Commissioner of Banks
245 Mass. 448
| Mass. | 1923
Carroll, J.

This petition is brought by the commissioner of banks, who on September 25, 1920, took possession of the Cosmopolitan Trust Company (an insolvent Massachusetts company doing business in Boston and having a commercial and a savings department) to transfer from the commercial department to the savings department money which had been illegally taken from the latter and paid to the former. The commissioner found in the savings department a large number of notes, which had been discounted by the commercial department and sold to the savings department. He asked that $1,297,429 of the amount paid for these notes be transferred to the savings department. The master to whom the case was referred, found that the notes were discounted in the commercial department and full face value was paid for them by the savings department, in cash or its equivalent, and, if the transactions are allowed to stand, a substantial loss will result to the savings department. In each case where notes of corporations or individuals borrowing on personal security, as stated in the petition, were transferred to the savings? department, the loans of the savings department on personal securities at that time exceeded one third of the deposits and income of the savings department. G. L. c. 168, § 54, cl. 9. It was found that no copy of a report of an examination of the affairs, assets and liabilities of the borrowing corporations mentioned in the petition, was ever delivered to the trust company, and that no examination of the affairs, assets and liabilities of these corporations was ever made at the request or on behalf of the trust company, as required by G. L. c. 168, § 54, cl. 9 (b).

o Some of the notes had no indorser, surety or collateral security. Subsequent to the transfer to the savings department, certain notes were renewed in that department, and the principal question in the case is whether the sum of *451$683,152.22, paid by the savings department for the purchase of these renewal notes, should be transferred to that department. The practice of the savings department was: “ A note in which were invested funds of the savings department was given a number and placed in an envelope correspondingly numbered. When such note was paid in cash the note was stamped ‘ Paid ’ and surrendered to the maker, and the envelope or cover of the note was stamped ‘ Paid.’ Entries were, of course, made in the books of the savings department to the effect that the note was paid. Precisely the same steps were taken in regard to a note which was not paid in cash, but for which a renewal note was substituted, with the additional step that the renewal note was given a new number and placed in another envelope correspondingly numbered. Upon the envelope or cover of the original note there would be made no entry to indicate whether the original note was ‘ paid ’ in cash or by a renewal note; it would be stamped ‘ Paid ’ in either case.”

The business of the commercial department and that of the savings department of the trust company were carried on in the same banking rooms. “ The executive officers of the trust company had the management of the business and affairs of both departments. The savings department had its own manager (sometimes a titular officer of the trust company) and subordinate employees acting under the general direction of the executive officers. The various department heads were, or felt themselves to be, directly responsible to the president of the trust company. So far as concerns the transactions because of which relief is asked in the petition, every one of those transactions was entered into pursuant to an order or direction of the president.” The master further found, that “ there was no intention upon the part of the officers of the savings department or upon the part of the makers of the renewed notes that debts evidenced by notes transferred from the commerical department should be extinguished by the giving and acceptance of renewal notes, or that the renewal notes constituted new debts, or that the transaction of renewing a note should constitute a new transaction between the savings depart*452ment and the individual borrower, or that the giving of a renewal note was anything more than a postponement of the time of payment of the debt evidenced by the renewed note; and that the renewal of time notes at maturity, if they were not then paid, was in accordance with the practice of the savings department — to obtain renewals of time notes at maturity, if not then paid and .if still retained in the savings department, in order that it should not appear to be carrying overdue notes among its assets. The above finding as to ‘ intention ’ is not based upon any direct evidence from trust company officer or from any borrower as to such intention.” It was also found that in every instance where notes were transferred from the commercial department to the savings department, the transfer was by direction of the president of the trust company. “ The savings department was treated as a ‘ feeder ’ of the commercial department. ... A general course of dealing thus made apparent made it evident that notes were transferred to the savings department rather for the purpose of obtaining funds for use in the commercial department than with the object of providing the savings department with investments of its funds. . . . Quite a number of the notes mentioned in the petition were transferred to the savings department in so short a time after their discount by the commercial department as to lead to the inference that it was intended that the makers of the notes should obtain savings department funds.”

