Opinion
13313
January 2, 1932.
Before DENNIS, J., Hampton, June, 1928. Affirmed.
Intervening petition by the County of Hampton against W. Fred Lightsey as receiver of the Bank of Hampton, in main proceeding by W.W. Bradley, as State Bank Examiner, petitioner, against Bank of Hampton, defendant. From an order decreeing that the County of Hampton was a preferred creditor as to assets in receiver's hands or thereafter coming into his hands, the receiver appeals.
The decree of Judge Dennis was as follows:
This is a proceeding by the County of Hampton, by and through its treasurer, R.E. Causey, commenced June 4, 1928, against W. Fred Lightsey, as receiver of the Bank of Hampton, Hampton, S.C. It is founded upon an intervening petition in the main cause, in which the receiver of the bank was appointed, with the authority of the Court first had and obtained.
Petitioner, County of Hampton, alleges it is the cestui que trust of a trust ex maleficio on the part of the Bank of Hampton, and as such is entitled to a preferred claim upon the general and unassigned assets in the hands of the receiver of the Bank of Hampton arising out of the facts alleged in the petition. The return of the receiver denied that petitioner was a preferred creditor, and contends that it was only a general creditor, without any lien or preference. The case was referred for the purpose of taking testimony.
The matter was heard by me by consent of counsel at Hampton, S.C. on the 4th day of March, 1931. The matter was heard on the petition, the return, and the testimony and exhibits in the record. On most of the material issues of fact in the cause, the parties are in substantial agreement. I find the facts to be as follows:
On July 12, 1926, the Bank of Hampton, by vote of the board of directors, was placed in the hands of the State Bank Examiner; thereafter, August 6, 1926, W. Fred Lightsey was duly appointed and qualified as receiver of said bank. The County of Hampton, by its treasurer, carried a general school account as a depositor of said bank. That for several years prior to the closing of said bank it was the custom and habit of the County of Hampton, at the commencement of the school year, to borrow money as represented by its notes given therefor in anticipation of the collection of taxes, and that after the passage of the Act commonly called the 6-0-1 Law, the county, for school purposes, would borrow money at the commencement of the school year to be paid back from the 6-0-1 money and other general taxes; that invariably these notes were negotiated for the county by the Bank of Hampton, that, in accordance with said custom and habit, in September, 1925, or at some time during the commencement of the 1925-1926 school year, the county being in need of funds, and in anticipation of receipt later on of the 6-0-1 school money from the State, and from other general school taxes, borrowed the sum of $35,000.00, and issued in evidence thereof two notes of the county in the sum of $10,000.00 and $25,000.00, which said notes were payable July 1, 1926, being payable to bearer and payable in the City of New York. The said loan and notes were negotiated for the county by and through the Bank of Hampton, in which bank the treasurer carried his general school account. The proceeds of the notes were placed to the credit of the general school account.
That on or about the 15th day of May, 1926, the county treasurer received from the State a voucher or warrant for $44,007.00, being the 6-0-1 money apportioned to Hampton County. On May 15, 1926, the treasurer of the county deposited said voucher to the credit of the general school account in the Bank of Hampton. The treasurer testified that, at the time he deposited said voucher, he notified the bank and instructed it to pay and obtain the two notes aggregating $35,000.00. The cashier of the bank testified that no instructions to pay the notes were at that time given. However, in view of subsequent developments, I do not think this point material.
