Opinion
13630
May 2, 1933.
Before SEASE, J., Union, May, 1932. Order affirmed.
Proceeding by Spartanburg County for a preference in the distribution of the assets of the Bank of Union, opposed by J.D. Arthur and another as receivers of the Bank of Union. From an order granting the preference, the receivers appeal.
The order of Judge Sease is as follows:
This matter comes before me upon motion of the petitioner for the allowance of a certain judgment heretofore procured by the petitioner against the receivers of the Bank of Union in the Court of Common Pleas of Union County, State of South Carolina, as a preference in the distribution of the assets of the said bank.
The action which culminated in this judgment was originally instituted in 1928, while the Bank of Union was a going banking concern organized under the laws of this State, and conducting a general banking business in the City of Union.
Prior, however, to the trial of the cause, the Bank of Union became insolvent, and under appropriate proceedings the respondents herein were duly appointed the receivers thereof. Thereafter the respondents were substituted as parties defendants in that suit, and the cause thus came on for trial before Hon. G.B. Greene, presiding Circuit Judge, who, upon the completion of the testimony, directed a verdict in favor of the plaintiff for the full amount prayed for.
The entire record, together with the evidence in the cause, has been filed with me in connection with this motion. From these papers it appears that plaintiff's action was grounded upon three checks, the payment of which had been received by the Bank of Union. Each of the three checks in question had been drawn by L.G. Miller, as treasurer of the petitioner against the account of the petitioner in certain banks of the City of Spartanburg, S.C. and were each payable to the Bank of Union. These checks bore on their face, as the officers of the bank admitted upon the trial, the clearest evidence that they were drawn against the funds of the petitioner, and not against the funds of Miller individually. The bank thus knew that the funds, against which these checks were drawn and out of which they were paid, were held by Miller as trust funds. In receiving from Miller such trust funds, then, the bank did so, subject to the same trust under which Miller had held them.
Upon receiving these trust funds, charged with full knowledge of their trust character, the bank, at the instance of Miller, applied the same in payment of certain indebtedness due it by the Bank of Duncan, which was a private banking corporation headed by Miller, and thereafter disbursed the funds realized in the course of its business. Some time thereafter it was discovered that Miller had embezzled approximately $1,000,000.00 of the funds held by him as treasurer of the plaintiff, and, included in the speculations, were the funds represented by these three checks.
When the bank thus joined with Miller in applying the proceeds of these checks, representing, as they did, trust funds, in violation of the trust under which they were held, the bank made itself privy to Miller's appropriation to the extent of such checks, and became chargeable as a trustee ex maleficio therefor. Allen v. Puritan Trust Co. (1912), 211 Mass. 409, 97 N.E., 916, L.R.A., 1915-C, 518, with note; Charleston Paint Co. v. Exchange Banking Trust Co. (1924), 129 S.C. 290, 123 S.E., 830.
Under such circumstances, it appears clear that the petitioner is entitled to a preference in the distribution of the assets of the Bank of Union to the extent of its judgment. Ex parte Bank of Aynor (1927), 144 S.C. 147, 142 S.E., 239, 243; Ex parte Hernlen (1930), 156 S.C. 181, 153 S.E., 133, 69 A.L.R., 443; Hampton County v. Lightsey (1932), 164 S.C. 63, 161 S.E., 879.
The facts of this case fit peculiarly the language of Mr. Justice Cothran in the first cited case: "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 onto the benefit of the theft and not account for it."
State of Idaho v. Bruce (1909), 17 Idaho, 1, 102 P., 831, 834 L.R.A., 1916-C, 1, 134 Am. St. Rep., 245, which is cited with approval by our Court in the Aynor case, supra, is a striking parallel to the immediate cause. There the State treasurer deposited State funds in a bank without the authority of law. The bank had notice of the character of the funds and of the relation which the State treasurer sustained to such funds. Upon the insolvency of the bank, the State set up a claim to a preference to the extent of such deposit. In sustaining the right to a preference, the Court in that case said: "When the funds are traced into the assets of the unfaithful trustee, or one who has knowledge of the character of the funds, they become a charge upon the entire assets with which they are mingled. * * * It would seem to be immaterial whether the property with which the trust funds were mingled was moneys, or whether it was bills, notes, securities, lands, or other assets. The bank which assigned in this case appears to have been engaged in a general business, and its assets consisted of moneys, securities, and lands; and, as the estate was augmented by the conversion of the trust funds, no reason is seen, under the equitable principle which has been mentioned, why they should not become a charge upon the entire estate."
