Denny, Banking Commissioner v. Thompson

• Decision Date: 19 December 1930
• Citation: 236 Ky. 714
• Parties: Denny, Banking Commissioner v. Thompson.
• Court: United States State Supreme Court — District of Kentucky

236 Ky. 714

Denny, Banking Commissioner v. Thompson.

Court of Appeals of Kentucky.

Decided December 19, 1930.

1. Banks and Banking. — Bank which was not in condition to pay debts and depositors in usual course was "insolvent."

2. Taxation. — Officer collecting tax money is regarded as bailee or trustee for state and municipalities.

3. Banks and Banking. — Sheriff depositing tax money could maintain claim for recovery thereof as bailee or trustee, on bank's insolvency.

4. Banks and Banking. — Bank and general depositor occupy relation of debtor and creditor, though depositor is government.

5. Banks and Banking. — Fiduciary's deposit of trust funds is "general deposit," though title "trustee" or "agent" is affixed to account.

6. Banks and Banking. — Deposits by trustee are not impressed with trust, unless there has been misappropriation by trustee with bank's knowledge.

7. Banks and Banking. — Bank's knowledge that deposit is trust fund becomes immaterial on question of preference after insolvency of bank.

8. Banks and Banking. — Commonwealth held not entitled to preference in payment to it of public funds deposited in bank which became insolvent.

Ky. Stats., sec. 4693, providing for giving of surety bonds by state depositories, declares that their execution shall not impair or delay the right of the commonwealth to recover from any delinquent or defaulting bank or the officers or stockholders thereof in the same manner as other creditors.

9. Banks and Banking. — Deposit made after bank's insolvency will not be given preference, unless bank was insolvent to knowledge of directors or officer in charge, and deposit was received with no reasonable expectation of repaying it in usual course.

10. Banks and Banking. — One making deposit after bank's insolvency will not be given preference, unless he was ignorant of insolvency and took seasonable action to rescind, and deposit augmented assets going into receiver's hands.

11. Banks and Banking. — Depositor held not entitled to preference as to deposit made shortly before bank closed, where directors had not been informed of critical situation, and cashier reasonably believed they could secure financial assistance.

The president of a correspondent bank through which the out-of-town business of bank in question was cleared had in time past rendered assistance, and claims of this correspondent bank were largely protected by collateral.

12. Banks and Banking. — Depositor held entitled to preference as to that part of deposit made within less than thirty minutes before bank's closing and while directors were in session.

13. Banks and Banking. — If bank accepted deposit with knowledge of insolvency, just before closing, it will be presumed payment made thereafter was not made from depositor's funds.

Appeal from Fulton Circuit Court.

J.W. CAMMACK, Attorney General, and M.B. HOLIFIELD, Assistant Attorney General, for appellants.

WHEELER & HUGHES for appellee.

OPINION OF THE COURT BY COMMISSIONER STANLEY

Reversing in part on direct appeal, and affirming on cross-appeal.

This appeal presents two major questions: (1) Is the commonwealth and its political subdivisions to be accorded a preference in the distribution of assets of an insolvent bank? and (2) when is a deposit made after the bank became insolvent to be returned to the depositor? Disposition must also be made of some subsidiary issues.

The case arises from the placing of the Hickman Bank & Trust Company in the hands of the banking commissioner for liquidation because of its insolvency on December 30, 1929. The appellee and cross-appellant, John M. Thompson, sheriff of Hickman county, had on deposit to the credit of an account styled "John M. Thompson, Tax Account," $18,522.27, representing tax collections for the state, county, the school and levee districts. By injunctive process he sought to have the banking commissioner and his representatives pay him that sum, but it was held by this court that under the statute the proper procedure to determine his right of preference was by a petition for review of, or exceptions to, the commissioner's report made in the circuit court, should that officer disallow his claim. Thompson v. Denny, Banking Commissioner, 233 Ky. 696, 26 S.W. (2d) 514, 515. The commissioner did deny the sheriff's right of preference altogether, and he has pursued the method indicated. The circuit court allowed his claim in part. From that judgment the respective parties appeal.

