Preferences Arising from Trust Relations

Harry B. Hutchins, University of Michigan Law School


Where property has once been impressed with a trust, the quality inheres therein and in the proceeds thereof so long as the trust relation continues, provided the rights of a bonafide purchaser for value and without notice do not intervene and identification remain possible. The trust impress, in the absence of a superior equity, at once places property in the preferred class. In equity, trust property belongs to the cesiui que trust, and his claim to it cannot be defeated by the insolvency or dishonesty of the trustee, if it constitutes, in an identifiable form, a part of the trustee's estate. It goes without saying that, under such circumstances, it is beyond the reach of the general creditors of the trustee. In order that this doctrine may be applied and a preferential claim for trust property enforced against the estate of an insolvent; it is not necessary that the relation between the insolvent and the claimant be technically that of trustee and cestui que trust. It may be a quasi trust relation, such, for example, as that existing between principal and agent or bailor and bailee. Further, in order to defeat fraud and in the interests of honesty and fair dealing, equity may thrust the trust relation upon a party. Whenever the title to property has been fraudulently obtained, it is, in equity, held by the transferee for the benefit of the defrauded party; and an appeal to the proper equitable remedy will always be sustained whenever the remedy furnished by the law is inadequate. The proceeds of negotiable securities, for example, that have been stolen and sold, may be impressed with a trust in the hands of the felonious taker or his assignee with notice. Equity, in such a case, "will raise a trust in invitum out of the transaction, for the very purpose of subjecting the substituted property to the purposes of indemnity and recompense." 1 If the property that is the subject of a trust, either expressed or implied, is in the possession of the insolvent trustee, or his assignee for the benefit of creditors, or if the proceeds thereof have been invested in other property that can be clearly identified as a part of the insolvent's estate, the problem is an easy one. The property, whether in its original or in a changed form, belongs in equity to the cestui que trust, and the court of equity will protect his interests as against general creditors. But when trust property has become so mingled with the private property of the trustee that identification in specie or by way of substituted property becomes impossible, the problem assumes a more complicated form. It is with this phase of the subject that this article will principally deal.