Fant v. Easley Loan & Trust Co.

Decision Date09 May 1933
Docket Number13632.
Citation169 S.E. 659,170 S.C. 61
PartiesFANT, State Bank Examiner, v. EASLEY LOAN & TRUST CO. et al. CENTRAL NAT. BANK OF SPARTANBURG et al. v. LOVE.
CourtSouth Carolina Supreme Court

Petition for Rehearing Dismissed June 10, 1933.

Appeal from Common Pleas Circuit Court of Pickens County; M. M Mann, Judge.

Action by Albert S. Fant, State Bank Examiner, against the Easley Loan & Trust Company and others in which J. L. Love was appointed receiver for defendant named and in which the Central National Bank of Spartanburg and others brought an action against the Receiver. From the judgment, the Central National Bank of Spartanburg and others appeal.

Reversed in part and affirmed in part.

Osborne & Butler, of Spartanburg, and Stephen Nettles, Wilton H Earle, and O. K. Mauldin, all of Greenville, for appellants.

Blythe & Bonham, of Greenville, and J. D. Wyatt, of Pickens, for respondent.

BONHAM Justice.

The Easley Loan & Trust Company is a banking corporation, which during the year 1929, had its place of business at Easley S.C. November 8, 1929, its affairs were taken over by the state bank examiner, and on November 29, 1929, J. L. Love was made receiver thereof and is now engaged in the discharge of the duties of that office.

Smith Bros. was a partnership composed of Lloyd H. Smith and Ralph H. Smith, engaged in the business of buying and selling cotton; their office was across the street from the banking house of Easley Loan & Trust Company.

The officers of the Easley Loan & Trust Company, of which we shall speak as the Easley Bank, were Lloyd H. Smith, president, Ralph H. Smith, vice president, A. F. Wyatt, cashier, S. F. McDaniel, assistant cashier; Earle Lawrence and James B. Spearman were bookkeepers.

The appellants herein brought this action, in the original case, against the receiver of the Easley Bank and allege that each of them sold cotton to Smith Bros., drew drafts upon Smith Bros. for the amounts of the proceeds of such sales, which drafts were deposited in local banks at the places of business of the sellers, and by such banks forwarded to the Easley Bank for collection, with letters of "credit and remittance" attached. That Smith Bros. abstracted the bills of lading and drafts from the bank, took them to their office, detached the letters and drafts, and attached to the bills of lading their own drafts on the persons to whom they sold the cotton; these bills of lading with their drafts were deposited in the Easley Bank which was given the check of Smith Bros. on that bank in each instance, and Smith Bros. were given immediate credit for the amounts and were checked out by Smith Bros. in their own business. These checks were not charged to the account of Smith Bros. but were attached to the original letter of credit and placed in the collection file, where they remained till the bank was closed. The proceeds of the drafts when collected were deposited to the credit of the Easley Bank with its correspondent banks in Greenville.

Plaintiffs claim priority over depositors and general creditors of the Easley Bank on the ground that the bank was guilty of fraudulent conduct in the premises from which arises a trust ex maleficio in favor of plaintiffs.

The Central National Bank of Spartanburg claims priority on the further ground that the check given by Smith Bros. in lieu of the draft and bill of lading which it had forwarded for collection, could, on two occasions before the bank was closed, have been paid, since on those occasions Smith Bros. had in the Easley Bank funds sufficient to pay it, but the check was never presented.

South Carolina National Bank of Greenville, S. C., and First National Bank of Blakely, Ga., claim priority on the further ground that the Easley Bank sent them checks in payment of their items, which checks were never paid, but which were a legal assignment pro tanto of the funds of the bank.

The Easley Bank had a bond of the National Surety Company insuring it against loss through fraud, embezzlement, abstraction, etc., of the bank's employees. Action was brought by the receiver to recover the amount of this bond, which action was compromised and settled for the sum of $17,500. The appellants claim priority in the distribution of this fund on the ground that the recovery was had because of the fraud of the officers and employees of the bank in the matter of the cotton transactions herein involved.

