Court Opinion

ID: 3318450
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:36:00.549695+00
Date Added: 2024-06-11T13:57:17.584099
License: Public Domain

The Federal Reserve Bank of Boston, herein referred to as the claimant, makes claim to priority in payment over the claims of depositors and general creditors, on behalf of the owners of certain checks and other items sent by it for collection, under the agreement hereinafter mentioned, to the defendant bank, also as to certain other items sent to the Unionville Bank and Trust Company which attempted to remit to the claimant through the defendant. These items were forwarded under letters of transmittal designated in this proceedings as letters X, Y, and Z.
For some years an agreement has been in force between the claimant and the defendant by which the claimant agreed that all items drawn on the defendant which the claimant received should be forwarded to the defendant for collection. The defendant agreed to collect and remit for cash letters on the same day when received, returning dishonored items, and to remit for non-cash items on the day they were collected. The defendant had the option of remitting by a shipment of money, or by acceptable bank drafts drawn on Boston or New York, New York drafts being sent to the Federal Reserve Bank of New York for the claimant's account.
The items transmitted in letter "X" consisted of checks drawn on the defendant which had been sent *Page 13 
to the claimant by member banks or other Federal Reserve Banks for collection. The defendant collected the checks (except some returned unpaid and not in issue) by charging the deposit accounts of the respective drawers and marking the items "paid," and on the same day forwarded its remittance draft for the amount of the items collected, drawn on a New York bank, to the Federal Reserve Bank of New York for account of the claimant. The item sent under letter "Z" was a "non-cash" item payable at defendant bank and was collected by charging a depositor's account there; the remittance draft was drawn on a Boston bank and forwarded direct to the claimant. Letter "Y" was sent to the Unionville Bank and contained checks drawn on that bank which it collected by charging the drawers' accounts, and the defendant, in accordance with instructions from the Unionville Bank, sent its (the defendant's) remittance draft to the claimant for the amount, charging the Unionville Bank's account.
In all three cases the remittance drafts were dishonored on presentation, although drawn against sufficient funds, because the drawee had received notice of the prior suspension of the defendant's business.
The claimant asserts a right to priority in payment over claims of depositors and general creditors, and the questions reserved upon the stipulated facts are: (1) Should the charges made against the deposit accounts of the drawers of the items contained in letters "X," "Y," and "Z" be cancelled? (2) If the answer to the first question is in the negative, has the claimant, to the extent to which it is authorized to prosecute claims by the owners of the items, a claim or claims against the defendant on account thereof, and if so, what is the status of such claim or claims as to classification or priority? *Page 14 
The claimant advances three propositions in support of its assertion of priority: First, that the relation of principal and agent and of cestui que trust and trustee existed between the claimant and the defendant not only as to the items before collection but as to the proceeds after collection; second, upon the collection of the items by charging the accounts of depositors, a trust was impressed on the defendant's cash on hand and the receiver took such cash subject to the trust; third, the drawing and sending of the remittance drafts was an equitable assignment pro tanto of the deposits with defendant's correspondents in New York and Boston on whom they were drawn.
It appears to be conceded by all parties in interest, as to all of the items involved, that the owners by forwarding them to the bank at which they were payable authorized that bank to accept payment in their behalf, and that when the maker's account was charged, by his express or implied authority, with the amount, he paid the check or other item and is no longer liable thereon. Federal Reserve Bank v. Malloy, 264 U.S. 160,44 Sup. Ct. 296, 31 A. L. R. 1261, 1266; NineteenthWard Bank v. First National Bank,184 Mass. 49, 67 N.E. 670; Baldwin's Bank v. Smith, 215 N.Y. 76,109 N.E. 138; note, 52 A. L. R. 995. It follows that the charges made against the deposit accounts of the drawers of the items mentioned in the first question reserved should not be cancelled.
It is undisputed that the sending of the items by the claimant to the City Bank under the arrangement between them created the relation of principal and agent. "So long as the items remained uncollected, the principal could control their disposition. The agent received the items for a specific purpose, and stood toward the principal as a trustee charged with an active duty toward the purpose of the agency, which was *Page 15 
the subject of the trust." Lippitt v. Thames Loan Trust Co., 88 Conn. 185, 202, 90 A. 369; CommercialBank v. Armstrong, 148 U.S. 50, 56, 13 Sup. Ct. 533. It is also uncontroverted that if the bank had been authorized to credit the proceeds of the collection to the forwarding bank, as upon a reciprocal account, and had done so upon making the collection, the relation between the parties would have changed to that of debtor and creditor and no preference over other creditors could be claimed.
