297 S.W. 938 | Ky. Ct. App. | 1927
Affirming in part and reversing in part.
For many years prior to May, 1925, the Farmers Bank of White Plains, Ky., a corporation with a capital stock of $15,000, transacted a banking business at White Plains, Ky. W.N. Bailey and others were the owners of bonds in varying amounts aggregating about $19,500, which they deposited with the bank for safekeeping. When the bonds were deposited the bank delivered to each of the owners a certificate acknowledging receipt of his bonds and reciting that the bond or bonds would be returned to the depositor on the surrender of the certificate properly indorsed. Prior to January 1, 1925, the bank, without authority from any of the owners, sold the bonds and placed the proceeds in a fund known as the "emergency fund." However, the proceeds were not kept separate from the other funds of the bank, but were mingled with the funds of the bank out of which it continued thereafter to transact its banking business. On June 23, 1923, the bank through its board of directors declared a 100 per cent dividend and on June 30, 1923, delivered and issued to each of its stockholders a time certificate for his portion of the dividend payable 12 months from date. Between June 30, 1924, and October 1, 1924, it paid out on these certificates the sum of $13,500. On May 9, 1925, it was ascertained that the bank was insolvent, and its assets were placed in the hands of the state banking commissioner for liquidation. At that time the books of the bank showed that there had been credited to the "emergency fund" the sum of $77,576.52, and there had been charged against that fund the sum of $60,573.24, leaving a balance of $17,003.28. When the bank closed its doors it had in its vaults $3,037.04 in cash, and checks which it had cashed amounting to $44.65, and was the owner of bonds of the market value of $4,094.85.
After ascertaining that the bank was insolvent and unable to pay its indebtedness in full, the banking commissioner brought suit against the bondholders for the *57 purpose of obtaining the advice of the court in the distribution of the assets. W.C. Durham and others, depositors and creditors, filed a petition asking that they be made parties defendant, and that they be authorized to make defense on behalf of themselves and all other depositors and creditors of the bank. L.R. Ray, sheriff of Hopkins county, filed an intervening petition alleging that he had collected taxes due the state of Kentucky, county of Hopkins, and county board of education of Hopkins county, aggregating the sum of $343.41, which he had deposited in the bank to his credit as sheriff, and asserting that he was entitled to have his claim paid in full to the exclusion of other creditors. On final hearing it was adjudged that the bondowners and Sheriff Ray were entitled to a preference in the distribution of the assets in the hands of the banking commissioner. From that judgment this appeal is prosecuted.
We shall first consider the propriety of the judgment as respects the bondowners. As the deposits were not to be returned to the depositor in kind, but the particular bonds left with the bank for safe-keeping were to be returned to the owners on the surrender of the certificates of deposit properly indorsed, there can be no doubt that the deposits were special and not general, and that the relation between the bank and each of the bondowners was that of bailee and bailor, and not that of debtor and creditor. People v. California Safe Deposit Co.,
"Most, if not all, of these cases have, however, been overruled or greatly limited and qualified, and the generally 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 when the claim is asserted, and must not have been expended or dissipated for any purpose in the business of the trustee."
And this is the rule uniformly adopted by this court. Allen v. Russell,
The next question for determination is whether the proceeds of the bonds may be traced into the assets of the bank. The old rule that money has no earmarks, and that the blending of trust money with the money of the trustee will defeat the owner's title and compel him to stand as a mere unsecured creditor, is no longer in force. The modern rule is 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. Peters v. Bain,
With respect to the bonds of the market value of $4,094.85, a different question is presented. It does not appear when these bonds were bought or how they were paid for. It is not shown that any of the trust funds were used in their purchase. There is no presumption that they were purchased with the trust funds. On the contrary, the presumption is that the bank used its own funds in making the purchase. It follows that the bondholders failed to trace any of the proceeds of their bonds into the bonds owned by the bank, and, that being true, they are not entitled to a prior claim thereon.
It is suggested that, besides the cash on hand, there are other assets in the hands of the commissioner of banking, and we are asked to say whether or not the bondholders have a preferred claim on these assets. That will depend on whether or not the proceeds of the bonds may be traced into such assets, and, the case in that respect not having been developed, we express no opinion on the subject.
The propriety of that part of the judgment awarding Sheriff Ray a preference for the state, county, and school taxes as deposited to his credit is also called in question. In the case of McAfee v. Bland, 11 S.W. 439, 11 Ky. Law Rep. 1, it was held that where the trustee had the right to make the deposit, trust funds placed on general deposit were not entitled to a preference in the distribution of the assets of the bank. In the case of Smith v. Arnold,
As to the bondholders, the judgment is affirmed in part and reversed in part; as to Sheriff Ray, the judgment is reversed and the cause remanded, with directions to enter judgment in conformity with this opinion.