38 F. 172 (E.D.N.C. 1889), Philadelphia Nat. Bank v. Dowd

Citation:38 F. 172
Case Date:February 16, 1889
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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38 F. 172 (E.D.N.C. 1889)




United States Circuit Court, E.D. North Carolina.

February 16, 1889

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Battle & Mordecai, for plaintiff.

F. N. Busbee, for defendant.


The defendant is the receiver of an insolvent national bank. The plaintiff, a bank doing business in Pennsylvania, sent during the winter and spring of the present year to the bank of which defendant is receiver commercial paper indorsed, 'For collection and immediate return to the Philadelphia National Bank. ' This paper was collected by defendant's bank, and the proceeds were mingled with the other moneys of the bank, instead of being forwarded to the plaintiff. The bill contains an allegation, which is not controverted, that the defendant's bank, at all times subsequent to making such collections, and at the time its affairs were placed in the hands of a receiver, had on hand cash to a greater amount than that due to plaintiff. Plaintiff asks to have the balance due it paid in full out of the assets of the insolvent bank on the ground that the latter, by receiving the paper for collection and immediate return, became a trustee for the transaction of the affair, and that either its entire property or the money in its vaults became impressed with the trust. In other words, it claims a priority in the nature of an equitable lien on either the assets of the bank or its cash on hand. The court holds that when defendant's bank mingled the money collected with its general funds, it was, if a breach of trust was committed thereby, a conversion of such money, and that thereupon the plaintiff became a simple contract creditor, with no claim that has a preference at law over any other simple contract debt. If the money was not held by the bank as trustee, the result is the same. On the former supposition, however, plaintiff would have a right to follow the money into any new form into which it could be specially traced. But it is immaterial whether or not the bank stood in the relation of a fiduciary to the plaintiff, because, on the facts stated in the bill, it appears that the money collected cannot be traced into any specific investment or fund, but has been indistinguishably mingled with the general assets of defendant's bank.

Such an opinion would have been very generally expressed without hesitation prior to 1879, when the English court of appeals rendered its decision in Re Hallett, (Knatchbull v. Hallett,) L. R. 13 Ch.Div. 696. I do not consider it all in conflict with several cases since decided in this country, most of which refer to Knatchbull v. Hallett. I look upon these cases as introducing a new principle into an old and well-known doctrine of equity, which, with the greatest deference to the courts deciding

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them, I do not feel at liberty to follow in advance of any adjudication by the supreme court. The cases are People v. Bank, 96 N.Y. 32; McLeod v. Evans, 66 Wis. 401, 18 N.W. 173, 214; Harrison v. Smith, 83 Mo. 210; Peak v. Ellicott, 30 Kan. 156, 1 P. 199; and Bank v. Weems, 6 S.W.Rep. 802. The facts of the case first cited (People v. Bank) are, briefly, as follows: Two notes made by the firm of Sartwell, Hough & Ford had been discounted by defendant, a state bank, and wishing to anticipate payment, they drew checks for the amount of the notes, which were thereupon charged to their account, and the notes were entered upon the books of the bank as paid. In fact they had been sold. Thereafter, the bank having become insolvent, a receiver was appointed, who refused to pay the notes. The case constituted in the court of appeals was an appeal from an order directing the receiver to make such payment. It appeared that at the time a smaller amount of cash than the face of the notes was found in the bank. The court, DANFORTH, J., delivering the opinion, (which is a brief one, and does not put the matter upon any well-defined principle,) held that the receiver must pay the notes in full out of money received by him after the bank's failure; that is to say, out of its general assets. He cites In re Le Blanc, 14 Hun, 8, affirmed 75 N.Y. 598, and Libby v. Hopkins, 104 U.S. 303, and says: 'Those cases stand upon the ground of a specific appropriation of a particular fund for the payment of the claim there brought in question. So does the one at bar. ' If the facts of People v. Bank showed the existence of a particular fund, there could be no question of the soundness of the decision, but it would not be authority for the cases professing to follow it. The difficulty seems to me to be that, while there once had been such a fund, it had been misappropriated, and neither existed nor could be followed when the bank's assets came to the receiver. People v. Bank is followed in New York by two decisions of general term,-- People v. Bank, 39 Hun, 187, and McColl v. Fraser, 40 Hun, 111. In the former, BARKER, J., says: 'If the identical moneys collected by the bank did not pass into the hands of the receiver, it makes no difference, for in some shape or form they went to swell the assets which fell into his hands. ' In Re Le Blanc, 14 Hun, 8, affirmed by the court of appeals without an opinion, and cited as authority by Judge DANFORTH, a particular fund passed into the hands of the receiver, which had been held by the corporation expressly for the payment of petitioner's claim, so the point in controversy did not arise. The New York case is followed by the supreme court of Wisconsin in McLeod v. Evans, two of the five judges dissenting. As the court puts its decision on an intelligible principle I will cite the reasoning of the prevailing opinion. COLE, C. J., says:

'The conclusion is irresistible from the facts that the proceeds of the trust property found its way into Hodges' hands, and were used by him either to pay off his debts or to increase his assets. * * * It is not to be supposed the trust fund was dissipated and lost altogether, and did not fall into the mass of the assignor's property; and the rule in equity is well established that, so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust. * * *

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We do not understand that it is necessary to trace the trust fund into some specific property in order to enforce the trust. If it can be traced into the estate of the defaulting agent or trustee this is sufficient.'

The sentences which I have italicized contain a modification of the equitable doctrine of following trust property necessarily, as I suppose, underlying the decision of People v. Bank, 96 N.Y. and adopted by the supreme courts of Missouri and Kansas in the cases cited from the reports of those states. Bank v. Weems, 6 S.W.Rep. 802, is placed upon the same doctrine of equity, but without as wide a departure from the form in which it is usually enunciated. In deciding it GAINES, J., says:

'It may be that when the entire mass is paid away the right to claim a trust in any money or property is lost. But if, as in the present case, throughout all the trustee's dealings with the funds so mingled together he keeps on hand a sufficient sum to cover the amount of the trust money, we think it capable of demonstration that the trust should attach to the balance that is found to remain in his hands. It is shown by evidence that after the bank received the money, amounting to about $5,000, its cash assets were never reduced below $6,000, until they went into the receiver's hands. Even admitting that in the course of its transactions this identical money was paid out by the bank to its uttermost farthing, yet we know that every dollar so expended left its representative and exact equivalent in the vault from which it was taken, and that, when again the money so left was expended, it left in turn its equivalent behind. We see, therefore, that, whatever changes may have taken place in the funds from the receipts and expenditures of the bank, the balance left at the date of its failure was the result of the proceeds of the notes, to the extent to which such balance was thereby increased, and that the cash which went into the hands of the receiver should be deemed the representative of those proceeds, and impressed with the trust character.'

Before proceeding to examine the English authorities supposed to support this line of decisions, I will give the...

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