Story Case

For several months, the directors of the Turko-American Bank had known that it was insolvent, but they had continued its operations in the hope of improving conditions. Many deposits were received, amounting to $361,566.95, during that time. It was the custom of the bank to take each day's cash, except what was necessary to start the next day's business, down town to the National City Bank, through which the clearing operations of the Turko-American Bank operated. On the twenty-eighth of August, several of the larger creditors filed a bill before the state court, asking the appointment of a receiver for the Turko-American Bank because of its insolvency. Because of the emergency which the bill alleged to exist, the court granted the appointment immediately, and Dudley Mc-Kee was named. The doors of the bank were closed at one o'clock, and the following condition was found to be then existing: On the twenty-eighth of August, the bank had received deposits of cash and cash items (checks, bank drafts, etc.) amounting to $2,532.88, which was still in its hands. There was additional cash on hand and balance with the National City Bank of $57,544.93. Other assets, such as the notes of customers, securities held, due from other banks, and so forth, amounted to $124,274.57. The bank owed to all its depositors the sum of $697,762.45, which was obviously far in excess of its ability to pay them. McKee reported these facts to the court and asked to be instructed as to how the funds should be distributed.

What disposition will the court require to be made of the various funds in the hands of the receiver?

Ruling Court Case. Quin Vs. Earle, Volume 95 Federal Reporter, Page 728

Quin, for almost ten years, had banked with the Chestnut Street National Bank. It appeared that on December 22, 1897, and some days prior thereto, the bank was hopelessly insolvent, but it was not shown that the officers of the bank were then conscious of the hopeless situation. About two o'clock of that day, Quin deposited a check of $3,000 with the bank. He, too, was ignorant of its distressing condition, and had no reason to believe that it was on the verge of failure. The check was received by the bank and payment was made by receiving credit on the check from another bank to which the Chestnut Street bank was indebted. At three o'clock of the twenty-second, the Chestnut Street National Bank closed its doors, and was unable to open them again for business. Earle was appointed receiver of the bank. Quin brings this action to recover the whole amount of $3,000. He claims that, since the bank was insolvent when the deposit was made, the money realized from the check, became trust property in their possession, to which he, Quin, was entitled above the claims of any other creditors.

It was contended by Earle that the money did not become trust proceeds, because it was not shown by Quin that the officers of the bank were aware of its hopelessly insolvent condition when it received the deposit.

Decision: When money is deposited with a bank, or paper which is turned into money, it is generally presumed that the bank becomes debtor and the depositor creditor as to the amount, but when the bank is insolvent, and the insolvency is known to the officers of the bank, there is no such presumption that the relation of debtor and creditor is created, but it is generally held that the defunct bank becomes a trustee of the money so received or collected, and in such a case the depositor is entitled to follow that money so long as its identity is not lost in the bank's general assets. If it becomes mingled in the bank's general assets, the depositor has a claim upon the whole amount of those assets for the amount of the deposit. In either case the depositor is entitled to his full claim, and is not compelled to claim as a general creditor. In this case, however, Quin failed to make out his claim for his full $3,000, because he was unable to show that the insolvent condition of the bank was known to the officers, when his deposit was received.

On this point, Circuit Judge Gray said: "The more modern doctrine has come to be that, where the fraudulent depository so mingles goods which he has obtained by fraud with the mass of like goods of his own, the whole may be seized, or considered as held in trust until equitable separation of the property of the defrauded party is made. So, advancing one step further, when money thus obtained has gone to swell the aggregate in the possession of the fraudulent party, it may, under proper proceedings, be segregated in amount from such aggregate sum, and made the subject of a trust, in order to accomplish the ends of justice. If my bushel of corn be obtained from me by fraud, and be poured into the mass of similar grain in the bin of the party committing the fraud, justice is satisfied, and no one can be wronged, by my having restored to me a bushel of the same grain out of the bin, though the identical grains obtained from me are not restored." Judgment was given for Earle, because knowledge of insolvency on part of bank officers was not known.

Ruling Law. Story Case Answer

If a bank is insolvent when it receives a deposit, and its insolvent condition is known to the officers of the bank, there is no presumption that the depositor intended to create the relation of debtor and creditor by making the deposit. If, therefore, the officers of a bank, knowing that it is in an insolvent condition, receive deposits, they take them as trustee; the bank does not become the beneficial owner of the moneys thus received. Accordingly, the depositor is entitled to follow that specific money and reclaim it, if it can be followed. If it cannot, he is entitled to receive from the assets of the bank that amount.

Upon these principles, the court should order that the receiver, in the Story Case, refund in full the amount of all the deposits for which the cash remained in the drawers of the bank. It is impossible to say which of the deposits made during the months of known insolvency have been retained, since they are mingled in one fund as book items only, but all of them are entitled to the fullest restitution that the balance of the fund remaining on hand will permit. The remaining cash on hand will be equally divided among the claimants in this class. Of the other assets, it is probably impossible to show that they were purchased from the funds of any particular class of depositors, so they will be distributed among all the creditors. The following statement form will make clear the application of the principles:

Deposits

Assets