Court Opinion

ID: 8033891
Source: CourtListenerOpinion
Date Created: 2022-09-09 03:18:32.587982+00
Date Added: 2024-06-11T16:37:03.680281
License: Public Domain

Eberly, J.,
concurring in the main opinion.
In this case we find a division of the court. ' This sitúa*458tion we find reflected in the two conflicting views here presented. It seemed to the writer that a somewhat more detailed recital of the facts out of which the controversy arose than that set forth in either majority or minority opinion might be of assistance, not for the contradiction of either, but rather as supplementary to both.
All agree that the First National Bank of Gering (hereafter called the Gering bank) received from the Central National Bank (hereafter called the Lincoln bank) for “collection and return” a note of $714 and accrued interest, signed by J. L. Moore, a note of $1,537.50, signed by Henry T. Pfenning, and a note of $1,600, signed by Fred Miller. It is not questioned biit what the Gering bank was, and is, an insolvent institution, and is now in charge of a federal receiver. While the extent of its insolvency may not definitely appear from the record before us, for the purpose of this discussion we will assume that its dividends to general creditors will not exceed 40 per cent.
Coming to the specific transaction out of which this litigation arose, it may be said that Moore and Pfenning were depositors of the Gering bank. After that bank had received the notes above described, on December 12, 1923, Pfenning’s deposit account therein,. then a credit balance amounting to $2-,849.13, was charged with his note of $1,537.50 which was then past due. It cannot be gainsaid that for a banker to charge a past-due note of the maker to the deposit account of the maker is proper banking practice, and that thereafter notes thus charged are the property of the maker.
On December 20, 1923, Moore’s deposit, then a credit balance of $1,214.73, was charged with $716.18, the amount of his note above referred to. Likewise, the note thus charged became the property of Moore. Corresponding credits were given by the Gering bank in the account of the Lincoln bank as the same appears in the books of that institution. When we examine the effects of the transaction, above outlined, upon the assets of the bank we find it to be nil. In other words, if it be conceived that immediate*459ly prior to each of these transactions, each piece of money, including pennies, nickels, dimes, quarters, halves, dollars, gold, paper, all cash items, in the bank till, personal property of every kind and description, and all real estate of the Gering bank had been branded and given an identifying number when these transactions were concluded, not a single number would be missing, nor would any be added. The physical properties thus constituting the actual assets of the bank, in possession of that institution, would be neither different or other at the conclusion of the transactions referred to than they were at their commencement.
It is to be remembered that the receipt of the notes above mentioned by the Gering bank, under the terms of the “Coll, and Ret.” slip, imposed the duty to collect in “cash or actual equivalent.” It could not then remit because it lacked cash. When the transactions between it and the makers of these obligations had been completed, the evidence affirmatively establishes it had failed to receive any “cash or the legal equivalent” thereon, out of which to satisfy the Lincoln bank. Therefore, its inability to comply with its duty still continued, and this condition remained when the federal receiver took possession of its assets.
True, the Gering bank, with the property of the Lincoln bank, paid and discharged a definite portion of its preexisting indebtedness. In so doing, two notes passed out of its possession to its general creditors who received them in payment of their dues. It cannot be said that-the notes in question, thus made use of thereafter, were either in the Gering bank, or form any part of its assets.
Considered as a book transaction, as reflected by the books of the Gering bank, its effect was that as theretofore the Gering bank had been indebted to Moore in the sum of $716.18, and to Pfenning in the sum of $1,537.50, which indebtedness was worth not to exceed forty cents on the dollar, it now owes the Lincoln bank $2,253.68, likewise actually worth forty cents on the dollar. But Moore and Pfenning now have the notes which were originally of the value of $2,253.68.
*460On the other hand, no one questions the fact that the Gering bank had no right to convert these notes to its own use, and no right to insist upon the Lincoln bank accepting the credit thus given. This credit the Lincoln bank rejects. It now seeks a preference against the assets of the Gering bank based on this transaction.
The third note, that of Fred Miller, for the sum of $1,600 and interest, was not found by the receiver when he went into possession of the Gering bank. It does not appear to have been in this bank at the time of the closing of its doors. The evidence offered by the appellee, the Lincoln bank, disclosed that, probably it had been sold to one Winslow, who was a depositor of the Gering bank. The witness, whose deposition was taken, could not recall how the matter was handled; and could not state whether the Gering bank received any property whatsoever, save and except possibly a check upon itself.
