
    James Roosevelt, as Executor and Trustee under the Last Will and Testatment of William Edgar Howland, Deceased, Respondent, v. The Land and River Improvement Company, Appellant, Impleaded with James B. Williams, Respondent, and Others.
    
      Equity — tracing funds wrongfully used—equitable ownership of mortgages — priority of legal title over equitable rights — subrogation.
    
    The subject-matter of an action was a fund in court, the proceeds of three mortgages given by Max Danziger to Francis H. Weeks, which was claimed by the plaintiff as executor and trustee of William E. Howland, deceased, by the defendant, the Land and River Improvement Company, of which Weeks was president in 1892, and also by the defendant James B. Williams. It appeared upon the trial that in October, 1885, Weeks, who was co-trustee and executor with the plaintiff, had in his possession certain stock belonging to the How-land trust, which it was agreed between him and the plaintiff should be sold and the proceeds be loaned to Max Danziger upon four mortgages to be given by him. Weeks sold the stocks for §74,000, deposited this sum to his own account in the Bank of Commerce, and later invested §60,000 of it in mortgages made by Max Danziger, which Weeks took in his own name as mortgagee, which latter fact did not come to the knowledge of the plaintiff until 1893. In the interval Weeks wrongfully used the mortgages for his own purposes, and actually parted with one of them, retaining the others. On December 12, 1892, Weeks, as president of the Land and River Improvement Company, borrowed for the use of that company of the defendant James B. Williams railroad bonds having a face value of §48,000, which were to be used to borrow §30,000 for that company, and gave to Williams as collateral security the three Danziger mortgages, which were duly assigned to Williams. Weeks took the railroad bonds to the Bank of Commerce and borrowed §30,000 on them, giving, to the Bank of Commerce, without the knowledge of Williams, his, Weeks’, individual note for the amount, and the proceeds were used solely by the company. Before the note became due Weeks drew a check upon the bank account of the company, made to his own order, for the amount of the note, received the money upon it, and when the note became due he paid upon it only §5,000, and had it renewed for the balance, the securities of Williams still remaining pledged to the bank. Subsequently the mortgages of Danziger were paid and the proceeds were brought into court.
    
      Held, that as the evidence showed that the moneys of the Howland trust were satisfactorily traced into the bank account of Weeks with the Bank of Commerce, and out of that account into the loans made to Max Danziger upon his mortgages, the Howland trust was the equitable owner of those mortgages;
    That as Williams was the legal owner of the mortgages, without knowledge or notice of latent equities, he was entitled to be first paid from the fund;
    That the act of Weeks, in paying one-sixth of the §30,000 note and procuring its renewal for the balance, did not alter or improve the position of the Land and River Improvement Company in regard to Williams, nor discharge its debt to him;
    That if the renewal of the note was to he deemed a new transaction, still Williams • was entitled to have the Land and River Improvement Company return his securities, an act which it had never performed;
    That Williams was entitled to an execution against the Land and River Improvement Company for his debt, as fixed hy the judgment in the action, and if this • was not paid or collected, Williams should he authorized to apply to the court to he paid from the fund in court, and upon such payment should assign to the .plaintiff all his rights under the j udgment.
    Appeal by the defendant, The Land and River Improvement Company, from a judgment of the Supreme Court in favor of the plaintiff, and the defendant James B. Williams, entered in the office of the clerk of the • county of New York on the 8th day of July, .1895, upon the decision of the court rendered after a trial at the New York Special Term.
    
      Alfred Jaretzki. for the appellant.
    
      James R. Soley, for the respondent Roosevelt.
    
      Charles E. Miller and Pcvyson Merrill, for the respondent Williams.,
   Patterson, J.:

. In the subject-matter of this action are involved the ownership of, and claims upon, a fund paid into court, being the amount due of three mortgages on real estate in the city of New York, which Were made by Max Danziger as mortgagor to Francis H. Weeks as mortgagee. When the,suit was instituted the mortgages were still outstanding liens, and Mr. Danziger was made a defendant; but on his application they were paid off, the money placed in a court depository to await the determination of the suit, and Mr. Danziger was allowed to retire from the litigation. The case has been much simplified since the hearing and decision at Special Term.' There the court was called upon to ascertain, adjust and administer the rights and equities of many parties who claimed the mortgages,, or some One or more of them. The plaintiff, as executor of and trustee under the will of William E. Howland, claimed them all, as the equitable owner thereof ; other parties claimed in the Tight of estates .of which they were the trustees or representatives; the defendant Williams claimed to hold them by assignment from Weeks for value and without notice of the claims or equities of any third party, and his claim has been recognized and sustained by the decree as paramount to all others. The Land and River Improvement Company is brought in as a party defendant, because of its relation to the mortgages, growing out of a transaction presently to be mentioned. All the defendants, claimants, except the. land company and Williams, have disappeared from the suit as it comes before us, by failing to appeal from the decree, and the contest is now narrowed down to one between the plaintiff, the Land and River Improvement Company (the appellant), and Mr. Williams, who has not appealed, but who ur^es that the full and proper relief to which he was entitled was not awarded him, and that hence a modification of the decree must be made in his behalf. We will, therefore, confine our consideration of the case to the material matters involved, as affecting the rights of the parties now before us, except so far as incidental reference may be necessary to other matters not immediately concerning such parties.

