Court Opinion

ID: 3431917
Source: CourtListenerOpinion
Date Created: 2016-07-05 20:00:47.125194+00
Date Added: 2024-06-11T14:03:44.745355
License: Public Domain

The Mechanics  Metals National Bank, the Metropolitan Life Insurance Company, and the State Bank of Omaha have filed petitions for rehearing. The first two contend 8.  BANKS AND    that the preferences allowed to them should be BANKING:     established against all of the assets coming liquidation: into the possession of the receiver, instead of equitable    being limited to a pro-rata distribution of the trust:       cash. They and the State Bank of Omaha argue presumption: that it will be presumed that the trust fund was prorating    present in the mass of the bank's assets, under intermingled the "augmentation theory," and that the receiver trust funds. must overcome this presumption by clear and satisfactory proof that the bank had lost or dissipated the fund.
Petitioners are in error in their assertion that the augmentation theory in any such sense prevails in this state. InDavenport Plow Co. v. Lamp, 80 Iowa 722, preference was given for money used by the defunct company in its business and in the payment of its debts. In Independent Dist. v. King, 80 Iowa 497, 503, it was said that, money having been traced into the estate impressed with the character of a trust fund, the burden was upon the assignee "to show that it contributed nothing to the estate which he acquired by virtue of the assignment * * *." This holding is based on McLeod v. Evans, 66 Wis. 401, 409 (28 N.W. 173, 214). McLeod v. Evans was overruled in Nonotuck Silk Co. v.Flanders, 87 Wis. 237 *Page 506 
(58 N.W. 383). In Bradley v. Chesebrough, 111 Iowa 126, the previous cases of Davenport Plow Co. v. Lamp and Independent Dist. v. King
were reviewed and limited, and the doctrine was laid down:
"That plaintiff was a trust creditor does not, of itself, entitle him to preference over general creditors. To obtain that right, he must show, by presumption of law or otherwise, that his fund has been preserved in the hands of the assignee, as an increase of the assets of the estate, from which it may be taken without impairment of the rights of general creditors."
This court has since steadily adhered to this doctrine. Cases post. Payment of debts is not an augmentation of assets. Leach v.State Sav. Bank, 202 Iowa 265 (quoted post); Birch v.International St. Bank (S.D.), 208 N.W. 167; In re Seven CornersBank, 58 Minn. 5 (59 N.W. 633); City of St. Paul v. Seymour,71 Minn. 303 (74 N.W. 136); Willoughby v. Weinberger, 15 Okla. 226
(79 P. 777); Empire St. Sur. Co. v. Carroll County, 114 C.C.A. 435 (194 Fed. 593). In First St. Bank v. Oelke, 149 Iowa 662, 667, it is said:
"It is the settled rule of our cases that a preference will not be allowed unless it be found that the fund has increased the present assets of the bank, and that it may be taken therefrom without impairment of the rights of creditors."
Confusion and misunderstanding have arisen probably because of the entanglement of the ultimate fact, which must be made to appear affirmatively, with the method by which that fact may be shown. The ultimate fact that must be shown is that the "fund has been preserved in the hands of the assignee, as an increase of the assets of the estate, from which it may be taken without impairment of the rights of general creditors." Cases above;Hudspeth v. Union Tr.  Sav. Bank, 197 Iowa 913; City of NewHampton v. Leach, 201 Iowa 316; Murray v. North Liberty Sav.Bank, 196 Iowa 729; Whitcomb v. Carpenter, 134 Iowa 227; Seeleyv. Seeley-Howe-Le Van Co., 128 Iowa 294. So-called claims of preference of the character of those involved in this case may not be allowed merely as for a liability or debt of the insolvent's. A liability for trust property misappropriated or lost is not entitled to a preference. The right to preference consists in the right of property in assets in the possession of the receiver, but equitably belonging to *Page 507 
claimant, and not belonging to the bank. The claimant is in the attitude of pursuing his own property. He may pursue it into different forms of property, if it is shown that it has been converted into such. But his right ultimately is to recover his own property, not to recover a debt or liability for his property. The principle is that the bank is not entitled to use property belonging to another to pay its debts, and its creditors are not entitled to resort to such property for satisfaction.Officer v. Officer, 120 Iowa 389, 393, 395; Farnsworth v.Muscatine Prod.  P.I. Co., 177 Iowa 21.
"`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.'" In re Hallett'sEstate, 13 Ch. Div. 696, quoted in Nonotuck Silk Co. v. Flanders,87 Wis. 237 (58 N.W. 383, 385).
As said in Stilson v. First St. Bank, 152 Iowa 724, 730:
"Claimant's claim of preference does not present a controversy with the bank, but with the other creditors of the bank. The right of preference as against other creditors is not an equity. When such preference is awarded, it is awarded strictly as a right of property, and not as a mere right to equitable relief against other creditors."