It must be conceded, however, as to the last transaction, there is nothing in the record which discloses affirmatively that the Gering bank received or had in its possession at the time it failed any property resulting from, or traceable to, this Miller transaction.
It has been suggested that Peters v. Bain, 133 U. S. 670, furnishes a proper rule for the guidance of this court in the present case. The facts in that case are numerous and involved. However, a careful analysis and condensation produces the' following result: Portsmouth, Virginia, is separated from Norfolk, Virginia, by the Elizabeth river. Bains were private bankers who conducted their banking and brokerage business at Portsmouth. As stockholders and officers they also controlled a national bank at Norfolk. Over a period of time, in an unlawful manner, the Bains of Portsmouth, by various devices, secured improper loans from the national bank of Norfolk aggregating $1,443,-462.99. This amount, due to the unlawful manner in which it was obtained, possesses all the qualities of a trust fund and was so treated by all the courts. This money, in the *461course of business, the Bains mingled .with that which they obtained from other sources.
On April 2, 1885, the comptroller of the currency took possession of the Norfolk bank. The Bain bank at Portsmouth immediately closed its doors because of insolvency. The Bains of Portsmouth, as partners and individuals, then made an assignment to trustees for the benefit of their creditors. The national bank receiver brought suit in equity claiming that a trust in the assigned property resulted from the unlawful loans to the Bains. The trustees named in the assignment, due to notice with which they were chargeable, were held by all the courts to have .obtained no greater rights than the Bains possessed, and that the property in their hands was subject to the same rules that it would have been, had no assignment been made.
This case was first tried in the circuit court of appeals, Mr. Chief Justice Waite of the United States supreme court and the circuit judges of that circuit then presiding. The result of the trial was that as to the certain specific property it was adjudged that the receiver was entitled to preference, and as to other items of property this relief was denied.
The reasons for the determination appear in the following excerpts, of the decision of the circuit court of the United States: “As to the trust resulting to the (national) bank by reason of the wrongful and unlawful use of its funds by its officers in the purchase of property for the firm or the several members thereof, this branch of the case divides itself into two parts, the first relating to property which was purchased with moneys that can be identified as belonging to the (national) bank; and, second, to that which was bought and paid for by the firm out of the general mass of moneys in their possession, and which may or may not have been made up in part of what had been wrongfully taken from the (national) bank. As to the first of these classes of property we entertain no doubt that the trust exists, and that it may be enforced by the receiver. * * * The property in the second class, however, occupies *462a different position. There the purchases were made with moneys that cannot be identified as belonging to the bank. The payments were all, so far as now appears, from the general fund then in the possession and under the control of the firm (Bain Bros.). Some of the money of the (national) bank may have gone into this fund, but it was not distinguishable from the rest.” Reported in Peters v. Bain, 133 U. S. 670, 678.
In other words, the report of this case discloses that all property of the Bains into which the evidence failed to affirmatively establish that trust funds had entered was placed by the circuit court of the United States in the second class, as to which preferential rights were denied the bank’s receiver.
This disposition of the case was, by the supreme court of the United States, on appeal; “in all things, affirmed.” The opinion was delivered by Fuller, C. J., and during its course he quoted the language of Mr. Justice Bradley in Frelinghuysen v. Nugent, 36 Fed. 229, with reference to the very claim then being made by the national bank receiver that he was entitled to a lien as a preferred claim against the mass of the assets of the Bains, notwithstanding he had been unable to prove that the items of property of which this mass was composed was purchased by the funds obtained from the national bank. In other words, the receiver had failed to trace the funds. In the discussion of the receiver’s claim the language appearing in the dissenting opinion was quoted, but the portion quoted in the dissenting opinion in this case is incomplete for the reason that the quotation, as made by Fuller, C. J., extended beyond what appears in our minority opinion. To aid in the full understanding of the quotation complete, we will indicate the portion of Justice Bradley’s language omitted in the dissenting opinion by italics, and supply the language made use of by Chief Justice Fuller in capitals: “It was said by Mr. Justice Bradley in Frelinghuysen v. Nugent, 36 Fed. 229: ‘Formerly the equitable right of following misapplied . money or other property into the hands of the parties re*463ceiving 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 distinguish- ■ able, 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. This is as far as the rule has been carried. The difficulty of sustaining the claim, in the present case is that it does not appear that the goods claimed — that is to say, the stock on hand, finished and unfinished — ivere either in whole or in part the proceeds of any money unlawfully abstracted from the bank: the same difficulty presents itself here, AND WHILE THE RULE LAID DOWN BY MR. JUSTICE BRADLEY HAS BEEN RECOGNIZED AND APPLIED BY THIS' COURT, NATIONAL BANK V. INSURANCE COMPANY, 104 U. S. 54, 67, AND CASES CITED, YET, AS STATED BY THE CHIEF JUSTICE, ‘PURCHASES MADE AND PAID FOR OUT OF THE GENERAL MASS CANNOT BE CLAIMED BY THE BANK, UNLESS IT IS SHOWN THAT ITS OWN. MONEYS THEN IN THE FUND WERE APPROPRIATED FOR THAT PURPOSE.’ ” Peters v. Bain, 133 U. S. 670, 693.
