The same case quotes with high commendation the language of Johnson, Ch., in Brown v. Gadsden, Speer, Eq. 37, who says, among other things:

"The doctrine of subrogation, from its very nature, never could have been intended for the relief of those who were in any condition in which they were at liberty to elect whether they would or would not be bound."

It also quotes the language of Chancellor Walworth in Sandford v. McLean, 3 Paige, 122:

"It is only in cases where the person advancing money to pay the debt of another stands in the situation of a surety, or is compelled to pay it to protect his own rights, that a court of equity substitutes him in the place of the creditor, as a matter of course, without any agreement to that effect. In other cases the demand of a creditor which is paid with the money of a third person, and without any agreement that the security shall be assigned or kept on foot for the benefit of said third person, is absolutely extinguished."

In the present case the laborers and material men had no dealing whatever with the bank. And the bank never bound itself absolutely to pay them. If the bank can be relieved at all, it must be on some other equity than that strictly called "subrogation."

The bank furnished money to Lawrence on his installments from the government, and after a while on what it conceived was a valid hypothecation of his claim, under his contract, against the government. Money was furnished, Lawrence stating that it was intended to be used in paying for labor and materials in complet ing this contract; and a large part of it was so applied. The hypothecation which was the consideration for the part of this loan now unpaid has been found invalid, null, and void. The laborers and material men have been paid out of the money furnished by the bank. The bank, however, has a large sum due to it and unpaid. There is a principle of equity which provides that, when one bona fide pays his money in the purchase of any kind of property, the money so paid to be applicable to obligations of the vendor, and the purchase and sale fail by reason of any irregularity or invalidity in the sale, the purchaser so paying his money is put in the place of the creditors who received it, and occupy the same position towards their debtor as they did before their claims were so discharged. Thus, A. purchases realty, bona fide believing that he is getting a good title, and, to clear it, pays off existing liens. If the title prove defective, and he be ousted by the true owner, he will be placed in the position of the creditors whose liens he has paid. Bailey v. Bailey (S. C.) 19 S. E. 670. So if lands of a deceased person are sold for payment of his debts, and the sale be declared invalid, any purchaser who has paid his money, and it has been applied to the debts, will occupy the position of the creditors who are so paid, in the administration of the assets. Freem. Void Jud. Sales, 51; Har. Subr. § 762. Also, if a sale be made to foreclose a mortgage, and the money applied towards its satisfaction, if the sale be declared invalid the mortgage will be revived, and its lien used to protect the purchasers. The great case of Bright v. Boyd, 1 Story, 478, Fed. Cas. No. 1,875,

lays down the rule, affirmed in Bank v. Hudson, 111 U. S. 83, 4 Sup. Ct. 303:

"Where the owner of an estate, after a recovery thereof at law from a bona fide possessor for a valuable consideration, without notice, seeks an account in equity, as plaintiff, against such possessor, for the rents and profits, courts of equity will allow him to make a deduction therefrom of all the meliorations and improvements made beneficially by him on the estate, and thus to recoup them from the rents and profits. The same doctrine holds in cases where the owner of an estate has only an equitable title thereto. The Roman law also allowed compensation for all beneficial expenditures, and, if a bona fide holder of an estate paid money to discharge any existing incumbrance or charge upon it, he was entitled to reimbursement pro tanto."

In Kanawha Coal Co. v. Kanawha & O. Coal Co., Fed. Cas. No. 7,606, a creditor, under a deed of trust, sold land of a debtor during the war; the debtor living within the Confederate lines. and the property lying in West Virginia. The sale was set aside, but the purchaser was protected by the debt his money had paid. In Davis v. Gaines, 104 U. S. 386, where the purchase money paid at a void sale was applied to the extinguishment of a valid mortgage, it was held that, "notwithstanding the irregularity or invalidity of the sale, the purchaser cannot be ousted unless the purchase money be repaid or tendered."

In one of the cases quoted by counsel for the bank, it appears that the assets of an insolvent corporation had been sold to pay its debts. The sale was subsequently declared invalid.

