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Cite as: [1904] ScotCS CSIH_1, (1904) 12 SLT 279, (1904) 6 F 1028

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15 July 1904

Johnston's Trustee.

Lord Justice-Clerk.—The facts out of which this case has arisen are these:—The late Mr Fleming Johnston, Writer to the Signet, died in July 1902, leaving his affairs in an embarrassed state, and investigation shewed that they had been embarrassed for some time. He had a client, Mrs Jopp, from whom he held a factory and commission. Under that factory and

Commission he sold a number of shares belonging to her of the North of Scotland Bank without consulting her, and paid £1194, 19s. 3d. into his own bank account, being the price of these shares. They were paid by a cheque in his favour, and so had to pass through his account. There was an additional sum of £45 of rent due to Mrs Jopp paid in, and at the time there was a sum of £439, 17s. in the account, so that the total sum was £1679, 16s. 3d.

The evidence seems to shew that Mr Johnston was anticipating the calling up of a bond for £1330 on a property belonging to him, and that he intended to utilise the price of the shares to meet the sum in the bond, and to grant a new bond in favour of Mrs Jopp. As it turned out, his creditor did not call up the bond, and he proceeded in the same month in which the price of the shares was realised to draw out £1500 from his bank account, and to obtain for the money seven deposit-receipts—one for £300, and six for £200 each. Two of these, the £300 one and one of £200, he uplifted. The remaining deposit-receipts were in his possession at the time of his death.

Only small sums, amounting in all to £27, 18s. 6d., had been drawn from his account between the time of the £1239, 14s. 3d. being paid in and the £1500 being drawn out to be exchanged for deposit-receipts. It is quite certain, therefore, that as there remained in his account a sum of £306, 17s. 9d. after the draft for the deposit-receipts, these deposit-receipts could not have been obtained except by the use of at least a large part of the money belonging to Mrs Jopp. The respondent in the petition admits that whatever view be taken as to the matter, at least £433 of the amount was necessarily Mrs Jopp's money.

Now, there can be no doubt whatever that throughout the whole time during which the price of these shares was dealt with, Mr Johnston stood in a fiduciary relation to Mrs Jopp. When he received the price of the shares he held it with responsibility to hold it for her and for no one else. The question in the case is whether when Mr Johnston, after receiving the money, drew a cheque and obtained these deposit-receipts, he must be held to have done so for behoof of Mrs Jopp, and when he dealt with other sums in his account, taking money and using it, he must be held to have done so with his own money and not with hers. I agree with the Lord Ordinary when he says that the former is the sound view, and that to allow the creditors of Mr Johnston to succeed in maintaining the opposite view would be to enable them to benefit by Mr Johnston's breach of the trust relation in which he stood, and to force a settlement with Mrs Jopp on the footing that his money was preserved in the deposit-receipts and hers left in the ordinary account to be dealt with by him as if it was his own. I have no difficulty in holding with Sir George Jessel in the case of Hallett that, as he quoted from Lord Hatherley, “if a man mixes trust funds with his own, the whole will be treated as trust property, except in so far as he may be able to distinguish what is his own.” It is no doubt true that Mr Johnston was not in the strict sense of the word Mrs Jopp's trustee. He was undoubtedly, while he held the money, under the obligations of trust, the obligation to hold it for another and to deal with it solely for that other's interest. Can this be got rid of by his passing it into his bank account or obtaining deposit-receipts for it? There is nothing in that to cause what is held in a fiduciary relation to merge into general debt as in a question between debtor and creditor. As Lord Justice Thesiger expressed in Hallett's case, the cases where moneys mixed cannot be separated “resolve themselves into cases where, although there may have been a trust with reference to the particular chattel which these moneys subsequently represented, there was no trust, no duty in reference to the moneys themselves, beyond the ordinary duty of a man to pay his debts; in other words, that there had been cases where the relationship of debtor and creditor had been constituted, instead of the relation either of trustee and cestui que trust, or principal and agent.” Now, here, whatever Mr Johnston did, the fiduciary relation of agent undoubtedly subsisted, and to have uplifted the whole of these deposit-receipts and used the contents for his own purposes would undoubtedly have been an absolute breach of his duty and the fiduciary position in which he stood. And I cannot hold that the trustee in Mr Johnston's sequestration is entitled to found on the mode in which Mr Johnston dealt with his bank accounts, seeing he dealt with them in a way which he should not have done if he was to do his duty by his client. Here, as in Macadam's case, Mr Johnston got the money into his hands for a definite purpose—I think plainly for investment in a bond to replace the one which he expected to be called up. There is no other explanation consistent with his honesty to account for the sale of the shares, and he so represented the matter in his letter as being for an investment. As in Macadam's case again, the proposed investment did not take effect, the bond not being called up, and so the money was in his hands, as it was in Mr Martin's hands, owing to delay of investment. The words of Lord Ardmillan in Macadam's case seem distinctly applicable here. “When he died he was bound to fulfil, and appeared able to fulfil, the trust,”—which was to invest the money—“ … Since his death it has been discovered that he was insolvent.” And the Court held that the trust adhered to the sum so deposited, and indicated that Martin's trustee could not claim the money which it would have been a breach of trust and fraud for Martin to have applied to his own purposes. The Lord President in concurring referred to the English case of Pennell, quoting with approval Mr Lewin's statement that “the Court in such a case will disentangle the account.” The opinions in that case, which I have read, are very emphatic and instructive, and all tend to the same conclusion.