It would seem that this decision as an entirety is in complete accord with the majority opinion in the instant case. Indeed, it appears that the doctrine announced in the majority opinion in this instant case is neither new in pronouncement nor novel in application. In State v. Bank of Commerce, 54 Neb. 725 (April 21, 1898); Morrison v. Lincoln Savings Bank & Safe Deposit Co., 57 Neb. 225 (December 22, 1898) ; City of Lincoln v. Morrison, 64 Neb. 822 (May 21, 1902), is involved the tracing of trust funds, and the result attained in each of these proceedings, in view of the facts involved, is entirely inconsistent with the con*464tention of the dissenting opinion, but entirely consistent with the reversal directed in this case.
In each of the three Nebraska cases last named, action was brought by the cestui que trust to enforce claims of preference against the assets of an insolvent’s trustee because of trust funds which were, or might have been, used or applied by insolvents in payment or discharge of general indebtedness. In at least two the facts involved were the use of trust funds in payment by insolvent banks of the preexisting depositors. Without qualifications, preferential rights based on these claims thus paid were, in every instance, denied by this court, and, as to trust funds thus disposed of, the cestui que trust was held, to possess only the rights of a general creditor and to be wholly without preference.
In fact, these deductions plainly appear, not only in the body of these ’ decisions, but in the syllabi of the cases referred to. Thus, in City of Lincoln v. Morrison, supra, appears the following: “Misappropriation of a trust fund does not entitle cestui que trust, merely as such, and for that reason alone, to a preference over general creditors of an insolvent trustee.” “But if the whole of such fund, or a greater portion thereof than that representing the trustee’s own money is used by an insolvent trustee in paying his debts, cestui que trust is not entitled to a preference over general creditors for the amount of his money so lost. * * * Capital Nat. Bank v. Coldwater Nat. Bank, 49 Neb. 786, and State v. Midland State Bank, 52 Neb. 1, limited. State v. Bank of Commerce, 54 Neb. 725, and Morrison v. Lincoln Savings Bank & Safe Deposit Co., 57 Neb. 225, adhered to.”
“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.” Morrison v. Lincoln Savings Bank & Safe Deposit Co., 57 Neb. 225.
*465In view of the substantial accord which prevails among the great majority of jurisdictions on the principles announced and applied by the majority opinion in the instant case, what changed conditions, if any, are now in existence which would justify this court in now abandoning the doctrine deliberately accepted and approved and permanently adopted by a line of decisions 'made almost three decades ago? The legislative branch of our state government has announced no disapproval. That progress in civilization may necessitate change in judicial concept and pronouncement to enable the. judiciary to conform to advancing civilization may be conceded. Even so, in order to justify the overruling of a former decision deliberately made, this supreme court should be convinced, not merely that the' case was wrongly decided, but that less injury will result from overruling than from following it. City of Wahoo v. Nethaway, 73 Neb. 54. We are convinced that the judgment of reversal is manifestly correct, and that most serious injuries would result from'a departure from the doctrine announced.
Because of the established course of business, the principles we are here considering find their usual, but not necessarily their exclusive, application to insolvent banks. In Nebraska, as elsewhere, we have state banks controlled by the state law, and national banks organized under federal statutes. It must be conceded that both of these branches are important factors in the state prosperity and that each is entitled to equality and identity of treatment in the application of our laws to the business situation in which they are interested. Neither should be preferred, both should be treated equally and no condition should be permitted to exist or be brought into being by judicial decision which would result in discrimination against either.
