of administering the estate. What remedy the trustee, the referee, or other officers who have rendered services in the matter of the estate have against the petitioning creditors we are not called upon to inquire. The order of the District Court will be affirmed, with costs.

NOTE. The following is the opinion of SWAN, District Judge, on reversing the findings of the referee:

SWAN, District Judge. Henry Reid was adjudged a bankrupt September 30, 1904, on the petition of creditors filed May 4, 1904. Reid was treasurer of the township of Au Gres, Arenac county, Mich., from April 4, 1903, to April 4, 1904. His business was that of country merchant carrying on a general store, and dealing, also, in connection therewith in hay, straw, wood, and lumber. On December 9, 1903, Reid and his wife executed a chattel mortgage to J. R. Petty for the benefit of Cole & Petty, bankers, of Au Gres, to secure payment of two promissory notes given by Reid to J. R. Petty aggregating $1,365, including interest and discount. This mortgage covered the fixtures and stock of merchandise of Reid in the village of Au Gres, and was filed in the office of the township clerk of that village December 10, 1903. There was due on said mortgage debt March 20, 1905, as found by the referee, $1,094.29, after deducting payments made, and an item of $30, to which claim was waived. The mortgaged property was demanded by the receiver in this cause, was surrendered by the mortgagees, and sold by the trustee. The proceeds were paid into the registry of this court subject to the claim of the firm of Cole & Petty under the mortgage. The sale brought $4,179.77-much less than the appraised value. No money was advanced at the time the mortgage was given, and, although it recites that Reid was then indebted to the mortgagees, he owed them nothing, but it was in fact a mortgage for future advances which were made subsequently and prior to February 10, 1904, as agreed, and applied to satisfy indebtedness of Reid at the Old Second National Bank of Bay City. The referee allowed the claim of the mortgagee, Cole & Petty, at $1,094.29. To the ruling the trustee took exceptions and filed his petition for review thereof. There is nothing in the proofs reflecting on the good faith of the mortgagee or the bankrupt in the execution of this security. The mortgagee advanced the sums for which it is held as security. The transaction in no degree impaired the estate of the bankrupt, and the trustee cannot complain of it. Ex parte Ames, 1 Low. 561, Fed. Cas. No. 323. The proofs do not sustain the exceptions filed by the trustee to the allowance of the claim. The ruling of the referee thereon is accordingly affirmed and the claim allowed.

2. The claim of the township of Au Gres is that the bankrupt's stock in trade is impressed with a trust in its favor, and that its claim is entitled to priority over those of unsecured creditors because the bankrupt used the funds of the township which came into his hands as township treasurer of Au Gres in the purchase of his stock in trade to the amount of $4,460. The trustee objected to this claim on several grounds, most of which were not argued. He denies that the bankrupt was indebted to the township of Au Gres in any amount, and denies that it is entitled to priority over the general creditors. The referee finds that from April, 1903, to April, 1904, Henry Reid was treasurer of the township of Au Gres, and that at the expiration of his term of office he failed to account for $4,474.87; that this money was used by the said Henry Reid in connection with his business and in paying his bills; that the said Henry Reid had been engaged in a general store business in Au Gres. Mich., for upwards of 12 years prior to 1903; that in April, 1904, the said Henry Reid had a stock of goods amounting to between $8,000 and $9.000; that at the time of the filing of the petition in bankruptcy against said bankrupt he was indebted to various persons, firms, and corporations for goods. wares, and merchandise sold to him between April 1, 1903, and April 1, 1904. in the sum of upwards of $5,000.

The testimony of Harvey A. Chamberlain is that Reid admitted that he had commingled the township funds with his own money, and that those funds were used in his business to pay bills and in payment for his stock of goods. April 9, 1904 nearly a month before the petition in bankruptcy was filed-the bank

rupt executed to Harvey A. Chamberlain, trustee for the township of Au Gres, a chattel mortgage upon "all and singular the goods and chattels of every name and nature owned by him wherever the same may be situate consisting in part of the stock of general merchandise in store on East Saginaw and Au Sable State Road in Au Gres and in transit thereto, all books of account, accounts and bills receivable owned by him; also all personal property wherever the same may be. * *