Prior to October, 1885, Francis H. Weeks, a lawyer in the city of New York, was the adviser, attorney and agent of many clients, who reposed in him unbounded confidence. He was the trustee of estates; the attorney, in fact as well as at law, of many persons, and the custodian of their money securities. Among those to whom he stood in the latter relation was Mr. W. E. Howland, who resided in France. Mr. Howland died in February, 1885, and by his last will and' testament appointed Weeks and the plaintiff executors thereof and trustees of a trust for the benefit of his, the testator’s, widow. Weeks and the plaintiff Roosevelt qualified as executors, and entered upon the duties of their trusteeship. Weeks had in his possession at the time of Mr. Howland’s death, and in October, 1885, shares of stock of a railroad corporation and. certain consolidated stock issued by the city of New York. In October, 1885, those stocks belonged to the trust of the Howland estate." It was about that time agreed between Mr. Roosevelt and Weeks that the investment of the amounts then represented by the stocks referred to should be changed, for which purpose they were sold by Weeks, and the proceeds, amounting to something over $74,000, were deposited by him to the credit of his personal account in the National Bank of Commerce of the city of New York. That was done on the 22d day of October, 1885. Before the sale of the stocks was made, the nature of the security in which the proceeds of sale were to be invested was agreed upon. Bonds and mortgages were the selected securities, and it was agreed that loans of $60,000. should be made to Max Danziger, to be secured by mortgages upon four pieces of real estate belonging to him, each piecé to be separately mortgaged for $15,000. Roosevelt examined the premises to be covered by the mortgages and assented to the loans being made upon them. All this was' done of course before the mortgages were made. Some of the money was not actually advanced until a month after the bonds and mortgages were delivered. Thus we have to start with, in the investigation, the facts that in- October, 1885, the Howland trustees resolved to make the investment in the Danziger mortgages, and, further, that they sold securities of their trust to provide the money to advance to Danziger, and that in their inception those mortgages were connected exclusively with a transaction in which the trustees of the Howland estate were alone concerned on the one side as investors of money of that estate. Weeks attended to the arrangement of the details of the loans, and instead of having the mortgages drawn to Mr. Roosevelt and himself as trustees, he procured them to be made out in his own name as mortgagee. This fact he concealed from Roosevelt, who did .not become aware of it until some time in 1893, when Weeks became a fugitive from justice and was brought back from foreign parts to be tried on an indictment for felony. Meantime, from 1885 until 1893, Weeks perpetrated a series of fraudulent acts in connection with these mortgages and the bonds to which they were collateral,, using them from time to time for his own purposes, but never parting with the legal title to but one of them, which.he assigned by formal instrument in 1888 to a Mr. Stevenson, and thus removed it beyond the reach of the true owner. He stated to the beneficiaries of' different trusts that the mortgages were securities, of the particular estates in which those persons were interested, and in all his juggling with these securities he always eluded detection and retained the confidence of those whose interests he had in charge until late in April, 1893, when upon his absconding his long-continued nefarious deeds came to light. We are now concerned with the ramifications of but one of Weeks’ fraudulent transactions; that one which brought int® business relations the trustees of the Howland trust (Weeks was displaced in the summer of 1893 by order of the court) and the defendant Williams, and the land company. Weeks was the president, treasurer and active executive officer of that company. Some time previous to December 12, 1892, he represented to Williams that the company was in need of funds and he made application to Williams for a loan. By an arrangement made between Weeks, as the representative of the company and Mr. Baxter, one of its directore, and Williams, the latter loaned to the land company certain bonds of railway companies belonging to him, Williams, individually, to he used as collateral to enable the land company to borrow elsewhere the sum of $30,000, and it was also agreed that the three Danziger mortgages should be assigned to Williams to hold as security for the return of his railway bonds. The transaction was evidenced by a Writing delivered to Williams as follows, viz.:

“New York, Deo. 12, 1892.
James B. Williams, Vice-President:
Received from James B. Williams as a loan thirty thousand dollars of the consolidated five per cent mortgage bonds of the Northern Pacific R. R. Co., Nos. 18707 to 18733, inch, and 18735 to 18737, inch; and also eighteen thousand dollars of the Northern Pacific & Montana R. R. Co. first mortgage bonds, Nos. 4967 to 4974, inch, and 4978 to 4989, inch Said bonds to be returned to said Williams within ninety days from date, and, as collateral security for said loan, three bonds and mortgages for fifteen thousand dollars, each made by. Max Danziger to Francis H. Weeks, all dated November 2, .1885, have been assigned by said Francis H. Weeks to said Williams.
“ [l. s.] LAND & RIVER IMPROVEMENT CO.,
“ By F. H. Weeks, PredtP

This agreement tells the whole story of the transaction of which it is the evidence, and shows, without the need of construction, what each party did and what relations were constituted between them. No question can be raised of Weeks’ authority to borrow the securities, nor of the loan being made directly to the company. The Williams. bonds were in terms borrowed by the company, and as the instrument shows the company pledged the mortgages to Williams, for although to he assigned by Weeks to Williams, that was to he done to make them available as a pledge for the obligation of the company, and not for a private indebtedness of Weeks in any manner. The land company, not constructively, hut actually, used the mortgages for its own purposes, and received the benefit of them. They were in due form assigned by Weeks to Williams, who took them without knowledge or notice of Weeks’ true relation to them, and as he was an innocent holder they were not impressed with a trust in his hands,-whereby his lien or claim upon them could be affected.

Williams’ securities were never returned to him, nor has he ever been satisfied in whole or in part for their value. Weelcs’ subsequent dealings with Williams’ securities were in "some respects as dishonest as most of his conduct. He took them to the Bank of Commerce and borrowed $30,000 on them, giving to the bank Ms individual note for that amount. He also borrowed $10,000 from a Mr. Oakes, which he added to the $30,000 obtained from the bank. He deposited the $40,000 thus raised to the credit of the defendant Land Company in its bank account. Thus this money is followed into the Land Company’s possession. But Williams did not know that Weeks borrowed it on his personal note, nor is there anything in the evidence to "justify an inference that he had any information or notice that Weeks at any time was using these securities for any other purpose than the particular one for which they were originally loaned. The subsequent history of this transaction with the bank is important. Weeks’ note for $30,000 was at ninety days and fell due March 13, 1893. Thirty days before that due date Weeks, as "treasurer of the land company, drew a check for $40,400' to his own order individually, but entered on the check-book stub or counterfoil that it was drawn to pay the bank its $30,000 and Oakes his $10,000, and interest on both sums. That this was a mere deception and concealment of an abstraction of money seems undeniable. The bank’s note had still a month to run and it was not paid. On the contrary, 'when it matured $5,000 was paid on account and the balance renewed for thirty days, the securities still continuing in pledge to the bank and Weeks made them the basis of another transaction at a later date , with the bank.

What has "thus far been said is sufficient to indicate upon what facts the rights of the three parties now before the court were adjudicated, and upon them the learned justice at Special Term held that the plaintiff as trustee was "the owner in equity of the three bonds and mortgages described in the complaint; that he was entitled to receive them (or their proceeds paid into court), subject to the right of the defendant Williams to them (or to the fund), as collateral security for the return by the defendant Land Company of his securities loaned by him for the benefit of that company, and that there should be judgment directing the Land Company to pay to Williams the value of such bonds on the 13th day of March, 1893, to wit, the sum of $36,803.50, with interest thereon to the date of such payment; that Williams have judgment against the Land Company for that amount, and that upon the payment of that amount to Williams the plaintiff was entitled to the fund in court. Thus the rights and equities of the parties were finally disposed of except that one matter was left open to which reference will be made hereafter.

On this appeal the first question raised was as to the plaintiff’s ownership in equity as trustee of the Howland trust of the three mortgages. It was incumbent upon the plaintiff to establish, as against all the defendants on the record, that the bonds and mortgages were actually the product of the Howland moneys, or, in other words, that those moneys be traced directly into such mortgages. There is no dispute concerning the rule in equity by which trust moneys are followed through a trustee’s mixed account under circumstances such as are disclosed here. That rule, which is generally referred to as the rule in Hallet's case (Knatchbull v. Hallett, L. R. [13 Ch. Div.] 696), was announced in substance in Baker v. N. Y. N. E. Bank (100 N. Y. 31), and distinctly in Importers c& Traders’ Hat. Bank v. Peters (123 id. 272). In the case at bar the money of the Howland trust was satisfactorily traced into the bank account of Weeks with the Bank of Commerce, and out of that account into the Danziger mortgages. The defendant Land Company is compelled to admit that by the 6th of November 1892, there had been paid to Danziger on his mortgages out of the How-land money, at least the sum of $31,931.51. An analysis of the testimony on this subject shows that $60,000 of Howland money (within a small fraction) Went into these mortgages. The $31,931.51 paid before November sixth is conceded. The subsequent payments to Danziger, or for him, extended over a period from November twelfth to December nineteenth. The dissection of Weelcs’- bank account made by Mr. Henworthy,. the expert accountant, shows that of the $60,000, all (but a few hundred dollars possibly) went into the mortgages.. The separation of the personal funds and moneys specificially drawn out for other purposes than to pay to Danziger seems to be complete, and we think the court below was right in so finding. For all money of other persons that" may have gone into Weeks’ account he seems to have accounted to the owners, and the court below was justified in treating those moneys in the same way that it did the personal funds of Weeks. (Baker v. N. Y. National Exchange Bank, 100 N. Y. 31.)