With reference to rights and liabilities arising out of transactions in negotiable paper, there should certainly be no condition permitted which would result in having one law for the national bank and another law for the state bank.
*466It is to be remembered that in the case before us the insolvent bank is a national bank. A national bank is an instrumentality of the United States subject to its paramount authority, subject to state jurisdiction, regulation, and control only to the extent and in the manner expressly permitted by congress. M’Culloch v. Maryland, 4 Wheat. (U. S.) *316; Osborn v. Bank of United States, 9 Wheat. (U. S.) 738; Van Allen v. Assessors, 3 Wall. (U. S.) 573; Lionberger v. Rouse, 9 Wall. (U. S.) 468; People v. Weaver, 100 U. S. 539; Davis v. Elmira Savings Bank, 161 U. S. 275; Owensboro Nat. Bank v. Owensboro, 173 U. S. 664; First Nat. Bank of Gulfport v. Adams, 258 U. S. 362; Bank of California v. Richardson, 248 U. S. 476; Des Moines Nat. Bank v. Fairweather, 263 U. S. 103; First Nat. Bank of Guthrie Center v. Anderson, 269 U. S. 341.
By federal statute, on the insolvency of the national bank, one of the executive departments of our federal government, by its agents, takes possession of it and its assets, and by this action its receiver, appointed by this department, and its assets are wholly withdrawn from the jurisdiction of the' state courts, except in so far as such jurisdiction is permitted by federal enactment. True, the provisions of the federal statute authorizing a suit in state courts against national banking associations exist. But, even so, they contain the exception: “The provisions of this section shall not be held to affect the jurisdiction of the courts of the United States in cases commenced by the United States or, by direction of any officer thereof, or cases for winding up the affairs of any such bank.” 24 St. at Large, ch. 373, sec. 4, p. 555.
A receiver of an insolvent bank is an officer of the United States within the meaning of section 563, Rev. St. U. S., which gives the district court jurisdiction of all lawsuits at common law brought by the United States or any officer thereof authorized by law to sue.
So, too, it has been held that a suit against the receiver of a national bank to compel him to pay out of the funds in his hands moneys claimed by the complainant is a. suit' *467arising under the laws of the United States and can be removed into the federal court. Hot Springs Independent School District v. First Nat. Bank, 61 Fed. 417; Jewett v. Whitcomb, 69 Fed. 417.
It therefore follows that, ordinarily, when cases are commenced against the federal receiver in a state court, the receiver may exercise the option of having the action tried in a federal tribunal if he so desires. We have already seen that the doctrine of the supreme court of the United States on the question now before us, as announced in Peters v. Bain, supra, is almost identical with the majority opinion in this case. It appears, too, that the federal courts have not departed from the path traced in the last-named case, but are still in substantial harmony with the present Nebraska doctrine.
This fact appears beyond question in the recent case of Farmers Nat. Bank v. Pribble, 15 Fed. (2d) 175, decided September 13, 1926, opinion by Walter H. Sanborn, Circuit Judge. The facts in this case were that the Farmers National Bank held for collection for Pribble a sight draft on an elevator company with bill of lading attached. The elevator company paid this draft by its check of $1,046.89 on a third bank situated in the same town. In accordance with local custom there was a daily clearance between the local banks, and the Farmers National Bank, two days before its failure, exchanged this check of $1,046.89 with the third bank for checks drawn upon itself. The difference in this transaction was $115.13 due the third bank. This was paid. It thus appears that no actual money or property came into the Farmers National Bank, but unquestionably the $1,046.89, by the clearance, was applied by it in discharge of its own indebtedness. Pribble claimed a preference under this state of facts, but it was denied by the federal receiver, which action was sustained by the circuit court of appeals. The important point presented in our instant case was there expressly decided. The court held: “It is indispensable to the maintenance by a cestui que trust of a claim to preferential payment (by a receiver) out of the proceeds of the *468estate of an insolvent that clear proof be made that the trust property or its proceeds went into a specific fund or into a specific identified piece of property which came to the hands of the receiver, and then the claim can be sustained to that fund or property only, and only to the extent that the trust property or its proceeds went into it. It is not sufficient to prove that the trust property or its proceeds went into the general assets of the insolvent estate and increased the amount and value thereof which came to the hands of the receiver.” See, also, Empire State Surety Co. v. Carroll County, 194 Fed. 593, and cases cited; Beard v. Independent District of Pella City, 88 Fed. 375; In re Seven Corners Bank, 58 Minn. 5; American Can Co. v. Williams, 176 Fed. 816; Willoughby v. Weinberger, 15 Okla. 226; Macy v. Roedenbeck, 227 Fed. 346, L. R. A. 1916C, 12; Central Trust Co. v. Chicago, A. & N. R. Co. 232 Fed. 936; State Bank of Winfield v. Alva Security Bank, 232 Fed. 847; Titlow v. McCormick, 236 Fed. 209; Zenor v. McFarlin, 238 Fed. 721; Scullin Steel Co. v. North American Co., 255 Fed. 945; Mechanics & Metals Nat. Bank v. Buchanan, 12 Fed. (2d) 891.
