City of St. Paul v. Seymour

• Decision Date: 24 January 1898
• Docket Number: 10,873 - (249)
• Parties: CITY OF ST. PAUL v. FRANK A. SEYMOUR and Another
• Court: Minnesota Supreme Court

74 N.W. 136

71 Minn. 303

CITY OF ST. PAUL v. FRANK A. SEYMOUR and Another

Nos. 10,873 - (249)

Supreme Court of Minnesota

January 24, 1898

In the matter of the receivership of the Bank of Minnesota the city of St. Paul filed a petition in the district court for Ramsey county, asking that Frank A. Seymour and William H. Lightner as receivers of said bank, be required to pay to the petitioner out of the general funds in their hands a balance of $22,480.81 due the petitioner from the insolvent bank upon trust account. From an order of O. B. Lewis, J., dismissing its petition on the motion of the receivers, the petitioner appealed. Affirmed.

SYLLABUS

Trust Funds -- Appropriation by Trustee to Pay His Own Debts -- Insolvency of Trustee -- Right of Beneficiary to Lien on Assets.

Trust funds, without being mingled with the assets or funds of the trustee, were paid out by him in satisfaction of his own indebtedness. Held, the cestui que trust is not entitled to have a lien or trust declared in his favor on the funds or assets in the hands of the receiver in insolvency of the trustee, subsequently appointed, and is not a preferred creditor.

James E. Markham and Carl Taylor, for appellant.

The balance which remained in the bank to the credit of the "coupon account" was a trust fund, and, by the application of equitable rules, such trust fund can be traced into the cash funds coming into the hands of the receivers. It is not the identity of the form, but the substantial identity of the fund itself, which is the important thing. City v. Johnson, 5 Dill. 241; First v Armstrong, 36 F. 59; Massey v. Fisher, 62 F. 958; Cleveland v. Hawkins, 79 F. 29; Montagu v. Pacific, 81 F. 602; Third v. Stillwater, 36 Minn. 75. When the bank receiving a check or draft "for collection only" receives payment in the form of a credit to itself at the clearing house, it is as actual a payment of the check as if the bank had received the cash money over the counter. Howard v. Walker, 92 Tenn. 452; 3 Randolph, Com. Paper, 1395; Charlotte v. American, 34 Hun, 26; Indig v. National, 80 N.Y. 100.

If the trust funds deposited by the city went into the bank and were represented by an indistinguishable portion of its general funds, and if an equal amount remained in the bank continuously from that time until the receivers took possession, it is well settled that the funds may be recovered from the receivers. Knatchbull v. Hallett, L.R. 13 Ch. Div. 696; Cavin v. Gleason, 105 N.Y. 256; Nonotuck v. Flanders, 87 Wis. 237; Continental v. Weems, 69 Tex. 489; National v. Insurance, 104 U.S. 54; Frelinghuysen v. Nugent, 36 F. 229.

Even if such trust funds cannot be traced into the hands of the receivers, yet as they were wrongfully commingled by the bank with, and went to augment, its general assets, the receivers representing the creditors stand in the shoes of the bank, and must refund from the general assets the amount of such trust fund. Peak v. Ellicott, 30 Kan. 156; Ryan v. Phillips, 3 Kan.App. 704; Myers v. Board, 51 Kan. 87, 98; Harrison v. Smith, 83 Mo. 210; Stoller v. Coates, 88 Mo. 514; First v. Sanford, 62 Mo.App. 394; Wisconsin v. Manistee, 77 Mich. 76; In re Johnson, 103 Mich. 109; Wallace v. Stone, 107 Mich. 190; Davenport v. Lamp, 80 Iowa 722; Independent v. King, 80 Iowa 497; Henderson v. O'Conor, 106 Cal. 385; Anderson v. Pacific, 112 Cal. 598; First v. Hummel, 14 Col. 259, 273; German v. Kimble, 66 Mo.App. 370; Windstanley v. Second, 13 Ind.App. 544; Smith v. Combs, 49 N.J.Eq. 420; People v. City, 96 N.Y. 32; Capital v. Coldwater, 49 Neb. 786; San Diego v. California, 52 F. 59; Montagu v. Pacific, supra; Massey v. Fisher, supra.

Young & Lightner, for respondents.

Assuming that the fund in question is a trust fund, yet no part of it went to augment the estate of the receivers, or even came into their hands. There is a clear distinction between adding to an insolvent estate by mingling with it trust property, and using the trust property to pay the insolvent's debts. In the one case the assets are increased with an equal increase of indebtedness; in the other case when the insolvent uses trust funds to pay debts, he does not increase, even for an instant, his assets, although he reduces his existing debts, creating a new liability to the same amount for converting the trust property. In re Seven Corners Bank, 58 Minn. 5; Bishop v. Mahoney, 70 Minn. 238.