The gist of the claim to a preference is that, since the agreement was that the proceeds were to be remitted on the same business day that the items were received for collection, the trust relation continued together with a right to the fund collected in lieu of the paper which produced it. As between the tests resorted to by the courts to determine the general question whether the trust continues after collection, (1) ability to trace the fund or (2) ascertainment as to whether the relation of principal and agent has ceased and that of debtor and creditor begun, we adopted, in the Lippitt case, supra (following Commercial Bank v.Armstrong, supra), the latter as the more satisfactory, ability to trace the fund being held merely evidential of the existence or nonexistence of this relation (p. 202). Although much litigation upon this subject has since intervened, we find in the decisions no reason for a material departure from that view. The examples cited (p. 202) also seem to us to narrow our necessary inquiry and to point somewhat significantly to the conclusion required upon the facts presented. "The agent would change the relation to that of debtor and creditor were it to mingle the funds collected with its own funds, and credit the collections to the sending bank under its arrangement with it to make remittances at specified times. If, on the other hand, it held *Page 16 
the funds collected, intending under its agreement to make immediate remittance, and for a very brief period, for business convenience, keeping the funds set apart or on special deposit for its principal, there would be no change in the relation, the trust would continue, and, on failure of the agent pending transmission of the funds, the principal would be entitled to them."
In that case the record was held insufficient to disclose that immediate remittance, to which the second example pertained, was agreed upon or intended, but it is indicated (p. 204) that in such a situation the mingling of collected funds with the bank's own funds, as distinguished from segregation as by special deposit, would affect adversely the continuance of a trust relation, as "the forwarding bank will get a like sum of money, but not the specific fund collected."
The cases involving the relations between the owner of paper sent to a bank for collection and the collecting bank, after the collection has been made, followed by insolvency of the bank, are extremely numerous and varied as to facts, reasoning, and results. Of the multitude it is practicable to mention only a few which we regard as specially persuasive. In People v. Merchants Mechanics Bank, 78 N.Y. 269, most of the facts were quite analogous to those in the present case. The Chemical Bank of New York sent a check, deposited in it and drawn on the defendant bank, to that bank, in accordance with the custom of the Chemical Bank to mail such checks to the Merchants  Mechanics Bank on Saturdays, the latter receiving them on Mondays, and on Tuesdays remitting by drafts on the Metropolitan Bank of New York. The draft remitted covering this check was not paid, a receiver of the Merchants and Mechanics Bank being appointed. It was there held (p. 274) "impossible out of these facts *Page 17 
to construct an appropriation or trust which would attach to the general assets of the bank afterward passing to a receiver, and require their application to the payment of the check in preference to all other indebtedness of the bank." "There was no actual setting apart or appropriation of any specific fund or property of the bank, or of the drawer, for the payment of the check. It is not claimed that the identical funds which had been deposited by the drawer, and on which deposits the credit on the books was founded, were in the possession of the bank, when the check was presented for payment. It is conceded that they were not, and that the bank had used them in its business, and converted them into securities or investments. The bank was simply debtor to the depositor for the balance of deposits which stood to its credit. By charging the check in account, the bank reduced its indebtedness to the depositor by the amount of the check, and constituted itself debtor to the holder of the check to a corresponding amount. It did not undertake to provide for the check by setting apart or appropriating any particular property or fund for that purpose, but by drawing a draft upon the Metropolitan Bank of New York, and remitting that draft to the Chemical Bank. It certainly assumed the payment of the check, but there is an entire failure to show that it impressed a special trust on any of its assets for that purpose." (p. 272). Although a trust has since been held to exist in some collection cases involving variant facts and which did not reach the Court of Appeals, Baldwin'sBank v. Smith (1915) 215 N.Y. 76, 85, 109 N.E. 138, appears to continue to recognize the necessity of setting aside a distinct fund which can be impressed with a trust, citing People v. Merchants  MechanicsBank, supra. *Page 18