1. The issue was raised as to whether the bank was in fact insolvent, and that matter is also presented. By a resolution of the board of directors, under circumstances to be related, the insolvency of the bank was declared to exist "owing to the number of frozen loans and shortage of cash;" and the bank was placed in the receivership of the banking commissioner for liquidation. On the evidence heard, it is contended in behalf of the appellant that the only cause for closing the bank was excessive unliquid assets, and that in time these can be reduced to money and the depositors paid in full; hence that the right of preference need not be considered. On the other hand, the appellee sought to show, and here contends that he did show, that the assets considered good but slow are in fact practically worthless. We do not enter into a consideration of the difficult question, for it is readily apparent — in fact admitted — that the bank was not in condition to pay its debts and depositors in the usual and ordinary course of business. Such condition is construed as insolvency within the meaning of the law relating to the liquidation of banks. Commonwealth ex rel. Denny, Banking Commissioner v. Hargis Bank & Trust Co., 233 Ky. 801, 26 S.W. (2d) 1045.

2. Another preliminary issue to be disposed of is whether the deposit is the property of the state and taxing districts. The argument is made in behalf of the banking commissioner that title to the money had not passed to the state and municipalities because it was not distributed among them, as is provided by law (section 4143, Statutes), and the sheriff is simply their debtor; also that in placing tax collections in the bank he had violated the terms of section 173 of the Constitution and section 3747 of the Statutes relating to the misuse or misapplication of tax collections. On the other hand, it is submitted, if it was the property of the state, county, and districts, the authority to maintain the claim was not vested in the sheriff but in other officials.

Without undertaking to answer the arguments or quote from authorities, we deem it sufficient for the purposes of this opinion to say that the collecting officer is regarded as a bailee or trustee for the state and municipalities. Commonwealth v. Fisher, 113 Ky. 491, 68 S. W. 855, 24 Ky. Law Rep. 300; Hill v. Fleming, 128 Ky. 201, 107 S.W. 764, 32 Ky. Law Rep. 1065, 16 Ann. Cas. 840; Johnson v. Fleming, 116 Ky. 680, 50 S.W. 855, 21 Ky. Law Rep. 4; United States v. Thomas, 15 Wall. 337, 21 L. Ed. 89. Quite obviously the state and municipal corporations can possess no personal property except through some sort of a bailee. As such the sheriff had the right to maintain the claim and seek to repossess the property of his bailors or cestuis que trust, if any distinction is to be drawn in the designation. City Transfer Co. v. Robinson, 12 Ky. Law Rep. 555; 6 C.J. 1166. A well-considered case on the subject is United States v. Atlantic Coast Line Railroad Co. (D.C.) 206 F. 190. Though apparently the question was not raised, a sheriff's right to make claim for funds deposited by him in a bank subsequently declared insolvent was also recognized in Farmers' Bank of White Plains v. Bailey, 221 Ky. 55, 297 S.W. 938.

3. To sustain the claim of preference in its entirety, it would be necessary to overrule, as appellee argues should be done, the opinion in Farmers' Bank of White Plains v. Bailey, supra. It was there specifically held that, in the absence of a statute or showing of facts sufficient to create a trust — distinguishable from an ordinary general deposit — no priority is to be awarded the commonwealth over general creditors. It is argued that the opinion is out of harmony with authorities from other jurisdictions and with Johnson v. Fleming, and Hill v. Fleming, supra. The first of these domestic cases involved the right of a litigant to recover of the master commissioner and receiver of a court funds that he had deposited in a bank which became insolvent. Holding that the officer was a trustee of public funds, it was further decided that under the circumstances he was not liable for the loss. The Hill case was a suit by sureties on the bond of a defaulting deputy sheriff who had been subrogated to the rights of a county against one who with notice had accepted payment with tax money of a personal obligation of the officer. Again declaring that the relation of the officer was that of a trustee and not a debtor, there was applied the familiar law that a cestui que trust may follow trust funds and recover them. While the facts of these cases are quite different, the argument of the conflict of the Bailey case with them is bottomed upon the legal conclusion that, being a trustee, funds collected by the officer continue impressed with the trust when deposited in an account so styled as to indicate its characetr, even though it be a general deposit, and that the title of the state and taxing districts is not divested by conditions bringing about insolvency. But the analogy fails in an important particular, as we shall see.

It is uniformly considered that a bank and a general depositor occupy the relation of debtor and creditor under a voluntary contract when not complicated by any further transaction than that of depositing and withdrawing money. Morse on Banks & Banking, sec. 568; Pierson v. Union Bank & Trust Co., 181 Ky. 749, 205 S. W. 906, 2 A.L.R. 172. The same relation exists as the depository of the...