Cent. Trust Co. v. Bank Of Mullens

• Decision Date: 15 October 1929
• Docket Number: (No. 6524)
• Citation: 108 W.Va. 12
• Court: West Virginia Supreme Court
• Parties: Central Trust Company, Receiver, etc. v. Bankof Mullens, et als.

108 W.Va. 12

Central Trust Company, Receiver, etc.

v.Bank of Mullens, et als.

(No. 6524)

Supreme Court of Appeals of West Virginia.

Submitted October 2, 1929.

Decided October 15, 1929.

Banks and Banking Claim for Amount of Checks Sent Directly to Bank for Collection and Immediate Remittance Held Entitled to Preference on Bank's Failure; Proceeds of Checks Sent Directly to Bank for Collection and Remittance Held Trust Funds in Hands of Bank's Receiver.

A state bank, not a member of the federal reserve system, sent its two drafts to a federal reserve bank, payable out of funds in a depository bank, in payment of checks of its depositors sent direct to it by the federal bank for collection and immediate remittance, under a special agreement to that effect, and charged the amounts against its funds in the depository bank. There were no mutual accounts between the federal and state bank. These two drafts, aggregating $12,327.81, were presented at the depository bank for payment on April 19, 1927, but were not then paid; on the next day the state bank was closed as insolvent, and payment of the drafts were refused by the depository bank for that reason, although it had sufficient funds on deposit to pay the drafts. Immediately thereafter the depository bank applied said funds in its hands on notes (whether due or not does not appear) executed to it by the insolvent bank, and later released to the receiver collateral securities pledged on said notes.

Held: In the distribution of the assets of the insolvent, the federal reserve bank should be preferred over general creditors as an equitable assignee of the fund on which the drafts (reduced by stipulation to $10,423.68) were drawn; or that said fund and cash in bank was a trust in the hands of the receiver for reimbursement of the federal reserve bank.

Appeal from Circuit Court, Wyoming County.

Suit by the Central Trust Company, receiver, against the Bank of Mullens and others, in which the Federal Reserve Bank of Richmond intervened. From the decree, intervener appeals.

Reversed and remanded.

E. W. Worrell, James M. Mason and M. G. Wallace, for appellant.

Lively, Judge:

The Federal Reserve Bank of Richmond, intervener in a chancery suit to settle the affairs of the Bank of Mullens, upon being denied priority over the general creditors of the latter bank for its claim, obtained this appeal.

The plaintiff, Federal Reserve Bank of Richmond, had its chief offices in Richmond, Virginia, and the Bank of Mullens was located at Mullens, West Virginia. An agreement was entered into between the two banks whereby the Bank of Mullens was entered on the par list of the plaintiff. Under this agreement, the Bank of Mullens received for collection checks drawn upon itself sent to it by the plaintiff, and if such checks were collectible, it agreed to forthwith remit the amount thereof to the Federal Reserve Bank at Richmond by draft on certain designated banks, one of which was the First National Exchange Bank of Roanoke, Virginia.

In accordance with this arrangement, on April 14, 1927, the plaintiff bank sent to the Bank of Mullens checks drawn on the latter amounting to $9,954.29. On April 16th unpaid checks aggregating $4,134.06 were returned by the defendant bank to the plaintiff and a draft in its favor for $5,820.23 was drawn on the First National Exchange Bank of Roanoke and sent to the plaintiff. On April 16, 1927, the plaintiff sent to the defendant bank checks aggregating $9,950.08, and on April 18, 1927, the Bank of Mullens returned checks aggregating $3,442.50, and in settlement for the retained checks a draft for $6,507.58 was drawn in favor of the plaintiff on the First National Exchange Bank of Roanoke. Accompanying the checks sent to the Bank of Mullens was a letter stating that they were to be collected and remittance made in accordance with the previous arrangement between the parties. The Bank of Mullens collected the checks by charging the same against the accounts of individual depositors. On April 19, 1927, the drafts on the First National Exchange Bank of Roanoke were presented by plaintiff for payment, but payment was refused on April 20th, because the Bank of Mullens was temporarily closed. The Bank of Mullens had, when it issued the drafts, deducted the amounts thereof from its balance in the Roanoke Bank. At the time the drafts in favor of the plaintiff were drawn on and presented to the First National Exchange Bank of Roanoke, there were funds to the credit of the insolvent bank sufficient to pay them, and this condition continued up to April 20th, the date on which the Bank of Mullens was closed by the state banking commissioner. Subsequently, the First National Exchange Bank of Roanoke applied said funds in its hands on notes (whether due or not does not appear) executed to it by the Bank of Mullens, and later released to the receiver collateral securities pledged on said notes. When the receiver took charge, the amount of cash on hands in the Bank of Mullens was $3,908.59. By stipulation, the amount claimed to be due on the plaintiff's drafts was reduced to $10,423.68. The trial chancellor affirmed the report of its commissioner in chancery in which the commissioner found that the relation of debtor and creditor existed between the plaintiff bank and the Bank of Mullens after the collections were made; that there was no augmentation of the assets of the latter bank; and, therefore, the plaintiff was not entitled to a priority in the assets of the Bank of Mullens over its general creditors.