Also, “The doctrine that a cestui que trust whose property had helped to swell the general assets of a corporation which was or became insolvent has a prior right to or interest in those general assets, without specific identification and tracing of such claimant’s property, was again expressly repudiated and denied by this court in the case last cited. The fact that the claimant’s property paid or reduced the indebtedness or liability of the insolvent corporation, so that it will pay a larger percentage of its debts, justifies no lien on its assets by or preference in payment to the cestui que trust (1) because such a reduction of indebtedness does not increase the property or the value of the property of the insolvent; and (2) because the property of the claimant so used to pay a part of the insolvent’s general indebtedness or liability never goes into, and therefore cannot be traced into, the property or assets of the insolvent which subsequently come into the possession of the receiver.” *469Farmers Nat. Bank v. Pribble, supra; Titlow v. McCormick, supra; American Can Co. v. Williams, supra; Lucas County v. Jamison, 170 Fed. 338; Multnomah County v. Oregon Nat. Bank, 61 Fed. 912; Beard v. Independent District of Pella City, supra; Hecker-Jones-Jewell Milling Co. v. Cosmopolitan Trust Co., 242 Mass. 181, 24 A. L. R. 1148.
In discussing these propositions, Sanborn, Circuit Judge, says: “The argument that the use of a trust fund by an insolvent trustee to diminish its indebtedness is equivalent to the use of it to add specific and traceable property to its assets is fallacious. The indispensable requisite of a trust in cases of this kind is the ability to take out of the property of the insolvent a traceable, identified part of it, which the insolvent, in violation of its duty as a trustee, has put into it. In a simple case the radical difference is plain. If an insolvent has assets worth $5,000 and owes $10,000, and, in violation of its trust, it puts into its assets government bonds of its cestui que trust worth $5,000, the cestui que trust may recover these bonds or their traceable proceeds, because such a recovery theoretically does not diminish the assets the insolvent rightfully held, nor deprive its general creditors of their recourse to that property. The $5,000 of assets which it had remains, and is still available for the general creditors after the withdrawal of the $5,000 of trust money which was added to the assets. But, if part of such insolvent’s indebtedness of $10,000 is its promissory note of $5,000, and if, in violation of its duty, it uses the bonds or money of its cestui que trust to pay and does thereby pay that note thereby reducing its indebtedness to $5,000, and the trust-money at the suit of the cestui que trust is then taken out of the $5,000 of assets, there then remains nothing to pay the general creditors, who by such a proceeding lose the 50 per cent, of their claims which they would have received out .of the $5,000 of assets the debtor had before the $5,000 of its indebtedness was paid by the $5,000 of trust money.” Farmers Nat. Bank v. Pribble, 15 Fed. (2d) 175.
