Case Name: STATE ex rel. RANKIN, Attorney General, Plaintiff, v. THE BANKING CORPORATION OF MONTANA et al., Dependants; THE TRUSTEES OF EPISCOPATE FUND, a Corporation, Appellant, v. GRAY, Receiver, et al., Respondents; STATE OF MONTANA and W. E. HARMON, Treasurer, Appellants, v. GRAY, Receiver, et al., Respondents; MITCHELL et al., Appellants, v. GRAY, Receiver, et al., Respondents; FAY, Appellant, v. GRAY, Receiver, et al. Respondents
Court: Montana Supreme Court
Jurisdiction: Montana
Decision Date: 1926-10-06
Citations: 77 Mont. 134
Docket Number: No. 5,826; No. 5,834; No. 5,841; No. 5,843
Parties: STATE ex rel. RANKIN, Attorney General, Plaintiff, v. THE BANKING CORPORATION OF MONTANA et al., Dependants. THE TRUSTEES OF EPISCOPATE FUND, a Corporation, Appellant, v. GRAY, Receiver, et al., Respondents. STATE OF MONTANA and W. E. HARMON, Treasurer, Appellants, v. GRAY, Receiver, et al., Respondents. MITCHELL et al., Appellants, v. GRAY, Receiver, et al., Respondents. FAY, Appellant, v. GRAY, Receiver, et al. Respondents.
Judges: Mr. Chief Justice Callaway, Associate Justices Stark and Matthews, and Honorable Theodore Lentz, District Judge, sitting in place of Mr. Justice Holloway, disqualified, concur.
Reporter: Montana Reports
Volume: 77
Pages: 134–153

Head Matter:
STATE ex rel. RANKIN, Attorney General, Plaintiff, v. THE BANKING CORPORATION OF MONTANA et al., Dependants. THE TRUSTEES OF EPISCOPATE FUND, a Corporation, Appellant, v. GRAY, Receiver, et al., Respondents. STATE OF MONTANA and W. E. HARMON, Treasurer, Appellants, v. GRAY, Receiver, et al., Respondents. MITCHELL et al., Appellants, v. GRAY, Receiver, et al., Respondents. FAY, Appellant, v. GRAY, Receiver, et al. Respondents.
(No. 5,826.)
(No. 5,834.)
(No. 5,841.)
(No. 5,843.)
(Submitted September 15, 1926.
Decided October 6, 1926.)
[251 Pac. 151.]
Mr. E. C. Day, for Appellant, The Trustees of the Episcopate Fund, a corporation, submitted a brief and one in reply to that of Respondent Receiver, and argued the cause orally.
Mr. L. A. Foot, Attorney General, and Mr. A. H. Angstman, Assistant Attorney General, for Appellant State of Montana, submitted a brief.
Mr. Wm. Scallon and Mr. Jos. B. Wine for Appellant Catherine F. Fay, submitted a brief, and one in reply to that of Respondent Receiver; Mr. Scallon argued the cause orally.
Mr. Chas. JEJ. Pew, for Appellants A. D. Mitchell et al., submitted an original and a reply brief, and argued the cause orally.
Messrs. Stewart & Brown, for Respondent Receiver, submitted a brief; Mr. John G. Brown argued the cause orally.
Mr. E. C. Day and Mr. T. A. Mapes, for Respondents Fidelity & Deposit Company of Maryland and American Surety Company of New York, submitted a brief, and argued the cause orally.

Opinion:
HONORABLE C. W. POMEROY, District Judge,
sitting in place of MR. JUSTICE GALEN, disqualified, delivered the opinion of the court.
The Banking Corporation of Montana, being insolvent, failed to open its doors for business on the morning of the 2d of May, 1923. The district court appointed Claude C. Gray receiver, and he entered upon the discharge of his duties May 16, 1923. During the interim the bank was in the hands of the state bank examiner. On the seventh day of January, 1925, the receiver filed his petition No. 49 in the district court, setting forth that various creditors of the bank were asserting preferences and asking that the court make an order requiring all such creditors to appear and prove their claims. The order was made, and, after notice given, numerous creditors presented claims for preference. After a full hearing, the court made an order allowing preferences to certain creditors and denying preference to the others. Among the preferred claims allowed were a number aggregating $1,980.77, to be paid proportionately out of the amount of cash on hand in the bank when it failed — $1,891.67. Trustees of the Episcopate Fund, a corporation, were denied a preference and appeal. The state of Montana was denied a preference and appeals. Catherine L. Fay was denied a preference and appeals. A. D. Mitchell, Grace Mitchell and Martin Clancy appealed from the order in so far as it denied a preference to them and also in so far as it granted a preference to Fidelity & Deposit Company of Maryland, and American Surety Company of New York. Pursuant to stipulation of all the parties involved, the appeals are consolidated in this court.
