Fant, Examiner v. Easley Loan Trust Co.

May 9, 1933. The opinion of the Court was delivered by The Easley Loan Trust Company is a banking corporation, which, during the year 1929, had its place of business at Easley, S.C. November 8, 1929, its affairs were taken over by the State Bank Examiner, and on November 29, 1929, J.L. Love was made receiver thereof and is now engaged in the discharge of the duties of that office. Smith Bros. was a partnership composed of Lloyd H. Smith and Ralph H. Smith, engaged in the business of buying and selling cotton; their office was across the street from the banking house of Easley Loan Trust Company. The officers of the Easley Loan Trust Company, of which we shall speak as the Easley Bank, were Lloyd H. Smith, president, Ralph H. Smith, vice-president, A.F. Wyatt, cashier, S.F. McDaniel, assistant cashier; Earle Lawrence and James B. Spearman were bookkeepers. The appellants herein brought this action, in the original case, against the receiver of the Easley Bank and allege that each of them sold cotton to Smith Bros., drew drafts upon Smith Bros. for the amounts of the proceeds of such sales, which drafts were deposited in local banks at the places of business of the sellers, and by such banks forwarded to the Easley Bank for collection, with letters of "credit and remittance" attached. That Smith Bros. abstracted the bills of lading and drafts from the bank, took them to their office, *Page 64 detached the letters and drafts, and attached to the bills of lading their own drafts on the persons to whom they sold the cotton; these bills of lading with their drafts were deposited in the Easley Bank which was given the check of Smith Bros. on that bank in each instance, and Smith Bros. were given immediate credit for the amounts and were checked out by Smith Bros. in their own business. These checks were not charged to the account of Smith Bros. but were attached to the original letter of credit and placed in the collection file, where they remained till the bank was closed. The proceeds of the drafts when collected were deposited to the credit of the Easley Bank with its correspondent banks in Greenville. Plaintiffs claim priority over depositors and general creditors of the Easley Bank on the ground that the bank was guilty of fraudulent conduct in the premises from which arises a trust ex maleficio in favor of plaintiffs. The Central National Bank of Spartanburg claims priority on the further ground that the check given by Smith Bros. in lieu of the draft and bill of lading which it had forwarded for collection, could, on two occasions before the bank was closed, have been paid, since on those occasions Smith Bros. had in the Easley Bank funds sufficient to pay it, but the check was never presented. South Carolina National Bank of Greenville, S.C. and First National Bank of Blakely, Ga., claim priority on the further ground that the Easley Bank sent them checks in payment of their items, which checks were never paid, but which were a legal assignment pro tanto of the funds of the bank. The Easley Bank had a bond of the National Surety Company insuring it against loss through fraud, embezzlement, abstraction, etc., of the bank's employees. Action was brought by the receiver to recover the amount of this bond, which action was compromised and settled for the sum of $17,500.00. The appellants claim priority in the distribution *Page 65 of this fund on the ground that the recovery was had because of the fraud of the officers and employees of the bank in the matter of the cotton transactions herein involved. It was referred to H.K. Townes, Esq., to take the testimony and determine all the issues of law and of fact. He filed his report, denying the right of plaintiffs to priority upon any of the grounds upon which their claims thereto were based. Exceptions to this report took the matter to the Circuit Court, where it was heard by Judge Mann, who denied priority "to all classes of creditors named in the report," and confirmed the referee's report thereabout. The appeal is from that order. The exceptions are numerous, by the several appellants, but save for the special claim of preference by Central National Bank of Spartanburg, S.C. and that of South Carolina National Bank of Greenville, S.C. and First National Bank of Blakely, Ga., they are practically the same. We shall not discuss them in detail and by number, but the opinion will dispose of all the questions made by them. The initial issue turns upon the question whether appellants are entitled to a priority in the distribution of the general assets of the Easley Bank by the application of the principle of a trust arising from the fraudulent acts of the