#### State *ex*rel. Brown vs. Rusk, Bank Comptroller.

*Lien of state upon interest of its bonds deposited by banJcs with comptroller attaches to substituted securities.*

*1.*A bank of tkis state purchased bonds of'the state, paying seventy per cent in cash, and covenanting to pay the remaining thirty per cent, in semiannual installments, with an agreement that said bonds should be deposited with the bank comptroller as security for the circulation of the bank, and that the state treasurer, on default in the payment of any such installment, might retain for the use of the state the amount thereof out of the interest money falling due on the bonds so deposited, if the circulation of the bank should then, in the opinion of the comptroller, be fully secured. These bonds were afterward withdrawn by the hank, and other securities received in lieu thereof, according to the provisions of the banking law. *Held,*that said bonds were held by the comptroller *in trust*for the payment to the state of any of said semi-annual installments which might remain otherwise unpaid (so far as this could be done with safety to the holders of the bills of said *bank);*and the bank had no right to withdraw said bonds and substitute other securities while any of such installments remained unpaid.

*2.*That the trust *attached to the securities so improperly substituted*for said bonds, in the comptroller’s hands.

APPLICATION for a *Mandamus.*

Tbe affidavit filed for tbe relator shows tbe following facts: In July, 1861, tbe state sold to tbe Bank of Columbus its bonds to tbe amount of $52,000, and received seventy per cent on that amount, and tbe bond of tbe bank, conditioned for tbe payment of tbe remaining thirty per cent., in semi-annual installments of one per cent., with an agreement that the state bonds so purchased should be deposited with the bank comptroller as security for tbe circulation of tbe bank, and that tbe state treasurer, in case said semi-annual installments, or any of them, should not be paid as they became due, might retain for tbe use of tbe state, and in payment of such unpaid installments, the amount thereof out of the interest money falling due upon any bond belonging to said bank, in tbe possession *637of sucb treasurer, if the circulation of said bant should then, in tbe opinion of tbe bant comptroller, be fully secured. Tbe bant at tbe same time executed to tbe state, and delivered to tbe state treasurer, its bond in the penal sum of $31,200, conditioned for tbe due payment of said thirty per cent, of the amount of said state bonds. After said state bonds were so deposited with tbe comptroller, the bank collected in its circulating notes, and deposited them with tbe comptroller, withdrawing from time to time, as sucb deposits were made, like amounts of tbe state bonds deposited as security for tbe notes, until, on tbe 5th of June, 1862, its outstanding circulating notes amounted to only $7,388, and tbe bonds deposited as security therefor to only $7,000, beside $388 in money. On that day tbe bank deposited with tbe comptroller $7,000 in specie (afterward substituting tbe same amount in United States treasury notes), in lieu of said Wisconsin bonds, which it then withdrew pursuant to law. On tbe 28th of June, 1865, and thereafter, tbe bank gave due public notice (E. S. cb. 71, § 12) requiring its circulating notes to be presented at tbe comptroller’s office for redemption within three years; and on tbe 29th of June, 1868, tbe time for redemption having expired, there remained in tbe comptroller’s bands $1,384 of tbe treasury notes so deposited, and tbe bank bad prior to that time assigned to tbe relator its right to tbe same, and bad given him an order upon tbe comptroller for tbe same; but tbe comptroller refused, on demand, to make sucb payment, and denied tbe relator’s right thereto.

Tbe return of tbe bank comptroller to tbe alternative *mandamus*stated, in substance, that of tbe thirty per cent, of tbe purchase price of tbe state bonds sold to said bank as aforesaid, tbe installments which fell due between July 1,1862, and January 1, 1868, both inclusive, amounting to $6,240, remained unpaid; that according to tbe condition of tbe bond given by said bank, and tbe true intent and meaning thereof, tbe bonds *638purchased by it from tbe state were deposited witb the bank comptroller in trust, first, to secure the circulation of said bank, and secondly, to secure to the state the balance due upon the price of said bonds, by the application thereto of the accruing interest on said bonds, so far as the same could be so applied without loss or injury to the holders of said circulation; that in June, 1862, when said bank withdrew the bonds of the state then remaining on deposit with said comptroller, the interest coupons attached thereto were worth in present money more than the sum of $1,384, being the sum here in controversy ;■ that the $7,000 which was deposited in lieu of said bonds represented, and was the substitute for said coupons, as well as for the principal sum of said bonds-; that respondent has no knowledge or information sufficient to form a belief; whether the comptroller was of opinion, at the time of said substitution, that the circulation of said bank was not fully secured, and he is advised that the same trusts which attached to said bonds and coupons while in the comptroller’s hands, attached to the fund into which they were so converted, and he is advised that it is his duty to retain; and he has been instructed by the state treasurer to retain, said sum of $1,384, to be applied to the payment of the balance due from said bank to the state upon the purchase price of said bonds.

