Continental Nat. Bank v. Weems

• Decision Date: 17 January 1888
• Parties: CONTINENTAL NAT. BANK OF N. Y. v. WEEMS <I>et al.</I>
• Court: Texas Supreme Court

6 S.W. 802

CONTINENTAL NAT. BANK OF N. Y. v. WEEMS et al.

Supreme Court of Texas.

January 17, 1888.

Appeal from district court, Harris county; JAMES MASTERSON, Judge.

Suit by the Continental National Bank of New York as a claimant pro interesse suo against the estate of the City Bank of Houston, an insolvent corporation, which had instituted proceedings in the nature of a creditor's bill for a receiver and to have its assets realized and distributed among its creditors. The receiver of the insolvent bank reconvened. The court disallowed several of the claims of the intervening bank and it appealed.

Goldthwaite & Ewing, for appellant. Hutchinson, Carrington & Sears, for appellees.

GAINES, J.

On the nineteenth day of December, 1885, William R. Baker, as president of the City Bank of Houston, and one of its largest stockholders, and the Houston Insurance Company, another stockholder, filed a petition in the district court of Harris county, against certain of its creditors and other stockholders, alleging its insolvency, and praying for the appointment of a receiver, and for the collection and distribution of its assets among the holders of claims against it, according to their respective priorities; and on the same day appellee Weems was appointed receiver, in accordance with the prayer of the petition, and has since been acting under direction of the court in that capacity. By course of dealing kept up through a series of years between the insolvent corporation and the Continental Bank of New York, the New York bank had discounted the paper of the Houston bank; and just before it fell due, had forwarded it to the latter "for collection and returns." Immediately before its failure, the Houston bank had received a large amount of paper so discounted for it by the New York bank, and had collected it in part and placed the proceeds to the credit of the latter. For others of these notes the Houston Bank received renewals, which were discounted by other banks in New York, and the proceeds applied to the payment of its debts. On the third day of September, 1886, appellant intervened in the original suit, claiming to be a creditor of the City Bank of Houston, and claiming a priority of payment out of the assets in the hands of the receiver, of the amount due to it by reason of the collection and appropriation of the proceeds of the notes sent by it to the Houston bank. The receiver resisted the claim, denying claimant's right to priority, and answered further that the City Bank, before its failure, had sent to the Continental Bank several promissory notes for sums amounting in the aggregate to over $20,000, to be discounted; that the latter refused to discount the notes, but retained them without authority, and then collected some of them, and were proceeding to collect the others. To this counter-claim complainant replied, setting up a lien upon the notes to secure the payment of a general balance due it from the City Bank at the time of its failure. Upon the trial of the issues so presented, the court gave judgment, disallowing the claim of priority, but allowing the claim of the Continental Bank as a general creditor, and awarding a recovery against it in favor of the receiver for the full amount of the notes claimed by him to have been converted by it, less about $5,000, paid upon drafts of the City Bank upon it, after the paper went into its hands. The judgment further provided that the Continental Bank should deliver up the notes or their proceeds to the receiver within 30 days, and that upon its failure to do so, the judgment against it should be charged against its dividends, and that the receiver should have execution against it for the balance. From this decree the Continental National Bank has brought this appeal.

The first assignment is, in substance, that the court erred in decreeing that appellant was not entitled to have the amount of the notes sent by it to the City Bank for collection paid in full from the assets in the hands of the receiver. The evidence shows that some of these notes, amounting to about $5,000, were collected by the City Bank, and were mingled with the funds after being credited to appellant; and that others were renewed, and the renewed paper discounted in New York, for account of City Bank, — the proceeds going to pay its debts. The first question to be determined is whether, under the agreement and the course of dealing between the two, the collecting bank is to be deemed the trustee of the funds received by it upon the notes which were paid, and of the renewed obligations which were taken in lieu of those which were not paid. Before the trial, an agreed statement of the facts was signed by the counsel representing the parties, and filed among the papers in the case. The agreement appended to the statement is as follows: "The matters and facts set forth in the foregoing eight pages are, for the purposes of the trial of the above-entitled cause, admitted to be true and correct, and may be used in evidence upon the trial of said cause, the parties thereto reserving the right to introduce such additional evidence not inconsistent with the foregoing as may be decided." The agreed statement contains the following paragraph: "That in the course of dealings between the City Bank and complainant, the latter was in the habit of discounting notes for the City Bank, and of forwarding the same, on maturity, to the City Bank for collection and returns, with an understanding that the proceeds of such discount notes should be preserved by said City Bank as the property of the complainant, and returned to it as such." The agreement further shows that the notes last referred to were received by the City Bank "for collection and return of proceeds." We think these facts settle the question of trust in the affirmative. If the securities had been sent for collection merely, the proceeds to be credited to the New York bank, it is clear that after their collection the relation of creditor and debtor would have subsisted, and the latter would have no claim upon the funds. But by the understanding between the banks and the actual transaction between the parties as shown by the agreed evidence, a special agency was created, and the City Bank had no authority to hold and credit the proceeds of the notes, but was bound to remit them immediately to its correspondent. This principle was clearly recognized by this court in the case of Bank v. Weiss, 67 Tex. 331, 3 S. W. Rep. 299, and is sustained by the great weight of authority, as appears from the citations in the opinion in that case.

But it is insisted by counsel for appellee, that there is other evidence in the record, not inconsistent with the agreement, which shows that the relation of debtor and creditor, and not that of trustee and cestui que trust, was created by the transaction. We think, however, that any evidence to show this fact in the face of the explicit statement in the admitted proof, would be inconsistent with the agreement, and should have been disregarded by the court, whether objected to or not. But we do not regard the evidence relied on as being in conflict with that in the agreed statement. The receiver, who was cashier of the insolvent bank for many years previous to its failure, testified to the effect that, in previous transactions of a like character, it had been the habit of his bank to collect and credit the proceeds of the discount notes sent to it for collection. But appellant showed, on the other hand, by the testimony of its president, that in discounting paper for its customers at a distance it was the custom to charge interest after the maturity of the paper, to allow for the transmission to it of the proceeds after collection, as well as exchange, on the amount; and that, in order to avoid these charges, the City Bank agreed to keep with the New York bank sufficient funds to meet the discounts as they matured; and that in all previous transactions this promise had been complied with. As long as the City Bank kept with its correspondent a sufficient sum to cover the amount of the discounted paper as it fell due, it had the right to the proceeds when collected; for it had then virtually taken up the securities. But we do not see how the conclusion can be drawn from this that it was entitled to credit its collections, when it had no funds in the hands of the New York bank to make good its account, as was shown to be the fact in this particular transaction. Had appellant permitted this, it might as well have extended credit to the Houston bank, in the first instance, without security, which the testimony shows it was very careful to avoid. It may be inferred from the receiver's testimony that his bank did not always have funds with its correspondent to cover its discounts at maturity. But he also testified that in every instance its account was immediately made good. As this was all the appellant could have legally demanded, it is not seen that the fact of his crediting the proceeds of the discounted notes returned for collection in such cases, could have affected appellant's right as to future cases under their express agreement, or under the restrictive indorsement made upon the notes in the particular instance now under consideration. We think, therefore, that when the City Bank collected the last notes it acted in a fiduciary capacity, and received the proceeds in trust for the Continental National Bank, and that it was its duty to remit them to the latter. This brings us to the further question, whether, under the circumstances of this case, they were divested of their character of trust funds when they were placed by the collecting bank in its vaults and there mingled with its other moneys. It is a principle of equity long recognized and applied that when one who is intrusted with the money of another invests it in property, the cestui que trust may follow the fund, and, fixing upon the property the...