Story Case

Certain bonds of the National Mercantile Company were being refunded at their maturity for a new issue. In each large city, one or more banks were accumulating the old bonds owned by their patrons, in view of sending all of them together to the refunding agencies, to be exchanged for the new issue. Four of the bonds, of an actual market value of $3,912, were deposited by Stanley LeClaire with the Merchants' Trust Bank for transportation and exchange. Before the date of the refund operation, the Merchants' Trust Bank was adjudged bankrupt, and Otis Humphrey elected trustee. LeClaire brought suit, after unsuccessful demands, to have the trustee deliver to him the four bonds which were held by the bank for him. Humphrey insisted that all creditors were entitled to have these bonds sold and placed in the common fund for distribution. It was pointed out that LeClaire had trusted the bank in the same manner as the man who had deposited money which he expected to withdraw later, so that where both had been deceived in their expectations, both should contribute to the loss caused by the unsoundness of the bank. What should be the judgment of the court?

Ruling Court Case. Henry Vs. Martin, Volume 88 Wisconsin Reports, Page 367

Henry sent money to H. D. Morgan with instructions to lend on good security. Pending the negotiation of a loan, Morgan deposited the money in the Seymour Bank. At the same time, he notified the bank that the money was not his, but that he was holding it under instructions for third parties. Subsequently, the Seymour Bank failed, and Martin was made receiver. Henry brought this action, claiming that he should not be compelled to share with the other creditors, but was entitled to the full amount, on the ground that the bank was trustee of the fund.

Mr. Justice Newman gave the opinion: "Henry made no special deposit of his money in Seymour's bank, nor did Morgan make any for him. Morgan's statement that he held it for third parties did not make it a special deposit. The relation was not that of bailment, since it was not a special deposit, the relation was that of debtor and creditor, and, therefore, Henry must share with the other creditors of the bank." Judgment was given for Martin.

Ruling Law. Story Case Answer

The owner of negotiable paper on specific deposit, or the owner of valuables on special deposit, may, in case of insolvency, reclaim them at any time, and neither deposit may be used as general assets in settling the affairs of the bankrupt institution. In either case, the relation is not that of debtor and creditor, but that of bailment without title in the bank, or trust with title in the bank. The bank does not own the property for its own use in either case, and the creditors have no right thereto.

The answer to the Story Case is clear. Since the bank had not yet sent away the bonds as instructed, and since they had not been converted into cash, there is a bailment. The money of the general depositor has been lost in the general assets of the bank, but the bonds of the LeClaire are distinctive and easily found. He did not agree to take an obligation of the bank, nor to part with them, except for the single purpose of refunding. The general creditors have, therefore, no right against them, and the trustee has no right to hold them. Judgment should be given against the defendant, Humphrey.