This section of the book is from the "Canadian Banking Practice" book, by John T. P. Knight.
Question 534.— A private banker advanced a farmer money, taking notes which he pledged to a chartered bank. Later he took a deed of the farmer's land, giving a letter saying he would re-convey land on payment of a certain sum by a certain date.
The private banker claims that he is a trustee for the chartered bank, and that the bank can follow the land in his, the private banker's name.
Could the bank follow the land, or would it be only an ordinary creditor against the private banker?
If the consideration stated in the deed was the payment of certain notes, would the chartered bank be a preferred creditor ?
How could the private banker be made a preferred creditor?
No mention of the notes was made in the deed.
Answer.—The security which a private banker takes for notes discounted by him for his customer, on which notes he has obtained an advance from a chartered bank, would be held by him in trust for the bank, and the transfer of the security could probably be enforced by action of law.
The assignee in insolvency of the private banker (if there were one) could not realize on the security held, and regard the money as part of the general estate.
Whether or not the particular security enquired about attached to the notes held by the chartered bank, would be altogether a question of fact. If the chartered bank held all the paper given by the farmer, whose land had been given to the private banker as security, it would seem to be clear that the land was held to secure the bank.
The custom in some banks is to require a short memorandum to be attached to each note given to the bank as security by a private banker, for which he in turn holds security from the debtor, declaring that he holds such security in trust for the bank.