Court Opinion

ID: 8033890
Source: CourtListenerOpinion
Date Created: 2022-09-09 03:18:32.583464+00
Date Added: 2024-06-11T16:37:03.673957
License: Public Domain

Rose, J.,
dissenting.
I take radical exception to the decision of the majority and to the propositions on which the allowance of plaintiff’s preferred claim is set aside.
*452The First National Bank of Gering, defendant, received from the Central National Bank of Lincoln, plaintiff, and accepted three promissory notes, aggregating with interest $4,467.23, for the sole purpose of collecting and returning the amounts due plaintiff, the owner. To that purpose alone defendant was specifically limited in writing and became a trustee to perform the duty of a fiduciary while openly transacting a banking business. defendant collected the notes, betrayed its trust, clandestinely credited to plaintiff on its books the proceeds of the notes, hid the trust funds in a wilderness of banking assets exceeding on paper $440,-000, where the converted trust property could not be identified, misappropriated the credits, wrecked the bank, went into the hands of a receiver and challenged- plaintiff to trace its trust funds into a specific asset of. the insolvent bank on penalty of having them taken by the general creditors of defendant.
The proceeds of plaintiff’s notes augmented the deposits in the insolvent bank, increased the general assets, replenished the depleted bank reserve and paid banking obligations to general creditors.' The mere change in the form of the trust property from notes to proceeds, from proceeds to credits, and from credits to assets, did not change the ownership. Plaintiff, the beneficiary, remained the owner. Defendant never acquired title to the notes nor to the proceeds nor to the credits, but, violating its duties as a fiduciary, converted the trust property to its own use by means of fictitious credits and misappropriations. Between plaintiff and defendant the contractual relation of banker and depositor was never created. The use of the trust funds for banking purposes was never authorized. Plaintiff had no knowledge of the collections or the credits or the misappropriations until after defendant had unlawfully spent' the trust money and until after the comptroller had closed the insolvent bank when it had on hands in cash $1,370.42 only — a fund practically exhausted.
Recognized principles of equity adapted to ethical banking under existing conditions and customs require payment *453of plaintiff’s claim out of the augmented assets to which the proceeds of the notes were illegally and fraudulently diverted. Departing from these principles, the majority have rendered a decision which permits general creditors of defendant to collect their debts in part from plaintiff, an iníocent suitor that did not participate in any wrongful, fraudulent or illegal act, or transfer its property to defendant or to the receiver or to the general creditors by any instrument known to the law. Plaintiff did not owe any debt or make any agreement authorizing defendant to use the trust property in the banking business. The proceeds of plaintiff’s notes were not seized on execution or attachment. The decree appointing the receiver did not authorize him to apply the trust funds of plaintiff to the payment of defendant’s debts. The general creditors have no greater right to plaintiff’s converted trust property than defendant. The effect of the decision is to allow the general creditors the benefits of defendant’s conversion and to apply the converted trust property to the payment of their contractual claims against the trustee. After reading what courts and text-writers have said on this subject, I am of the opinion there is no reason in morals, law or logic for the failure of a court of equity to restore to plaintiff from the mass of defendant’s assets the equivalent of the converted proceeds of the notes. The majority rule, defeating plaintiff’s claim for payment out of the mass of assets in the hands of the receiver, as stated in the syllabus, is:
“A trust fund may be followed and recovered in equity by the beneficiary, 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 some specific fund or property.”
I solemnly protest against this rule that sets bounds to equity power and thus prevents the court from restoring trust money indistinguishably mingled with assets in the hands of a dishonest trustee, unless “when, and only when,” the beneficiary can trace it to, and identify it in, some specific fund or property. Under that rule equity does not af*454ford a remedy, if the lawless trustee converts the trust property and hides it in assets where the beneficiary cannot identify it. Banking, finance and commerce have outgrown the rule stated, if it ever had any foundation in righteousness. Limitation of equitable power to a hidebound rule often defeats justice.
The mission of equity will fail if it is not permitted to develop with honest business and existing conditions. Knavery is progressive and more vigilant than equity at a standstill. Rascaldom invents at night devices to evade and cheat fixed rules of equity announced by courts in the light of day. The means employed by a faithless trustee to change the form of trust property and to hide its equivalent from the beneficial owner in a general mass of assets should not be more powerful for iniquity than the conscience of a chancellor for justice. I have an abiding conviction that a proper disposition of the present case required adherence to the following rule of this court:
“Where a trustee mingles trust moneys with his own funds, cestui que trust is entitled to a charge upon the whole; and so long as any portion of the mass into which the trust fund has entered remains in any form, it is subject to such charge, and may be followed and claimed.” City of Lincoln v. Morrison, 64 Neb. 822.
