cestui qu,e 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 $1,000 of trust funds and 500 of his own and purchased property which advanced in value to. twicé 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, though it was by reason of the wrong- . ful 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 of her own which has been mingled with the funds of the firm, the result of the combinanation being the procurement of the policies.”

The opinion then proceeded to discuss this question of alleged right of property in the wife to insure her husband’s life, and it was held that this.was not such right of property as constituted a mingling of funds in the purchase or procurement of the policies.

In the case quoted from above there was held to have been no mingling of* the partnership funds with the funds of the wife or the assured in the payment of premiums. All were paid from partnership funds.

In the case we are considering there was concededly a mingling of defendant’s funds with the funds of the wife or the assured. The court in Holmes v. Gilman (supra), declined to pass upon the question as to the rights of the parties in case of the mingling of' funds in the payment of premiums, a part being trust funds and a part other than trust- funds. The opinion of Peckham, J., evidently was that under some circumstances the cestui que trust would be permitted to share proportionately in the. whole fund. There was no suggestion by him, however, that the cestui que trust would be permitted in any such case to recover the whole fund, subject only to a claim by the assured or his wife or children to a return of the money advanced by them or either of them, with interest.; and yet this is just what the referee decided in this case. ■ -

He found that as to the policy first issued,, the one payable -directly to the wife, there was a mingling of funds in tile payment of the premiums, one payment, seventy-six dollars (the second one made on the policy) having been made by the deceased from moneys furnished! by the wife expressly for this purpose; and yet the defendí ant was awarded' the whole fund, the wife being merely allowed a lien thereon for her seventy-six dollars and interest. The referees put this on the ground that the wifé loa/necl this money to.the husband and did not pay the premium herself. There was-little reason fdr holding it to.have been a loan. The relation of the wife to that policy was that she held the legal title toi the policy. It was a coni tract between the company and the wife, the husband acting merely -as her agent. Thiswas held in Whitehead v. New York Life Ins. Co. (102 N. Y. 143) and has never -been questioned. The wife furnished! this seventy-six dollars, therefore, to her agent to pay a premium upon ■her own policy, and that would hardly have constituted a loan by her to het husband.. It is, however, of no consequence whether the money was that of thé wife or the husband when it was paid upon the policy. It was not the .money of the defendant anyway, and! the defendant was not, therefore, in any event. entitled to the pro-! portionate share in the fund arising from that policy based upon that payment. Every payment of premium made on that policy, which was not from the money of the defendant, inured to the benefit ■ of the wife, and in the accounting with reference to and distribution of the. fund arising from that, policy, she was at. least entitled to the; proportionate share based upon such payment.

The case of Holmes v. Gilman (supra) is certainly authority for the proposition that where all the premiums have been paid from; trust moneys, the eestmi que trust is entitled to the whole insurance!' fund. "When, however, a part of the premiums -only has been paid . from trust moneys,-a different question is presented. -In-such case; where. the first ¡premiums -paid, when the policies,- had their legal inception, were made from the trust moneys the inception of the policies and the legal title of the wife thereto would be infected with the improper use of trust moneys, and the rights of the; wife; would, from the very first, be subject and subordinate to the equities of the cestui que trust therein. The wife would still hold' the legal title, however, and while her legal title would avail her nothing if all subsequent premiums were paid from trust moneys, the whole fund then being regarded as earned solely by trust moneys and as belonging to the cestui quo trust, still, if some of the subsequent premiums should be paid by the wife or the husband for her benefit from any other than trust money, such premiums would attach themselves to the wife’s legal title and. she would at least be entitled to the proportionate share of the whole fund earned by such premium as she was entitled to the benefit of. This was precisely the condition of facts found by the referee in this case, viz.: That there was a mingling, of funds used in the payment of premiums upon one of the policies, and that the inception of that, policy was tainted with the use of stolen moneys. The referee upon such a finding of facts should at least have allowed the wife to share in the whole fund in proportion to the amount of the premiums paid by hem

We are-not at all satisfied with the findings of the referee upon the evidence before him , The defendant had the burden of proving that the payments of premiums upon the policies were made from stolen moneys; and we do not think the evidence was- such as té authorize the finding as to the first premiums on the two policies, and as to several others that they were made from moneys embezzled and stolen from the defendant company. Nor do we think the defendant company showed itself entitled to claim the benefit of any moneys used in the payment of premiums which had been embezzled and stolen from the old firm. We refrain, however, from discussing the facts or the evidence given on the first trial, because we do not desire in any way to interfere with a full and fair investigation of the facts upon the new trial which must be ordered before a new referee. The new referee should, upon such evidence as is produced before him, determine, as to the various premiums paid upon these two policies, which ones were paid from moneys embezzled and stolen from the defendant, and which from moneys embezzled and stolen from the old company; and as to the moneys of the old company, what right, if any, the defendant acquired therein. These facts the new referee 'should determine without reference to, and without being influenced by, any determination made by the referee on the ..first trial.

We have only passed upon the questions of law involved in the ' <case so far ias applicable to the facts found by the referee. We do not determine what the rights of the parties may be upon any new condition of the facts .found by "the- new referee.

The judgment should be reversed and a new' trial ordered before- : ■a new referee* to be named in the order, with costs of this appeal to abide event. ' ■,

.Yak Brunt, P. J., Rumsey, Patterson- and Parker, ' JJ., concurred.

Judgment reversed, new trial ordered before a new referee,.-to be \ named in the order, with costs of this appeal to the appellant to. .! ubide the event. ' •  