The Episcopate Fund Appeal.
The Trustees of the Episcopate Fund, a corporation, purchased from the Banking Corporation a note and mortgage which became due February 1, 1922. On February 16, 1923, the Trustees of the Episcopate Fund delivered the note and mortgage to the Banking Corporation, with instructions to collect the same or institute proceedings for the foreclosure thereof. On April 30, 1923, the Banking Corporation accepted in payment of the note and mortgage a draft drawn on the Old National Bank of Spokane for $1,314, and one drawn on the National Park Bank of New York City for $743.32'. The amount due was $2,027, and the balance of $30 of the aggregate of the drafts belonged to the Banking Corporation. On April 30, 1923, the Banking Corporation indorsed the Spokane draft to the Helena Branch of the Federal Reserve Bank of Minneapolis and deposited it with that bank for collection. The draft was then forwarded .to the Spokane Branch of the Federal Reserve Bank of San Francisco and paid .to that bank May 1. Credit was thereupon given to the Helena Branch Bank. The latter bank never gave credit to the Banking Corporation on ont of town items until notified of payment by due course of mail. The proceeds of the collection did not come into the hands of the Banking Corporation, but were applied by the Helena Branch Bank; on the Banking Corporation's indebtedness. On final settlement with the Helena Branch Bank, there came into the hands of the receiver $1,390.79 in cash and approximately $80,000 in pledged securities.
On April 30, 1923, the Banking Corporation remitted the draft for $743.32, drawn on the National Park Bank of New York City to its correspondent, the Continental & Commercial National Bank of Chicago. That bank collected the draft and applied the proceeds on the indebtedness of the Banking Corporation. Sufficient of the securities pledged to the Chicago bank by the Banking Corporation were collected by the receiver to wholly discharge the indebtedness of the Banking .Corporation. Thereupon the rest of the securities pledged to the Chicago bank were turned over to the receiver and became a part of his trust.
"Except by agreement or usage a bank has no right to take anything but money in payment of paper it holds for collection. If it takes a cheek, it is agent of the drawer in collecting the cheek, and not until the money is obtained has it fulfilled its duty as agent of the holder of paper. So that, although it has had such check certified and has credited the amount to the owner of the paper, it is agent to collect; yet, if it becomes insolvent before actually receiving the money on such check, the owner can claim in preference to the general creditors; proceeds received subsequent to insolvency being held in trust." (1 Morse on Banks & Banking, 5th ed., 247.) To the same effect, see Selover on Bank Collections, page 242', Zane on Banks & Banking, page 299, and 2 Michie on Banks & Banking, pages 1395, 1399, 1433.) The record in this ease contains no evidence of agreement or usage to prevent the application of the rule.
"As between the cestui que trust and trustee, and all parties claiming under the trustee, otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature or character, and all the fruit of such property, whether in its original or its altered state, continues to be subject to or affected by the trust." (3 Pomeroy's Equity Jur., 4th ed., p. 2398, and note.) It follows that the cash and pledged securities which came into the hands of the receiver from the Helena Branch Bank and the pledged securities which came into his hands from the Chicago bank came charged with the trust of the Trustees of the Episcopate Fund. Such a result is a logical sequence of the holding of this court in the Stanton Bank Case, which was an appeal from the same order from which this appeal was taken. The decision in that case would necessarily have been the same had the Stanton Bank made its claim only after the funds and securities had reached the hands of the receiver. In that event, the Helena Branch Bank would have paid the receiver $9,965.67 instead of $1,390.79. (State ex rel. Rankin v. Banking Corporation, 74 Mont. 491, 241 Pac. 626.)
State's Appeal.
The state claimed preference for moneys deposited with the bank in excess of the amount covered by depository bonds. The court denied a preference to the state to the extent of the moneys deposited by the state treasurer which had come into his hands from the Industrial Accident Board, and from this action of the court the state appeals. These funds were public moneys, under the decision of this court in State ex rel. School District v. McGraw, 74 Mont. 152, 240 Pac. 812, rendered since the date of the district court's order, and the state is entitled to the preference. There is a dispute between the attorney general and the attorney for the receiver as to the am mint, involved. The correct amount of the additional preference to be allowed is $1,503.75, as given in the order of the district court.