This rule of equity was stated by an oracle of wisdom and was deliberately adopted by a unanimous court. It does not set bounds to equitable relief, but adopts the principle that a claim for converted trust funds, ind'istinguishably mingled by a faithless trustee with general assets thus augmented, may be made a charge against the mass. The majority, instead of adhering to this classic in the literature of equity jurisprudence, followed its mere application by Doctor Pound to a mass of assets which did not include the equivalent of converted trust property. The growth of the remedy indicated by the rule last quoted was recognized as early as 1889 in an opinion by Chief Justice Fuller of the supreme court of the United States, who quoted with approval the following language:
*455“Formerly the equitable right of following misapplied money or other property into the hands of the parties receiving it depended upon the ability of identifying it; the equity attaching only to the very property misapplied. This right was first extended to the proceeds of the property, namely, to that which was procured in place of it by exchange, purchase, or sale. But if it became confused with other property of the same kind, so as not to be distinguishable, without any fault on the part of the possessor, the equity was lost. Finally, however, it has been held as the better doctrine that confusion does not destroy the equity entirely, but converts it into a charge upon the entire mass, giving to the party injured by the unlawful diversion a priority of right over the other creditors of the possessor.” Peters v. Bain, 133 U. S. 670, 693.
The application of the rule stated in City of Lincoln v. Morrison, 64 Neb. 822, announced as it was by this court as a guiding principle of equity and justice, would have resulted in a decree allowing plaintiff’s claim in preference to the claims of general creditors.
The proposition that the trust fund did not enter into the purchase of the bank building, furniture, fixtures or bills receivable, as a reason for not granting plaintiff the relief sought, will not stand the test of analysis or justify the failure to charge the mass of assets with plaintiff’s claim. It destroys itself when reduced to a definite philosophy. The principal mediums of exchange in the business world are credits, commercial paper, checks, drafts and securities. Equity looks through the mere forms in which property is held to substance and reason for the purpose of dealing justly with conditions as they exist. Though the converted trust funds were not originally hid in or mingled with the kinds of property enumerated, the bank indebtedness was nevertheless reduced by the proceeds used for banking purposes. The general indebtedness with which those items of property were burdened was decreased to the extent of the trust fund wrongfully converted and used by the insolvent bank. The outstanding obligations of defendant *456would have been greater to the extent of $4,467.23, when the receiver took charge, if they had not been reduced by the proceeds of the notes. The financial disaster of the insolvent bank might have occurred earlier, with still greater liabilities, except for the unlawful use of the converted proceeds in banking transactions. All that seems to me to be “manifest,” in considering plaintiff’s right to a preference over general creditors, is that it is immaterial whether the converted proceeds were used to purchase the bank building, furniture, fixtures and bills receivable or reduced the insolvent bank’s indebtedness by which those items of property were burdened.
The same result is reached by another course of reasoning. Defendant is insolvent. Its assets are in the hands of a court of equity for the purpose of winding up its affairs and of distributing its assets among those entitled to them. Before distribution can be made the assets- must be reduced to a common fund. Upon completion of that process all property, real, personal and mixed, must be reduced to money — a single fund in the hands of the receiver. Plaintiff’s property, changed in form by fraud, is in that fund. No reason exists for separating the different kinds of property to make proof of plaintiff’s right to a preference impossible and for uniting all assets in a common fund for distribution among general creditors.
The classification of plaintiff with general creditors is fundamentally wrong. Plaintiff is in a different class. Without any fault or neglect or suspicion of wrongdoing plaintiff confidingly entrusted its notes to defendant for collection in the due course of honest banking. Plaintiff by specific instructions in writing deliberately attempted to keep its notes and the proceeds thereof out of the defendant bank. It did not part with its title or ownership or become, a depositor. The situation of the general creditors is entirely different. Their claims grew out of mutual contracts, legal deposits and other authorized transactions. Their funds, property, deposits and credits were entrusted to the bank under mutual contracts creating the relation of debtor *457and creditor or of banker and depositor. In view of this difference, it would be more reasonable, equitable and just to classify plaintiff as a preferred creditor.
The ruling of the majority that plaintiff cannot recover its trust proceeds without proof that they went into a specific fund or into an identified article of property in the hands of the receiver, after being traced into the general assets, does violence also to established rules of evidence. It was the duty of defendant as trustee to disclose to the beneficiary what became of the trust property. That duty was never performed. The insolvent bank was required, under governmental control, to keep an account of its transactions. The law imposed on defendant as trustee the duty of telling where the trust funds went. If they could be followed after being mingled with general assets into which they were traced by plaintiff, the banker was the person to make the proof and the equity court was the tribunal to require defendant to disclose the truth, if provable. The holding that plaintiff was compelled to trace its property beyond the mass into a specific fund amounts to admitting the futility of equitable relief in a controversy like this between honest business and shocking fraud, both shown beyond the possibility of mistake.
Confidence in banks as collecting agencies will be impaired by the rules announced by the majority. Millions in notes,and drafts aré transmitted daily by banks to other banks for collection. With disturbed banking conditions and frequent bank failures commercial paper intended for collection only may, in a changed form, be diverted in a night to general creditors of insolvent banks and lost, if it must be traced into a specific fund or into an identified article of property as a condition of reclaiming it. The general creditors are not entitled to the forbidden fruit of defendant’s ■conversion.
I am authorized to say that Chief Justice Goss and Judge Day concur in this dissent.