It was referred to H. K. Townes, Esq., to take the testimony and determine all the issues of law and of fact. He filed his report, denying the right of plaintiffs to priority upon any of the grounds upon which their claims thereto were based. Exceptions to this report took the matter to the circuit court, where it was heard by Judge Mann, who denied priority "to all classes of creditors named in the report," and confirmed the referee's report thereabout.

The appeal is from that order.

The exceptions are numerous, by the several appellants, but save for the special claim of preference by Central National Bank of Spartanburg, S. C., and that of South Carolina National Bank of Greenville, S. C., and First National Bank of Blakely, Ga., they are practically the same.

We shall not discuss them in detail and by number, but the opinion will dispose of all the questions made by them.

The initial issue turns upon the question whether appellants are entitled to a priority in the distribution of the general assets of the Easley Bank by the application of the principle of a trust arising from the fraudulent acts of the officers and employees of the bank, technically denominated a trust ex maleficio.

Counsel for respondents asked, and were given, leave to review the line of cases beginning with that of Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E. 239, 242, which promulgated this doctrine. In a strong argument counsel seeks to have the court overrule this case, and the line of cases following and dependent on it. The contention is that there is no proper distinction in law between a constructive trust and a constructive trust ex maleficio, and that South Carolina is practically alone in making a distinction. He cites from 26 R. C. L. 1356 the following: "The generally accepted rule at the present time is that it must appear that the trust property or its proceeds, have found their way directly into the estate of the trustee; that the property must be found to reside in the assets at the time the claim is asserted, and must not have been expended or dissipated for any purpose in the business of the trustee. If it appears that the trust moneys are dissipated or lost there is no fund to impress with the trust, and the sole remedy of the beneficiary is to proceed against the trustee personally."

This court adheres to the opinion in the Aynor Case, and those which follow and rely on it.

It therefore becomes necessary to determine whether the facts in this case bring it within the views declared in the cases above referred to.

There seems to be some confusion of understanding of the holdings of this court in these several cases. Let us briefly review them.

In the Bank of Aynor Case it appears that that bank held certain notes of the county of Horry, which it sent to the American Bank & Trust Company at Columbia for sale and remittance of the proceeds. The notes were sold but the proceeds were not remitted; they were converted by the American Bank & Trust Company to its own use. The day before this bank closed its doors it laid aside certain securities and notified the Bank of Aynor that they were assigned to it in payment for the proceeds of the notes.

Mr. Justice Cothran, delivering the opinion of the court, said: "But, even if the assignment of the securities cannot be sustained, the Bank of Aynor would be entitled to priority in the distribution of the assets of the bank, for the reason that, under the circumstances detailed, the funds to which it was entitled became, in the hands of the American Bank & Trust Company, a trust fund, which were appropriated by the officers of the American Bank & Trust Company to the uses of the bank, under circumstances which, in the absence of protection to the Bank of Aynor, constituted a breach of trust with fraudulent intent, practically a theft, which inured to the benefit of the American Bank & Trust Company." (Italics added.)

This conduct resulted in creating what the learned justice termed a constructive trust ex maleficio. The conclusion arrived at by Mr. Justice Cothran was that the Bank of Aynor was entitled to realize upon the pledged collateral, or to be paid as a preferred creditor out of the assets of the bank. In this view Mr. Justice Stabler concurred. Mr. Justice Carter dissented from the conclusion that the bank was entitled to a preference out of the general assets of the American Bank & Trust Company, in which opinion Chief Justice Watts concurred. Mr. Justice Blease was disqualified. The court was composed of four justices who divided evenly upon the question of priority of payment from the general assets.

It would seem, then, scarcely proper to hold that case is authority for such doctrine.

There followed the case of Ex parte Hernlen, 156 S.C. 181, 153 S.E. 133, 140, 69 A. L. R. 443. The opinion in this case was also written by Mr. Justice Cothran. It said:

"When Vandiver induced Mrs. Hernlen to allow her deposit to remain in the bank upon his promise to invest it in a real estate mortgage, it amounted to the same thing as if he had induced her to make a deposit upon such an engagement; under either condition the deposit would constitute the corpus of a trust fund and the bank a trustee of it for Mrs. Hernlen. ***
"It is an established principle, under the case of Ex parte Bank of Aynor, 144 S.C.

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