Bd. Of Sup'rs Of Lunenburg County v. Prince Edward-lunenburg County Bank

• Decision Date: 20 March 1924
• Court: Virginia Supreme Court
• Parties: BOARD OF SUP'RS OF LUNENBURG COUNTY. v. PRINCE EDWARD-LUNENBURG COUNTY BANK et al.

121 S.E. 903

BOARD OF SUP'RS OF LUNENBURG COUNTY.

v.PRINCE EDWARD-LUNENBURG COUNTY BANK et al.

Supreme Court of Appeals of Virginia.

March 20, 1924.

Appeal from Circuit Court, Lunenburg County.

Suit by M. E. Gee and others against the Prince Edward-Lunenburg Bank, in which H. D. Peters was appointed receiver for defendant, and in which the Board of Supervisors of Lunenburg County filed a petition against the Prince Edward-Lunenburg Bank and another. Decree for defendants, and petitioner appeals. Reversed and remanded.

Geo. E. Allen, of Victoria, for appellant.

N. S. Turnbull, Jr., of Victoria, and E. W. Hudgins, of Chase City, for appellees.

This is a suit in equity instituted by petition in a pending cause by the county of Lunenburg, the cestui que trust, through its board of supervisors, the appellants, seeking to have the appellee bank held to have been primarily, and the appellee receiver of the bank held to be secondarily (as having in his bands the assets of the bank), a constructive trustee ex maleficio of certain deposits by the county treasurer of money beneficially belonging to the county in said bank, and obtained by it at a time when, unknown to the depositor, the bank was insolvent and was so known to be by its officers on the ground, among others, that in such case the cestui que trust has the right to rescind the transaction and recover back the deposits, where, as is alleged to be true of the instant case, the said money came into the receiver's hands, and it increased to that extent the amount of the assets which came into the hands of the latter.

The case was decided in the court below upon the demurrer of the receiver to the petition, the decree being adverse to the county and dismissing the petition, the effect of which was to hold that the receiver was not, under the circumstances mentioned, a constructive trustee ex maleficio of the money sought to be recovered back. It is that decree which is under review.

The petition, so far as material, Is as follows:

"To the Honorable Circuit Court of Lunenburg County:

"Tour petitioner, the board of supervisors of Lunenburg county, respectfully represent unto your honor, as a basis for the relief hereinafter prayed for, the following case:

"(1) Upon a bill filed by M. E. Gee and others against the Prince Edward-Lunenburg County Bank, Incorporated, before the judge of the circuit court of Lunenburg county, in vacation, on the 9th day of January, 1922, praying that a receiver be appointed for the said bank, an order was entered appointing said H. D. Peters, receiver, and directing him to take charge of the books, papers, and as sets of said bank, and proceed to administer them under the supervision of your honor.

"(2) That upon the date of the appointment of said receiver and at the time he took charge of the assets of said bank there was in said bank certain moneys belonging to your petitioners, to wit, the sum of $4,705.12, deposited in said bank on January 1, 1922, in currency, by C. C. Hatchett, treasurer of Lunenburg county, in his name as treasurer of Rehoboth district improvement road sinking fund, for the purpose (and no other) of redeeming certain bonds issued by your petitioners for the improvement of the public roads of Rehoboth magisterial district in said county; and the sum of $1,325.16 deposited in said bank in currency in the name of C. C. Hatchett, treasurer, for the specific purpose (and no other) of taking up certain warrants issued by said board of supervisors to persons residing in Pleasant Grove district, in which said bank is located. * * *

"(3) That upon the qualification of said receiver and the taking charge of the assets of said bank, said sums came into his hands. * * *

"Petitioners further represent that said deposits were made with funds from sources other than said bank and that the assets of Baid bank were augmented by said transaction. * * *

"Petitioners further allege that said bank was insolvent when said deposits were made, and so known to be by itB said officers; * * * all of which was wholly unknown to petitioners and said C. C. Hatchett, treasurer, who regarded said bank as one of the strongest institutions in the county.

"Your petitioners pray that they may be allowed to file this petition, and that, if necessary, it may be considered as exceptions duly filed in regular course to the report of Master Commissioner W. E. Nelson, in so far as said report does not allow said sum as a preferred claim; that the said Prince Edward-Lunenburg County Bank, Incorporated, and H. D. Peters, receiver, be made defendants to this petition, and required, but not on oath, to answer the same, oath being hereby waived; and that this court may declare said funds to be impressed with a trust and entitled to preference in the administration of the assets of the said insolvent bank, and that it be decreed that said sums be paid in full to your petitioners, the said board of supervisors, and that your honor may grant such further and other relief in the premises, both general and special, as the nature of the case may require, or to equity and good conscience shall seem meet.

