(2 Wall. 252, at pages 256, 257 and 258, 17 L. Ed. 785):
"The counsel have argued as to the effect of mixing the money of plaintiff with that of defendant. In the view we take of the matter, there was no such admixture. It being understood between the parties that, when the money was received, it was to be held as an ordinary bank deposit, it became by virtue of that understanding the money of the defendant the moment it was received. * * *
"If we are correct in these views, it would seem that the relation of principal and agent was changed the moment the money received was placed in the general fund of the bank, and the plaintiff credited on its book with the amount. * * *
"If the Marine Bank had thus received depreciated money, and kept it without using it until called for, or had sent it by express to plaintiff, it would have been relieved from further liability. In other words, as long as the defendant retained strictly the character of agent, and acted within the principle laid down in the circular, it was protected. But, as we have already shown, the defendant changed that relation by using the money as its own, and became the debtor of the plaintiff for the sum collected."
When the principle of Marine Bank v. Fulton County Bank, supra, is applied to the present situation, it comes down to this: If funds received by an agent for the account of its principal are with its principal's consent commingled with the agent's own funds so as to change the relationship to that of debtor and creditor, the result is that the commingled fund is the agent's property, since the latter no longer is required to pay over a specific fund but merely the amount for which it has become indebted. It follows that the agent must be held to have that "unfettered use" of the funds collected from the assigned accounts which renders the assignment void as to its trustee in bankruptcy under the rule of Benedict v. Ratner, supra. The fact that the assignee who has permitted the commingling of the funds essays to lay verbal restrictions upon the assignor's disposition thereof cannot change the legal relationship between the parties or serve to raise a trust or create an equitable lien in any portion of the commingled fund. Such restrictions, if agreed to, may give rise to an action for damages if violated, but they cannot create a property right in an unsegregated portion of the assignor's funds which would prevent the latter from effectively disposing of title thereto. As Mr. Justice Holmes said in National City Bank v. Hotchkiss, 231 U.S. 50, at page 57, 34 S. Ct. 20, 21, 58 L. Ed. 115, a case involving similar questions: "A trust cannot be established in an aliquot share of a man's whole property, as distinguished from a particular fund, by showing that trust moneys have gone into it. On similar principles a lien cannot be asserted upon a fund in a borrower's hands, which, at an earlier stage, might have been subject to it, if, by consent of the claimant, it has become a part of the borrower's general estate. But that was the result of the dealings between these parties, and it cannot be done away with by a wish or intention, if such there was, that alongside of this permitted freedom of dealing on the part of the bankrupts, the security of the bank should persist. It is not like the case of property wrongfully mingled with general funds and afterwards traced." It will be seen that this language is peculiarly applicable to the present case. Equally pertinent is the following statement of Mr. Justice Werner in Lighthouse v. Third National Bank, 162 N.Y. 336, 344, 345, 56 N.E. 738, 741, quoted with approval in Re Finkelstein (C.C.A.) 298 F. 11, 17, by Circuit Judge Mayer: "One of the first essentials to the creation of an equitable lien is the specific thing or property to which it is to attach. 'Though possession is not necessary to the existence of an equitable lien, it is necessary that the property or funds upon which the lien is claimed should be distinctly traced, so that the very thing which is subject to the special charge may be proceeded against in an equitable action and sold under decree to satisfy the charge.' Jones, Liens, § 34, and Grinnell Minturn & Co. v. Suydam, 3 Sandf.[5 N.Y.Super. Ct.] 132."
These cases make it clear that the law will not permit one by a secret agreement with his agent to retain his property in funds which he has permitted to be so mingled with those of his agent as to make them subject to the demands of the latter's creditors. To hold otherwise would, we think, open wide the door for fraud against creditors of the agent. This is particularly so in a case like the present where the parties are closely related by blood. Especially pecially in such cases should there be full compliance with the requirements which the law has laid down. Nor can the fact that the principal is a lawyer excuse him from such full compliance.
From what has been said it is clear that the true criterion to be applied in this case is whether the proceeds of the assigned accounts which the assignor had been authorized to collect were kept segregated for the benefit of the assignee. If they were the assignment is valid. If, however, they were, with the assignee's consent, commingled with the assignor's other funds, the assignee's property in the fund is gone and the assignment is void as against the assignor's trustee in bankruptcy.
Turning to the facts of the present case, we observe that Jerome L. Markovitz in authorizing the bankrupt company to collect the accounts for him asked that the proceeds be segregated. Nevertheless, at the request of the treasurer of the bankrupt he agreed that the proceeds might be deposited in the bankrupt's sole bank account and commingled with its other funds. Applying the above criterion to these facts, we must necessarily hold that at the moment he permitted the commingling of his funds with those of the bankrupt he lost his special property therein and his relationship with the bankrupt as to them became merely that of creditor and debtor. The agreement of the parties that the treasurer of the company should act as his agent in disbursing this portion of the company's funds could have no legal effect to protect his claim. It was, as Mr. Justice Holmes said in National City Bank v. Hotchkiss, supra, merely the expression of a "wish or intention" which could not do away with the legal effect of the commingling of the funds which he approved. It necessarily follows that the rule laid down in Benedict v. Ratner should have been applied to this case and the claim of Jerome L. Markovitz dismissed.
We have not overlooked the cases of Chapman v. Emerson (C.C.A.) 8 F.2d 353, and Petition of Post (C.C.A.) 17 F.2d 555, relied on by the referee. In the latter case the Circuit Court of Appeals for the First Circuit held that Benedict v. Ratner was not applicable because of the differences between the law of Massachusetts and that of New York. That case is, therefore, not controlling here, since, as we have indicated, the law of Pennsylvania upon this subject is substantially the same as that of New York.
Chapman v. Emerson, supra, decided by the Circuit Court of Appeals for the Fourth Circuit, would seem to sustain the assignee's position in this case, although the facts of that case are not very fully stated in the opinion. However, its authority is very doubtful, since, as the same court pointed out in Union Trust Co. v. Peck, 16 F.2d 986, it is on the extreme border line and is not to be extended. Furthermore an examination of Judge Rose's opinion in that case shows that the court did not consider the legal principles which we have discussed in this opinion and which seem to us to be controlling. To the extent that Chapman v. Emerson holds that a principal may retain property in a fund which he has permitted his agent to commingle with his own funds we believe that it is in conflict with Benedict v. Ratner and we, therefore, do not deem it to be controlling authority here.
The petition for review is sustained, the order of the referee is reversed, and the petition of Jerome L. Markovitz for an order on the trustee to pay over to him the cash received from the accounts receivable of the bankrupt is dismissed.
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