Court Opinion

ID: 8033889
Source: CourtListenerOpinion
Date Created: 2022-09-09 03:18:32.581152+00
Date Added: 2024-06-11T16:37:03.671275
License: Public Domain

Good, J:
The Central National Bank of Lincoln brought suit in equity against the First National Bank of Gering and its receiver and another to establish a preferred claim, payable in full from the general assets of said bank in the hands of its receiver. The defendant bank will hereinafter be called the bank.
While the bank was open and transacting, under the laws ■of the United States, a general banking business, it received from plaintiff for collection and return four promissory notes, aggregating in face value about $4,800. Plaintiff transmitted these four notes to the bank in November, 1923. They were received by the bank in a fiduciary capacity and on specific instructions to collect and make return. Two of the notes were by the bank collected from the makers by the latter drawing checks upon their accounts in the bank. Another of the notes was renewed, and the bank sold the renewal note and converted or used the proceeds. The bank was closed December 31, 1923. The fourth of the notes was found in the bank after it went into the possession of the receiver. This latter note was ordered returned to the plaintiff and will not be further considered in this case.
Plaintiff’s action is based on the assumption that the proceeds of the three notes in controversy were mingled with *446the general assets of the bank, and that they augmented the assets which came into the possession of the receiver, to the extent of the amount of the proceeds of such notes, and that, therefore, plaintiff is entitled'to have its claim allowed as preferred and payable from the general assets of the bank in the hands of its receiver. The defense of the receiver proceeds on the theory that the proceeds of the three notes have not been traced by the plaintiff into any specific property that came into the receiver’s possession.
The foregoing facts are presented by proper pleadings, carefully drawn. The trial court found for plaintiff, preferred its claim to the full amount of $4,467.23, and directed payment from any funds in the hands of the receiver. Defendant bank and its receiver appeal.
Is plaintiff, under the pleadings and facts, entitled to have its claim preferred and paid out of the general assets of the bank in the hands of its receiver? This is the only question for determination.
It appears that plaintiff was not informed of the collection of the notes and did not know that any of them had been collected or renewed until after the failure of the bank. At the time the two notes were collected and at the time the third note was renewed, the bank gave plaintiff credit upon its books for the amount of the proceeds of each of the three notes. This was done without the knowledge or consent of the plaintiff, and plaintiff never received the proceeds of any one of the three notes. It further appears that assets of the bank, consisting of real estate, furniture, fixtures, bills receivable, altogether having a face value in excess of $400,000, came into the possession of the receiver, but that such assets were probably worth not to exceed 40 per cent, of their face value. There was also an item of about $1,300 in cash. It appears that this cash item was practically extinguished or used in the payment of other preferred claims, pursuant to the order of the comptroller of the currency. It appears also that subsequent to the collection of the two notes and the renewal of the third the bank acquired some new bills receivable; but whether they *447represented new loans made from cash funds in the bank, or were renewals of preexisting bills receivable owned by the bank, is not disclosed. <
For the sake of argument, it may be assumed that the bank received cash for the three notes in question and that plaintiff has traced the proceeds of its notes into the cash fund of the bank. If there had been a cash fund on hand sufficient to pay the plaintiff’s claim, there is no doubt but that it should have been allowed and ordered paid as a preferred claim from such fund, because plaintiff had traced its trust fund into the cash fund. However, since .the cash fund has been dissipated and plaintiff has not traced its trust fund into any other specific property, the question arises whether or not it may impress a lien or trust upon all the assets of the bank and have its claim paid therefrom, to the exclusion of general creditors of the bank.
It is manifest that, so far as the bank building, furniture and fixtures are concerned, plaintiff’s trust fund did not enter into their purchase and is not invested in those items. It is also apparent that.plaintiff’s trust fund did not enter into the purchase of any of the bills receivable owned by the bank at and prior to the time it collected or converted the proceeds of plaintiff’s notes.
The law relating to the right of a cestui que trust to follow trust funds that have been misapplied by the trustee has been one on which the authorities have, from the earliest time, differed. The ancient rule was that money had no ear-marks, and when a trust fund was mingled with other funds it could no longer be identified and could not be reached by the beneficiary. The first departure from this rule was made in the English case of In re Hallett’s Estate, 13 Ch. Div. (Eng.) 696, in which it was held: “If money held by a person in a fiduciary capacity, though not as trustee, has been paid by him to his account at his bankers, the person for whom he held the money can follow it, and has a charge on the balance in the bankers’ hands.”
In attempting to follow the rule thus announced, some of the courts went to the extreme of holding that where *448trust funds are commingled with the general assets of the trustee the beneficiary has a lien upon all of the assets of the trustee and has a preference over general creditors of the trustee. This rule was announced in McLeod v. Evans, 66 Wis. 401, and was followed, to some extent, by the courts of Kansas, Missouri, and Iowa, and, apparently, by this court in the cases of Anheuser-Busch Brewing Ass’n v. Morris, 36 Neb. 31, and State v. State Bank of Wahoo, 42 Neb. 896. In the last-mentioned cases this court, in effect, held that, where a bank collects money for another, it holds the same as trustee of the owner, and, on the making of an assignment by the bank for the benefit of its creditors, the trust character still adheres to the funds in the hands of the assignee, and the owner is entitled to have his claim allowed and preferred over the claims of general creditors.