In Commissioner of Banks, petitioner, in re Prudential Trust Co. 240 Mass. 478, it was decided that notes and other securities handed over from the commercial department to the savings department should be returned by the latter and the sum of money paid from the savings department for these securities should be transferred from the commercial department to the savings department. It was said at page 483 of the opinion, in speaking of the provisions of the statute: “ These provisions of statute manifest a legislative purpose to place savings departments of trust companies as nearly as possible on the same footing of security as savings banks, and to overcome so far as practicable *453the risk arising from the temptation to officers of embarrassed trust companies to help out any weakness in the commercial department by resort to the more conservative and secure assets of the savings departments. These provisions, having regard to the ends sought to be attained, must be treated as mandatory and not merely as directory. They would fall short of accomplishing their purpose if they are held merely as binding upon the conscience of officers of trust companies. These provisions have the further effect of requiring the restoration to the savings department of the equivalent of any withdrawals, swapping of investments or other transactions between it and the commercial department made contrary to the statutes to the harm of the savings department and for the apparent or supposed advantage of the commercial department. Deposits in the savings department of trust companies are presumed to be made upon the faith of the statutes for their protection. This faith must be kept in the performance as well as in the word of the law. The trust company is a single legal entity. Its departments are established by the statute, but nevertheless it is one corporation.” And again, at page 484: “ But it was not the design of the General Court that the conflicting interests of the two classes of depositors under the circumstances here disclosed should be worked out on the theory of tracing trust funds. That would render illusory to a large extent the safeguards apparently held, out by the statute for the protection of the depositor in the savings department.” The withdrawals of the deposits in the savings department to pay the commercial department for the notes transferred were illegal. Commissioner of Banks in re Prudential Trust Co. supra. Commissioner of Banks v. Cosmopolitan Trust Co. 240 Mass. 254, 259. Commissioner of Banks, petitioner, in re Hanover Trust Co. 242 Mass. 343.

The subsequent renewals of the notes in .the savings department were illegal, and the funds of this department could not be used to help out the commercial department. The depositors in the savings department could not be deprived of their funds by the mismanagement of the officers *454of the trust company. The rule established in Commissioner of Banks, petitioner, in re Prudential Trust Co. and Commissioner of Banks v. Cosmopolitan Trust Co. is decisive of the case at bar. The funds taken from the savings department to pay the notes given in renewals of the notes originally in the commercial department, should be returned. The fact that the notes were renewed in the savings department did not as matter of law amount to a payment and extinguishment of the original indebtedness. The finding of the master on this question cannot be disturbed.

Even if the well established presumption that the giving of a negotiable promissory note discharges a preexisting debt between the parties upon which it is founded, is applicable in the liquidation of a trust company, to the renewal of notes by the savings department, when the original transaction was with the commercial department of the same trust company, which we do not decide, this presumption is not conclusive. It is a question of fact whether the original debt is discharged. The authorities on this question were collected in the recent case of Stebbins v. North Adams Trust Co. 243 Mass. 69, and it was there said, at page 74: “ the question whether the indebtedness continued was one of fact. The effect of the surrender of the matured notes to the maker upon their renewal and of the method in which the account was kept by the trust company was for the jury in connection with the other facts.” The finding of the master, that there was no intention by the officers of the savings department or by the maker of the notes that the debt to the commercial department should be extinguished by accepting the renewal notes, while not based on direct evidence amounted to a finding that the original debt was not extinguished. Such a finding could be made on all the facts and inferences to be drawn from them, including the evidence regarding the course of business and the purpose of the transfers, although there was no direct evidence as to such intention. Even if the collaterals exchanged were reduced or of fluctuating value, or consisted of maturing accounts receivable, as was the case with some of the renewals, it was still open to the master to find as a fact that *455the original debt remained unpaid. The principle that one seeking a rescission must restore what he has received is not applicable to these proceedings. We have not thought it necessary to review the decisions cited by the commercial depositors. The case at bar is governed in all respects by Commissioner of Banks v. Cosmopolitan Trust Co. supra. The exceptions were overruled properly.

A decree is to be entered directing the commissioner of banks to transfer from the commercial department of the Cosmopolitan Trust Company to the savings department of the same, the sum of $1,297,429.

So ordered.