Appeal of Catherine L. Fay.
On the first day of May, 1918, the Banking Corporation took a real estate mortgage in its name as "trustee for the holders of the obligations hereby secured." The secured obligations were thirty-two bonds for $500' each, payable to "the Banking Corporation of Montana, trustee or bearer." Bonds numbered 1 and 2 matured November 1, 1918, and bonds numbered 31 and 32 matured May 1, 1926. The habendum clause in the mortgage reads: "To have and to hold the above-described property unto the trustee to its own proper use, benefit, and behoof, forever, but in trust, nevertheless, under the terms of this mortgage deed, for the uses and purposes herein set forth."
The mortgage provided: "The trustee, whenever the said bonds shall have been paid in full and according to the terms and provisions in said bonds and herein contained, will deliver to the grantors a good and sufficient deed of acquittance and release hereof."
At some time prior to December 1, 1922, Catherine L. Fay purchased six bonds numbered 24 to 29. No indorsement or assignment appears on any of the bonds. On February 19, 1923, G. W. Casteel, as president, and 0. A. Tweed, as secretary, executed in the name of the Banking Corporation as trustee, a full satisfaction of the mortgage, which was recorded in Chouteau county on March 2'4, 1923. Among the papers of the Banking Corporation which came into the hands of the receiver was its draft on the Continental & Commercial National Bank of Chicago, payable to the order of Mrs. Catherine L. Fay, signed by O. A. Tweed, cashier, for #3,105. The principal and accrued interest of all the bonds, together with an agreed penalty for anticipated maturity, were paid the Banking Corporation on or prior to March 23, 1923, and probably as early as February 19. The bank had the address of Mrs. Fay. On April 7, 1923, G. W. Casteel, as president, wrote her, at her street address at Waterbury, Connecticut, as follows:
"The next semiannual interest payment on the above bonds will be May 1st. Arrangements have been completed for paying the loan off as soon as the bonds can all be gathered in. You will please turn your bonds in to us at your convenience, and within the next ten days or two weeks, so that the details can be properly completed. We have in process of closing now a very splendid loan on a high-class hotel property, and the loan will be divided into $500 bonds, bearing 7 per cent, interest. These bonds should be ready for delivery by May 1st. We consider them high class in every respect and will be pleased to recommend them as an investment for the money coming on the Hagen bond payment. We will make reservation of such number of bonds as you may want, until the total has been subscribed. Let us know if we shall hold some for you. We will be glad to give you full detailed information regarding this loan, if you are interested. ' '
On Saturday, April 28, 1923, Mr. William Scallon, as attorney for Mrs. Fay, called at the bank after banking hours and presented the bonds to O. A. Tweed, the cashier. He received no satisfaction from Tweed, who told him he would have to see the president, Casteel, who was not at the bank. The bonds were left with the bank for safekeeping. They were found among the bank's papers, perforated "paid." When the bank closed there was $1,891.67 in money on hand. It had on deposit in banks $19,270.45. It does not appear that, at any time before the bank closed and after the bonds were paid, the amount of money in the bank was less than when it closed. It does not appear that any of the money received by the bank in payment of the bonds was commingled with the funds deposited in banjis. The receiver was a witness at the trial. Mrs. Fay's claim was presented, in due course, to the receiver, as a preference claim, and allowed as a general claim in the amount of $3,210. The court confirmed the action of the receiver, and claimant appealed.
"If a mortgage is made to one person to secure several notes or bonds made to him, and the mortgagee assigns the notes or bonds to different persons, but continues to hold the mortgage security in his own name, he will hold it in trust for the several persons to whom he has assigned the mortgage notes, bonds, or other evidences of the debt due to him." (2 Perry on Trusts, 6th ed., 753.) "Trustees for bondholders are governed by the general rules that govern trustees in the ordinary performance of the duties of a trust." (Id. 760.) "In all matters connected with his trust, a trustee is bound to act in the highest good faith toward his beneficiary, and may not obtain any advantage therein over the latter by the slightest misrepresentation, concealment, threat, or adverse pressure of any kind." (Sec. 7888, Bev. Codes 1921.)
