Source: https://supreme.justia.com/cases/federal/us/294/231/
Timestamp: 2019-04-23 16:34:23+00:00

Document:
1. A suit by a trustee in bankruptcy to recover, under § 60(b) of the Bankruptcy Act, property, or the value of property, which the debtor transferred to a creditor, is maintainable at law, but, if prosecuted in equity without objection, the same relief may be decreed. P. 294 U. S. 234.
2. A national bank accepted a pledge of securities as collateral for an existing debt with reasonable cause to believe that a preference would be effected within the meaning of § 60(b) of the Bankruptcy Act. The debtor became a bankrupt within four months, and, while the bankruptcy proceedings were pending but before the trustee had made any demand upon it based on § 60(b), the bank disposed of the securities for fair value to some of its depositors, receiving payment not in cash, but by accepting their checks drawn on itself and charging them against their accounts. Some months later, the trustee sued the bank to avoid the preferences, and, after a protracted litigation, he obtained a decree for the value of the securities. Although the bank had become insolvent and was placed in the hands of a receiver six months before the decree was entered, the receiver had not been made a party. Afterwards, the trustee sought an order requiring the receiver to pay the amount claimed, as a preferred charge upon the bank's assets.
elected to avoid the preferences, were not wrongful acts on the part of the bank, and the bank was not chargeable as a trustee ex maleficio. P. 294 U. S. 235.
(2) The bank, when it accepted payment for the securities by cancelling to an equivalent extent debts due by it to the depositors who acquired them, was under no preset duty to set up a trust of the proceeds, and as it had then a solvent, going business, and made the transfer without fraudulent or obstructive purpose, there is no reason why the transaction should be treated retrospectively as something other than it was meant to be. P. 294 U. S. 236.
(3) When the transfer was avoided, the bank became chargeable like any common law debtor with a duty of restitution to the extent of the value of the property disposed of. P. 294 U. S. 237.
(4) The assets of the bank in the hands of the receiver are not subject to a trust in favor of the trustee in bankruptcy. P. 294 U. S. 238.
Certiorari, 293 U.S. 547, to review the affirmance of a decree imposing a trust on the funds of an insolvent national bank at the suit of a trustee in bankruptcy.
A trustee in bankruptcy asserts a claim against the receiver of a national bank for the value of property received by the bank as an unlawful preference. The receiver admits the validity of the claim if it is placed upon the same level as the claims of creditors at large. The trustee insists that the claim must have priority on the ground that the avails of the unlawful preference are subject to a trust.
In September, 1928, the bankrupt, John Fitzgerald, had overdrawn his deposit account with the Farmers' National Bank of Pekin, Ill., and was also indebted to the bank upon promissory notes. In response to a demand for collateral security he delivered to the bank notes of other persons, as well as a certificate of stock, the whole of the face or par value of about $35,000. Most of the securities so delivered have been returned to the trustee, and are not in controversy now. Four items only are the subject of this suit.
1930. The bank then had a payment on account to the extent of $1,597.31, the payment being made by the deposit of a check to its credit in the First National Bank of Chicago, Illinois. The balance in that account was afterwards reduced to $776.57, which latter amount, together with the bonds themselves, the receiver stands ready to transfer to the trustee.
The election by the trustee to reclaim the collateral securities in behalf of the estate was announced, as we have seen, on July 20, 1929, and was manifested by the beginning of a suit for appropriate relief. No charge was made that the transaction was voidable for any actual fraud. The suit was under § 60(b) of the National Bankruptcy Act (11 U.S.C. § 96(b)) upon the ground that the effect of the transaction was to prefer one creditor over others, and that the creditor, the bank, had reasonable cause to believe that such effect would follow. * Under Schoenthal v. Irving Trust Co., 287 U. S. 92, an action at law could have been maintained for the recovery of the property or its value. Without objection, however, the suit was tried in equity. Cf. Buffum v. Peter Barceloux Co., 289 U. S. 227, 289 U. S. 235. It ended on June 24, 1932, in a decree invalidating the transactions of September 7, 1928, as constituting a forbidden preference, and directing the return of the securities, or the value of such as had been converted into money.
Comptroller of the Currency. The receiver appointed by the Comptroller was not a party to the suit to invalidate the preference. After the entry of a decree, the trustee in bankruptcy petitioned for an order instructing the receiver that the four contested items were a preferred charge upon the assets, and that payment should be made accordingly. The District Court granted the relief prayed for, and, upon appeal to the Court of Appeals for the Seventh Circuit, the order was affirmed. 70 F.2d 956. A writ of certiorari issued from this Court.
1. For convenience, the first of the contested items, the proceeds of the stock certificate, will be considered by itself, the conclusion appropriate for this item being typical of the conclusion appropriate for the others.