Hecker-Jones-Jewell Milling Co. v. CosmopolitanTrust Co. (1922) 242 Mass. 181, 136 N.E. 333, 24 A. L. R. 1148, is widely recognized as a leading case for the denial of a trust relationship. In that case a draft with bill of lading attached was drawn upon a customer of the drawer of the draft, which was forwarded through a local bank to the defendant trust company for collection. The latter received payment by authorized charge against the deposit account of the drawee, but failed without having accounted for the draft, and the drawer claimed a preference in the distribution of the assets. The court said (p. 185): "Ordinarily when a draft has been paid to the collecting bank, the owner's right of control ends, and the relation between the collecting bank and the owner of the draft ceases to be that of agent to principal, and becomes that of debtor to creditor. . . . `Upon the collection of a draft or check, the [collecting bank] was not required to keep the proceeds by itself as the plaintiff's property, but might mingle it with its own money and make itself the plaintiff's debtor for the amount received. As soon as the proceeds became a part of the funds of the [collecting bank] under this arrangement, the plaintiff's right to control it as specific property was gone, and the plaintiff had instead a right to recover a corresponding sum of money.'" The plaintiff contended that instructions to "collect and remit" imported an agreement to hold the specific proceeds in trust. As to this, after distinguishing some of the authorities relied upon, the court said (p. 186): "On the other hand, the courts in many jurisdictions, emphasizing the fact that all senders of paper for collection know that it is the general practice of banks to mingle the proceeds with their other assets, hold that they must be taken to assent thereto, and hence to the relationship of debtor and creditor instead of *Page 19 
trustee and cestui que trust as to such proceeds. Indeed the view contended for by the plaintiff would apparently make the banks guilty of a breach of trust in mingling the proceeds of collections with their other assets, in accordance with the convenient and usual mode of business. [Citing many cases, including Lippitt
v. Thames Loan  Trust Co., supra.] In the case at bar it is clear that the plaintiff, by making the draft collectable through the trust company, authorized a collection by the method which was actually followed. The `proceeds' produced were merely a diminution of the debt or account owed by the trust company to [the drawee], and a corresponding increase in the trust company's general substance, by means of book entries, and there was no actual reduction to possession of anything that could be regarded as the subject-matter of a trust. In other words, by the reasonable construction of their acts, the parties must be held to have contemplated the relationship of debtor and creditor after the collection."
To the same effect, and largely following the reasoning in the Massachusetts case just mentioned, is CitizensBank v. Bradley (1926) 136 S.C. 511,134 S.E. 510, in which a draft sent to the Pinewood Bank was paid by a check charged to drawee's deposit and on the same day a cashier's check was remitted to the drawer or the forwarding bank, but before it was returned and presented, the bank examiner took charge of the Pinewood Bank. In addition to holding, as in the Massachusetts case, that after the Pinewood Bank accepted the check in payment of the draft the relation between the claimant and the bank was that of creditor and debtor, and that the claimant was put upon the same plane as other creditors and not entitled to a preference, the court said, further (p. 522): "I think, too, that even if the relation [could] be considered a *Page 20 
trust, the claimant has utterly failed to trace into the hands of the liquidating committee any money, the `res' upon which a trust could be imposed. The transaction was one of ordinary banking business; the claimant entered into it for his convenience, knowing that when the collection should be made it would be mingled with the general funds of the bank, and he be allowed a credit to the extent of the collection . . . ; and I see no reason why the court should strain a point to establish a trust in favor of one who took the same chances as all other creditors took, and abrogate the salutary principle that `equality is equity.'"
Here, equally, it seems, the agreement permitting remittance by draft — which it is obvious and admitted is the usual and only commercially practicable general course — instead of shipment of currency, contemplated and authorized the mingling of the proceeds of collection in the general funds of the bank; it was equivalent to authority to the bank to use for its own general purposes the money collected and to pay the forwarder by draft on its funds on deposit in another bank. An agreement or understanding whereby the collecting bank is to use the money collected, and substitute therefor its own obligation is inconsistent with the idea of a trust and creates the relation of debtor and creditor instead of trustee and beneficiary. CaliforniaPacking Corporation v. McClintock, 75 Mont. 72,241 P. 1077.