*470In this connection/ it may be interesting to quote the words of Judge Sanborn in the discussion of the language of Mr. Justice Bradley, from whose opinion in Frelinghuysen v. Nugent, 36 Fed. 229, as previously explained, the minority dissenting in this case, have quoted a portion. Judge Sanborn, with reference to this case, says: “Mr. Justice Bradley, from whose opinion in Frelinghuysen v. Nugent, 36 Fed. (C. C.) 229, counsel for the plaintiff quote some general statements relative to trusts, did not in that case decide or adopt the theory that the unlawful use of trust money by a trustee in violation of its trust vested in its cestui que trust a like right to its recovery from its receiver that the deposit of it and adding its value to the assets of the insolvent might have created. Justice Bradley held in that case that no trust ex maleficio was proved. In American Can Co. v. Williams, 178 Fed. 420, cited by plaintiff, the court held that the identification and tracing of the trust funds into the hands of the receiver or other person from whom it was to be taken was essential to the recovery thereof from such receiver. It is not denied that decisions and opinions of courts have been rendered to the effect that a cestui que trust may have payment of claims for trust funds from the receivers of assets of insolvents in preference to their general creditors without identification or tracing, and that they may have such payments because trust funds were used to pay some of the debts of the insolvent ; but those opinions are not in accord with the established principles, rules, and practice in equity in the courts of the United States, or with the great weight of authority throughout the United States.” Farmers Nat. Bank v. Pribble, supra.
In the concluding paragraph of this opinion, Judge San-born further says: “Our conclusion is that the plaintiff in this case failed to prove two indispensable requisites to his alleged cause of action: First, that his draft for $1,046.89 or its proceeds ever went into a specific identified piece of property or fund or funds which were in the hands of the Farmers’ Bank when it closed on May 12, 1924; and, second, *471that such draft or its proceeds ever went into a specific identified piece of property or fund in the hands or control of the defendant, the receiver.” Farmers Nat. Bank v. Pribble, supra.
In view of the authorities quoted, and the reasons upon which they are based, the acceptance of the proposal contained in the dissenting opinion is wholly impossible. Obviously, the modification of the rule, there sought, that previously obtained in this jurisdiction .would confer on the claimants a preference right which has heretofore been denied them, not only in the state courts of Nebraska, but in the federal tribunals as well.
It may be conceded that the changes advocated would be exceedingly beneficial to one class of claimants. On the other hand, it would be exceedingly prejudicial to the general depositor and the general creditor.
In the case of state banks, the full force and full effect of this new doctrine, if adopted, would extend not only to the insolvent institutions, but would include the guaranty fund and all in any way interested therein. You cannot remove assets of an insolvent state institution upon the excuse of preferred right thereto without depriving both the state bank and the guaranty fund of their just recourse for advances made for the benefit of a general depositor thereof.
The injustice to the state banks, however, would not end here. They would have no escape from the law as we interpret it, while a federal court or receiver of an insolvent national bank would have. It is quite plain that if an action were commenced against the federal receiver to enforce a claim of preference in a state court, as we have already seen by the authorities cited, proper steps timely taken could secure a removal of such suit to the federal district court where justice would be administered in accordance with the federal rule and in entire disregard of any contrary determination the state courts might make. In other words, if we assume the adoption of the proposition contained in the dissenting opinion, the federal court would be to the *472federal receiver the city of refuge, and to them would naturally and inevitably be removed for trial all cases involving preference to assets in his hands. The result of this would be that, in the event of identical claims to preference, one in favor of the state bank and against an insolvent national bank would be denied by the federal tribunal; and the identical claim in favor of a national bank and against an insolvent state institution would be enforced by the state court. So, the adoption of the rule presented in the minority opinion, in view of the situation and of plurality of jurisdiction, would result in a manifest and substantial discrimination against our own state institutions.
Justice can never be promoted by the creation of conditions through judicial action which necessitate one rule for state institutions and another rule for federal corporations. Discrimination and inequality furnish no permanent foundation for confidence, nor do they promote prosperity, nor tend to advance the interest of trade and commerce. The rule adhered to in the majority opinion .has the virtue of universality, and is, in effect, the rule now enforced in both federal and state courts. Under it no favored class exists. There is the same rule for the state bank and the national bank, irrespective of the jurisdiction in which the case may be tried.
Conceding to the new proposition advocated by the minority full force and effect of the reasoning with which it is sustained, we are constrained to the belief that it is not in accord with the authorities cited in its support, and we are compelled to accept, in accord with enlightened public policy, precedent, authority, and reason, the opinion of Good, J., which has been adopted by the majority of this court.
The following opinion on motion for rehearing was filed November 10, 1927. Former judgment of reversal vacated, and judgment of district court affirmed.
1. Trusts: Notes: Collection by Bank. A bank that receives *473and accepts a promissory note for the sole purpose of collecting the debt and remitting the proceeds is a trustee and as such is accountable to the beneficiary.
