Cent. Nat. Bank of Lincoln v. First Nat. Bank of Gering
| Citation | 115 Neb. 472,216 N.W. 302 |
| Decision Date | 10 November 1927 |
| Docket Number | No. 25214.,25214. |
| Parties | CENTRAL NAT. BANK OF LINCOLN v. FIRST NAT. BANK OF GERING ET AL. |
| Court | Supreme Court of Nebraska |
A bank that receives and accepts a promissory note for the sole purpose of collecting the debt and remitting the proceeds is a “trustee” and as such is accountable to the beneficiary.
A mere change in the form of property confided to and converted by a trustee does not change the ownership, the beneficiary remaining the owner.
Where the form of trust property is changed by a fiduciary and the resulting proceeds are wrongfully mingled by him with the mass of assets comprising his insolvent estate, the beneficiary of the trust, in a proper case, may resort to the mass for redress, if augmented by the trust property.
The proceeds of commercial paper received by a bank as trustee and wrongfully credited to the owner, if equivalent to money for banking purposes, may, in equity, be treated as money.
Where proceeds of a note are converted by a bank as trustee, a credit to the beneficiary therefor on its books may be evidence of a credit equivalent to money.
The conversion of trust property by a bank and credit to the beneficiary therefor on its books, contrary to instructions, without the knowledge of the beneficiary, do not necessarily create the relation of banker and depositor.
The proceeds of a note intrusted to a bank for the sole purpose of collecting and returning the amount due thereon may be traced as trust funds into the general assets of the bank after it has been closed on account of insolvency and such funds may be made the basis of a preferred claim against the general assets of the bank, where it is shown that the note was collected, that the proceeds were converted by the bank and wrongfully credited to the beneficiary without the latter's knowledge, and that the fund was mingled with the mass of assets used for general banking purposes, thus augmenting the general assets.
Where the beneficiary of a trust, in an action to establish a preferred claim as a charge against the general assets of an insolvent bank in the hands of a receiver, traces the trust fund through conversion of the bank into the mass of its assets, the burden of proof is on the receiver who has control of the bank records and accounts to prove that the assets were not augmented by the conversion or that the trust fund disappeared from the assets, if the defense is based on those grounds.
Appeal from District Court, Scotts Bluff County; Barron, Judge.
Suit by the Central National Bank of Lincoln against the First National Bank of Gering, of which Charles F. Lyman was appointed receiver, and another. From a decree for plaintiff, the defendant bank and the receiver appeal. Affirmed.
See, also, 115 Neb. 444, 213 N. W. 745;115 Neb. 444, 214 N. W. 75.
Morrow & Morrow, of Scottsbluff, for appellants.
Fred S. Berry, of Wayne, amicus curiæ.
Field, Ricketts & Ricketts, of Lincoln, and Honnold & Clarke and Mothersead & York, all of Scottsbluff, for appellee.
This is a suit in equity to trace proceeds of notes into a national bank subsequently closed on account of insolvency and to establish a preferred claim payable in full from general assets in the hands of the receiver.
The Central National Bank of Lincoln is plaintiff. The First National Bank of Gering, hereinafter called “the bank,” and its receiver are defendants. While the bank was transacting a commercial banking business under the laws of the United States, it received from plaintiff four promissory notes for the exclusive purposes of collecting the amount due on each and of returning the proceeds to plaintiff. For these purposes plaintiff transmitted and the bank received the note of Fred Miller for $1,600, interest $80, total $1,680; the note of Henry Pfenning for $1,500, interest $37.50, total $1,537.50; the note of J. L. Moore for $700, interest $14, total $714; the note of George Schnell for $1,000, interest $25, total $1,025. The Miller note was transmitted November 3, 1923, and the others were transmitted November 30, 1923. Each note matured on or before December 5, 1923. Plaintiff owned all of these notes which, with interest, aggregated $4,956.50. In addition to the facts stated, the petition contains in substance pleas that the bank collected the debts evidenced by these notes, converted the proceeds thereof, mingled plaintiff's funds with the general assets of the bank, used them for banking purposes, never returned or paid any part of them to plaintiff, became insolvent, reduced the cash in the bank to $1,370.42, and went into the hands of a receiver, its doors not being open for commercial banking after December 31, 1923. The equitable relief sought by plaintiff is the establishment of a preferred claim for $4,956.50 payable in full from the general assets of the bank in the hands of the receiver.
The answer, among other things, denies material facts upon which the petition for a preference over general creditors is based and challenges the right of plaintiff to charge the mass of assets in the hands of the receiver with the proceeds of the notes.
From the standpoint of each side the facts were well pleaded and the principal contest at the trial in the district court grew out of a controversy as to the right of plaintiff to a preference over general creditors without tracing the proceeds of the notes into specific funds or property. On this feature of the case the trial court found that the Schnell note fell into the hands of the receiver and that the proceeds of the other notes were appropriated by the bank and were mingled with its assets, thus becoming a charge upon the mass. Consequently the receiver was ordered to return the Schnell note to plaintiff and to pay the latter, out of general assets, $4,467.23, the amount of principal and interest due on the notes collected by the bank. From the decree of the district court defendants appealed.
The controlling question presented by the appeal has been vigorously argued on three different occasions by counsel for all litigants and at the third hearing a valuable brief was submitted by other counsel acting in the capacity of a friend of the court. With commendable frankness counsel for the receiver and the bank stated in the first instance in his brief the question for determination as follows:
“We are willing to rest this case on the broad general principle that the appellee has not traced its notes into any particular fund or property of the First National Bank and therefore is not entitled to a preferred claim of any kind.”
The same proposition was repeated in open court. Opposing counsel accepted the challenge as a correct statement of the controlling question, conceded that the proceeds of the notes had not been traced into any specific fund or property in the hands of the receiver and argued nevertheless that the trial court properly charged the mass of the bank's assets with plaintiff's claim. In considering the merits of the appeal at a former term the majority of this court delivered an opinion stating correctly the question for solution in the following language:
Central Nat. Bank v. First Nat. Bank, 115 Neb. 444, 213 N. W. 745.
The reduction of the problem to this form is a premise established by all litigants and accepted by the court. It is a recognition of the fact that the proceeds of plaintiff's notes were traced into the general assets of the bank--a conclusion properly drawn from the evidence. That the assets were augmented by proceeds of the notes is also a proper deduction from the evidence.
The members of this court, like courts elsewhere, are divided on the proper solution of the question. The rulings are in hopeless conflict. In the present case the majority in the former opinion held:
“A trust fund may be followed and recovered in equity by the beneficiary, as against the trustee or his general creditors, either in its original or substituted form, when, and only when, it can be traced to and identified in some specific fund or property.
“One seeking, in equity, the allowance of a claim for preference against an insolvent bank in the hands of a receiver has the burden of proving that his trust fund either came into the possession of the receiver, or was invested in some specific fund or property that came into the hands of the receiver.” Central Nat. Bank v. First Nat. Bank, 115 Neb. 444, 213 N. W. 745.
These rulings resulted in a reversal of the decree from which defendants appealed, but there was a dissenting opinion in which three members of the court joined. Central Nat. Bank v. First Nat. Bank, 115 Neb. 444, 213 N. W. 745. Upon a motion by plaintiff for a rehearing, the case was again argued and submitted. In the light of new briefs, rearguments, further research and deliberation, four members of the court entertain the view that the dissenting opinion contains the better solution of the question presented by the appeal and it is therefore adopted as the opinion of the court. Without repeating the reasons for the dissent, the principles based thereon and now adopted are as follows:
[1] 1. A bank that receives and accepts a promissory note for the...
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