The decisions of courts of other States disclose diversified attitudes as to the nature and effect of relations such as are here in question and as to the elements and considerations determinative as to whether the relation is one of trust or of debtor and creditor, amounting to a direct and irreconcilable conflict of authorities as to the resulting conclusions. Those cases which adhere to a holding of debtor and creditor appear *Page 21 
to predominate, although there has been manifested in recent years an increasing tendency to allow a preference. Many of the cases denying a trust relation rest their conclusion upon the view that no such relation was intended or that the facts otherwise preclude the existence of a trust; in others the decisive feature is held to be inability to trace the proceeds of the collection; in still others, especially Federal cases, the right to preference is denied where collection is made by check on or charge against a deposit in the collecting bank, on the theory that the assets of the bank are not augmented thereby. Among the more recent and fairly illustrative cases holding in favor of a trust relation are Federal Reserve Bank v. Peters
(1924) 139 Va. 45, 123 S.E. 379, 42 A. L. R. 742, andBank of Poplar Bluff v. Millspaugh (1926)313 Mo. 412, 281 S.W. 733, 47 A. L. R. 754. Many cases upon this general subject are collected and reviewed in notes, 24 A. L. R. p. 1152; 42 A. L. R. p. 754; 47 A. L. R. p. 761, and 73 A. L. R. p. 71, to which reference is made in lieu of further citations. See also 29 Michigan Law Review, p. 548; 8 Thompson, Corporations (3d Ed.) § 6215.
The owner or forwarder and the collector may so agree as to require collection in currency and remittance thereof, but manifestly such a course would be commercially impracticable as of general application; they might agree that the proceeds be held in strict trust and remitted to the forwarder, but such intent is not manifested by the arrangement here presented. Also, many cases have held that even if it were found that the parties intended a trust, preference could not be allowed if the strict principles of tracing were followed. A trust requires a definite subject-matter, which is lacking in the absence of an expressed intent that the collector shall satisfy his duty to the forwarder *Page 22 
out of a specific fund or source. If remittance to the forwarder may be made out of any of the assets of the collector, the res to which an equitable lien might attach is wanting even were the other requisites of such a lien found to be present.
Under the Negotiable Instruments Law, a draft or check does not operate as an assignment of the fund on which it is drawn. General Statutes, §§ 4444, 4506;Alexiou v. Bridgeport-Peoples' Savings Bank,110 Conn. 397, 402, 148 A. 374. The situation here does not satisfy the requirements of an equitable assignment.Alderman v. Hartford  New York TransportationCo., 66 Conn. 47, 54, 33 A. 589; WindsorCement Co. v. Thompson, 86 Conn. 511, 86 A. 1;Sunderlin v. Mecosta County Savings Bank, 116 Mich. 281,74 N.W. 478.
If modern developments of the operations of forwarding and collection warrant extending additional protection to the owner or forwarder by way of preference in case of insolvency of the collecting bank, it would seem that it can best be afforded by statute, rather than through illogical use of trust terminology or doubtful application of trust principles. This appears to be recognized by the adoption, during the past three years, by eighteen States, of a provision in a Uniform Bank Collection Code which allows a preference when an item is sent to a bank which charges it to the maker's account and fails without having paid or settled for the item. The New York statute to this effect is quoted in In re Jayne  Mason,251 N.Y.S. 768, 770. See, "Failed Banks Collection Items, and Trust Preferences," Bogert, 29 Michigan Law Review (1931) 545; "Constructive Trusts and Bank Collections," Townsend, 39 Yale Law Journal (1930) p. 980.
We find nothing in the facts relating to the item *Page 23 
contained in letter "Y" to the Unionville Bank which, at most, places the claimant in a position superior as to priority to that appertaining to the items covered by letters "X" and "Z". As to all the items which are included and represented in the reservation, we hold that they are not entitled to payment before and in preference to the deposits and other liabilities of the bank. Briefs and arguments were confined to the question of such priority. The denial of this may require further inquiry and determination as to the status of these claims with respect to the classification to be accorded them, whether as "deposits" entitled to priority under § 3935 of the General Statutes as against all claims except expenses of settlement, or as "other liabilities" which are relegated to a position subsequent to deposits in order of payment. The receiver also suggests that this further question may affect not only the claims now before us but also others based upon dishonored drafts, treasurer's checks, and certified checks.