Later, on June 30, 1926 (the County's fiscal year ends on June 30th of each year), the treasurer of the county presented, in person, to the Bank of Hampton, the county's check in the sum of $35,000.00 payable to the Bank of Hampton, at which time the county had on deposit to its credit in said bank in the general school fund more than the sum of $35,000, and at the time of presenting said check the treasurer notified, instructed, and informed the Bank of Hampton and its officials that he wanted the check to clear that day, and specifically notified the said bank that said check was for the purpose of paying the said two notes which matured July 1, 1926. On the face of the check was the notation:
Note $10,000.00 Due July 1st " $25,000.00 " $35,000.00 ____________ $35,000.00 6-0-1 Law. The Bank of Hampton closed on July 12, 1926, and it then developed that the bank had only forwarded the sum of $10,000.00, and had only paid the $10,000.00 note, and that on the date it was stamped and marked paid and charged to the county's account, June 30, 1926, the Bank of Hampton had opened a savings account of the County of Hampton and credited said account with the sum of $25,000.00, and did not forward the $25,000.00 or pay the $25,000.00 note. None of this was made known or divulged to petitioner. The cashier of the bank testified that the $25,000.00 savings account with the county was for the purpose of balancing its books. Without any knowledge to and without the consent of the county the said bank wrote a letter to Eyer Co. stating that they had requested their correspondent bank, Hanover National Bank, to pay the $10,000.00 note, and asked that Eyer Co. extend the time of payment on the $25,000.00 note until July 15th, at which time it would be paid, together with accrued interest. The note was extended on the strength of said letter by Eyer Co. until July 15, 1926.Between the time between the giving and cashing of said check on June 30, 1926, and the time of the closing of said bank on July 12, 1926, the treasurer called at the bank and asked if the notes had been paid and returned to the bank. The officials of the bank stated that the notes had not been received, but that the matter was being attended to.
I find that the check for $35,000.00 was given by the treasurer of the county to the bank for the express purpose of forwarding the proceeds and paying the said two notes, and that the county had to its credit at that time more than sufficient funds on deposit in said bank to pay the same. Only the $10,000.00 note was paid. I find that the check was accepted by the bank and was paid to the bank for the express purpose of paying and obtaining the said notes, and that the action of the bank in not forwarding the remaining $25,000.00 and paying the $25,000.00 note, and in making the credit entry and opening up a savings account, and in writing for an extension of the note, was not made known to or divulged to petitioner, and that petitioner was in no way informed of these acts on the part of the bank, and was entirely unknown to petitioner, and was in no way known to petitioner until after the closing of the bank at which time petitioner, or shortly thereafter, became acquainted with the facts. I further find that petitioner thought that both notes had been paid, or that the money to pay the same had been forthwith forwarded, and was led to believe that such was the case, and that the failure of the bank to do so was a direct violation of the instructions given to it by petitioner.
In the meantime, the voucher or warrant for $44,007.00 deposited by petitioner to its credit on May 15, 1926, was forwarded by the Bank of Hampton to its Columbia correspondent bank, and was placed to the credit of the Bank of Hampton in its usual course of business, and that, from the date of its deposit to the date of the closing of the bank, it was checked upon and used by the Bank of Hampton in its usual course of business in paying off the Bank of Hampton's obligations.
The record shows that the general and checking accounts in the bank were considerably reduced between May 15, 1926, and the date of its closing, and that during this time there were heavy withdrawals of deposits, which the cashier testified was usual at that time of the year. These deposits went to the credit of the general school fund checking account, and in turn went to the credit of the Bank of Hampton with its correspondent bank in Columbia, and that it went into the coffers of the bank and was used in the ordinary course of business and was checked against in payment of its debts, and that the said fund, or the bulk of it, was used by the bank in reducing its obligations, which was done in the usual course of the bank's business, by drawing checks against this fund.
The testimony shows that on June 30, 1926, the date the check was charged to the account of the county and stamped and marked paid and canceled, the Bank of Hampton had cash on hand the sum of $30,650.77, $7,751.47 remainder of said sum being to its credit with its various correspondent banks, the said cash on hand of $30,650.77 being reduced by $10,000.00 representing the note which was paid.
The cashier of the bank further testified that at that time, June 30, 1926, the Bank of Hampton had unassigned notes, loans, and discounts in a sum in excess of $35,000.00, the loans and discounts amounting to $212,000.00, and bills payable amounting to $45,000.00; when the bank closed, it had cash on hand in its vaults $4,951.87. The cashier testified that the reason the entire $35,000.00 was not forwarded was that the bank did not have sufficient money on hand, but that it had sufficient security to borrow upon, and that the bank was planning to do this, and further testified that the transaction was handled as it was at the instance of the president and the vice-president of the bank.