The mortgage recites the election in 1903 and qualification of Reid as township treasurer of Au Gres, and that during his incumbency of that office he received funds belonging to such township aggregating a large sum, which moneys he has invested in his business, instead of keeping them separate and apart as required by law, and there is now invested in his business and property funds belonging to the township of Au Gres, Arenac county, Mich., aggregating the sum of, to wit, $4,400. After providing for the sale of the property and the payment of the expenses of the trust, the mortgage makes it the duty of the trustee to pay the township of Au Gres the sum of money mentioned, or such other sum as shall be found due said township and his bondsmen, if they shall have paid the township, and the mortgagor repeats his admission of his conversion of the township moneys, stating that the same have been used in his (the mortgagor's) business and the purchase of the property "herein described." Chamberlain took possession of the mortgaged property. but on demand turned the same over to the receiver in bankruptcy by whom it was sold as stated. No claim is made by the township under this mortgage, nor is it assailed as an objection to the equitable lien claimed by the township. The books of the township and the testimony of Chamberlain show that Reid, at the expiration of his term as township treasurer, was debtor to the township in the sum of $4,474.87 for moneys received by him as such treasurer. September 16, 1904, Reid made an affidavit acknowledging that he owed the township the sum of $4,640, and that amount of money was by him used in the general store business which he was conducting in the village of Au Gres. Reid died in November, 1904. The testimony of Chamberlain and the affidavit of Reid was objected to by the trustee as incompetent-the first because the matters testified to were equally within the knowledge of Reid and inadmissible under the Michigan statute of 1903; the second for the same reason, and on the claim that Reid made the admission under threat of criminal prosecution for embezzling the moneys of the village.

The competency of the testimony of Chamberlain is not affected by the state statute. The testimony was competent under the act of Congress (Rev. St. § 858 [U. S. Comp. St. 1901, p. 659]), notwithstanding the statute of Michigan. Hobbs v. McLean, 117 U. S. 579, 6 Sup. Ct. 870, 29 L. Ed. 940. See, also, King v. Worthington, 104 U. S. 46-50. 26 L. Ed. 652; Potter v. National Bank, 102 U. S. 163, 165, 26 L. Ed. 111: Whitford v. Clark County, 119 U. S. 525, 7 Sup. Ct. 306, 30 L. Ed. 500. Section 21a of the bankrupt act provides that "any designated person, including the bankrupt and his wife may be required to appear before the court or before a referee or the judge of any state court to be examined concerning the acts, conduct, or property of a bankrupt," etc. Act July 1, 1898, c. 541, 30 Stat. 552 [U. S. Comp. St. 1901, p. 3430]. The rules of evidence applicable to such examinations are those prescribed by the Acts of Congress. Cases, supra.

There is no evidence that Reid's affidavit was procured by threats of criminal prosecution. Chamberlain's testimony is that he asked Reid if he was willing to make affidavit that he had used the moneys "which had come into his hands as township treasurer * * in connection with his business," and "he [Reid] said that he was, and this affidavit was presented to him and he said he could swear to it willingly, which he did"; that he "never made representations to Reid or anyone representing him that he was criminally liable; that such representations were made to Reid by the agent of the Fidelity & Guaranty Company about July 1, 1904." The affidavit was made September 16, 1904. Having his memory refreshed by the testimony of Townsend, Chamberlain states that the representations as to Reid's criminal liability was made in June, 1904-about three months before Reid's affidavit was made. There is no evidence, what those "representations" were, nor any testimony contradicting that of Chamberlain in any particular. So far as the record

shows, the admissions of Reid contained in the affidavit were entirely voluntary. He was chargeable with the knowledge of the statutes which makes it a crime punishable by imprisonment for a public officer to appropriate to his own use the public moneys in his hands. "Representations" to him of that fact alone prior to his admissions could not exclude them in a criminal prosecution against him for the offense. The rule in criminal cases is that to make an accused's statement admissible "the proof must be sufficient to establish that the making of the statement was voluntary; that is to say, that from the causes which the law treats as legally sufficient to engender in the mind of the accused hopes or fears in respect to the crimes charged, the accused was not involuntarily impelled to make a statement when but for the improper influences he would have remained silent." Bram v. United States, 168 U. S. 549, 18 Sup. Ct. 183, 42 L. Ed. 568. The cases upon this question are exhaustively reviewed in the opinion. See, also, Hopt v. Utah. 110 U. S. 574, 4 Sup. Ct. 202, 28 L. Ed. 262; Tucker v. United States, 151 U. S. 164, 14 Sup. Ct. 299, 38 L. Ed. 112.

