Citizens' Bank Of Pinewood v. Bradley

• Decision Date: 20 September 1926
• Docket Number: (No. 12069.)
• Citation: 134 S.E. 510
• Parties: CITIZENS' BANK OF PINEWOOD. v. BRADLEY, State Bank Examiner.
• Court: South Carolina Supreme Court

134 S.E. 510

CITIZENS' BANK OF PINEWOOD.

v.BRADLEY, State Bank Examiner.

(No. 12069.)

Supreme Court of South Carolina.

Sept. 20, 1926.

Watts, J., dissenting.

Appeal from Common Pleas Circuit Court of Sumter County; John S. Wilson, Judge.

Action by the Citizens' Bank of Pinewood against W. W. Bradley, State Bank Examiner, for liquidation of the Bank. From a decree allowing priority to certain claims, the Bank and Bank Examiner appeal. Decree modified as to certain claims.

Purdy &. Bland, of Sumter, for petitioner.

M. W. Seabrook and A. S. Merrimon, both of Sumter, for respondent.

COTHRAN, J. This court must take judicial notice of the unprecedented clashes of financial institutions and private enterprises recently occurring, which have shocked the state, and must anticipate in their wake the presentation of innumerable problems for its determination. I regard this, therefore, as a most critical period in the judicial history of this state, and feel the deepest responsibility in deciding the questions, as they arise, upon the most painstaking consideration, lest an erroneous decision will be "drawn into a precedent" fraught with disaster.

I concur in the opinion of Mr. Justice WATTS so far as the disposition of the claim of Mrs. M. Ida Mims is concerned, but dissent from the allowance of the other three claims as preferred claims.

The Citizens' Bank of Pinewood has gone upon the rocks, and the controversy is over the salvage. Certain creditors of the bank claim preferences in the distribution of the assets of the defunct institution, which claims to preference are resisted by the state bank examiner and the liquidating committee representing all of the creditors, including the depositors. The amounts are small, the principle involved is of vast consequence in its application to numerous other institutions in process of liquidation.

In December, 1922, the bank closed its doors, and on the 29th the state bank examiner took charge of its affairs. There is confusion in the "case" as to the dates, but it sufficiently appears that early in 1923 the bank filed a petition in the court of common pleas against the state bank examiner, setting out the facts and alleging that the board of directors, with the consent of the stockholders, had consented to liquidate the affairs of the bank; that suits were threatened against the bank, and that it feared its assets would be wasted. Thereupon, his honor, Judge Wilson, circuit judge, passed an order authorizing the bank to liquidate its affairs under the sole supervision and control of the examiner and subject to the order of the court, and enjoined all proceedings against the bank, except in the pending cause. In August, 1923, his honor, Judge Wilson passed a further order requiring that:

"All persons having claims against said bank do file proof of such claims with W. W. Bradley, state bank examiner, at Columbia, within 60 days from the date thereof, or that such claim should be barred."

Thereafter he passed a further order, referring it to the master to take proofs of the claims against the bank and report them to the court, with the order of priorities and with his recommendations as to any payments which should be made by the bank at this time or in the near future. Many claims were filed, and among such claims filed and allowed by the master, the following were allowed preference: Koiner Flour Mills, $359.40; Kaminski Hardware Co., $124.20; Mrs. Ms Ida Minis, $204.05. The claim of M. W. Seabrook,. $250, was disallowed by the master as a preferred claim.

Exceptions were filed to the conclusions of the master as to these four claims, by the examiner, and by Seabrook. The matter coming before his honor, Judge Wilson, he passed an order dated July 23, 1924, sustaining the report of the master in the allowance of preference to the three first claims stated, and overruling the report in the disallowance of preference to the Seabrook claim. From this decree the bank and the examiner have appealed.

I begin the discussion with the very clear, strong, and just declaration made by the court (Mr. Justice Woods writing the opinion) in the case of Livingstain v. Bank, 77 S. C. 305, 57 S. E. 182, 22 L. R. A. (N. S.) 442, 122 Am. St. Rep. 568:

"No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors."