Our conclusion on this branch of the case may be summed up thus: The right of the plaintiff is based upon tracing the trust moneys into the mortgages at the outset, and not upon any theory of the substitution of the mortgages subsequently for the money. Those mortgages constituted an investment originally contemplated by Roosevelt and Weeks, to make which, railroad and. municipal bonds of their trust estate were sold, and the moneys realized put into Weeks’ bank account, to be in readiness for that identical investment, and upon an analysis of that account, applying the recognized rule of the application of drawings, the evidence shows ■that the $60,000 of mortgages were paid for by the Howland "moneys. Thus we ascertain that the Howland trustee is the equitable owner- of these mortgages.

The second question relates to the rights of the defendant Williams, and the obligations of the land Company. Williams has the legal title to the three mortgages as the assignee thereof for value, without knowledge or notice of latent equities. He is in no way affected by any transactions of Weeks with the Land Company after he parted with the possession of his railroad' bonds to the company. He is entitled to- stand on his written agreement, and if Weeks’ ■fraudulent acts as an officer of the Land Company have entailed loss upon that company, it is one for which Mr. Williams is in no "way responsible. It is suggested by the learned counsel for the appellant that, when Weeks took up the $30,000 note, the indebtedness of the Land Company was paid, arid any subsequent dealings of Weeks with the bank were on his own account. The inference sought to be drawn from that seems to be that by the act of Weeks in retiring that note, the Land' Company became discharged from the transaction and it was then left as a matter between Williams and Weeks individually. It is said that Weeks drew his check for $30,000 and. paid the note, and then made a new transaction with the bank, borrowing $25,000 and repledging the same securities, and that Williams was told of the reduction of the indebtedness. Whatever form the transaction assumed, it was in fact only a renewal of the loan by the bank to the extent of five-sixths of the first loan. It is claimed that what may be considered as the proceeds of the mortgages, realized in the way stated, having, by the repayment of the loan, found their way back into Weeks’ hands as an individual, the land company is not responsible for what Weeks did afterwards, and that the transaction, so far as the company is concerned, ended. But that is not the situation. The $30,000 note was only paid in part; the rest of it was renewed. It was not an entirely new loan to Weeks. But suppose it was. It then became the business and the duty of the land company to see that Williams’ securities were returned to him. Whether it may be said that the company converted the Williams securities is immaterial. It failed to return them. On the payment' of the note he was entitled to them; but there was nothing but a partial payment, and the securities were not released, so that they might be returned. It was a transaction never closed between the land company and Williams. It remains open to this day, and the status of Williams has not been changed. He demanded the return of his bonds from Weeks, who, as said, was the financial officer of the company and the proper person to demand 'them from. There are no equities of the land company overriding those of Williams, nor is there an equality of equities, and he cannot be turned from his direct course in the pursuit of his rights by the effort to raise an issue based upon supposititious relations between him and Weeks individually. So far, then, as the rights and relations of the parties now before the court are concerned, we think they were equitably and justly ascertained and defined by the justice at Special Term, and the parties being all before the court, and it being in full possession of the subject-matter of the action, plenary relief can be afforded by final decree. This was sought to be done by the provisions before referred to, but, we think, those provisions do not settle as absolutely and thoroughly-as should be Mr. Williams’ rights. The modification he asks for should be made, without compelling him to apply for further relief at the foot of the decree, and thus leave open for further discussion the matter of what additional relief he may be entitled to. He has, undoubtedly, the first right to the extent found by the court below. There is no reason why he should be indefinitely postponed in realizing the amount due him. His priority of lien entitles him to priority of payment, and, therefore, the decree should be reformed to this extent, viz., that a provision be added that Williams have execution against the land company for the amount directed to be paid by it to him, and that if such payment is not made or Williams fails to collect the amount on execution, then he may apply to the court on notice to be paid.out of the fund in the court depository, and shall be entitled to such payment on assigning to the plaintiff all. his rights under this decree in manner and form to be approved by the court. With this modification the judgment appealed from must be affirmed, with costs.

Van Bbunt, P. J., Williams and O’Brien, JJ., concurred.

Judgment modified as directed in opinion, and affirmed as modified, with costs.  