Newton v. . Porter
69 N.Y. 133, 1877 N.Y. LEXIS 809 (1877)
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Rule of Law:
The owner of stolen negotiable securities may trace and reclaim the proceeds of their sale from the thief or any subsequent assignee who took the proceeds with notice of their illicit origin, even after the proceeds have been converted into a different form of property.
Facts:
- In March 1869, the plaintiff was the owner of negotiable government and railroad bonds.
- On March 12, 1869, the bonds were stolen from her.
- The thieves sold a portion of the bonds and divided the proceeds.
- One thief, William Warner, used his share to make loans, for which he received promissory notes.
- Another thief, George Warner, used his share to purchase a bond and mortgage, which was assigned to his wife, Cordelia Warner.
- The Warners were arrested and hired the defendants, a group of attorneys, to represent them in criminal and civil proceedings.
- To secure payment for legal services, William Warner transferred the promissory notes to defendants Miner and Warren, and Cordelia Warner assigned the bond and mortgage to defendant Porter.
Procedural Posture:
- The plaintiff brought an equitable action in the New York Special Term (trial court) to establish her right to certain securities held by the defendants.
- The trial court found that the defendants had notice that the securities were the proceeds of stolen bonds when they received them.
- The trial court entered a judgment against the defendants for the value of the securities.
- The defendants appealed from the judgment of the Special Term to the Court of Appeals of New York (the state's highest court).
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Issue:
Does the owner of stolen negotiable securities have an equitable right to reclaim the proceeds of those securities from a third-party assignee who took the proceeds with notice that they were derived from the stolen property?
Opinions:
Majority - Andrews, J.
Yes. The owner of stolen negotiable securities has an equitable right to reclaim the proceeds of those securities from any person who possesses them with notice of their origin. The court reasoned that while the plaintiff lost legal title to the bonds themselves once they were sold to bona fide purchasers, her equitable right to the proceeds remained. Equity allows an owner to follow and reclaim property through any transformations, so long as it can be identified. The court will impose a constructive trust, or a trust 'in invitum,' on the proceeds or substitute property in the hands of the wrongdoer or an assignee with notice. This principle is not limited to breaches of fiduciary duty but extends to property acquired by felony, as it would be an anomaly for a victim of theft to have fewer remedies than a beneficiary of a formal trust. Because the defendants took the securities (the notes and mortgage) with notice that they were the avails of stolen property, they stand in the same position as the thieves, and the plaintiff may enforce her equitable claim against them.
Analysis:
This case is a foundational decision in the law of restitution, establishing that the equitable remedies of tracing and constructive trust apply to the proceeds of stolen property, not just to misapplied trust funds. By extending these remedies beyond formal fiduciary relationships, the court significantly broadened the power of equity to prevent unjust enrichment. The decision affirms that a wrongdoer cannot defeat an owner's claim by merely changing the form of the property. This precedent solidifies the rule that anyone who takes property with knowledge of its illicit origins (i.e., is not a bona fide purchaser) cannot acquire title superior to that of the true owner.