The attorneys for petitioner contended in argument before me, and the petition in substance alleges, that the failure of the bank to forward the entire proceeds of the $35,000.00 check and the appropriation by the officials of the bank to the use of the bank and the manner in which the transaction was handled constituted a breach of trust with fraudulent intent, and that it resulted in a trust ex maleficio, and that petitioner was entitled to rank as and to be declared a preferred creditor, and was entitled to be paid in full out of the assets of the bank in the hands of the receiver, and that the trust being one ex maleficio, that petitioner was entitled to rank as a preferred creditor without being required to trace the funds, or to show that the funds or any part thereof went into the hands of the receiver in any form.
This brings us to consideration of the principles of law governing the case. The case of Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E., 239, 243, and the case of Ex parte Hernlen, 156 S.C. 181, 153 S.E., 133, 69 A.L.R., 443, were relied upon by attorneys for petitioner as sustaining their contention. This question was raised in the case of Ex parte Bank of Aynor, supra. As the Court, consisting of four justices, was equally divided upon the question, it was in that case left open for future decision. After careful consideration of the latter case of Ex parte Hernlen, supra, I am of opinion that the decision should be for petitioner, as hereinbelow qualified. In the opinion of Mr. Justice Cothran, in the case of Ex parte Bank of Aynor, the question is clearly and succinctly stated as follows:
"The authorities are much divided upon this question. Many of them, and we must admit a decided majority of the decided cases, are to the effect that, even in cases of fraudulent misappropriation of trust funds which entered into the assets of an insolvent corporation, the beneficiary of the trust is not entitled to priority over general creditors in the distribution of assets by a receiver, unless he can show that the trust funds have been received by the receiver — he must be able to trace the funds — to establish a res upon which the trust may operate. (See extended note upon the subject in L.R.A., 1916-C, 21, particularly at page 53.)
"Other cases from Courts of the highest respectability take a different view, and accord the right of priority in the distribution of the assets of the receivership estate, not upon the ground that assets sufficient to respond to the obligation have reached the hands of the receiver, but that the misappropriated funds have reached the coffers of the corporation before receivership, and have been used for its benefit.
"The minority rule appeals most strongly to our sense of equity and justice. We do not think that the cases which enforce the majority rule draw the very material distinction between an ordinary constructive trust and a constructive trust ex maleficio. In the former class of trusts, the title has properly passed to the trustee, and it has very properly been held that one who seeks to impress a trust upon a certain fund must of necessity point out the fund — there must exist the res upon which the trust is to be impressed. It is therefore perfectly logical, as held in the cases of White v. Bank, 60 S.C. 122, 38 S.E., 453, and Citizens' Bank v. Bradley, 136 S.C. 511, 134 S.E., 510, that in cases of receivership the beneficiary must show that funds have come into the hands of the receivership upon which the trust is to be declared. The beneficiary of a simple constructive trust is no more than an ordinary creditor, except where he can point to a fund in the hands of the receiver upon which his asserted trust is to operate. Otherwise, to allow the trust would grant him a preference over other creditors who possess an equity equal to his.
"But the case is quite different from a constructive trust ex maleficio. There the trustee has acquired no more title to the misappropriated fund than a thief would have acquired. As a matter of law and morals he occupies that detestable position; and the beneficiary occupies a much more favorable position than that of the general creditors or the beneficiary of a simple constructive trust. If it can be shown, therefore, that the misappropriated fund went into the coffers of the corporation prior to receivership, was disbursed by the corporation in the payment of its debts or in the acquisition of property, there can be no reason or justice in allowing the general creditors to receive the benefit of the stolen property, simply for the reason that a corresponding amount of money was not turned over to the receiver. The corporation will have received the benefit of the stolen fund by the reduction pro tanto of its liabilities; the general creditors should not be heard to say that they may hold on to the benefit of the theft and not account for it.