"And your petitioners will ever pray, etc. "Board of Supervisors of Lunenburg Co., "By Counsel."

The demurrer of the receiver, as stated in writing, was upon the following grounds:

"(1) Because this petition should be filed in the name of the treasurer of Lunenburg county, C. C. Hatchett, and not in the name of the board of supervisors of Lunenburg county, Va. The treasurer of Lunenburg county, C. C. Hatchett, is the legal custodian of the funds of the county. The supervisors have only the right to draw warrants thereon. The treasur-er is absolutely liable to them for all funds coming into his hands and they cannot release him from his liability even by ordering him to deposit money in a certain bank.

"(2) Because the funds deposited by the said C. C. Hatchett in the Prince EdwardLunenburg County Bank were general deposits —not trust deposits.

"(3) Because the facts alleged in the petition do not constitute a trust or show that a trust was created at the time the deposits were made by the said C. C. Hatchett in the Prince Edward-Lunenburg County Bank; and the facts alleged show merely the general deposit of said funds creating the relationship of debtor and creditor between said bank and said depositor.

"(4) Because the public funds of a county or municipality deposited in a bank, which subsequently becomes insolvent, by the treasurer of said county or municipality, are not given a preference purely as such. In the absence of facts creating a trust (as is the case here) they are treated as other deposits and stand on the same footing as other general deposits or individuals. The fact alone that they are public funds creates no trust or preference.

"(5) Because the said board of supervisors of Lunenburg county, Va., never' made any deposits in said bank as same were made by the treasurer of said county, C. C. Hatchett, and said board of supervisors has no privity of contract with said bank or ever has had any.

"(6) Because the title to said moneys deposited in said insolvent bank was not and is not in the board of supervisors of Lunenburg county; the legal custody thereof is in C. C. Hatchett, treasurer, who must account to the said board of supervisors for the same in toto, whether or not he receives same or any part thereof from said insolvent bank.

"(7) Because said C. C. Hatchett, treasurer, as custodian of the funds of the county, had the right to make a deposit in any bank, at his own risk, so that the same became a. general deposit, and he exercised this right when he made the deposits mentioned in said petition in said Prince Edward-Lunenburg County Bank."

SIMS, P., after making the foregoing statement, delivered the following opinion of the court:

In our view of the case there are only two questions presented by the assignments of error which need be passed upon, and they will be disposed of in their order as stated below.

1. Was the appellee receiver, under the circumstances above mentioned, a constructive trustee ex maleficio of the money in the bill mentioned, so that, if the money had belonged to and if this suit had been brought by the county treasurer, he would have had the right to recover the money?

The question must be answered in the affirmative.

In Pennington v. Bank, 114 Va. 674, at page 678, 77 S. E. 455, 457 (45 L. R. A. [N. S.] 781), this Is said and held:

"The authorities are agreed that when a bank, with knowledge of its insolvency, receives a deposit it perpetrates a fraud on the customer, and is held to be a constructive trustee of the deposit, and the depositor may recover of the receiver the deposit, if it can be identified, or its equivalent, if it cannot be identified, when the customer's money ha3 been mingled with the bank's funds, which, to an amount equal to the deposit, has gone into the hands of its receiver. Western German Bank v. Norvell, 134 Fed. 724, 69 C. C. A. 330; Tiffany on Banks and Banking, § 89, p. 349, and cases cited in notes."

In the citation from Tiffany just mentioned, this is said:

"The relation between a bank and its depositor being merely that of debtor and creditor, the depositor is entitled to no preference upon the bank's insolvency, but must come in with the other general creditors."

And this authority continues:

"For a bank to receive deposits with knowledge of the hopeless insolvency, however, is fraudulent, and in such case the depositor may rescind the transaction and recover back his deposit from the bank, which becomes-a constructive trustee ex maleficio, and holds the deposit for the use of the depositor. 'A banker, who is, to his own knowledge, hopelessly insolvent, cannot honestly continue his business, and receive the money of his customers, and, although having no actual intention to cheat and defraud a particular customer, he will be held to have intended the inevitable consequences...