2. -: -: Conversion. A mere change in the form of property confided to and converted by a trustee does not change the ownership, the beneficiary remaining the owner.
3. -: , -: Following Proceeds. Where the form of trust property is changed by a fiduciary and the resulting proceeds are wrongfully mingled by him with the mass of assets comprising his insolvent estate, the beneficiary of the trust, in a proper case, may resort to the mass for redress, if augmented by the trust property.
4. -: -: -. The proceeds of commercial paper received by a bank as trustee and wrongfully credited to the owner, if equivalent to money for banking purposes, may, in equity, be treated as money.
5. -: -: -. Where proceeds of a note are converted by a bank as trustee, a credit to the beneficiary therefor on its books may be evidence of a credit equivalent to money.
6. Banks and Banking: Conversion op Trust Property. The conversion of trust property by a bank and credit to the beneficiary therefor on its books, contrary to instructions, without the knowledge of the beneficiary, do not necessarily create the relation of banker and depositor.
7. -: -: Insolvency: Preference. The proceeds of a note entrusted to a bank for the sole purpose of collecting and returning the amount due thereon may be traced as trust funds into the general assets of the bank after it has been closed on account of insolvency and such funds may be made the basis of a preferred claim against the general assets of the bank, where it is shown that the note was collected, that the proceeds were converted by the bank and wrongfully credited to the beneficiary without the latter’s knowledge, and that the fund was mingled with the mass of assets used for general banking purposes, thus augmenting the general assets.
^8. -: -: -: -: Burden of Proof. Where the beneficiary of a trust, in an action to establish a preferred claim as a charge against the general assets of an insolvent bank in the hands of a receiver, traces the trust fund through conversion of the bank into the mass of its assets, the *474burden of proof is on the receiver who has control of the bank records and accounts to prove that the assets were not augmented by the conversion or that the trust fund disappeared from the assets, if the defense is based on those grounds. .
Heard before Goss, C. J., Rose, Dean, Day, Good, Thompson and Eberly, JJ.
Rose, J.
This is a suit in equity to trace proceeds of notes into a national bank subsequently closed on account of insolvency and to establish a preferred claim payable in full from general assets in the hands of the receiver.
The Central National Bank of Lincoln is plaintiff. The First National Bank of Gering, hereinafter called “the bank,” and its receiver are defendants. While the bank was transacting a commercial banking business under the laws of the United States, it received from plaintiff four promissory notes for the exclusive purposes of collecting the amount due on each and of returning the proceeds to plaintiff. For these purposes plaintiff transmitted and the bank received the note of Fred Miller for $1,600, interest $80, total $1,680; the note of Henry Pfenning for $1,500, interest $37.50, total $1,537. 50; the note of J. L. Moore for $700, interest $14, total $714; the note of George Schnell for $1,000, interest $25, total $1,025. The Miller note was transmitted November 3, 1923, and the others were transmitted November 30, 1923. Each note matured on or before December 5, 1923. Plaintiff owned all of these notes which, with interest, aggregated $4,956.50. In addition to the facts stated, the petition contains in substance pleas that the bank collected the debts evidenced by these notes, converted the proceeds thereof, mingled plaintiff’s funds with the general assets of the bank, used them for banking purposes, never returned or paid any part of them to plaintiff, became insolvent, reduced the cash in the bank to $1,370.42, and went into the hands of a receiver, its doors not being open for commercial banking after Decern*475ber 31, 1923. The equitable relief sought by plaintiff is the establishment of a preferred claim for $4,956.50 payable in full from the general assets of the bank in the hands of the receiver.
The answer, among other things, denies material facts upon which the petition for a preference over general creditors is based and challenges the right of plaintiff to charge the mass of assets in the hands of the receiver with the proceeds of the notes.
From the standpoint of each side the facts were well pleaded and the principal contest at the trial in the district court grew out of a controversy as to the right of plaintiff to a preference over general creditors without tracing the proceeds of the notes into specific funds or property. On this feature of the case the trial court found that the Schnell note fell into the hands of the receiver and that the proceeds of the other notes were appropriated by the bank and were mingled with its assets, thus becoming a charge upon the mass. Consequently the receiver was ordered to return the Schnell note to plaintiff and to pay the latter, out of the general assets, $4,467.23, the amount of principal and interest due on the notes collected by the bank. From the decree of the district court defendants appealed.