Other grounds of defense were stated in the return, which need not be stated here. The relator answered, denying that, by the condition of the bond of the bank given to the state as aforesaid, or otherwise, the bonds purchased by the bank from the state were deposited to secure to the state the balance due upon the purchase price of said bonds, and alleges that the only lien which the state had on said bonds was *for accruing interest*on that portion of the purchase price thereof remaining unpaid while said bonds remained in the hands of the state treasurer, and that this was extinguished by the treasurer’s delivery to said bank of said bonds on or before the fifth *639of June, 1862; that, when said bonds were so delivered to said bank, there was no sum whatever due from said bank to the state for either principal or interest on the purchase price of the bonds. The answer therefore denies that the state ever had a lien upon, or interest in, said sum of $7,000 [in treasury notes] above mentioned, or any part thereof, or that any trust whatever attached thereto, while the same was in the hands of the comptroller, in favor of the state; and denies that the money so deposited with the comptroller resulted from, or was the proceeds of, said bonds, or was the fund into which they had been converted. The answers to the other grounds of defense are omitted.

The respondent demurred to the relator’s answer to his first defense.

*P. I. Spooner,*of counsel, for the demurrer,

cited 1 Tif. & Bui. on Trusts, 11, 33; Lewin on Trusts, 22 Law Lib. p. 102; Story’s Eq. Jur. §§ 1258, 1259, 1216, 1217, 1222; 1 Cox, 100; 15 Yes. 314; 16 id. 278-81; 6 Johns. Ch. 437; and argued at length that the lien of the state upon the interest coupons attached to the bonds deposited by the bank, to secure the payment of the unpaid purchase money of said bonds, attached in equity to the fund into which the bonds were converted, or which was deposited in lieu of the bonds ; and that the creator of the trust could not be allowed to take advantage of his own wrong in withdrawing the bonds, by claiming that the substituted fund was divested of the trust.

*Gregory dé*Pinney, *contra:*

The bonds purchased of the state were deposited with the comptroller, and passed into the custody of the state treasurer, to be “ held exclusively for the redemption of the bills or notes of such association,” until the same should be redeemed. By the bond in question, the *treasurer*might, in a certain contingency, lay hold of the coupons or interest falling due on the bonds, and apply them to the. payment of semi-annual install*640ments falling due tbe state on tbe bond; but tbis did not give bim power to *lay hold of the bond itself*’ *or its proceeds*when sold, nor did it authorize *any other person*or officer to take ' *any*of tbe property of tbe bank, and apply it to tbe payment of tbe debt due tbe state. At most, there was a conditional mortgage or pledge of tbe interest accruing on tbe bonds. These bonds were withdrawn under tbe provisions of sees. 47 and 13, ch. 71, R. S., and treasury notes, equivalent to specie, deposited with tbe *comptroller,*not with tbe treasurer, in lieu thereof. The money in question, therefore, is a substituted or exchanged security, and *not the proceeds of either bonds or coupons.*Tbe agreement of pledge would not bind tbe new security for tbe circulation. 'It would not bind tbis property if it bad been received in exchange for tbe pledged property. *Rhines v.*Phelps, 3 Grilm. 455.

Under tbe law, tbe treasurer bad no custody or control directly of or over tbe treasury notes deposited with tbe comptroller. Tbe bank never made any agreement giving either bim or tbe comptroller any right in relation thereto, beyond such as he might have under tbe banking law, by virtue of bis official position. Tbe comptroller was in no sense tlie agent of the state. He was a trustee under tbe law, and held tbe fund to be applied, first, exclusively to tbe redemption of tbe bills of tbe bank (R. S. ch. 71, § 47); and, secondly, tbe surplus, after tbe time for redemption had expired, to be paid over to tbe order of tbe bank. Beyond tbe performance of these duties in relation to tbis fund, be bad no authority whatever.