It is said in Slater v. Oriental Mills, 18 R.I. 352
(27 A. 443):
"* * * the illustration may be used of a debtor mingling trust funds with his own in a chest or bag. Though the particular money cannot be identified, the amount is swelled just so much, and the amount added belongs to the cestui que trust. But in the latter case there is no swelling of the estate, for the money is spent and gone; or, as respondent's counsel pertinently suggests, `Knight Bruce's chest — Jessel's bag — is empty.' Shall we, therefore, order a like amount to be taken out of some other chest or bag, or out of the debtor's general estate? Suppose the general estate consists only of mills and machinery acquired long before the complainants' money was appropriated. Upon what principle could that property be taken to reimburse them? But the complainants say: `Our money has been misappropriated *Page 508 
by the debtor without our consent and without our fault. Why should we not be reimbursed out of his estate?' Undoubtedly is it right that everyone should have his own; but, when a claimant's property cannot be found, this same principle prevents the taking of property which equitably belongs to creditors of the trustee, to make it up. The creditors have done no wrongful act, and should not be called upon, in any way, to atone for the misconduct of their debtor. It is an ordinary case of misfortune on the part of claimants, whose confidence in a trustee or agent has been abused."
By our statute the depositor is given a preference in the distribution of the proceeds of the property of the bank. The depositors are entitled to have the bank's property devoted first to the payment of depositors. They are not entitled to have property not belonging to the bank applied to such payment. Conversely, the owner of property which the bank has taken and misappropriated is not entitled to reimbursement out of property which belonged to the bank, and which the law gives to the depositors. The controversy is with the depositors. Stilson v.First St. Bank, 152 Iowa 724, 730 (quoted supra). It was said inFarnsworth v. Muscatine Prod.  P.I. Co., 177 Iowa 21, 30:
"It follows, therefore, that the burden is on the one claiming preference to point out the fund into which his property has gone, show that it exists, passed into the hands of the receiver, either in its original form or as substituted in other property, and that, in taking out his property, he leaves the property of the insolvent concern intact for general creditors."
The ultimate fact of non-dissipation may be shown by actual proof, or prima facie by presumption.
Property in the possession of and ostensibly belonging to the bank is presumed to be its own. Such property may be shown, however, to be the property of claimant, and to have come into the possession of the bank under circumstances which did not give the bank title to it. When it is so shown to have come into the possession of the bank, without more, we allow to claimant the benefit of the presumption that the bank did not dispose of the property which it had no right to dispose of, and has not lost or dissipated it, but transmitted it, with the other assets in its possession into the possession of the receiver. This *Page 509 
presumption has its limitations, which need not be now particularly referred to. First St. Bank v. Oelke, 149 Iowa 662;Stilson v. First St. Bank, 152 Iowa 724; Farnsworth v. MuscatineProd.  P.I. Co., 177 Iowa 30; Jewel v. Clay, 107 Iowa 52;Bradley v. Chesebrough, 111 Iowa 126; Hanson v. Roush, 139 Iowa 58;  Hudspeth v. Union Tr.  Sav. Bank, 197 Iowa 913.
This presumption has been spoken of as "a presumption of law." It is not a presumption of law, but a rebuttable presumption of fact. Stilson v. First St. Bank, 152 Iowa 724, 727; Hudspeth v.Union Tr.  Sav. Bank, 197 Iowa 913.
In the case before us, both on original submission and in the petitions for rehearing, the collections for the Mechanics 
Metals National Bank and the Metropolitan Life Insurance Company are treated as having been made in the form in which the collecting bank would have authority to make them, — that is, in money. It is shown, therefore, that moneys belonging to claimants came into the possession of the bank, and were not paid over by the bank to claimants. From these facts, standing by themselves, a presumption would arise that the moneys of the claimants passed with the assets in the bank into the possession of the receiver. It is not presumed that the money was converted by the bank into bills receivable, or into a deposit account with another bank, or into any other form of property. If it appears that the claimant's money was intermingled with the bank's money, the trust attached to the commingled fund. When by withdrawals the commingled fund has been diminished below the amount of the trust fund, the trust fund is, to the extent of such diminution, dissipated. As said in the Slater case, 18 R.I. 352
(27 A. 443), supra, "The money is spent and gone." The trust for cash received by the bank may be established against the cash found in the possession of the bank when the receiver takes charge, but only to the extent of the lowest amount of cash held by the bank between the time of the receipt of the trust funds and the time of enforcing the trust. Board of Commissioners v. Strawn, 157 Fed. 49; Schuyler v. Littlefield, 232 U.S. 707. This rule has been often recognized in this court. In Whitcomb v. Carpenter,134 Iowa 227, 231, it was said, through Justice Weaver:
"The money was mingled with the funds of the bank, which were certainly increased by that amount, and the trust character *Page 510 
of the sum so appropriated operates to create a lien for its amount upon the entire fund with which it was mingled; and when thereafter the fund is diminished by withdrawals therefrom by the trustee, he is presumed to have withdrawn his own moneys, and so long as the balance left on hand is equal to or greater than the trust fund, the right of the cestui que trust to have it applied to the payment of his claim remains unimpaired."