officers and employees of the bank, technically denominated a trust ex maleficio. Counsel for respondents asked, and were given, leave to review the line of cases beginning with that of Ex parteBank of Aynor, 144 S.C. 147, 142 S.E., 239, 242, which promulgated this doctrine. In a strong argument counsel seeks to have the Court overrule this case, and the line of cases following and dependent on it. The contention is that there is no proper distinction in law between a constructive trust and a constructive trust ex maleficio, and that South Carolina is practically alone in making a distinction. He cites from 26 R.C.L., 1356 the following: "The generally *Page 66 accepted rule at the present time is that it must appear that the trust property or its proceeds, have found their way directly into the estate of the trustee; that the property must be found to reside in the assets at the time the claim is asserted, and must not have been expended or dissipated for any purpose in the business of the trustee. If it appears that the trust moneys are dissipated or lost there is no fund to impress with the trust, and the sole remedy of the beneficiary is to proceed against the trustee personally." This Court adheres to the opinion in the Aynor case, and those which follow and rely on it. It therefore becomes necessary to determine whether the facts in this case bring it within the views declared in the cases above referred to. There seems to be some confusion of understanding of the holdings of this Court in these several cases. Let us briefly review them. In the Bank of Aynor case it appears that that bank held certain notes of the County of Horry, which it sent to the American Bank Trust Company at Columbia for sale and remittance of the proceeds. The notes were sold but the proceeds were not remitted; they were converted by the American Bank Trust Company to its own use. The day before this bank closed its doors it laid aside certain securities and notified the Bank of Aynor that they were assigned to it in payment for the proceeds the notes. Mr. Justice Cothran, delivering the opinion of the Court, said: "But, even if the assignment of the securities cannot be sustained, the Bank of Aynor would be entitled to priority in the distribution of the assets of the bank, for the reason that, under the circumstances detailed, the funds to which it was entitled became, in the hands of the American Bank Trust Company, a trust fund, which were appropriatedby the officers of the American Bank Trust Companyto the uses of the bank, under circumstances which, in the absence of protection to the Bank of Aynor, constituted a *Page 67 breach of trust with fraudulent intent, practically a theft,which inured to the benefit of the American Bank TrustCompany." (Italics added.) This conduct resulted in creating what the learned Justice termed a constructive trust ex maleficio. The conclusion arrived at by Mr. Justice Cothran was that the Bank of Aynor was entitled to realize upon the pledged collateral, or to be paid as a preferred creditor out of the assets of the bank. In this view Mr. Justice Stabler concurred. Mr. Justice Carter dissented from the conclusion that the bank was entitled to a preference out of the general assets of the American Bank Trust Company, in which opinion Chief Justice Watts concurred. Mr. Justice Blease was disqualified. The Court was composed of four Justices who divided evenly upon the question of priority of payment from the general assets. It would seem, then, scarcely proper to hold that case is authority for such doctrine. There followed the case of Ex parte Hernlen, 156 S.C. 181,153 S.E., 133, 140, 69 A.L.R., 443. The opinion in this case was also written by Mr. Justice Cothran. It said: "When Vandiver induced Mrs. Hernlen to allow her depositto remain in the bank upon his promise to invest it in a real estate mortgage, it amounted to the same thing as if he had induced her to make a deposit upon such an engagement; under either condition the deposit would constitute the corpus of a trust fund and the bank a trustee of it for Mrs. Hernlen. * * * "It is an established principle, under the case of Ex parteBank of Aynor, 144 S.C. 147, 142 S.E., 239, that the beneficiary of such a trust as this is entitled to be preferred in the distribution of the assets of a failed bank, over the general creditors." In the case of Hampton County v. Lightsey, 164 S.C. 63,161 S.E., 879, it appears that the treasurer of Hampton County delivered to the Bank of Hampton $35,000.00 *Page 68 with which to pay two notes — one for $10,000.00 and one for $25,000.00, which were held against the county by a bank in New York. The Bank of Hampton was instructed that