Lumber Co. v. Sternberg, 38 F.2d 614, 617; Rogers v. Page, 140 F. 596, 606; In re Henry C. King Co., 113 F. 110, 111; Rubenstein v. Lottow, 223 Mass. 227, 229 et seq., 111 N.E. 973. The bank took the risk that, in future and indeterminate contingencies, it might be compelled to return what it accepted or the value. At the outset, it was not a trustee, ex maleficio or otherwise. It was a bailee, and nothing more.
If a trust was not created in September, 1928, through the acceptance of a security which has turned out to be a preference, none was in existence on February 9, 1929, when part of that security, the certificate of stock, was delivered to a purchaser. True, by that time, the debtor was in bankruptcy, but the other uncertainties, for anything here shown, were as indefinite as ever . The accurate determination of assets and liabilities had still to wait upon the process of proof and liquidation. At most, the security was voidable, not void, and the trustee up to that time had made no move to avoid it. A suit would have been a sufficient election, even though not preceded by a demand (Eau Claire National Bank v. Jackman, 204 U. S. 522, 204 U. S. 534-535; Stephens v. Pittsburgh Plate Glass Co., 36 F.2d 953), but, as yet, there had been no suit, nor statement that a suit was coming. To turn the bank into a wrongdoer in the absence of actual fraud, to charge it with all the liabilities growing out of a constructive trust, there was need of some act of avoidance that would put the brand of guilt upon it. Cf. Boyd v. Dunlap, 1 Johns.Ch. 478, 482, per Kent, Ch. We hear of no such act till July, 1929, when the trustee in bankruptcy brought suit to declare the preference a nullity.
trust ex maleficio, whereby the bank was chargeable as a wrongdoer for parting with the shares. There was no trust implied in fact unless it be the fiduciary obligation assumed by a bailee to act with prudence and fidelity in the disposition of the pledge. The trustee does not assert that this obligation has been violated. On the contrary, he concedes that the price was equal to the value. With its duty thus defined and measured, the bank agreed with Cullinan to accept payment of the price by cancelling to an equivalent extent the debt due him as a depositor. Cf. Jennings v. United States Fidelity & Guaranty Co., ante, p. 294 U. S. 216; Old Company's Lehigh, Inc. v. Meeker, ante, p. 294 U. S. 227. We do not need to consider whether effect would be given to such an agreement according to its form if the bank at that time had been under a present duty to set up a trust as to the proceeds to the use of the bankrupt or of the trustee as his successor. For the purposes of this case, we assume, though we do not hold, that a trust in that event would attach to the cash assets in the vaults to an equivalent amount. A different result follows when there is neither trust to be set up nor willful wrong to be repaired. The bank, when it parted with the certificate, had a solvent, going business, and did not make the transfer with any fraudulent or obstructive purpose. There is no reason in such circumstances why the transaction should be treated retrospectively as something other than it was meant to be. Jennings v. United States Fidelity & Guaranty Co., supra. Equity fashions a trust with flexible adaptation to the call of the occasion.
were intact, to make return in specie. But what is here sought is very different. By a process of analysis, a unitary transaction, the cancellation of a debt to a depositor, is treated as if split up into two parts, a fictitious withdrawal by the depositor of coin or other currency, and its return to the bank to be applied upon the purchase. The money so returned is then subjected to a trust and, though mingled with other money, is viewed as retaining its identity so long as any portion of the fund is discovered to be intact. These fictions and presumptions may serve well enough in their application to one whose act is against equity and conscience at the time of its commission. They may be implements of justice in cases of theft or actual fraud. So at least, we now assume. In circumstances less flagrant, they will be used more charily. They will not be so applied as to impose a trust by relation upon moneys that have entered into "the stream of the firm's general property" (Holmes, J., in National City Bank v. Hotchkiss, 231 U. S. 50, 231 U. S. 57), and are distinguishable no longer.
held by the receiver upon a trust for equal distribution. Cf. Wisdom v. Keen, 69 F.2d 349, 350; Fera v. Wickham, 135 N.Y. 223, 230, 31 N.E. 1028; Gerseta Corp. v. Equitable Trust Co., 241 N.Y. 418, 425, 150 N.E. 501. The shift had come too late.
The collections on these notes were made in April, 1929. They were made not in cash received over the counter, but by cancellation of a debt owing to the makers upon their deposit balance in the bank. There was neither trust nor claim of trust until the bank had suspended and was in the hands of a receiver.
The payment was made, as we have seen, by the deposit of $1,597.31 in the First National Bank of Chicago, Illinois.
"If a bankrupt shall . . . have made a transfer of any of his property, and if at the time of the transfer, . . . and . . . within four months before the filing of the petition in bankruptcy, . . . the bankrupt be insolvent and the . . . transfer then operate as a preference, and the person receiving it or to be benefited thereby, or his agent acting therein, shall then have reasonable cause to believe that the enforcement of such . . . transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value from such person. . . ."
§ 60(b), 11 U.S.C. § 96(b).

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