Brennan v. Tillinghast

• Decision Date: 07 January 1913
• Docket Number: 2,254.,2,253
• Parties: BRENNAN v. TILLINGHAST. TILLINGHAST v. BRENNAN.
• Court: U.S. Court of Appeals — Sixth Circuit

201 F. 609

BRENNAN v. TILLINGHAST.

TILLINGHAST v. BRENNAN.

Nos. 2,253, 2,254.

United States Court of Appeals, Sixth Circuit.

January 7, 1913

[Copyrighted Material Omitted]

Charles M. Humphrey, of Ironwood, Mich., for John Brennan.

I. A Fish and Quarles, Spence & Quarles, all of Milwaukee, Wis for the receiver.

Before WARRINGTON and KNAPPEN, Circuit Judges, and SANFORD, District judge.

SANFORD District Judge.

John Brennan, the complainant below, filed a bill in the Circuit Court, sitting in equity, against the First National Bank of Ironwood, Mich., an insolvent banking association, and Philip Tillinghast, receiver of said bank, the defendants below, seeking to recover as preferred claims against the bank the value of certain stock deposited by Brennan with the bank as collateral and sold by the bank, and the sum of $1,000 deposited by Brennan with the bank a short time before it was placed in the hands of the receiver. The court, on final hearing, allowed the first of these items as a preferred claim, and disallowed the second. Brennan and the receiver have each appealed from this decree; and the two appeals have been heard together.

The material facts are these:

The First National Bank of Ironwood, Mich., hereinafter called the Ironwood Bank, was organized as a national banking association in 1888, and conducted a banking business in Ironwood until June 21, 1909, when it closed its doors, and Tillinghast was appointed as its receiver by the Comptroller of the Currency.

On February 1, 1909, Brennan borrowed from the Ironwood Bank the sum of $1,000, for which he executed his promissory note, due in four months, with interest, and deposited with the bank as collateral security certificates for certain shares of mining stock, including 200 shares of the capital stock of the Shattuck-Arizona Copper Company.

On April 8th Brennan deposited with the Ironwood Bank the sum of $1,000, for which he received a certificate of deposit. This deposit was received by the cashier of the bank, with the understanding at the time that it was to be used in paying Brennan's note at its maturity.

The receiver admitted in his answer that the bank was insolvent from February 1st, when the note was given, to June 21st, when the receiver was appointed, including the date, April 8th, on which the deposit was received; and the cashier who received the deposit testified that he had known for about ten years before that the bank was insolvent.

On May 1st the Ironwood Bank, through its cashier, without the knowledge or consent of Brennan, sold 195 of the shares of the stock of the Shattuck-Arizona Copper Company which it held as collateral to his note, the proceeds of which, $3,558.75, were on that day deposited in the City National Bank of Duluth, Minn., hereinafter called the Duluth Bank, to the credit of the Ironwood Bank, in a pre-existing open account.

Against this open account in the Duluth Bank, in which other deposits were made from time to time, the Ironwood Bank drew from day to day various drafts to meet its daily clearing house balances.

And from May 1st to May 8th, inclusive, the Ironwood Bank also drew four drafts on the Duluth Bank against this open account, in favor of the American Express Company, for amounts aggregating $2,807.32. These drafts were purchased by the express company from the Ironwood Bank on the dates on which they were drawn, and the express company on such dates paid the Ironwood Bank the amounts of such drafts, in cash, over its counter. At all times from May 1st to May 10th, inclusive, the open account of the Ironwood Bank at the Duluth Bank, after crediting all deposits made and deducting all drafts drawn, showed a balance in favor of the Ironwood Bank, varying in amount from day to day, but always in excess of $3,558.75. On May 10th this balance amounted to $4,273.39. On May 11th, however, this account of the Ironwood Bank at the Duluth Bank was overdrawn in the sum of $1,068.75.

On June 14th, after Brennan's note had fallen due and when he did not know that any part of his stock had been sold by the Ironwood Bank, he, after a conversation with its cashier, who advised him to let the note run, gave up his original intention of paying his note with his certificate of deposit, and, instead, paid the Ironwood Bank the interest due on his note, and gave the bank a renewal note for the principal.

In addition to these transactions, Brennan also had a checking account with the Ironwood Bank, and, when its doors closed, owed it for an overdraft on this account the sum of $216.07.

The books of the Ironwood Bank furthermore show that at all times from February 1st until it closed on June 21st there was $8,000 or more of cash on hand in its vaults, and $15,652.23 in cash came into the hands of the receiver. And, while it appears that the bank books contained many false cash entries, the evidence fully sustains the finding of the court below that from and after April 8th until the closing of the bank it had continually on hand in cash in its own vaults more than $3,500.

The remainder of the stock held by the bank as collateral on Brennan's note has been returned by the receiver to Brennan.

The evidence further showed that claims had been filed against the Ironwood Bank aggregating $603,000; that the Comptroller of the Currency had levied an assessment of 100 per cent. on its stockholders; that 30 per cent. dividends had already been paid to creditors; that not exceeding 10 per cent. more could be paid; and that the other claims for preferences which had been filed and which were still pending aggregated between $3,500 and $4,000.

On this state of facts we have reached the following conclusions:

1. The court below correctly held that Brennan was entitled to recover as a preferential claim, to be paid in full, the sum of $3,558.75 received by the Ironwood Bank from the sale of his stock, less the amount of his note, $1,000, and of the overdraft, $216.07, leaving a balance of $2,342.68, for which sum he was granted a decree against the receiver.

It is undisputed that the proceeds of the sale of Brennan's stock, wrongfully converted by the Ironwood Bank to its own use, constituted a trust fund, which did not lose this character when mingled with other moneys of the bank, and that Brennan was entitled to recover the amount thereof as a preferred claim, if, and to the extent that, he sustained the burden of proof of tracing this money, either in its original shape or in a substituted form, into the moneys which came into the hands of the receiver as part of the assets of the bank. Peters v. Bain, 133 U.S. 670, 693, 10 Sup.Ct. 354, 33 L.Ed. 696; Board of Commissioners v. Strawn (C.C.A. 6) 157 F. 49, 54, 84 C.C.A. 553, 15 L.R.A. (N.S.) 1100; In re Brown (C.C.A. 2) 193 F. 24, 29, 113 C.C.A. 343, affirmed sub nom. First National Bank of Princeton v. Littlefield, 226 U.S. 110, 33 Sup.Ct. 78, 57 L.Ed. . . .; Empire State Surety Co. v. Carroll County (C.C.A. 8) 194 F. 593, 604, 114 C.C.A. 435, and cases cited.

And proof that the tort-feasor has mingled the trust funds with his own and made payments thereafter out of the common fund, is, nothing else appearing, a sufficient identification of the remainder of that fund coming into the hands of the receiver, not exceeding the smallest amount the fund contained subsequent to the commingling, as trust property, under the legal presumption that he regarded the law and neither paid out the trust fund nor invested it in other property, but kept it sacred. Board of Commissioners v. Strawn, supra, at page 51; Empire State Surety Co. v. Carroll County, supra, at page 605, and cases cited.

Applying these general principles, we are of opinion that the court below correctly held that the proceeds of the sale of Brennan's stock constituted a trust fund held by the Ironwood Bank for his benefit; that the transactions in connection with the four cash drafts drawn in favor of the express company constituted, in effect, a transfer of $2,807.32 of this trust fund in cash to the vaults of the Ironwood Bank; that this portion of the trust fund must be deemed to have remained in the vaults of the Ironwood Bank as part of...