the notes must be paid by June 30th. The Bank of Hampton forwarded a check for $10,000.00 to pay the note of that denomination, but retained the $25,000.00 in the coffers of the bank for the use of the bank. The bank closed its doors. The county claimed a preference in the distribution of the general assets of the bank upon the authority of the Bank of Aynor and the Hernlen cases, which preference was allowed by the Circuit Judge which decree was sustained by this Court. In the case of Bradley v. Guess, 165 S.C. 161,163 S.E., 466, it appears that Guess had in his deposit box in the Bank of Denmark Liberty bonds of the par value of $56,000.00. The cashier of the bank, without the knowledge of Guess, hypothecated these bonds with other banks as security for notes given for money borrowed for the use of the bank. The bonds were sold to pay the notes. When Guess discovered that his bonds had been abstracted and used by the bank for its own purposes, he was given, and accepted, other securities for the payment of the amount of the bonds. The Court held that for the reason that he had accepted such securities, he had waived his right to preference of payment out of the general assets of the bank; otherwise he would have been entitled to it on the principle of a trust ex maleficio created in his favor by the conduct of the bank in appropriating his bonds to its uses. It appears that the bonds when sold realized $9,512.15 more than the notes for the payment of which they were pledged, for which amount the Court held Guess was entitled to preference. It will be observed that throughout these cases the prevailing principle upon which preference was allowed is that in each instance the bank was the beneficiary of the funds of the claimant which had been fraudulently converted to its use by the bank. *Page 69 The crucial question in the case here under review is, Did the Easley Loan Trust Company reap the benefit of the tortious acts of Smith Bros., or were Smith Bros. the sole beneficiaries of their method of handling these cotton transactions? It needs but to recall these methods as they are detailed in the evidence, to conclude that the Easley Bank was not the beneficiary. It is true that when the receipts came in for the cotton thus sold by Smith Bros., they were placed to the credit of the Easley Bank with its correspondent banks. But, Smith Bros. had been given credit on the books of the Easley Bank for the like amounts, which they had checked out for their own uses. All that the Easley Loan Trust Company got was worthless checks. These alone came into the hands of the receiver as proceeds of these cotton transactions. This cardinal, outstanding fact takes these cases out of the range of the opinions in the Bank of Aynor case and the cases which follow its lead. The Central Bank of Spartanburg maintains that it is entitled to preference for the reason that after its bill of lading and draft had been purloined and the check of Smith Bros. had been substituted for them, on two occasions Smith Bros. had a balance to their credit more than sufficient to pay this check, if it had been presented. The evidence in support of this claim is wholly unsatisfactory. There is evidence that at least one other of these checks was in the bank at the times when it is claimed by Central Bank its check could and should have been paid. It is not shown that there were not other checks of Smith Bros. in the bank of earlier date than that of the Central National Bank. This claim for priority is without merit. Nor is there merit in the claims of South Carolina National Bank of Greenville and First National Bank of Blakely that they were entitled to preference because cashier's checks of the Easley Bank were sent them which were not honored by the drawees, because of the closing *Page 70 of the Easley Bank, which checks operated as assignmentspro tanto of the funds of the Easley Bank in the drawee banks. This contention is refuted by the decisions of this Court in Pinewood Bank v. Bradley, 136 S.C. 511,134 S.E., 510; Loan Savings Bank v. Peurifoy, 141 S.C. 318,139 S.E., 783. Since the adoption by this State of the Negotiable Instruments Law, a check is not an assignment protanto of the funds of the drawer. Section 6940, Code 1932. These transactions antedated the Act of 1930 (36 St. at Large, p. 1368), which has no retroactive effect. All of the appellants claim priority in the distribution of the fund of $17,500.00 derived from the settlement of the action brought upon the bond given to the Easley Bank by National Surety Company to indemnify the bank against fraud, embezzlement, abstraction, etc., of its employees. The bond was for the benefit of depositors, general