Later, the case of McLeod v. Evans, supra, and other early decisions by the Wisconsin "court were overruled in Nonotuck Silk Co. v. Flanders, 87 Wis. 237. In the latter case it was held that one for whom a bank had collected a draft before it failed was not entitled to preference over other creditors if the bank had disposed of the proceeds before the assignee came into possession. The authorities up to that time were quite extensively reviewed in this case. It was there pointed out: “The guiding principle is that a trustee cannot assert a title of his own to trust property. If he destroys a trust fund by dissipating it altogether, there remains nothing to be the subject of the trust. But so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust.” The opinion further quoted from Little v. Chadwick, 151 Mass. 110, wherein it was said: “When trust money becomes so mixed up with the trustee’s individual funds that it is impossible to trace and identify it as entering into some specific property, the trust ceases. The court will go as far as it can in thus tracing and following trust money; but when, as a matter of fact, it cannot be traced, the equitable right of the cestui que trust to follow it fails.”
*449This court also has departed from the rule announced in Anheuser-Busch Brewing Ass’n v. Morris, and State v. State Bank of Wahoo, supra, and has allied itself with the general rule now prevailing in the courts of this country. In the case of State v. Bank of Commerce, 54 Neb. 725, it was held:
“When trust funds are wrongfully converted, and not only do not remain in the hands of, and are not found among the assets of, the wrong-doer but are actually traced out of his hands and shown to have been dissipated, then the beneficiary of the trust fund is not entitled to have his claim allowed as a preferred one against the estate of the insolvent wrong-doer.
“If the trust property consisted of money, the claim of the beneficiary of the trust fund may be preferred to the extent of the cash found among the assets of the insolvent trustee at the time of his failure, unless it affirmatively appears that such cash assets are not part of the trust fund.”
In that case it was recognized that the beneficiary of a .trust fund could follow it so long as he could trace it into any specific fund or property. In that case a county treasurer deposited trust funds in a bank which afterwards failed. The court held that the county was entitled to have its claim decreed a first lien upon any asset of the insolvent bank which it showed was the product of the beneficiary’s moneys. More than $15,00.0 had been so deposited, and the bank was aware of the fact that it was a trust fund. When the bank failed, it had left in its vaults only $140 in cash. It had -used the treasurer’s deposit in paying off other depositors of the bank. It was not shown that any part of the public money was represented or embraced in any particular assets of the bank which came into the possession of its receiver. The county was held entitled to reclaim the $140, as being part of the trust fund, but was not entitled to have its claim against the insolvent bank decreed a first lien upon the other assets thereof.
Again, in Morrison v. Lincoln Savings Bank & Safe Deposit Co., 57 Neb. 225, this court held: “The owner of trust *450property is not, merely by reason of the character of his claim, entitled to a preference over the general creditors of an insolvent trustee.” And further held: “A person asserting a claim for preference against an insolvent estate has the burden of showing that such estate has been increased, to some extent, by the misappropriation of trust funds or property belonging to the claimant.” In that case a bank, while a going institution, had received trust funds and, prior to insolvency, had misappropriated them. It was sought to have the claim allowed as preferred against the general assets of the bank. It was announced in the body of the opinion that “the doctrine held in some jurisdictions, that the beneficiary of a trust fund is entitled in a case of this kind to a preference over the general creditors of an insolvent without showing that such fund, or part of it, was included in the assets which came into the hands of the receiver,” was expressly repudiated in the case of State v. Bank of Commerce, supra. It was further stated therein that the right rests “upon the equitable title of the beneficiary, who, seeking to recover specific property or to fix a charge upon a mass, must trace his estate, and show that the specific thing claimed is in equity his property, or that his estate has gone into and remains in the mass he seeks to charge.” Later in the case of City of Lincoln v. Morrison, 64 Neb. 822, in an able opinion written by that eminent jurist, Judge Pound, the authorities were again reviewed, and it was therein held that, where a trustee has used the trust fund in paying his debts, the cestui que trust is not entitled to a preference over general creditors for the amount of his trust fund so misappropriated.
The principles announced in the last three mentioned Nebraska cases are now firmly established in this jurisdiction. They are supported by the great weight of authority, both English and American, and seem to be based upon sound reason. The rule is that a trust fund may be followed and recovered in equity, as against the trustee or his general creditors, either in its original or substituted form, when, and only when, it can be traced to and identified in *451some specific fund or property. 39 Cyc. 350, and cases therein cited; 26 R. C. L. 1348, 1354, 1355, secs. 213, 214, 218, 219, and cases therein cited. The reason for the rule is not that the beneficiary is entitled to a preference because of the misapplication by the trustee of trust funds, but upon the theory that the trust fund has been traced into, and is a part of or invested in, some specific fund or property of the trustee.
In the instant case, the plaintiff has done no more than to show, at most, that its trust fund was paid into the bank and became commingled with the bank’s cash fund. If there was anything in that fund which came into the hands of the receiver, then plaintiff would be entitled to resort to such fund, because it had traced its property into it. If plaintiff had shown that the cash fund of the bank, which included plaintiff’s funds, was invested in some specific property, he could still follow it to that particular property. It is quite apparent that plaintiff’s trust funds were not invested in the bank building, furniture and fixtures; nor were they invested in any of the bills receivable which belonged to the bank at the time the trust funds were paid to it; nor is it disclosed that the trust funds of plaintiff were invested in any of the assets of the bank which came into the possession of the receiver. The proof, therefore, fails to establish plaintiff’s right to a preference out of the general assets of the bank.
It follows that the judgment of the district court is erroneous. It may be that upon a subsequent trial plaintiff may be able to trace its trust funds into some specific property that came into the possession of the receiver, in which event, of course, plaintiff should be given a preference as to such specific property. The judgment is, therefore, reversed and the cause remanded for further proceedings.
Reversed.