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Opinion of the Court.
if the appellant had the right to continue the litigation against Dunn and Gillam, that right is based on their alleged fraudulent conduct and is a claim for damages on account of the fraud, and since there was no evidence that the lease was granted for an inadequate return, there was no basis for an award of legal damages to the appellant.
Undoubtedly in an action at law for fraud or deceit, since the action sounds in damage, the plaintiff must prove damage to establish a right to recover. If Dunn and Gillam had retained the lease which they fraudulently obtained from Thomas, as guardian, the plaintiff could, at its option, either have brought suit in equity against them for the cancellation of the lease, or for damages against the guardian, or possibly also at law for damages against Dunn and Gillam, and on familiar principles any relinquishment of plaintiff's right to cancel the lease would necessarily have limited plaintiff to a right of recovery for damages. But such is not the situation. here presented. The grant of the lease by Thomas, the guardian, to Dunn and Gillam with a secret agreement that the guardian should be jointly interested in the lease. with Dunn and Gillam, was a fraud upon the ward, rendering the whole transaction voidable at the option of the ward or those legally representing her. It is not necessary in such a situation in order to establish the right to relief to show that the beneficiary was damaged by the fraudulent conduct of the trustee. It is sufficient to establish that the fiduciary has exercised his power of disposition for his own benefit without more. Michoud et al. v. Girod et al., 4 How. 503, 533; Wardell v. Railway Co., 103 U. S. 651, 658; Thomas v. R. R. Co., 109 U. S. 522; Burns v. Cooper, 140 Fed. 273, 277; Mastin v. Noble, 157 Fed. 506, 509; New York Central & H. R. R. R. v. Price, 159 Fed. 330, and Lane & Co. v. Maple Cotton Mill, 232 Fed. 421, 423.
Dunn and Gillam did not retain their interest in the lease which they had fraudulently acquired. They transferred it, together with the secret interest of Thomas, the guardian in the lease, to the defendant the Bull Head Oil Company in exchange for stock in that corporation. They then acquired by purchase from Thomas, for the sum of $3,500 and an automobile, his interest in the stock of the corporation. Some of the stock which they acquired by this transaction was turned over to their wives who, the court found, took as donees, and some of it was retained and is now held by appellees, and some of it has been transferred by them to innocent purchasers for value. In such a situation, equity adopts the salutary rule that he who fraudulently traffics with a recreant fiduciary shall take nothing by his fraud. The ward or the beneficiary of a trust may, at his option, follow the trust res fraudulently diverted until it reaches the hands. of an innocent purchaser for value, or he may, at his option, claim the proceeds of the sale or other disposition of the trust res in the hands of him who fraudulently acquired it of the fiduciary.
The legal principles governing the right to follow trust funds diverted in breach of the trust were succinctly and accurately stated by Turner, L. J., in Pennell v. Deffell, 4 DeGex, M. & G. 372, 388, as follows:
"It is an undoubted principle of this court that as between a cestui qui trust and trustee and all parties claiming under the trustee, otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruits of such property, whether it is in its original or its altered state, continues to be subject to or affected by the trust."
To the same effect are Oliver et al. v. Piatt, 3 How. 333, 401; Lane v. Dighton, Amb. 409; Ex parte v. Dumars, Atkyns, 232, 233; Taylor v. Plummer, 3 Maule & Selwyn,
562, 571; Cobb v. Knight,.74 Me. 253; People v. California Safe Deposit & Trust Co., 175 Cal. 756; Hubbard v. Burrell, 41 Wis. 365.
The rule is the same as against a fraudulent vendee who has exchanged the property purchased for other property. American Sugar Refining Co. v. Fancher, 145 N. Y. 552.
The rule is the same with respect to the proceeds of property tortiously misappropriated and found in the hands of the tort feasor or his transferee with notice. Newton v. Porter, 69 N. Y. 133.