creditors, and all others having business of such nature with the bank. No reason is assigned why claimants should have priority except that it was on proof of the wrongful acts in connection with their cotton transactions that the action was settled and the money collected. Other wrongful and criminal acts are charged in the complaint against the employees which must of a surety have entered into the compromise. This claim of priority cannot be sustained. We have not discussed the question whether the Easley Loan Trust Company was chargeable with the knowledge and acts of its officers and agents acquired and committed in connection with appellant's property for the reason that the view which we have taken of the case renders it unnecessary. However, we may say that in our judgment they were so chargeable. The case of Citizens' Bank v. Heyward, 135 S.C. 190,133 S.E., 709, is authoritative. The appellants have suffered grievous wrongs and losses at the hands of Smith Bros., who used the Bank of Easley as their instrument. But that bank derived no benefit from *Page 71 their transactions. Therefore it would be inequitable to say that appellants shall have a preference over the depositors and general creditors of the bank, whose funds constitute in large part the assets of the bank which have come to the hands of the receiver. "No rule of equity appeals more to the judicial conscience than that which requires the assets of an insolvent corporation to be distributed ratably among creditors." Livingstainv. Banking Company, 77 S.C. 305, 57 S.E., 182, 184, 22 L.R.A. (N.S.), 442, 122 Am. St. Rep., 568. The decree of the Circuit Judge is affirmed, except as modified in the opinion of Mr. Acting Associate Justice Featherstone, in which the majority of the Court concurs. MR. CHIEF JUSTICE BLEASE and MR. JUSTICE STABLER concur in part. MR. CHIEF JUSTICE BLEASE and MR. JUSTICE STABLER and MR. C.C. FEATHERSTONE, CIRCUIT JUDGE, dissent in part. ORDER ON PETITION FOR REHEARING In the petition for rehearing, the respondent takes two positions. The first is that this proceeding and all issues therein are wholly legal, and not equitable; and, accordingly, it follows that the findings of fact of the special referee, confirmed by the Circuit Judge, are final, and, therefore, this Court has no jurisdiction to review them. The supporting authorities are Metz v. Critcher, 83 S.C. 396, 65 S.E., 394,Willard v. Finch, 123 S.C. 56, 116 S.E., 96, and Raines v.Sanders, 134 S.C. 284, 132 S.E., 581. Each of the cited cases had reference to a proceeding to establish and foreclose a mechanic's lien, which the Court said was purely a statutory proceeding, and was not one in equity. We do not regard those decisions as applicable here. The principles by which this case is governed are stated in the recent case of Bain v. Rogers, 158 S.C. 417,155 S.E., 619, 620, as follows: "Ordinarily, the ascertainment and application of the assets of a bank to the payment of its obligations and the determination of the stockholders' liability, when the subject of judicial inquiry, are matters of equity jurisdiction (Parker v. Bank, 53 S.C. 588, 31 S.E., 673, 69 Am. St. Rep., 888; Man v. Boykin, supra [79 S.C. 1,60 S.E., 17, 128 Am. St. Rep., 830]; Buist v. Williams, 81 S.C. 495,62 S.E., 859; Wilkes Co. v. Arthur, 85 S.C. 299,67 S.E., 297), and in such cases the rule is now well settled that this Court will not disturb the findings of fact by the Master concurred in by the Circuit Judge, unless such conclusions are against the clear preponderance of the evidence or without any supporting evidence (Kaminski HardwareCo. v. Bag Co., 150 S.C. 244, 147 S.E., 874), and it is incumbent on the appellant to convince the Court that the Circuit Judge was in error in the conclusions reached by *Page 79 him on the facts (Rivers v. Woodside Bank, 150 S.C. 45,147 S.E., 661)." We find nothing in this case to take it out of the general rule above stated. Appellants claimed that assets of the bank were impressed with a trust in their favor. This claim the respondent denied. The question of whether or not property is impressed with a trust is always one to be considered and acted upon in equity. "Trusts" are peculiarly within equitable jurisdiction. The second position is that even if the action is one in equity, the appellant failed to show by the clear preponderance of the evidence that the bank purloined the bills of lading, or that it received the benefit of the misappropriated funds. A further review of the evidence in the case has not caused us to change the views formerly expressed. It is, therefore, ordered that the petition be dismissed, and that the stay of remittitur heretofore granted be revoked.