"Another matter: It is unquestionably the law that a receiver can acquire no other greater or better interest than the debtor had in the property and assets committed to his care; he is clothed with all the powers which the debtor possessed, and is subject to his obligation; he has been held `to stand in the shoes of the debtor.' 34 Cyc., 191; In re. American Co., 125 S.C. 214, 118 S.E., 303; Carroll v. Cash Mills, 125 S.C. 332, 118 S.E., 290."
In a careful consideration of the case of Ex parte Hernlen, it appears to me that the Court has adopted this principle of law as controlling. In fact, it is stated that the beneficiary of such a trust, as is present in this case, is entitled to be preferred in the distribution of the assets of the failed bank, over general creditors.
In the Hernlen case, Mrs. Hernlen was already a depositor in the People's Bank of Anderson. No new money or assets were put into the bank. The president of the bank, on her threatening to withdraw her deposit, agreed to invest it in the McCarley mortgage for her benefit. The agreement was never carried out; the note and mortgage were never delivered to Mrs. Hernlen. It was held that the trust was created in bad faith.
While the notes and mortgages were subsequently delivered to the liquidating agent and were paid by McCarley to the liquidating agent, the sequence of events shows that the liquidating agent, due to a former assignment of the notes to certain correspondent banks, paid the proceeds to the Carolina National Bank, which, by subsequent assignments, had obtained the $8,000.00 note from the National City Bank of New York and the $2,000.00 note from the Bank of Anderson, where they had been placed as collateral to certain obligations of the People's Bank. The point is the liquidating agent, or receiver, was not able to retain the proceeds of the McCarley notes and mortgage, or of the $8,000.00 note, which had been promised to be delivered to Mrs. Hernlen, and naturally the proceeds thereof could not be and were not used by the liquidating agent, or receiver, for the benefit of general creditors.
Mrs. Hernlen was declared to be a preferred creditor and entitled to payment in full out of the unpledged assets in the hands of the receiver. It could not be said she was entitled to this preference because she was able to trace any assets coming into the hands of the receiver. She was beneficiary of a trust ex maleficio, and was declared to be a preferred creditor.
This seems to me a salutary rule. The failure of the bank to remit for and pay the $25,000.00 note, when it had marked paid and charged the check to petitioner's account, was a gross breach of its trust and a fraud upon the rights of petitioner. The check was accepted with these instructions and for this purpose. Petitioner relied upon the bank officials to perform the trust. The bank practiced a gross deception upon petitioner. It gave no information or advice to petitioner that would have put it on inquiry or enable it to assert its rights in the premises while the bank remained open. This created an equity in petitioner's favor that is peculiarly cognizable and remediable in a Court of chancery. To hold otherwise, it seems to me, would be to sanction a legal fraud. Constructive trusts, as stated by some of the authorities, are not what are known as technical trusts; the grounds of relief in such case are strictly speaking fraud and not trust. Equity declares a trust in order that it may lay its hands on the thing and wrest it from the possession of the wrongdoer. 26 R.C.L., 1232. I hold this to be a sound distinction. There is further distinction between an ordinary constructive trust and a constructive trust ex maleficio, which has been pointed out in the Bank of Aynor case. Such a case is present here.
This is not a case of the petitioner as a deposit-creditor seeking a preference. As to the $25,000.00, after the check was accepted and paid by the bank and same charged to petitioner's account, the relation of creditor and debtor as to this fund between petitioner and respondent immediately and automatically ceased. After that moment, the bank held the funds as agent to forward. After that moment, the bank had no more title to the funds than a thief had.
It is therefore ordered, adjudged and decreed, that a petitioner is a preferred creditor on its claim for $25,000.00 and entitled to be paid, so far as same will do so, out of the remaining assets in the hands of the receiver of the Bank of Hampton as of date March 4, 1931, and out of any assets that may hereafter come into the hands of the receiver. It was testified to in the record that the receiver had on hand something like $3,000.00 and some real estate in Hampton County and some lots in Beaufort. The receiver is directed to pay over to petitioner, or its attorneys, on said claim, the cash on hand, with a lien in petitioner's favor against the remaining assets in the hands of the said receiver. It is further ordered, adjudged and decreed, that petitioner have a right to apply to this Court for any further orders to carry out the terms of this decree.