Tbe question whether any lien exists in favor of tbe state has been once decided by this court, after full argument. *State ex rel. Marshall v. Rush,*21 Wis. 212.

Cole, J.

In support of tbe demurrer to tbe first paragraph of tbe answer, it is claimed, that, under tbe agreement between tbe bank and tbe officers of tbe state, tbe bonds of tbe state *641were beld in trust for two purposes: first, to secure the outstanding circulation of the bank; and secondly, for the application of the accruing interest, on the bonds to the discharge of the purchase money due the state, if it could be so applied without injury to the bill holders; that this agreement created an express trust to subserve the above purposes, and that if the bank which created the trust has converted or withdrawn the state bonds — the trust property — and deposited treasury notes in lieu thereof, the lien which attached to the bonds will, by operation qf law, attach also to the fund into which the bonds were converted; and that, as the trust for the benefit of the holders of the circulating notes has been completely fulfilled, that in favor of the state on the balance of the substituted fund is valid, and must be enforced. We are free to confess that this seems to be a correct view of the nature and effect of the agreement, and the principles of law applicable to it. Indeed, by its express language, the bank covenanted and agreed that the bonds deposited with the comptroller should remain as security for its then existing circulation, and moreover, in case it did not pay the installments when they became due^ — - the circulation being secure — the treasurer was authorized to retain for the use of the state, and in payment of such unpaid installments, the amount thereof out of the interest money falling due upon any bond belonging to the bank, in the possession of the state treasurer. It is very manifest that this trust in favor of the state was not intended to interfere in any manner with the operation of the banking law, so far as the security of the bill holders was concerned, but the bank, by the agreement, relinquished the right to withdraw its securities deposited with the comptroller, which the banking law gave it. That the bank might relinquish this right .to exchange securities, is a proposition which probably no one would controvert or contest. And that it did so by this agreement, until the purpose of the trust w;as fulfilled, seems to us very *642clear. Having improperly withdrawn the bonds, in violation of its agreement, it cannot be allowed to say that the fund substituted by its own act, or by the act of itself and the trustee, is discharged of the trust which attached to the bonds, or to the interest falling due upon them. Upon this point, the remarks of Mr. Justice Stoet, as found in section 1258, Eq. Jur., are strictly applicable. “ Whenever,” says he, “ the property of a party has been wrongfully misapplied, or a trust fund has been wrongfully converted into another species of property, if its identity can be traced, it will be held, in its new form, liable to the rights of the original owner, or *cestui que trust.*The general proposition, which is maintained both at law and equity upon this subject, is, that if any property, in its original state and form, is covered with a trust in favor of a principal, no change of that state and form can divest it of such trust, or give the agent or trustee converting it, or those who represent him in right (not being *bona fide*purchasers for a valuable consideration without notice), any more valid claim in respect to it, than they respectively had before such change.” Now, as we have already said, the bank, by its agreement, expressly fastened upon the bonds deposited with the comptroller a trust in favor of the state. It agreed that the accruing interest on the bonds might be applied to the payment of the unpaid purchase money whenever it made default, providing it could be so applied with safety to the bill holders. The fact that the property covered with the trust has been changed by the bank in violation of the agreement, does not divest it of the trust. To say that, notwithstanding this trust, the bank still retained the right to withdraw at any time the bonds by virtue of the provisions of the general banking law, seems to us clearly inadmissible.

But it is claimed by the counsel for the relator, that this question is entirely disposed of by the decision in *State ex rel. Marshall et al. v. Rusk,*21 Wis. 212. But this, we think, is a *643misapprehension of the extent of that decision. The point, that, under this agreement, the bonds were held charged with a trust of a two-fold character, both to secure its existing outstanding circulation, and also for the application of the accruing interest on the bonds to the discharge of the purchase money due the state, is one which was not suggested by counsel on the argument of that case, and certainly did not occur to the court while examining the cause. That case, we think, was rightly decided upon the questions argued by counsel and considered by the court. A question which was entirely overlooked by counsel, and which was not even'considered by the court, cap hardly be said to have been settled by the decision. We do not intend to call in question the correctness of the decision in the above case. Upon the points covered by it, we think it is sound. But the view which we have been considering of the nature' and effect of the agreement made by the bank, has for the first time been presented.

It results from these views that the demurrer must be sustained.

*By the Court.*— Demurrer sustained.