The purchaser whose money had been used to pay off the debts of the corporation was permitted to stand in the place of the creditors who were paid by his money. When this case is examined, it will be seen that it proceeds upon the principle that the assets of an insolvent corporation are a trust fund for its creditors. The purchaser whose money paid off these creditors succeeded to their beneficial interest in the trust. St. Louis & S. Coal & Min. Co. v. Sandoval Coal & Min. Co. (Ill. Sup.) 5 N. E. 370. Can this equity be administered in favor of the bank? It will be noted that in every case quoted the money paid was used either in removing incumbrances resting on the title, or in paying debts having behind them a quasi lien or a trust, and which, as Mr. Pomeroy says, "would be recoverable at law." 3 Pom. Eq. Jur. § 1300. In the case at bar no debt was paid with this money which relieved any incumbrance which was protected by any quasi lien or a trust, or which was a debt of the government, or recoverable at law. Let the transaction be analyzed. Certain laborers performed work, and certain material men contributed material to the building, at Lawrence's request, and under contract with him. He was an independent contractor. They were paid with money borrowed by him from the bank. If by this the bank were entitled to stand in the shoes of the laborers and material men, against whom could it claim? Not against the government, for it had no contract with these laborers and material men. But it is supposed that, as the government had a right to withhold the fund in favor of this class, the bank could ask that this right be exercised in its favor.

The

terms of the contract gave the government the right and privilege of withholding part of the fund only "in the event of the failure of Lawrence to promptly make payment to all persons who may supply him with labor and materials in the prosecution of the work." But the position taken by the bank goes upon the idea that all of this class in whose shoes it wishes to stand were promptly paid. The postulate upon which the right and privilege of the government depended did not exist. There was nothing for the bank to take. Let the case be regarded from another standpoint. The position of the bank is that it furnished to Lawrence a certain amount of money; that Lawrence used it in the construction of the public building,-paying laborers and material men. If the bank has any equity, it must work it through Lawrence. It can have

no greater right than he. If Lawrence can claim to be a beneficiary in this fund for the excess unpaid to the bank, because he expended the money for labor and materials, he could make a similar claim for all the money he expended for the same purposes, -a proposition which refutes itself. But the government exercises its right and privilege of withholding the fund against Lawrence himself. Without this proviso it would have no right to withhold anything, but would be bound to pay it over to Lawrence. By virtue of this proviso it retains the money, and insists that it be distributed among those who have not been promptly paid. Until they are satisfied, Lawrence has no right to the fund, nor has the bank. There is still another view of this case. The contract gave to the United States the right and privilege of withholding a part of the contract price, for a specified reason,-that laborers and material men were not promptly paid. This right and privilege the United States could exercise or not, at its option. Until it was exercised, Lawrence could demand the money earned on his contract. The United States did not exercise this right and privilege until 9th February, 1894, when Lawrence demanded payment of this balance. Then, for the first time, the requirement was made that the outstanding claims, all or nearly all of which were on file in the department, should be paid. Lawrence recognized the propriety of the demand, and consents that this money be thus applied. Until this was done, the laborers and material men-those who were paid, and those remaining unpaidhad not a shadow of interest in the money in the treasury, and could give none to the bank, nor could Lawrence derive any from them.

It appears that G. D. Barr & Sons furnished labor and materials to Lawrence, in the construction of the building. He gave them his note for $415.88. This note never has been paid, and is now in the possession of G. D. Barr & Sons. It was discounted by them in the Greenville Savings Bank, but they have been compelled to pay it. The note was taken for an open account. A note is not payment of an account, unless it be expressly accepted as payment, or produce payment. If the note be dishonored, the holder may proceed on the account. If the note be negotiable, it must be produced and surrendered. Barr & Sons can prove for

the amount of the account, $415.88 and interest, as the maker of the note liquidated the demand at its date.

The notes discounted for the accommodation of Lawrence, indorsed by G. D. Barr & Sons, are not entitled to a dividend on this fund.

It appears that Lawrence was indebted to William E. Springer & Co. in the sum of $668.84 for hardware used in the building. He gave them a draft on the supervising architect of the treasury department for this amount, chargeable on the amount due him on his contract. This Springer & Co. accepted, and afterwards sold to Mr. Norwood; not assuming, as far as the evidence shows, any guaranty or personal liability therefor. The draft is valueless. Mr. Norwood cannot resort to the original account, for Springer & Co. cannot do so. They took the draft and used it, selling it for what it would bring. The claim is disallowed.