The circumstances under which Reid's affidavit was made meet the requirements of the rule just quoted-to make it admissible in a criminal case. In Michigan it is held that a confession is presumed to be voluntary in the absence of evidence to the contrary. People v. Barker, 60 Mich. 277, 27 N. W. 539, 1 Am. St. Rep. 501. A proceeding in bankruptcy is not a criminal case, although it may disclose acts of criminality. It is simply the procedure for the collection and distribution among creditors of the bankrupt's estate. The affidavit is admissible not as a confession of Reid's criminality, but as an admission of his own and the liability of his estate for moneys in his hands because of the disposition he made of them. As there is no evidence that would justify its exclusion as a confession in a criminal proceeding, for a stronger reason it is competent against the bankrupt's estate as an acknowledgment of the facts it recites affecting the title of the assignee to the property in controversy. The trustees "stand in the place of the bankrupt; his rights are their rights; and theirs, like the liens of judgments at law, are subordinate to all the prior liens legal and equitable upon the property in question." Gibson v. Warden, 14 Wall. 248, 20 L. Ed. 797; Cook v. Tullis, 18 Wall. 332-341, 21 L. Ed. 933. "As to everything except fraudulent conveyances and fraudulent preferences under the bankrupt law, he takes by his assignment as a purchaser from the bankrupt with a notice of all outstanding rights and equities." Dudley v. Easton, 104 U. S. 103, 26 L. Ed. 668; Donaldson v. Farwell, 93 U. S. 634, 23 L. Ed. 993; Mueller v. Nugent, 184 U. S. 1, 22 Sup. Ct. 269, 46 L. Ed. 405. The facts made competent the affidavit of Reid and his admissions to Chamberlain. There is no evidence to contradict either.

The property of the bankrupt, therefore, came into the hands of the trustee burdened with the equitable lien of the township if it has traced its funds into the stock in trade of the bankrupt which came into the hands of the trustee. The referee has found that the proofs fail to show such conversion by the bankrupt, and rejected the claim of the township. This conclusion must have been based upon the rejection of Reid's oral admissions, his affidavit, the recitals in his mortgage to Chamberlain, and the testimony of Chamberlain. If this evidence is creditable, it establishes beyond a reasonable doubt that the township's money went into the stock in trade of the bankrupt which came into the hands of the trustee. It is not claimed or shown that it was used to purchase other property, real or personal, of the bankrupt, or that he made any other disposition of it than that he stated. If any weight whatever is to be given to the evidence adduced by the township, it traces the trust funds beyond a peradventure to the specific property upon which the township claims a iien. When Reid entered upon his duties as township treasurer April 3, 1903, it is shown without contradiction that there was turned over to him $3,191.26-the aggregate of the various township funds. At the close of his term, April 4, 1904, the amount of township funds he had received and should have had, including the $3,191.28 mentioned, deducting all payments made by him in the course of his official duties, was the sum of $4,460. This Reid stated under oath he "paid, laid

*

out, and expended in his business for the purchase of goods, wares, and merchandise, * and that amount of money was by him used in the general store business which he was conducting at the village of Au Gres, Arenac county." This fixes beyond controversy the periods between which the conversion of the township funds occurred. There is no evidence what, if any, part of the goods and merchandise so purchased had been sold in the course of the bankrupt's business during that period. The trustee holds the proceeds of sale of the identical stock in trade of the bankrupt into which this money was wrongfully converted.

This is not a case where the claim of the cestui que trust against the insolvent trustee's estate is predicated on the ground that the misapplied securities have gone to swell the bankrupt's estate, and therefore the equity of the cestui que trust to reimbursement from the estate of the bankrupt is paramount to the claim of general creditors. If that only were its extent, a different question would be presented. In his report the referee says: "The only testimony as to what was done with the money of the township, so far as it was invested in the business of the bankrupt, is that of Harvey A. Chamberlain, and his testimony is that the money was used in connection with his business in paying for stock." The proofs, however, are more specific than this conclusion, as we have seen. Mentioning in a cursory way the recitals in Reid's chattel mortgage to the township, and in his affidavit, he obviously denies their competency upon grounds above discussed and overruled, as well as that of the testimony of Chamberlain, saying that "it does not appear that the goods and property turned over to the receiver were purchased with the moneys of the petitioner. *" The cases cited for the legal conclusions of the referee, viz.. Fire & Water Commissioners v. Wilkinson, 119 Mich. 655, 663. et seq., 78 N. W. 893, 44 L. R. A. 493, and Frelinghuysen v. Nugent (C. C.) 36 Fed. 237, are in entire accord with the great weight of authority expository of the right to follow the trust funds when traced into specific property. In the first the authorities, federal and state, and English, are fully reviewed, and in both the same equitable doctrine is declared which is ruled in National Bank v. Insurance Company, 104 U. S. 54, 26 L. Ed. 693. See, Cook v. Tullis, 18 Wall. 332, 21 L. Ed. 933.