Dunn and Gillam, when they fraudulently acquired the Thomas lease by the corrupt action of the guardian, which action they actively induced, became trustees ex maleficio of the lease, and as such trustees they became equitably bound to hold the lease for the benefit of the ward or, in the event of a sale or other disposition of it, to hold its proceeds upon a like obligation. Any other rule would enable the fraudulent recipient of trust property, acquired through a breach of trust, to render himself immune to the remedial action of equity by the simple expedient of transferring the trust res thus acquired to an innocent purchaser for value, or otherwise placing it beyond the reach of the defrauded beneficiary of the trust. Nor are they in any better situation with respect to the stock which they acquired by purchase from Thomas with full knowledge that it was a part of the proceeds of the lease fraudulently acquired from the guardian and by them fraudulently transferred to the Oi! Company. Not being innocent purchasers, they took it impressed with the trust to which the lease itself was subject. Newton v. Porter, supra.
The plaintiff's bill was framed in conformity to the rule as we have stated it. It prayed cancellation of the lease in the hands of the Bull Head Oil Company, the transferee of Dunn and Gillam; "but if for any reason the
Court shall hold" that the lease could not be cancelled, then it prayed that the stockholders be adjudged to hold the stock in trust for the plaintiff. The District Court having decreed that the leasehold itself could not be followed into the hands of the Bull Head Oil Company, the plaintiff was not barred from claiming the proceeds of the lease in the form of stock or money in the hands of those stockholders who were not innocent purchasers for value, and the pleadings were appropriately framed to that end. Suit to establish an equitable claim to specific property does not bar a recovery of the proceeds of that property if it develops in the course of the trial that the defendant has conveyed it away in violation of his equitable obligation to the plaintiff. Taylor v. Kelly, 3 Jones, Eq. 240; Haughwout v. Murphy, 22 N. J. Eq. 531-547; Valentine v. Richardt, 126 N. Y. 273; Sugg v. Stowe, 5 Jones Eq. 126; Siter's Appeal, 26 Pa. 178; Frick's Appeal, 101 Pa. 485; Bartz v. Paff, 95 Wis. 95. See also Jervis v. Smith, 1 Hoffman's Chancery Rep. 470; Daniel's v. Davison, 16 Vesey 249; and 1 Sugden on Vendors, 277.
In Valentine v. Richardt, supra, suit was brought in equity to cancel a conveyance of real estate for fraud. The alleged fraudulent grantee, and his grantee and a subsequent mortgagee, were made parties defendant, and the relief demanded was that the two conveyances and the mortgage be declared void and that they be surrendered up and cancelled, and for such further and other relief as might be just. On the trial the court found that the first conveyance was procured by fraud, but that the second conveyance and the mortgage were taken in good faith for value, and the complaint was dismissed as to them. It was held that the first grantee was a trustee of the property ex maleficio; that the bill might be retained against the first grantee and that the plaintiff might, in equity, secure a money judgment for the value of the land, not as damages, but as a substitute for the land it
self, and that, under the frame of the bill and prayer, the court had power to render any judgment consistent with the facts alleged and proved; a principle of decision which we think is exactly applicable to the present case. See also Mooney v. Byrne, 163 N. Y. 86.
The compromise agreement entered into by plaintiff with defendants other than Dunn and Gillam was not technically a confirmation of the lease. It was both in form and in substance only an abandonment of an appeal from a decree of the court, adjudging an indefeasible title to the lease to be in the defendant corporation. The practical effect was to enable the other stockholders, at a price, to lessen the danger of being involved in the fraud by their probable guilty knowledge of it. But even if it were deemed to be a confirmation of the lease, such a confirmation is not inconsistent with a recovery of the proceeds of the lease from Dunn and Gillam and those claiming under them, nor, as has been pointed out, does it bar a recovery of the proceeds. Indeed, a recovery of the proceeds of the assignment of the lease by Dunn and Gillam could be predicated only on a confirmation of the transfer which would bar a recovery of the leasehold itself. Bonner v. Holland, 68 Ga. 718; Cavieux v. Sears, 258 Ill. 221; Beltencourt v. Beltencourt, 70 Ore. 384, 396.
Nor do we find it necessary to consider the question whether Eaves, the curator, or Thomas, the guardian, properly represented the minor, or whether either of them possessed exclusively the power to dispose of the property of the minor, or to determine the precise legal effect of the addition of Eaves' signature to the Thomas lease. Thomas, under whom Dunn and Gillam claim, assumed to act as guardian in the disposition of his ward's property. Dunn and Gillam dealt with him in that capacity. On common law principles they cannot deny the legal capacity in which their lessor purported to act in executing the lease under which they claim. Clary v. Ferguson, 8