The controlling question presented by the appeal has been vigorously argued on three different occasions by counsel for all litigants and at the third hearing a valuable brief was submitted by other counsel acting in the capacity of a friend of the court. With commendable frankness counsel for the receiver and the bank stated in the first instance in his brief the question for determination as follows:
“We are. willing to rest this case on the broad general principle that the appellee has not traced its notes into any particular fund or property of the First National Bank and therefore is not entitled to a preferred claim of any kind.”
The same proposition was repeated in open court. Oppos*476ing counsel accepted the challenge as a correct statement of the controlling question, conceded that the proceeds of the notes had not been traced into any specific fund or property in the hands of the receiver and argued nevertheless that the trial court properly charged the mass of the bank’s assets with plaintiff’s claim. In considering the merits of the appeal at a former term the majority of this court delivered an opinion stating correctly the question for solution in the following language:
“Plaintiff’s action is based on the assumption that the proceeds of the three notes in controversy were mingled with the 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.” Central Nat. Bank v. First Nat. Bank, ante, p. 444.
The reduction of the problem to this form is a premise established by all litigants and accepted by the court. It is a recognition of the fact that the proceeds of plaintiff’s notes were traced into the general assets of the bank — a conclusion properly drawn from the evidence. That the assets were augmented by proceeds of the notes is also a proper deduction from the evidence.
The members of this court, like courts eleswhere, are divided on the proper solution of the question. The rulings are in hopeless conflict. In the present case the majority in the former opinion held:
“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, wheii, *477and only when, it can be traced to and identified in some specific fund or property.
“One seeking, in equity, the allowance of a claim for preference against an insolvent bank in the hands of a receiver has the burden of proving that his trust fund either came into the possession of the receiver, or was invested in some specific fund or property that came into the hands of the receiver.” Central Nat. Bank v. First Nat. Bank, ante, p. 444.
These rulings resulted in a reversal of the decree, from which defendants appealed, but there was a dissenting opinion in which three members of the court joined. Central Nat. Bank v. First Nat. Bank, ante, p. 451.
Upon a motion by plaintiff for a rehearing, the case was again argued and submitted. In the light of new briefs, rearguments, further research and deliberation, four members of the court entertain the view that the dissenting opinion contains the better solution of the question presented by. the appeal, and it is therefore adopted as the opinion of the court. Without repeating the reasons for the- dissent, the principles based thereon and now adopted are as follows:
1. A bank that receives and accepts a promissory note for the sole purpose of collecting the debt and remitting the proceeds is a trustee and as such is accountable to the beneficiary.
2. A mere change in the form of property confided to and converted by a trustee does not change the ownership, the beneficiary remaining the owner.
3. . Where the form of trust property is changed by a fiduciary and the resulting proceeds are wrongfully mingled by him with the mass of assets comprising his insolvent estate, the beneficiary of the trust, in a proper case, may resort to the mass for redress, if augmented by the trust property.
4. The proceeds of commercial paper received by a bank as trustee and wrongfully credited to the owner, if *478equivalent to money for banking purposes, may, in equity, be treated as money.
5. Where proceeds of a note are converted by a bank as trustee, a credit to the beneficiary therefor on its books may be evidence of a credit equivalent to money.
6. The conversion of trust property by a bank and credit to the beneficiary therefor on its books, contrary to instructions, without the knowledge of the beneficiary, do not necessarily create the relation of banker and depositor.
- 7. The proceeds of a note entrusted to a bank for the sole purpose of collecting and returning the amount due thereon may be traced as trust funds into the general assets of the bank after it has been closed on account of insolvency and such funds may be made the basis of a preferred claim against the general assets of the bank, where it is shown that the note was collected, that the proceeds were converted by the bank and wrongfully credited to the beneficiary without the latter’s knowledge, and that the fund was mingled with the mass of assets used for general banking purposes, thus augmenting the general assets.
8. Where the beneficiary of a trust, in an action- to establish a preferred claim as a charge against the general assets of an insolvent bank in the hands of a receiver, traces the trust fund through conversion of the bank into the mass of its assets, the 'burden of proof is on the receiver who has control of the bank records and accounts to prove that the assets were not augmented by the conversion or that the trust fund disappeared from the assets, if the defense is based on those grounds.
The former opinion is overruled, the reversal set aside, and the judgment of the district court is
Affirmed.