Upon the whole matter I concur in the opinion of the Lord Ordinary, and would move your Lordships to affirm his interlocutor.

Lord Young.—I concur in the result, and generally in the views stated by the Lord Ordinary and by your Lordship. I think that the question here is really one of fact to be determined on the evidence before us. I cannot say that the question is free from difficulty, but on the whole I think this money is identified, or to use a very appropriate expression, is earmarked, as the money of the client. On that ground, that the money is on the evidence sufficiently identified or earmarked as the money of the client, I concur in the judgment proposed by your Lordship.

Lord Moncreiff.—The Lord Ordinary's interlocutor is right. On 19th November 1900 Mr Johnston, without authority, sold 125 shares belonging to his constituent Mrs Jopp, for which, together with £45 of interest, or rents collected, he received £1239, 19s. 3d., which he paid into his account-current with the Commercial Bank. There was at that date standing at his credit on his own account a sum of £439, 17s. On 21st November he paid in a sum of £155. After deducting certain small sums drawn out there stood at his credit on 22d November £1806, 17s. 9d. On the same day he passed a cheque on his current account for £1500, and received in exchange seven deposit-receipts, six for £200 each, and one for £300. Of these deposit-receipts five for £200 each remained extant at Mr Johnston's death in July 1902, two and a half years later, and these are the deposit-receipts which the petitioner Mrs Jopp now claims to be taken out of the sequestration under section 104 of the Bankruptcy (Scotland) Act, 1856.

Before proceeding further I may state what I understand to be the law which is recognised and illustrated in the English and Scottish decisions to which the Lord Ordinary refers.

First, where a trustee or agent, with or without authority, sells trust property and lodges the proceeds of the sale in bank in his own name, the money so lodged can be followed and vindicated by the truster provided it can be traced with reasonable certainty.

Secondly, this holds good not only as between the truster and the trustee but also as between the truster and the trustee's trustee or assignee in bankruptcy acting for the general body of his creditors.

Thirdly, the proceeds of the sale can be vindicated although they may have been blended with moneys belonging to the trustee. And

Fourthly, if after the proceeds of trust property are so lodged and blended with the trustee's own funds, the trustee, for his own purposes, draws out part of the mixed funds he will be held to have drawn out his own funds, and not those which represent the proceeds of the trust-estate.

Now, I do not think that I misrepresent Mr Home's able and candid argument for the reclaimer when I say that he disputes one and all of these propositions.

I shall afterwards have something to say upon the authorities, but before doing so I shall proceed to ascertain what were the funds with which the seven deposit-receipts were purchased. Taking the most unfavourable view for Mrs Jopp, it is clear to demonstration that those deposit-receipts, which cost £1500 in all, were purchased, at least to the extent of upwards of £900, with the proceeds of Mrs Jopp's 125 shares which Mr Johnston on 19th November sold without her authority. I do not admit that that is the limit of Mrs Jopp's claim, but when the deposit-receipts were purchased Mr Johnston had standing at his credit in an account-current £1806, 17s. 9d., which consisted to the extent of £1239, 19s. 3d. of money belonging to Mrs Jopp. Therefore, apart from Mrs Jopp's money, he had, counting everything, only £566, 18s. 6d. which could be held to have entered the deposit-receipts amounting to £1500 in the most unfavourable view for Mrs Jopp. Therefore, deducting £566, 18s. 6d. from £1500, we find there remains a balance of £933, Is. 6d., which must have been made up of Mrs Jopp's money.