The attorneys for the plaintiff make application for a fee out of the fund. This application is resisted by the attorneys for the creditors. It will be remembered that the contract with the government authorized the United States to withhold payment of part of the contract price in case of failure promptly to pay laborers and material men. This was all. The United States could not pay these people. It could simply withhold the money until they were paid. The proceedings in this case, therefore, were necessary, and no one could bring them but Lawrence. The suit brought the fund into court, and gave the United States every assurance that was necessary. In this way, and in this way only, have the creditors been able to get any money. Counsel are entitled to compensation. Their fee is fixed at $300.

The fees of

the special master are fixed at $125. Let proper orders be prepared.

NIGHTINGALE v. MILWAUKEE FURNITURE CO. et al.

(Circuit Court, S. D. California.

December 23, 1895.)

No. 284.

1. CORPORATION-CHANGE INTO PARTNERSHIP.

A corporation formed according to the state law, and duly set going as such, cannot be changed into a copartnership by a court of equity, at the suit of one of the incorporators, merely because the books were kept by him as if the concern was a copartnership.

2. SAME.

Nor is the character of the concern changed by the fact that the stockholders in a paper guarantying a debt of the company spoke of it as a "firm."

8. SUIT FOR ACCOUNTING-FRAUD OF COMPLAINANT.

The general manager of the business of a corporation, who, though an expert bookkeeper, has kept the books so that the true state of accounts cannot be ascertained therefrom, and who has been guilty of appropriating funds of the corporation to his own use without accounting therefor, cannot maintain a bill for an accounting by the corporation, or by the members thereof considered as partners, for money advanced by him for the use of the corporation.

Bill by Newell Nightingale against Milwaukee Furniture Company and others. Bill dismissed.

Edward S. Bragg and Stephen M. White, for complainant.
Waldo M. York and A. W. Hutton, for defendants.

ROSS, Circuit Judge. The transactions which culminated in the present suit had their beginning in the spring of 1888. A certain furniture business had been established and carried on in the city of Los Angeles by the firm of Bryant, Arnold & Jones, afterwards by Bryant & Arnold, and then by Otis P. Arnold alone. On the 2d day of March, 1888, Otis P. Arnold, L. J. P. Morrill, George L. Arnold, and John Jucker, who are made defendants to the bill, together with the complainant and certain other persons, namely, Seth C. Arnold, William Zinns, and A. C. Blankenburg, for the purpose of forming a corporation under the laws of California to carry on at the city of Los Angeles a general furniture business, prepared and signed articles of association for the purpose, and filed them in the office of the county clerk of Los Angeles county, Cal., and on the 5th day of March, 1888, filed a certified copy thereof in the office of the secretary of state of California, such articles stating, in substance, the term and life of the corporation to be 50 years, and the business in which it proposed to engage to be the buying and selling of furniture; and stating its capital stock to be $100,000, divided into 1,000 shares of the par value of $100 each; and stating that 90 per cent. of such capital stock was then in fact paid in. The persons subscribing for the stock, and whose names appeared as subscribers upon the subscription list attached to and made a part of the articles of incorporation so filed, and the number of shares taken by each, were as follows, namely: The defendant Otis P. Arnold, 200 shares, $20,000; the defendant L. J. P. Morrill, 200 shares, $20,000; the complainant, Newell Nightingale, 150 shares, $15,000; the defendant John Jucker, 50 shares, $5,000; the defendant George L. Arnold, 50 shares, $5,000. In addition to these, all of whom were made parties to the bill in this case, Seth C. Arnold's name appears as a subscriber for 100 shares, $10,000; A. C. Blankenburg, 100 shares, $10,000; and William Zinns, 50 shares, $5,000. In and by the articles of incorporation the board of directors thereof was fixed at five, and the defendants Otis P. Arnold, L. J. P. Morrill, George L. Arnold, the complainant, Newell Nightingale, and the said A. C. Blankenburg, were named and designated as the first board of directors. In the bill filed by the complainant he omitted to allege the fact, afterwards set up in the answer of the defendants, and established by proof, that upon the filing in the office of the secretary of state of California of a certified copy of the articles of incorporation filed with the county clerk of Los Angeles county, the secretary of state, pursuant to the statute of California, issued and delivered to the Milwaukee Furniture Company his certificate stating that a certified copy of such articles was filed in his office on the 5th day of March, A. D. 1888, containing the required statement of facts, to wit: First, the name of the corporation; sec