The first question to be determined is: What was the relation between the plaintiff and the Bank of Mullens after the latter collected the checks sent to it by the plaintiff by charging the same against the account of the individual depositors? There seems to be almost a unanimity of opinion among the courts that a bank accepting paper for collection is the agent of the party from whom it is received. Morse on Banks and Banking, Vol. 1, 6th Ed., see. 214, page 547. The conflict arises as to the relationship existing after the collection has been made. In a large number of jurisdictions it is held that the fact of collection changes the status of the parties to that of debtor and creditor. Although, probably contrary to the weight of authority, we are in accord with the modern trend of decisions which supports the rule that in the absence of a reciprocal accounts arrangement between the sending and collecting bank, where paper is sent under a specific agreement clearly evidencing an intent of immediate collection and remittance, the collecting bank as agent of the sender holds the amount collected in trust for it. State National Bank v. First National Bank, 187 S. W. (Ark.) 673; First State Bank v. O'Bannon, 266 Pac. (Okla.) 472; Bank of Poplar Bluffs v. Millspaugh, 281 S. W. (Mo.) 733, 47 A. L. R 754; Federal Reserve Bank v. Peters, 123 S. E. (Va.) 379, 42 A. L. R 742, and note on page 754; Hawaiian Pineapple Company v. Browns, 220 Pac. (Mont.) 1114; People ex rel. Russell v. Iuka State Bank, 229 111. App. 4; Sinclair Refining Company v. Tierney, 270 Pac. (N. M.) 792; State v. Excello Feed Milling Company, 267 Pac. (Okla.) 833; Griffith v. Burlington State Bank, 277 Pac. (Kans.) 42; Messenger v. Carroll Trust & Savings Bank, 187 N. W. (Iowa) 545. And this is true even though the collecting bank collects the paper by charging it against the account of the individual drawer and draws its draft on another bank in favor of the sender for the amount thus collected. Bank of Poplar Bluffs v. Millspaugh, supra; Spokane if; E. Trust Company v. United States Steel Products Company, 290 Fed. 884; Goodyear Tire & Rubber Company v. Hanover State Bank, 204 Pac. (Kans.) 992; Federal Reserve Bank v. Peters, supra; State v. Excello Feed Milling Company, supra; Hawaiian Pineapple Com, pany v. Browne, supra. Where, under an agreement to collect and remit, the sender has evinced an intention to make the collecting bank its agent for the purpose of collecting and remitting, to permit the collecting bank at its option to change the intended relationship to that of debtor and creditor by the manner in which the collection is made and the proceeds remitted would be subversive of sound commercial practice. As was said in Griffith v. Burlington State Bank, supra: "If a bank were to be permitted to change at will the relation of agent to that of debtor, forwarding banks would be compelled to require shipment of currency in order to protect themselves. The effect upon the transaction of business would be so disastrous that the evil consequences would far outweigh the hardship to depositors resulting from application of the principal and agent doctrine to occasional bank failures."

It is contended by the attorney for the receiver that as the transaction above referred to did not result in any augmentation of the defendant's assets, plaintiff should not be permitted to assert a preference over the general creditors of the insolvent bank. In Bank of Poplar Bluffs v. Millspaugh, supra, the court said in this connection: '' Relief has been denied in some cases on the theory that the transaction in judgment did not result in augmenting the assets that passed to the receiver or official acting as receiver of the failed bank. The argument in support of such theory runs about like this: If Ethel Reichert had not drawn her draft on her deposit in the Bank of Puxico, and said bank had failed as it did, it would have failed owing Ethel Reichert $5,000. But, instead of owing Ethel Reichert $5,000 when it failed, the Bank of Puxico owed plaintiff bank $5,000, evidenced by the draft that it gave plaintiff on the Citizens Trust Company of Gorin. Therefore, there was in effect no difference in the amount of the estate or assets that passed to the commissioner of finance; that the assets that passed to the commissioner of finance were neither increased nor diminished by the whole transaction. But this...