Mr. Randolph Murdaugh, for appellant, cites: Deposit made in due course not trust fund: 134 S.E., 510; 136 S.C. 511. Trust fund must be set aside as such: 45 S.E., 328; 81 N.W., 469; 75 N.W., 97. Equal distribution of assets: 141 S.E., 705; 143 S.C. 516. Trust created by promise to invest: 153 S.E., 133; 156 S.C. 181. Investment not completed: 118 N.W., 411; 299 Ill. App. 23.
Messrs. Hugh O. Hanna and C. Lester Thomas, for respondent, cite: Constructive trusts: 26 R.C.L., 1232. Constructive trust ex maleficio: 144 S.C. 147; 142 S.E., 239; 153 S.E., 133; 138 Va., 333; 121 S.E., 903. Must be able to trace funds to give priority: L.R.A., 1916-C, 21; 60 S.C. 122; 38 S.E., 453; 136 S.C. 511; 134 S.E., 510. Receiver acquires same interest debtor had: 34 Cyc., 191; 126 S.C. 214; 118 S.E., 303; 125 S.C. 332; 118 S.E., 290. Special deposit misappropriated may be recovered from Receiver: 209 P., 824; 112 Kan., 23; 209 P., 825; 112 Kan., 25. Must be sum on deposit equal to trust fund: 16 Ohio App. 240; 222 P., 740; 110 Ore., 61. Intention to create trust fund: 101 Iowa, 488; 70 N.W., 626; 64 Kan., 502; 67 Pac., 1108; 108 Neb. 111; 187 N.W., 762; 37 A.L. R., 124. Deposits for payment of debt to third persons: 37 A.L.R., 124; 31 A.L.R., 478. Relationship of debtor and creditor: 136 S.C. 511; 134 S.E., 510. Claimant had knowledge of insolvency: 143 S.C. 516; 141 S.E., 705. Promised investment not completed: 118 N.W., 411.
January 2, 1932. The opinion of the Court was delivered by
The decree of Judge Dennis will have to be affirmed, but we desire to add thereto a short statement:
His decree is founded upon the Hernlen case, 156 S.C. 181, 153 S.E., 133, 69 A.L.R., 443, which we desire to reaffirm. The facts in this case bring it squarely within the principle of that case.
The bank knew that the notes aggregating $35,000.00 were to be taken care of by the money received from the 6-0-1 school law; the money was borrowed to await the coming in of that fund.
In addition to this, there is no dispute about the fact that the check of July 1, 1926, was received by the bank upon the express agreement that it was to be used for the purpose of paying the notes. The bank at that time had sufficient funds to pay the check.
There can therefore be no doubt that a trust was created, the bank becoming the agent of the county to pay the notes.
The testimony also reveals that the cashier of the bank knew then that he was not going, at that time, to carry out the trust, his reason being that to pay the notes in full would cripple the bank.
He did not tell the county of this, he says, for the reason that to do so would reveal the weakened condition of the bank, and probably cause it to have to close.
His motive, doubtless, was good, in so far as his own conscience was concerned, but, nevertheless, his conduct amounted to a breach of trust, and an intentional breach.
Equity and good conscience required him, when he accepted the trust, to carry it out.
If he did not intend to carry it out, he ought not to have agreed to do so.
As before stated, the cashier, no doubt, did what he thought was best for the bank, and no actual fraud may have been intended; but his acceptance of the trust, knowing that he was not going to carry it out, in law, created a trust ex maleficio.
The judgment of this Court is that the decree of Judge Dennis be affirmed.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES STABLER, CARTER and BONHAM concur.
MR. JUSTICE COTHRAN did not participate on account of illness.