## Facts

- Elizabeth S. Newton owned $13,000 in U.S. government bonds and a $1,000 railroad bond, all negotiable by delivery.
- On March 12, 1869, the securities were stolen.
- The thieves sold $11,500 of the bonds and divided the proceeds.
- William Warner used part of his share to make loans and received promissory notes from borrowers.
- George Warner used $2,000 of the proceeds to acquire a bond and mortgage, which was assigned to his wife (Cordelia/Cornelia) without consideration.
- In January 1870, William Warner, George Warner, Cordelia Warner, and another were arrested and indicted for stealing the bonds or aiding the larceny.
- The Warners retained attorneys (including Oliver Porter, Miner, and Warren) to defend the criminal charges and anticipated related civil litigation.
- William Warner transferred to Miner and Warren promissory notes (about $2,250) derived from loans made with the stolen-bond proceeds.
- Cordelia Warner assigned to Porter the bond and mortgage acquired with the stolen-bond proceeds.
- The trial court found the attorneys took these securities with notice that they were the proceeds of Newton’s stolen bonds.
- By the time suit was brought, the attorneys had collected, disposed of, or otherwise realized proceeds from the notes and the bond and mortgage.
- Newton sued in equity to establish her right to the securities (or their proceeds) and compel the attorneys to account.

## Issues

1. Whether the owner of stolen negotiable securities may trace and recover identifiable proceeds (and substituted property) from assignees who took with notice of the theft.
2. Whether equity may impose a lien and constructive trust on traced proceeds in the hands of recipients with notice, even absent a voluntary trust relationship.
3. Whether the right to follow proceeds is cut off only by transfer to a bona fide purchaser for value without notice.

## Decision

- The Court of Appeals of New York affirmed the judgment for Newton.
- The court held Newton could follow the stolen bonds into identifiable proceeds and into property acquired with those proceeds.
- Because the attorneys took with notice of the proceeds’ unlawful origin, they were subject in equity to a lien and trust in Newton’s favor and had to account.
- The decree properly awarded Newton the value of the traced securities/proceeds the attorneys had collected or disposed of.

## Legal Principles

- A victim of theft may trace the proceeds of stolen negotiable securities, and any identifiable substitutes, through subsequent changes in form.
- Equitable tracing is available against the thief and against assignees who take with notice; such recipients cannot claim a better position than the wrongdoer.
- Equity may impose a constructive trust (trustee ex maleficio) and an equitable lien on traced proceeds to compel restitution, without any express or voluntary trust.
- The tracing remedy is limited where the proceeds or substituted property cannot be identified, or where they have passed to a bona fide purchaser for value without notice.

## Conclusion

The court held that stolen negotiable securities do not lose the owner’s claim in equity upon conversion into other assets; when traced proceeds are identifiable and held by recipients with notice, equity treats them as constructive trustees and requires an accounting, subject to the protection afforded bona fide purchasers without notice.


Newton v. Porter, 69 N.Y. 133 (N.Y. 1877)