After the hearing hereon, counsel for the respondents requested the incorporation in this record of the testimony and all other proceedings in the case of Spartanburg County v. The Bank of Union, tried heretofore in this Court before Hon. G.B. Greene, presiding Circuit Judge, which case has already been referred to herein. Such request was joined in by the attorneys representing the petitioner; and accordingly this testimony and record has been filed with me. I have read and considered this testimony and record, and it supports my conclusion that the petitioner is entitled to the preference prayed.
It is therefore ordered that the petitioner be and hereby is, entitled to a preference in the distribution of the assets of the Bank of Union to the extent of its said judgment, and is entitled to have its said judgment paid in full before the payment of any sums of the general assets of the Bank of Union to the general creditors thereof.
Messrs. Sawyer Sawyer, for appellants, cite: As to tracing funds into the hands of an unfaithful trustee: 144 S.C. 147; 156 S.C. 181; 164 S.C. 63. Where bank with knowledge of trust violates deposit contract: 211 Mass. 409; 97 N.E., 916; L.R.A., 1915-C, 518; 129 S.C. 290; 123 S.E., 830. Assets of insolvent corporation should be distributed ratably among creditors: 167 S.C. 1; 165 S.E., 359; 77 S.C. 305; 57 S.E., 182; 22 L.R.A. (N.S.), 442; 122 A.S.R., 568; 164 S.C. 261. Must be a res upon which the trust is to be impressed: 144 S.C. 158; 60 S.C. 122; 38 S.E., 458; 136 S.C. 511; 134 S.E., 510.
Messrs. Nicholls, Wyche Russell and Barron, Barron Walker, for respondent, cite: Duty of bank in receiving trust funds with knowledge of their character: 100 S.C. 220; 84 S.E., 713; 104 U.S. 54; 26 L.Ed., 693; 218 N Y, 106; 112 N.E., 759; L.R.A., 1916-F, 1059; 129 S.C. 290; 123 S.E., 830; 97 N.E., 916; L.R.A., 1915-C, 518; 237 Fed., 258; 84 N.E., 585; 130 U.S. 267; 9 Sup. Ct., 519; 32 L.Ed., 959. As to trustee ex maleficio: 44 Fed. 2d 11; 282 U.S. 901; 51 Sup. Ct., 3; 75 L.Ed., 793; 158 Pac., 24; L.R.A., 1917-A, 680; 163 S.C. 242; 161 S.E., 454; 144 S.C. 147; 142 S.E., 239; 156 S.C. 181; 69 A.L.R., 443; 164 S.C. 63. Beneficial owner might follow funds and assets before distribution to creditors: 51 Kan., 87; 37 A.S.R., 263; 32 Pac., 658; 20 A.S.R., 442; 45 N.W., 1049; 143 Mo., 664; 45 S.W. 677; 227 Pac., 261; 37 A.L.R., 126.
May 2, 1933. The opinion of the Court was delivered by
The history of this litigation, and the causes which led to it, are clearly and succinctly stated in the order of Judge Sease, from which this appeal comes to this Court. That order correctly disposes of the issues made by the appeal.
It is not seriously denied that the transactions between L.G. Miller and the Bank of Union created a trust in favor of the County of Spartanburg in the assets of the bank. The gist of the contention is that they did not create a trust ex maleficio which entitles the county to a preference in the distribution of those assets.
The evidence in this case is conclusive that the Bank of Union had knowledge that the funds which it received from L.G. Miller were funds of the County of Spartanburg, which Miller had in trust as the treasurer of the county, and that they were being misappropriated by him to the payment of the obligations of the Bank of Duncan, of which he was president, to the Bank of Union. When, therefore, the Bank of Union received them with this knowledge and converted them to its uses, there arose a trust ex maleficio; there were present the characteristic elements of fraud by him who misappropriated the funds, and knowledge thereof by the bank which received them in payment of obligations not due it by the lawful owner of the funds.
The exceptions are overruled, and the order of Judge Sease is affirmed. Let it be reported.
MR. CHIEF JUSTICE BLEASE and MESSRS. JUSTICES STABLER and CARTER concur.