LEVY v. DREW (1935)

In his petition for rehearing, defendant stoutly maintains that we have fallen into error in concluding that he could not offset his bill against the California Olive Growers, Inc., against the money collected by him on the judgment against that corporation. His argument is based upon the fact that the collection was made by him more than four months prior to the bankruptcy of his debtor and the provisions of section 68 of the Bankruptcy Act (11 USCA § 108), which contains the following: “Set-offs and counterclaims. (a) In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.”

As a basis for his argument, defendant urges that he did not become trustee of the funds received by him, and if he did, the trust terminated upon the application of the funds to the payment of the judgment which evidenced the debt. He further argues that as there was no trust proven, because there was no attempt to trace the res of the trust, and as the res of the trust was not proven and identified, the evidence was not sufficient to establish a trust. The vice of this argument lies in the fact that this action need not be construed as one to recover the identical dollars paid defendant under the execution. The trust did not come into being until the order setting aside the judgment became final. Garrett v. Jensen, 44 Cal. App. 99, 186 P. 156. Up to that time the possession of the money by defendant was lawful. After that time the law imposed upon him the obligation of returning the money to the California Olive Growers, Inc. When his judgment was vacated, it left defendant with an unliquidated demand for the reasonable value of his services, the amount of which was then in dispute and litigation between the parties. The argument that the beneficiary must identify the res of the trust in the possession of the trustee before he can establish the existence of the trust needs only its statement to demonstrate its fallacy. If money forms the corpus of the trust, an unfaithful trustee would need only to mingle the trust funds with his own to defeat the trust, if defendant's argument were sound. A trustee cannot be permitted to profit by his own wrong.

“A trust is either: 1. Voluntary; or, 2. Involuntary.” Section 2215, Civ. Code. “An involuntary trust is one which is created by operation of law.” Section 2217, Civ. Code. “One who wrongfully detains a thing is an involuntary trustee thereof, for the benefit of the owner.” Section 2223, Civ. Code.

Defendant rightfully came into possession of the money here in question. He lost the right of possession and thereafter his detention of the money became unlawful. Under these circumstances, he should be held to be a trustee holding the money for the benefit of the rightful owner after his possession was rendered unlawful by the vacation of the judgment. Garrett v. Jensen, supra; Kreutz v. Livingston, 15 Cal. 344; Greiner v. Greiner, 58 Cal. 115.

Where money is collected by a judgment creditor under a judgment which is subsequently reversed, it should be returned. Bank of the United States v. Bank of Washington, 6 Pet. 8, 8 L. Ed. 299. Where money is paid by a bankrupt debtor to his creditor for a specific purpose, and is not used for that purpose, the creditor becomes a trustee and holds the money in trust. Lehigh Valley Coal Co. v. Maguire (C. C. A.) 251 F. 581. In this case it was said: “Set-offs are authorized only in cases of ‘mutual debts or mutual credits.’ Bankruptcy Act, July 1, 1898, c. 541, § 68, 30 Stat. 565 (Comp. St. 1916, § 9652 [11 USCA § 108]). This does not enlarge or change–it only recognizes–what under general law may constitute set-offs. * * * But where a creditor receives money from his debtor, with instructions not to apply it on the debt, but to hold or use it for a specific purpose, the right of set-off does not exist, because the creditor has become, not the debtor of his debtor, but the trustee of a specific trust.”

In Libby v. Hopkins, 104 U. S. 303, 26 L. Ed. 769, and Alvord v. Ryan (C. C. A.) 212 F. 83, it was held that the right of set-off under section 68 of the Bankruptcy Act arises in the case of debtor and creditor, and not in the case where the creditor holds money of the debtor as trustee.

As defendant held the money as trustee and not as creditor of the California Olive Growers, Inc., he could not offset his bill against that corporation against the money he held and thereby gain a preference over other creditors. His obligation to return the money could be enforced by suit of the trustee of the estate of the bankrupt corporation.

The petition for rehearing is denied.

MARKS, Justice.

We concur: BARNARD, P. J.; JENNINGS, J.