## Facts

- Walter J. Schmidt & Co. (Schmidt), a brokerage firm, filed for bankruptcy, and a receiver took control of a bank deposit Schmidt maintained at the Lincoln Trust Company.
- Cole, Schrader, Bonynge, and Salmond each asserted that some portion of the Lincoln Trust Company deposit equitably belonged to them, rather than to Schmidt’s general estate.
- The receiver treated the deposit as a trust (constructive trust) fund for the benefit of those claimants, but the balance in the account was insufficient to reimburse all claimants in full.
- A bankruptcy special master was appointed to determine how the insufficient fund should be distributed among the competing trust claimants.
- The special master ordered distribution on an inverse-chronology basis: the claimant whose funds were last deposited into the commingled account would be paid first, then the next-to-last, and so on, until the fund was exhausted.
- Under that method, Salmond received nothing, and Schrader (who was reached only after earlier payments) did not receive the full amount he claimed.
- Schrader filed exceptions to the master’s report, arguing that the remaining commingled trust deposit should be divided pro rata among the claimants entitled to share in it.

## Issues

1. When multiple beneficiaries claim interests in a single commingled trust deposit that is insufficient to pay everyone in full, should distribution follow a Clayton’s Case–type ordering rule based on deposit timing (such as “last in, first out”), or should the fund be divided pro rata among the beneficiaries?

## Decision

- The court rejected the special master’s inverse-order (“last deposited, first paid”) distribution method derived from Clayton’s Case reasoning.
- The court held that, as between multiple innocent beneficiaries jointly interested in an inadequate commingled trust fund, equity requires a pro rata division of the remaining fund.
- The court modified the master’s report accordingly and directed that the claimants who establish trust interests in the deposit share ratably in what remains.

## Legal Principles

- The rule in Clayton’s Case is an accounting presumption used to allocate payments in running accounts; it is not a fairness rule for deciding which of several innocent beneficiaries should bear the loss when a trustee’s commingled fund is short.
- When several beneficiaries are jointly interested in the same commingled trust deposit and the fund is inadequate, a time-sequence priority (whether first-in-first-out or last-in-first-out) is an arbitrary method of assigning loss and should not control absent a special reason to prefer one claimant.
- In the absence of a principled basis to separate or prioritize interests within a deficient common fund, equity treats the shortfall as a shared loss and distributes the remaining fund proportionately among those entitled to participate.

## Conclusion

In *In re Walter J. Schmidt & Co.*, the court held that an insufficient commingled trust deposit in the hands of a bankruptcy receiver must be distributed pro rata among the customers with equitable interests in the fund, and it refused to use Clayton’s Case-style timing presumptions to create priority among equally situated claimants.


In re Walter J. Schmidt & Co., 298 F. 314 (1923)