The great weight of authority is against the proposition that if the trust fund goes to augment the estate of the trustee (and not to pay his other debts), the cestui que trust has a lien on the general assets of that estate. The earlier cases in New York and Wisconsin have been overruled. National v. Insurance, 104 U.S. 54; Litchfield v. Ballou, 114 U.S. 190; Peters v. Bain, 133 U.S. 670; Metropolitan v. Campbell, 77 F. 705; Spokane v. First, 68 F. 979; Boone v. Latimer, 67 F. 27; Spokane v. Clark, 61 F. 538; Multnomah v. Oregon, 61 F. 912; Commercial v. Armstrong, 39 F. 684; Philadelphia v. Dowd, 38 F. 172; Wasson v. Hawkins, 59 F. 233; Illinois v. First, 15 F. 858; Cecil v. Thurber, 8 C.C.A. 365; Cragie v. Hadley, 99 N.Y. 131; Cavin v. Gleason, 105 N.Y. 256; Atkinson v. Rochester, 114 N.Y. 168; Little v. Chadwick, 151 Mass. 109; Appeal of Hopkins (Pa.) 9 A. 867; Englar v. Offutt, 70 Md. 78; Slater v. Oriental, 18 R.I. 352; In re Lebanon Bank, 166 Pa. St. 622; Freiberg v. Stoddart, 161 Pa. St. 259; Commercial v. Davis, 115 N.C. 226; St. Louis v. Austin, 100 Ala. 313; Northern v. Clark, 3 N.D. 26; Muhlenberg v. Northwestern, 26 Ore. 132; Union v. Goetz, 138 Ill. 127; Mutual v. Jacobs, 141 Ill. 261; Shields v. Thomas, 71 Miss. 260; Burnham v. Barth, 89 Wis. 362; Nonotuck v. Flanders, 87 Wis. 237; In re Plankington, 87 Wis. 378; Henika v. Heinemann, 90 Wis. 478; Portland v. Locke, 73 Me. 370; Goodell v. Buck, 67 Me. 514.

OPINION

CANTY, J.

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The city of St. Paul kept in the Bank of Minnesota two accounts. One was a general account, on the funds in which the city treasurer drew checks for the various bills and items of expense which the city owed, except interest on its bonds; the other, a special account, the funds in which were kept solely for the purpose of being forwarded to the Chase National Bank of New York for the payment of interest on the bonded indebtedness of the city. These accounts were so kept for about five years prior to December 22, 1896, on which day the Bank of Minnesota, being insolvent, was taken possession of by the state bank examiner, and receivers were appointed by the court to take charge of its assets, and administer them for the benefit of its creditors. On October 19, 1896, the city deposited in this special account $56,865, and on November 20, 1896, the further sum of $16,820. All of this, except a balance of $22,480.81, had been forwarded by the Bank of Minnesota to the Chase National Bank, and paid out on bond coupons, before the failure of the Bank of Minnesota on December 22d.

The city filed its petition in the proceeding in which the receivers were appointed, and asked that this balance be declared a trust on the funds in the hands of the receivers, and that they be ordered to pay the same over to the city. The application of the city came on for hearing before the court, and thereupon, for the purpose of a motion of the receivers to dismiss the petition, the city and the receivers entered into a stipulation which was to be considered with and as a part of the petition. On such motion, the court dismissed the petition, and from the order dismissing the same the city appeals.

Besides the foregoing facts, it is alleged in the petition

"That it was understood and agreed between the said city of St Paul and the said Bank of Minnesota, at the time said account was opened, that the funds so deposited should be held by said bank as agent and trustee for said city, and not otherwise; that the account so opened with said bank should be known as the 'City of St. Paul Coupon Account,' and the funds deposited in said account by said city of St. Paul should be kept separate and apart from the general funds of said bank; * * * that the said bank kept the amount so deposited to the credit of said coupon account mixed with its general cash funds in its vaults, but that at all times since the opening of said coupon account said Bank of Minnesota has kept on hand in its vaults a sufficient amount of cash to pay the amount credited to said City of St. Paul Coupon Account."

It is further alleged that, when funds were deposited in the bank in this account, the amount of the same was entered on a pass book; that the bank would then forward the funds to the Chase National Bank, and, after the coupons were paid by the latter bank, it would cancel and return them to the Bank of Minnesota; and the latter bank would deliver them to the city comptroller, who would then direct the city treasurer to give...