Bryant v. Linn County, Or., E-9449.

• Decision Date: 24 October 1938
• Docket Number: No. E-9449.,E-9449.
• Citation: 27 F. Supp. 562
• Parties: BRYANT v. LINN COUNTY, OR., et al.
• Court: U.S. District Court — District of Oregon

27 F. Supp. 562

BRYANT v. LINN COUNTY, OR., et al.

No. E-9449.

District Court, D. Oregon.

October 24, 1938.

Oscar Hayter, of Dallas, Or., for plaintiff.

Mark V. Weatherford and J. K. Weatherford, Jr., both of Albany, Or., for all defendants except United States Nat. Bank of Portland.

JAMES ALGER FEE, District Judge.

This suit was brought by the Receiver of The First National Bank of Albany, Oregon, an insolvent institution to prevent the payment of the proceeds of bonds pledged by the Bank to secure deposits made therein by the officers of Linn County. Most of these deposits were in the form of checks drawn upon institutions outside of Albany. These instruments were forwarded to correspondent institutions and the credits thereby obtained were destroyed or seriously impaired by debit items before the closure of the Albany Bank on March 1, 1933. It is conceded that the pledge of certain of the bonds was invalid. The Receiver would, therefore, be entitled to this fund, except for the fact that it is claimed the deposits constituted a trust fund. In this connection, David B. Evans, Esq., the Special Master to whom the cause was referred, found that the Albany Bank had been insolvent for a year prior to the date of closure, to the knowledge of its managing officers. He further found that the deposits made by the officers of the County during that year were made on the faith of the solvency of the institution. The court approves this finding but on the basis of the record further finds that the Albany Bank was hopelessly and irretrievably insolvent for many years prior to March 1, 1933, to the knowledge of its managing officers and that the deposits made not only by the officers of the County but all other persons during the entire period were upon the faith of the solvency of the Bank.

It is apparent, then, that the initial questions involved are first, whether a trust ex maleficio arose by virtue of the condition of the institution and the knowledge of the officers thereof, and second, as to whether there was a trust res which came into the hands of the Receiver.

These questions are intermingled, and solution depends upon whether federal law or state law should be applied. Schumacher v. Harriett, 4 Cir., 52 F.2d 817, 82 A.L.R. 1, is authority which would indicate that a trust res could be created by deposit of checks upon other banks even if the credits thereby obtained were wiped out by subsequent debit items charged to the forwarding Bank. The case above cited has been the basis of much controversy in the federal courts, and may have been overruled by Jennings v. United States Fidelity & Guaranty Co., 294 U.S. 216, 221-224, 55 S.Ct. 394, 79 L.Ed. 869, 99 A.L.R. 1248. See Koechling v. Pyne, 2 Cir., 88 F.2d 1012.

It is probable that the view adopted in Schumacher v. Harriett, supra, is that applied in most of the state courts. See Note, 82 A.L.R. 208 and ff. The Oregon Supreme Court, adopting the rule of the Schumacher case, held that where a check drawn on an outside bank was deposited, the effect was the same as if cash had been placed in the receiving bank and the fact that the check had been forwarded to another institution which collected and credited the bank originally receiving it, coupled with the fact that these credits had been dissipated by subsequent debits against that bank, would not prevent the tracing of the fund by the original depositor. School District v. Schramm, 142 Or. 296, 20 P.2d 241. Furthermore, the ultima thule was reached in the same decision by the creation of a trust ex maleficio as to the check based upon the fiction that where the officers of the bank knew of insolvency, it was the intention to use the money of the bank in paying off the debits rather than the credit obtained from the deposited check.¹ However, this decision related only to one check deposited two days before closure. School District v. Schramm, supra.

The Supreme Court of the United States in Erie Railroad Company v. Tompkins, 304 U.S. 64, 72, 73, 58 S.Ct. 817, 819, 82 L.Ed. 1188, 114 A.L.R. 1487, has said: "* * * in all matters except those in which some federal law is controlling, the federal courts exercising jurisdiction in diversity of citizenship cases would apply as their rules of decision the law of the state, unwritten as well as written." There may still be a question as to whether the court will apply equitable doctrines peculiar to a particular state or will be bound under the federal constitution to the interpretations of the substantive law of equity as applied by the High Court of Chancery in England in 1789 and ramifications thereof.

The creation of a trust, the existence of a res, and the tracing of a trust fund are, of course, dependent upon the substantive law developed by the Chancellors. However, for the purposes of this opinion it will be assumed that all commercial transactions of each state will be governed by the local law of that state.² It is doubtful that distinctions could be maintained between these branches of law especially as there has been a tendency to syncretize the substantive principles of law and equity in states where there has been but one system of procedure.

There is no real reason, except perhaps the constitutional one above suggested, why trust relations of a national bank should not be controlled by the law of the state wherein it is situated, any less than the title to the real estate which it holds or the construction of the terms of a negotiable instrument which a citizen of that state has executed to it. The interpretation of no federal law, treaty, or constitutional provision is involved in determinations as to whether money is held in trust by a bank.³

The vital distinction must be made between the interpretation of transactions of a national bank while in the normal transaction of its business and the relations which arise upon insolvency. The latter must be construed in the light of the federal statutes relating to liquidation. It is true, rights in existence can not be destroyed by the application of the statutory rule, but these may be modified by waiver or inaction, to serve the purpose of orderly distribution.

The final question in this case is then one of the distribution of the assets of an insolvent National Bank.⁴ Liquidation of the assets of such a corporation and distribution thereof is accomplished under the authority of the federal constitution and the laws of Congress passed pursuant thereto.⁵ In the past, on the one hand, federal courts in determining questions of the existence of a trust res were applying and interpreting doctrines of equity jurisprudence.⁶ On the other hand, these courts, in dealing with problems of administration of the assets of an insolvent National Bank were construing the governing statutes of the United States. In the latter sphere, no state statute, or rule of law applied by a state court, is given weight.⁷ Here, then, is a situation where a "federal law is controlling". Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 819, 82 L.Ed. 1188, 114 A.L.R. 1487. The construction here given by federal courts to the federal enactment must still prevail, whether a trust is involved or not.

The distribution of the assets of an insolvent national bank is controlled by a law enacted by the Congress which requires a ratable division thereof.⁸

When the doors were closed, if the state law be followed, a trust ex maleficio was created not only in favor of the County of Linn, but in favor of every other person whose deposit was similarly accepted. In view of the history of its operation while insolvent for years before, the depositors of this bank must have been nearly all embraced in this class. The assets of the bank were then practically all held in trust. If distribution had been made upon theory of the existence of a trust ex maleficio, the depositors would have thus shared pro rata in the assets. Standard Oil Co. of New Jersey v. Elliott, 4 Cir., 80 F.2d 158. It will be noted that the results accomplished if a claim of trust ex maleficio upon the part of each depositor had been promptly asserted would have been exactly the same as are those now to be attained, if the receiver distribute all the assets in accordance with the mandate of the...