If it could be justly claimed that the proofs failed to show that the funds of the township had gone into the property of the bankrupt, as was the fact in Frelinghuysen v. Nugent, supra, the finding of the referee upon the evidence ought not to be disturbed, nor should it be set aside upon a contradicted question of fact unless the referee's error is clear. Oteri v. Scalzo, 145 U. S. 589, 12 Sup. Ct. 895, 36 L. Ed. 824. There the facts were not disputed, yet they were disregarded and a conclusion to the contrary was reached. No authority has been cited or found requiring the cestui que trust to show the apportionment of the trust fund between the various departments of the bankrupt's business. It is sufficient to charge the property with an equitable lien in favor of the township that its moneys went into stock in trade of the bankrupt which came into the hands of the trustee. Cavin v. Gleason, 105 N. Y. 256, 11 N. E. 504. It is for the trustee to show that specific portions of that property were not purchased with the trust funds, and there is no evidence to that effect, except the single fact that the inventory did not include Reid's lumber. This is, however, of no significance. "The lien of the cestui que trust is upon the mass for the value of the things converted." Erie R. R. Co. v. Dial (C. C. A. Sixth circuit, November 7, 1905), 140 Fed. 689, 72 C. C. A. 183. It would be difficult, if not impossible, to establish more satisfactorily the use made by the bankrupt of the township moneys than has been done by his admissions, oral and by affidavit, and the recitals of the mortgage He alone knew what he had done with them. There is no evidence that he lost them by bad investments, speculation, gambling, robbery, in the payment of debts, or otherwise than as he stated. In National Bank v. Insurance Company, 104 U. S. 67, 26 L. Ed. 693, the court quoted with approval from Frith v. Cartland, 2 Hen. & M. 417, 420, as "established doctrines" two rules: (1) "So long as the trust property can be traced and followed into other property into

which it has been converted that remains subject to the trust"; and (2) "that, if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own."

As the conversion of such funds into other property does not impair the right of the beneficiary to claim the substituted property, and as the funds of the township are traced into the property of the bankrupt which has come into the hands of the trustee, the finding of the referee is reversed, and the claim of the township is allowed and decreed to constitute a lien upon the property prior in right to the claims of unsecured creditors of the bankrupt.

SMITH V. MOTTLEY.

(Circuit Court of Appeals, Sixth Circuit. December 14, 1906.)

No. 1,558.

1. BANKRUPTCY-PRIORITY OF DEBTS-LAW GOVERNING.

Whether a claimant is entitled to priority of payment from a fund which passes into the hands of a bankrupt's trustee on the ground that the claimant's money was held in trust by the bankrupt and passed into such fund is not a question to be determined by the priorities allowed under the insolvency laws of the state, which are superseded by the bankruptcy act. Act July 1, 1898, c. 541, 30 Stat. 544 [U. S. Comp. St. 1901, p. 3418].

[Ed. Note.-For cases in point, see Cent. Dig. vol. 6, Bankruptcy, § 539.] 2. TRUSTS--SUIT TO RECOVER TRUST FUND-WRONGFUL MINGLING OF FUNDS. The burden of showing that his property has been wrongfully mingled in the mass of the property of the wrongdoer is upon the owner who seeks to follow the same, but, when this is done, the burden shifts to the wrongdoer to show that the owner's money or property has passed out of his hands, and in that respect his trustee in bankruptcy stands in the same position.

[Ed. Note. For cases in point, see Cent. Dig. vol. 47, Trusts, §§ 523, 602.]

8. BANKRUPTCY-DEBT ENTITLED TO PRIORITY OF PAYMENT-TRUST FUND. Claimant gave a check to a bank for the purpose of paying a note which she supposed the bank held with authority to collect. The bank, which had made the loan for the payee, claimed to have such authority, and accepted and collected the check, placed the proceeds to the credit of the payee, and promised to obtain and surrender the note; the owner being then absent with it. The bank, in fact, had no authority to collect and was insolvent, and became bankrupt shortly thereafter. not having obtained the note nor paid over the money to the payee. From the time the money was received until the bankruptcy the bank had at all times more money on hand than the amount so received and a larger amount passed into the hands of its trustee. Held, that claimant's money was presumably a part of such fund, and that she was entitled to recover the same from the trustee.

[Ed. Note. For cases in point, see Cent. Dig. vol. 6, Bankruptcy. § 539; vol. 6, Banks and Banking, §§ 157, 189-191, 1116.]

Appeal from the District Court of the United States for the Western District of Kentucky at Bowling Green.

For opinion below, see 143 Fed. 407.

Jno. B. Rodes and W. B. Gaines, for appellant.

John E. Du Bose, for appellees.

Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.