#### A. G. BOBBITT, J. T. BOBBITT, MRS. ARTELIA HIGHT, and MRS. CORA H. HOWELL v. OXFORD NATIONAL BANK, R. R. HERRING, E. N. CLEMENT, JOHN S. WATKINS, E. A. HUNT, and A. H. POWELL, Trustees for FIRST NATIONAL BANK OF GRANVILLE, Its Creditors and Stockholders.

(Filed 18 September, 1935.)

1. Banks and Banking O b — National bank receiving trust deposit must keep same segregated or secured by bonds.

It is tbe duty of a national bank to segregate all assets held by it in any fiduciary capacity from its general assets, and to keep separate books *461and records showing in proper detail all transactions engaged in by it in its fiduciary capacities, and if any of such funds are used in the conduct of the bank’s business, the bank must first secure such funds by Government bonds or other securities set aside in its trust department. U. S. Code, Anno., Title 12, Banks and Banking, sec. 248.

3. Banks and Banking C e — Held: National hank accepted trust created by will by accepting deposit and discharging duties under the trust.

Testator directed that a portion of his estate be deposited in a designated national bank in trust for his daughter for her life, and the income therefrom be paid to her, and that upon her death the principal be paid to designated beneficiaries. The bank accepted the deposit and paid the daughter four per cent on the deposit per year, and used the funds in its general banking business by depositing securities in its trust department. *Helé:*The bank, by its acts, accepted the trust created by the will and exercised control over the funds as trustee, and neither the bank nor its trustees in liquidation can successfully contend that such deposit was a time deposit.

3. Banks and. Banking BE e — Claimants held entitled to lien on bonds set apart as security in trust department by national bank.

A national bank accepted a trust deposit under the terms of a will, and later transferred the deposit to its trust department and used the funds in its general banking business, but set aside in its trust department bonds and securities sufficient to cover trust funds so used, as required by TJ. S. Code, Anno. Title 12, Banks and Banking. *Helé:*Upon the bank’s insolvency, the beneficiaries of the trust are entitled to a lien on the bonds so set aside in the trust department, in addition to their claim against the estate of the bank.

Appeal from *Sinclair, J.,*at April Term, 1934, of Grahville.

Eeversed.

This case was beard upon tbe following agreed statement of facts:

“1. Tbat tbe plaintiffs are tbe devisees and legatees under tbe last will and testament of T. E. Bobbitt, late of Granville County, wbicb said last will and testament was duly probated and is of record in tbe office of tbe clerk of tbe Superior Court of said county of Granville.

“2. Tbat tbe defendant Oxford National Bank is a banking institution, chartered under tbe laws of tbe United States, and tbe defendants E. E. Herring, E. N. Clement, John S. Watkins, E. A. Hunt, and A. H. Powell are liquidating trustees, to wbom bave been transferred certain assets of tbe First National Bank of Granville, now in process of liquidation.

“3. Tbat tbe Oxford National Bank purchased certain assets of tbe said First National Bank of Granville under an agreement signed by unsecured creditors of said bank owning more than seventy-five per cent of tbe unsecured claims against said bank, and agreed to pay in cash to tbe unsecured creditors of tbe said First National Bank of Granville *462sixty per cent of the claims, and in its answer filed in this canse lias signified both its ability and willingness to pay sixty per cent of the amount hereinafter mentioned.

“4. That the plaintiffs have brought this action for the purpose of establishing against said Oxford National Bank and/or said liquidating trustees of the First National Bank of Granville, as a preferred claim, the deposit hereinafter described.

“5. That Item Three of the last will and testament of T. E. Bobbitt, deceased, is in words and figures as follows, to wit:

“ ‘Item Tiikee.

“ ‘All of the residue and remainder of my estate I direct to be divided into four equal parts or shares: I give and bequeath unto each of my sons, A. G. Bobbitt and J. T. Bobbitt, and to my daughter, Artelia Hight, their heirs and assigns, one of said shares in fee simple, and should either of my said sons, or my said daughter, die before I do, leaving issue, then the issue of such deceased child or children shall take the part or share to which the parent, if living, would be entitled; the other one-fourth share I direct my executors to deposit in the National Bank of Granville, of Oxford, N. 0., to be held by said bank in trust for the use and benefit of my daughter, Cora H. Howell, for and during the term of her natural life, the annual income and interest on the same to be paid over to her, and at the death of my said daughter, Oora H. Howell, the said amount or share so deposited in the said bank shall be equally divided between my two sons, A. G. Bobbitt and J. T. Bobbitt, and my daughter, Artelia Hight, share and share alike, and should either of my said sons or my said daughter die before the said Cora H. Howell, then the share, or interest, of such deceased son or daughter shall pass to the issue of said deceased child, and such issue shall be entitled to receive the part or share thereof to which the parent, if living, would bo entitled ; and it is expressly stipulated and directed by me that each of my sons and daughters shall pay over to my beloved wife, or to someone for her use and benefit, four per cent, annual interest on the amounts received by them from my estate for the purpose of meeting the expenses, of the support, maintenance, care, and attention of my beloved wife, and if said four per cent, on said amounts shall not be sufficient to meet said expenses, then each of my children shall contribute pro rata to make up the amount of said deficiency, and the said National Bank of Granville, in the disbursement of the interest and income on the amount deposited therein for my said daughter, Cora H. Howell, shall pay said four per cent, and the pro rata share, which may be required to be paid under the terms above set out.’