It was recognized in Leach v. Iowa St. Bank, 202 Iowa 887, 892, where it is said:
"So far as appears, upon this record, the fund to the credit of the Iowa State Bank in its correspondent bank was never depleted to a point below the proceeds of these bonds."
It was recognized in In re Insolvency of Farmers  Merch. Sav.Bank, 202 Iowa 859, 863, where it is said:
"It follows that either the bonds in the possession of the receiver must be retained by him, because not specifically identified, and be used for the purpose of paying general creditors, or they must be prorated among the respective claimants. It would be manifestly inequitable and unjust to deprive the claimants thereof, and thereby swell the assets of the bank, which never acquired title thereto, to the advantage of creditors. We have no hesitation in holding that the bonds must be returned to the claimants, to be prorated among them, or sold by the receiver, and the proceeds thus used."
In Leach v. State Sav. Bank, 202 Iowa 265, 269, it is said:
"The argument for the applicant at this point is that the deposit of these funds to the credit of the bank necessarily enlarged its assets, and that, therefore, the amount coming later into the hands of the receiver must have been enlarged accordingly. The first part of this argument would be good, if the bank were solvent; the latter half of the argument is nonsequitur. The tracing of these funds shows that they operated to the advantage of particular creditors only. If the money had been in some manner invested in other assets, a different question would be presented. The money disappeared into a chasm of indebtedness. It reduced particular indebtedness accordingly, but it created no asset. So far as the debtor bank was concerned, it was a dissipation, and not an investment."
The general principle is well expressed in County of Grand *Page 511 Forks v. Baird, 54 N.D. 315, 320 (209 N.W. 782, 783), where it is said:
"The principle is that the trustee cannot assert a title of his own to trust property. In applying this principle to banks holding public funds in trust, and not in the capacity of debtors, the conversion by the bank of the cash assets, from time to time, into the various forms of investment, and their employment in the ordinary business of the bank, must be held to involve the cash to which it has title as owner, and not that which it holds in trust; for it is at all times precluded from asserting its ownership of the amount so held. From this it follows that the cestui may, at any given time, fasten the trust upon the cash assets available, to the extent of the minimum on hand between the origin of the trust relation and the times of its enforcement. This principle has never, in our opinion, been successfully controverted since Sir George Jessel, Master of the Rolls, gave utterance to his remarkably simple, yet compelling, illustration."
As said in Empire St. Sur. Co. v. Carroll County, 114 C.C.A. 435, 447 (194 Fed. 593, 605), quoted in Poisson v. Williams, 15 Fed. (2d Series) 582, 584:
"Proof that a trustee mingled trust funds with his own, and made payments out of the common fund, is a sufficient identification of the remainder of that fund coming to the hands of the receiver, not exceeding the smallest amount the fund contained subsequent to the commingling * * * [citing cases], as trust property; because the legal presumption is that he regarded the law, and neither paid out nor invested in other property the trust fund, but kept it sacred."
This rule is likewise subject to the qualification that the receptacle in which the trust money is kept, or the bank account in which it is deposited, may be the receptacle or bank account kept for the purposes of the trust; that the withdrawals may be shown to be withdrawals of trust funds, and the replacements therein for the purpose of replacing the trust moneys wrongfully withdrawn therefrom. See Leach v. Iowa St. Bank, 202 Iowa 887;Cable v. Iowa St. Sav. Bank, 197 Iowa 393, 401; Baker v. New YorkNat. Exch. Bank, 100 N.Y. 31 (2 N.E. 452); Cohnfield v.Tanenbaum, 176 N.Y. 126 *Page 512 
(68 N.E. 141, 98 Am. St. 653); Garst v. Canfield, 44 R.I. 220
(116 A. 482).
Andrew v. Security Sav. Bank, 203 Iowa 546, is cited as holding contrary to our original opinion herein. In that case an express trust was created, and recognized as existing throughout. It was created by a promissory note, which went into the bills receivable, and was to be kept invested in mortgages. The burden of showing dissipation was held to be on the receiver. The court was divided in opinion on the fact question. The majority found themselves unable to hold that the facts were such as to show dissipation. If it had certainly appeared that all the trust fund had been transmuted into cash, a different question would have been presented.
The petitions are overruled.