But not content with docking the £1500 at one end to the extent of £506, 18s. 6d., the reclaimer endeavours to cut down Mrs Jopp's interest at the other end in this way. He points out that on 23d April and 3d May 1901 respectively Mr Johnston cashed two of the deposit-receipts, amounting together to £500, and he maintains that it must be presumed that the money so drawn out was Mrs Jopp's money, and that therefore the most that she can possibly claim, although he does not admit that she is entitled to it, is £433, Is. 6d. It seems to me that this contention is entirely against all equity, principle, and decision. But fortunately there is ample authority both in the law of England and Scotland to lead to the rejection of the defender's contention. The result of those authorities is, that in such a case where a client's money has in a certain sense been mixed with that of the trustee or agent it can be traced and disentangled, and that if in the meantime the trustee or agent has drawn money out of the mixed fund it is to be presumed that the money which he has drawn is his own.

The identification of the proceeds of the 125 shares is in this case greatly simplified by the fact that Mr Johnston allowed five of these deposit-receipts which were lodged on 21st November 1900 to remain extant until his death in July 1902, although in the interval he uplifted several deposit-receipts of a later date. The reasonable inference is that, whatever may have been Mr Johnston's original intention as to the use to which the proceeds of the shares should be put, he desired, so far as possible, that at least to the extent of £1000 they should remain earmarked.

I go further. In my opinion the reasonable inference from the evidence is that Mr Johnston put the whole of Mrs Jopp's money, amounting to £1239, 19s. 3d., into the deposit-receipts. It is true that in April and May 1901 he drew out and applied to his own purposes two deposit-receipts representing £500. These Mrs Jopp does not seek to follow, but there remain five deposit-receipts, amounting in all to £1000, which I think unquestionably represent the proceeds of her shares.

The Lord Ordinary has gone so fully into the authorities that I do not propose to detain your Lordships by a detailed examination of them. They were all cases in which the question was between the truster or cestui que trust and the assignees in bankruptcy of the trustee or agent. One of the most important of these cases is Pennell v. Deffell . I refer particularly to a passage in the judgment of Lord Justice Knight Bruce:—“When a trustee pays trust money into a bank to his credit, the account being a simple account with himself, not marked or distinguished in any other manner, the debt thus constituted from the bank to him is one which, as long as it remains due, belongs specifically to the trust as much and as effectually as the money so paid would have done had it specifically been placed by the trustee in a particular repository and so remained; that is to say, if the specific debt shall be claimed on behalf of the cestuis que trustent it must be deemed specifically theirs, as between the trustee and his executors and the general creditors after his death on one hand, and the trust on the other. Whether the cestuis que trustent are bound to take to the debt—whether the deposit was a breach of trust—is a different question. This state of things would not, I apprehend, be varied by the circumstance of the bank holding also for the trustee, or owing also to him, money in every sense his own.”

The opinion of Lord Justice Turner is to the same effect.

That part of the decision was approved and followed on this point in the leading case In re Hallett's Estate, in which the Master of the Rolls, Sir George Jessel, emphatically indorsed the views expressed by Lord Justice Knight Bruce in Pennell's case; see also 1 Bell's Com., pp. 286, 287.

The only other decision to which I think it necessary to refer is a Scottish decision of the First Division of the Court—Macadam v. Martin's Trustees . This decision, which was delivered after Pennell v. Deffell, and before the decision In re Hallett's Estate, was given in a case between the clients of a law agent and the trustee on the law-agent's bankrupt estate. As here, the client applied under the 104th section of the Bankruptcy Act, 1856, to have a sum of, £1000 which had been given to the law-agent to be invested in a heritable security and which he had paid into his own bank account, taken out of the bankrupt estate. The Lord Ordinary, whose judgment was adhered to, found that the petitioners had right to the £1000, and that the same must be taken out of the sequestration of the deceased law-agent.

The Lord President held that the point had been expressly and rightly decided in the case of Pennell v. Deffell .

For a concise statement of the law of England, which was recognised in Macadam's case to be the same as the law of Scotland, I may refer to the 10th edition of Lewin on Trusts, Ch. 31, sections 2 5, pp. 1095–97.

I am therefore of opinion that the Lord Ordinary's judgment should be affirmed.

LORD TRAYNER was absent.

6 F 1028

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