*463“6. That on 1 February, 1928, the executors of T. E. Bobbitt, deceased, drew a check in the sum of $4,401.59 on their account as executors in the National Bank of Granville, and deposited the same in said bank under the following styled deposit: ‘The National Bank of Granville, Trustee for Oora H. Howell.’

“7. That a pass book was issued by said bank and delivered to said executors, showing said deposit.

“8. That said deposit was set up by the bank as an interest-bearing deposit, or account, and the National Bank of Granville paid, until its merger with the First National Bank of Oxford, interest on said account to the said Oora H. Howell at the rate of four per cent from the date of such deposit until and including 4 March, 1933.

“9. That after the date of said deposit, as aforesaid, in the National Bank of Granville, said bank and the First National Bank of Oxford merged under the style of the First National Bank of Granville, which said bank succeeded to the property and property rights of both the National Bank of Granville and the First National Bank of Oxford.

“10. That on 11 February, 1932, the principal of this deposit, to wit, $4,401.59, was transferred by the First National Bank of Granville from the individual ledger of said bank to the trust ledger kept by said bank.

“11. That after said transfer this account and all other accounts on said trust ledger were secured at all times by bonds set aside for the purpose, having at all times a fair market value in excess of the total amounts appearing on said trust ledger.

“12. That officers of the First National Bank of Granville on numerous occasions made statements to the plaintiffs that this account had been transferred to the trust ledger, and that all amounts appearing on said trust ledger were adequately secured by bonds set aside for the purpose.

“13. That the First National Bank of Granville was closed by proclamation of the President of the United States on 4 March, 1933, since which time it has not been able to open and perform general banking functions; that said bank is now in process of liquidation.

“14. That the total deposits appearing on the trust ledger of said bank at the time said bank was closed amounted to $21,118.45.

“15. That said bank had in cash at the time it closed the sum of ■$29,386.95.

“16. That the National Bank of Granville and the First National Bank of Granville were authorized and empowered to act in all fiduciary ■capacities and relationships.

“17. That the funds in controversy in this action were immediately ■upon their deposit in said bank commingled with other assets belonging to said bank, and were at all times used by said bank in the conduct of the bank’s business generally.

*464“18. Tbat tbe plaintiffs contend tbat said deposit constitutes a preferred claim against tbe First National Bank of Granville, and is entitled to payment in full, and tbe defendants contend tbat sucb deposit is an ordinary interest-bearing deposit and entitled to participate in tbe distribution of tbe assets of tbe First National Bank of Granville as an unsecured claim only.”

His Honor signed tbe following judgment:

“Tbis cause coming on to be beard before tbe undersigned judge presiding at tbe April Term, 1934, of tbe Superior Court of Granville County, and attorneys representing tbe plaintiffs and defendants having agreed to waive a jury trial, and having also agreed upon tbe facts, a statement of which is hereto attached and made a part hereof:

“It is now, upon sucb agreed facts, considered, adjudged, and decreed tbat tbe plaintiffs’ claim declared on in tbis action is neither a preferred nor a secured claim against tbe First National Bank of Granville, and tbe plaintiffs are entitled only as other unsecured creditors of tbe First National Bank of Granville to participate in tbe assets of said bank transferred and assigned to R. R. Herring, E. N. Clement, John S. Watkins, E. A. Hunt, and A. H. Powell, trustees for said bank.

“It is further considered, adjudged, and decreed tbat tbe plaintiffs have and recover of tbe defendant Oxford National Bank sixty per cent of tbe sum of $4,401.59, together with sucb costs as accrued up to tbe time of tbe filing by said Oxford National Bank of its answer, to wit, on 21 February, 1934, said judgment as to said Oxford National Bank to be discharged by payment by said Oxford National Bank of said sixty per cent of. said $4,401.59, and sucb costs, into tbe office of tbe clerk of tbe Superior Court of Granville County.