He who claims a departure from this rule must establish his right clearly. It becomes necessary to consider the four claims separately:

First. The Koiner Claim, It appears that in November; 1922, H. L. Baxley, the president of the Citizens' Bank of Pinewood, was also engaged in the.mercantile business, and purchased a lot of flour from the Koiner Flour Mills, at Richmond, Va. The flour was shipped "order notify" Baxley at Pine-wood, and a draft with the bill of lading attached, was drawn upon Baxley for the price of the flour, $359.40. The draft was placed by the Koiner Flour Mill in commercial channels, and on November 22, 1922, was received in due course by the Pinewood Bank for collection and remittance, its correspondent, the forwarding bank, evidently not knowing that Baxley was president of the Pinewood Bank. In some way, not explained, the bill of lading was separated from the draft, and Baxley, on November 25th, presented the bill of lading to the railroad company and received the flour. On December 26th, Baxley took up the draft for $359.40, with his personal check on the Pinewood Bank, in which he had a deposit sufficient to meet it. The check was charged to Baxley's account on December 27th, and on that day a cashier's check on the Pinewood Bank was remitted to Koiner Flour Mills or to the forwarding bank, in payment of the draft, but before it had time to be returned and presented, the bank examiner took charge of the Pinewood Bank.

The claimant seeks to establish its right to a preference upon the theory that the relation which existed between it and the Pinewood Bank was that of principal and agent, and that the proceeds of the collection was a trust fund in the hands of the bank, which it is able substantially to identify in the hands of the liquidating committee.

A few, a very few, cases in other jurisdictions sustain the contention of the claimant, but the overwhelming majority declare the rule to be that, before the collection is made, the relation between the owner of the paper and the collecting bank is that of principal and agent; but that after the collection has been made, the relation of debtor and creditor arises. This conclusion is based upon the custom of banks to credit those for whom collections have been made and remit in the bank's usual exchange; the owner of the paper is presumed to have acquiesced in the custom of the collecting bank to mingle the collection with its own funds, assuming the position of a debtor to the owner.

The case of Milling Co. v. Trust Co., 242 Mass. 181, 136 N. E. 333, 24 A. L. R. 1148. decided by a court of great reputation, with the note attached, contains a masterly discussion of the question at issue. It so nearly corresponds with the facts of the case at bar that an extended reference to it may be justified. In that case a draft with bill of lading attached was drawn upon a customer of the drawer of the draft; the draft was forwarded through a local bank to the defendant Trust Company for collection; the collecting bank received payment of the draft by check of the drawee upon a deposit with the collecting bank. The collecting bank failed, not having accounted for the draft. The drawer of the draft claimed a preference in the distribution of the assets of the insolvent collecting bank, as nearly a parallel case with the case at bar as could possibly be found. The court in denying the claim of preference said:

"It is not disputed that the [collecting bank] was the agent of the owner of the draft in question for the purpose of collecting it. The plaintiff [drawer] as principal retained control of it, and could sue the collecting bank for negligence. * * * On the other hand, the * * * collecting bank had such rights in and title to the draft as were necessary to enable it to make the collection. * * * When the draft was paid to the defendant [collecting bank] from the deposit of the drawees, * * * by their direction, that operated as payment of the draft as against the owner: * * * Ordinarily, when a draft has been paid to the collecting bank, the owner's right of control ends, and the relation between the collecting bank and the owner of the draft ceases to be that of agent to principal, and becomes that of debtor to creditor. * * * 'Upon the collection of a draft or check, the [collecting bank] was not required to keep the proceeds by itself as the plaintiff's property, but might mingle it with its own money, and make itself the plaintiff's debtor for the amount received. As soon as the proceeds became a part of the fund of the [collecting bank] under this arrangement, the plaintiff's right to control it as specific property was gone, and the plaintiff had, instead, a right to recover a corresponding sumof money.' * * * 'One who collects commercial paper through the agency of banks must be held impliedly to contract that the business may be done according to their well-known usages, so far as to permit the money collected to be mingled with funds of the collecting bank.'"

In the note to this case and in E. R. A. 1917P, 600 there is a multitude of cases sustaining the same conclusion.

In Bank v. Armstrong, 148 U. S. 50, 13 S. Ct. 533, 37 L. Ed. 363, it is held that, after a collecting bank has actually collected a draft, the relation between it and the drawer is that of debtor and creditor.

In Cronheim v. Postal Co., 10 Ga. App. 716, 74 S. E. 78, it is held (quoting syllabus by the court):

"Where the owner of a check delivers it to a bank for collection, and. before the proceeds are remitted, the bank fails and is placed...