The funds of the bondholders became a trust fund in the hands of the Banking Corporation, and, so far as such trust funds are traced to the possession of the receiver, they are impressed with such trust, and the bondholders are entitled to a preference to that extent. In this case, the amount of funds so traced is $1,891.67. (Hawaiian Pineapple Co. v. Browne, 69 Mont. 140, 220 Pac. 1114.) What has been said does not conflict with the holding of this court in Yellowstone County v. First Trust & Savings Bank, 46 Mont. 439, 128 Pac. 596. The decision in that case was based on the construction of the agreed statement of facts. The court said: "The recital that the county funds were 'commingled with the funds of said bank,' cannot be given any other meaning than that such county funds were commingled with all the funds of the bank. The expression, 'the funds of said bank,' means all the funds of the bank, and since the deposits in 'the correspondent banks constituted portions of this bank's funds, the recital must be held to mean that the county funds were mingled with the funds comprising each of these several deposits."
Mrs. Fay is entitled to a preference in the amount of cash in the bank when it closed pro rata with other preferred claimants of the same class.
Appeals of A. D. Mitchell, Grace Mitchell and Martin Clancy.
The appellants each held certificates of deposit in the bank which matured in July and September, 1922. These certificates were renewals of certificates covering a period of years. Their claims aggregate $44,206.01. Grace Mitchell and Martin Clancy were represented in their dealings with the bank by A. D. Mitchell. The appellants claimed preference for the reason that they left their money in the bank in consequence of false and fraudulent representations as to the solvency of the bank, made by G. W. Casteel, its president, to A. D. Mitchell, which they believed and upon which they relied. They offered to prove the insolvency of the bank during all the period from the maturity of the certificates to the closing of the bank. The offer was denied. The certificates were neither paid nor renewed. A review of the evidence as to the representations is unnecessary. The appeal is from a denial of the preference.
These parties further appealed from the order of the district court allowing preferences to the American Surety Company and the Fidelity & Deposit Company of Maryland. These companies had furnished depository bonds for deposits of state funds made by the state treasurer. They paid the state's claim under the bonds and demanded preference by reason thereof. The appellants particularly question the allowance of the preference as to moneys deposited by the state treasurer in the estray account of the state livestock commission.
The right of the state to a sovereign preference in the assets of an insolvent bank and the right of a surety to be subrogated thereto were fully considered and upheld by this court in the case of Aetna Accident & Liability Co. v. Miller, 54 Mont. 377, L. R. A. 1918C, 954, 170 Pac. 760, and again in the case of State ex rel. Rankin v. Madison State Bank, 68 Mont. 342, 218 Pac. 652. The rule of these eases is, in the absence of legislation to the contrary, supported by the overwhelming weight of authority and is now reaffirmed. Since the rights of the parties became vested before the enactment of Chapter 132, Session Laws of 1925, that Act has no application to this case.
The state was entitled to a preference for the moneys in the estray account for the reasons heretofore stated in this opinion in considering the state's appeal.
Counsel states in his brief: "Obviously, from a common sense standpoint, appellants' situation is, so far as the specific assets are concerned, the same as that of one who deposited $40,000 in-cash under false pretenses." This statement is fallacious. The appellants, when the representations were made, were and had been for many years general depositors. The relation of a bank with a general depositor is that of debtor and creditor. (Pethybridge v. First State Bank, 75 Mont. 173, 243 Pac. 569; 1 Perry on Trusts, 122; 2 Michie on Banks & Banking, 883.) It would be a strange doctrine that would permit a creditor to impress his debtor's property with a trust simply because, when the creditor attempted to collect the debt, the debtor falsely represented his ability to pay and thereby obtained forbearance.
In Venner v. Cox (Tenn.), 35 S. W. 769, the court of chancery appeals of Tennessee had under review a case where the depositor was induced to leave his deposit in an insolvent bank by the false and fraudulent representations of its president. The contention of the depositor was disposed of in the following words: "But this case is one simply of creditor and debtor, wherein the debtor, by a series of egregious lies as to his solvency and ability to pay his debts, induces his creditor to forbear pressing the payment of his demand and to continue his creditor. If such misrepresentations operate in equity to divest title to property, and to convert debtors into trustees for their creditors, we apprehend that the field of trust estates will be immensely enlarged." The case is cited with approval in 7 C. J\ 732, and 1 Michie on Banks & Banking, 594, note 1. The district court was right in rejecting appellants' offer of proof and in denying them a preference.
The cause is remanded to the district court, with directions to modify the order appealed from by allowing the further preferences hereinbefore indicated, and when so modified the order will stand affirmed.
Modified and affirmed.
Mr. Chief Justice Callaway, Associate Justices Stark and Matthews, and Honorable Theodore Lentz, District Judge, sitting in place of Mr. Justice Holloway, disqualified, concur.