“Tbis judgment shall in no wise prejudice any rights tbat the plaintiffs may have to participate as other unsecured creditors may participate in any and all assets _ formerly belonging to tbe First National Bank of Granville, and transferred and assigned for tbe purpose of liquidation to R. R. Herring, E. N. Clement, John S. Watkins, E. A. Hunt, and A. H. Powell, liquidating trustees of said bank.”

To tbe foregoing judgment tbe plaintiffs excepted and appealed to tbe Supreme Court, assigning errors.

*J. P. and J. H. Zollicoffer and T. Lanier for plaintiffs, appellants.*

*Royster & Royster for defendants, appellees.*

Sciibnck, J.

It is contended by tbe plaintiffs, appellants, tbat since tbe banks involved in tbis case were all national banks, tbe funds in controversy, namely, one-fourth of tbe residue of tbe estate of tbe late T. E. Bobbitt, deceased, were funds held in trust by tbe bank and used *465by tbe bank in tbe conduct of its own business, and tbat upon failure of tbe First National Bank of Granville, they, as beneficiaries of said funds, bad a lien upon tbe United States bonds and other securities set aside for tbe protection thereof; and they invoke section 248, subsection (k), of tbe chapter entitled “Federal Beserve System,” United States Code Anno., Title 12, Banks and Banking, at page 319, sec. 248, which, after making provision for national banks to act as trustees, executors, administrators, guardians, and in other fiduciary capacities in which State banks come in competition with national banks, reads as follows:

“(k) . . . National banks exercising any or all of the powers enumerated in this subsection (k) shall segregate all assets held in any fiduciary capacity from the general assets of the bank, and shall keep a separate set of books and records showing in proper detail all transactions engaged in under authority of this subsection. . . .

“No national bank shall receive in its trust department deposits of current funds subject to check, or the deposit of checks, drafts, bills of exchange, or other items for collection or exchange purposes. Funds deposited or held in trust by the bank awaiting investment shall be carried in a separate account and shall not be used by the bank in the conduct of its business unless it shall first set aside in trust department United States bonds or other securities approved by the Federal Beserve Board.

“In the event of the failure of such bank, the owners of the funds held in trust for investment shall have a lien on the bonds or other securities so set apart, in addition to their claim against the estate of the bank.”

It was the duty of the First National Bank of Granville to segregate all of the assets held by it in any fiduciary capacity, including the funds in controversy, from the general assets of the bank, and to keep a separate set of books and records showing in proper detail all transactions engaged in by it in its fiduciary capacities; and if any of the trust funds were used in the conduct of the bank’s business, it was the duty of the bank to first set aside in its trust department United States bonds or other securities to secure the fund so used, so that, in the event of failure, the owners of the fund so used should have a lien on such bonds or securities, in addition to their claim against the estate of the bank.

The bank did not keep the funds in controversy separate from its general assets, but elected to use them in the conduct of its business by depositing United States bonds or other securities to secure the same. The bank and its successor trustees are therefore bound by its acts in depositing security therefor and using the funds in its business.

The intention of the statute invoked is to protect beneficiaries of trust funds, by having the bank to either keep the trust funds segregated from its general assets or by securing such trust funds with proper securities. *466Tbe bank received tbe funds in controversy and deposited tbe same to its own credit, and paid interest to tbe beneficiaries as provided in tbe will of T. E. Bobbitt. In so doing tbe bank accepted tbe trust created by tbe terms of tba will and exercised control over tbe funds in controversy as trustee; and, to enable it to use sucb funds in tbe conduct of its own business, it set aside in its trust department United States bonds and other securities to secure tbe same.

Tbe funds in controversy were funds accepted by tbe bank as trustee under tbe terms of tbe will, and were used by tbe bank in tbe conduct of its business, after having been secured by securities set aside for that purpose, and we, therefore, conclude that tbe plaintiffs have a lien on tbe bonds and other securities set apart as security in tbe trust department of tbe First National Bank of Granville, in addition to their claim against tbe estate of tbe bank, and that there was error in adjudging that “tbe plaintiffs’ claim declared on in this action is neither a preferred nor a secured claim against tbe First National Bank of Granville.”

Tbe case is remanded to tbe Superior Court that there may be there entered a judgment that tbe plaintiffs have and recover $4,401.59 as a preferred and secured claim against tbe First National Bank of Gran-ville, together with costs in this behalf incurred.

Reversed.