Larabee Flour Mills v. First Nat. Bank of Henryetta , 13 F.2d 330 ( 1926 )

LEWIS, Circuit Judge.

These two cases present the same issue and there is no difference in them on the controlling facts. In each a preference claim over other creditors of an insolvent national bank is sought. It was denied in Case No. 7090 and allowed in No. 7205. The appeals may be conveniently disposed of in one opinion.

These are eases for winding up the affairs of national banks, and there can be no doubt of jurisdiction in the district courts, regardless of the amounts involved. Judicial Code, § 24, par. 16 (Comp> St. § 991); Guaranty Co. of North Dakota v. Hanway, 104 F. 369, 44 C. C. A. 312; International Trust Co. v. Weeks, 203 U. S. 364, 366, 27 S. Ct. 69, 51 L. Ed. 224.

In Case No. 7090 these are the facts: The Larabee Flour Mills drew a draft on Eu-bank Produce Company, of Henryetta, Oklahoma, for $944.91, and caused it to be sent by the Commerce Trust Company of Kansas City, Missouri, to the First National Bank of Henryetta, Oklahoma, for collection and remittance of proceeds to the Trust Company. The Henryetta Bank presented the draft on July 20, 1923, to the Produce Company for payment and the Produce Company gave its check on the Henryetta Bank in'payment of the draft. The Produce Company, at the time it gave the cheek, had a credit with the Bank as a depositor for more than sufficient to pay its cheek. The Bank accepted the cheek in payment of the draft, charged the amount thereof to the account of the Produce Company and on the same day mailed its draft on the First National Bank of Okmulgee, Oklahoma, to the Commerce Trust Company for tho $944.91, payable to the Trust Company. On that same day, July 20, 1923, tho Henryetta Bank was closed by tho Comptroller of the Currency and since then it has been under the control of appellee Hulse as receiver appointed by tlie Comptroller. The draft for $944.91, drawn on the First National Bank of Okmulgee, was presented to that bank for payment on July 26, 1923, payment was refused and that draft remains unpaid. The appellant thereupon sued the Henryetta Bank and its receiver. On these facts, alleged in tho complaint and admitted by the answer, Laraboo Flour Mills asked that it be given a preference over and above the common claims of other creditors in payment out of the assets of the Henryetta Bank in the hands of tho receiver. The court denied tho preference and dismissed the suit.

In No. 7205 these are the facts: The Kansas Flour Mills Company shipped a ear of flour and feed to D. O. Gifford, of Burlington, Kansas, and drew a draft therefor in tho sum of $690.66 on Gifford, endorsed the draft, attached it to the bill of lading and handed it to the American State Bank of Great Bond, Kansas, to bo forwarded for collection. It forwarded tho draft with the bill of lading to the Farmers’ National Bank of Burlington, Kansas, for collection and remittance, and Gifford, on being notified took up the draft on May 9, 1924, with his cheek on the Burlington Bank, drawn in its favor, for the sum of $690.66. Tho Burlington Bank on receipt of Gifford’s check surrendered the" bill of lading to him and charged his account with the amount of his check. At that time Gifford had a credit with the Burlington Bank as a depositor for more than sufficient to pay his check. On the next day the Burlington Bank drew its draft on the Commerce Trust Company of Kansas City for the sum of $689.66, payable to the American State Bank of Great Bend, as the proceeds less its collection charges of the draft on Gifford, and mailed it to the American State Bank at Great Bend. Before that draft could he presented in due course to the Commerce Trust Company for payment the Burlington Bank ceased business and was taken in charge by the Comptroller of the Currency, and has since been in charge of appellee Dudley as receiver appointed by the Comptroller. The draft on the Commerce Trust Company remains unpaid. Kansas Flour Mills Company brought this suit against the Burlington Bank and Dudley, its receiver, asking that it be given a preference over and above the common claims of other creditors in payment out of the assets of the Burlington Bank in the hands of the receiver. The court allowed the preference.

The real issue in each case is between the preference claimant and general creditors of the bank. They will get less if the preference is allowed. Each claimant assorted an equity, that the assets taken over by the Comptroller are trust funds in which it is a preferred beneficiary. It is difficult to explain or understand by what equitable right one who has not contributed to the creation of a fund should be given a special and superior interest therein, though some of the state courts seem to so hold. The collecting banks acted as agents, Commercial Bank v. Armstrong, 148 U. S. 50, 13 S. Ct. 533, 37 L. Ed. 363, and had they collected and retained the funds called for by tho drafts, as was- their duty on account of insolvency, the equities of claimants would be plain; but instead of doing so they merely shifted credits on their books and records. No part of the funds in tho banks when they failed was placed there by claimants or by any one for them. In each case the draft was paid by cheek on the insolvent. No additional funds were brought into tho bank by either transaction. If the drafts which they held for collection had been paid in currency or by check on some other bank, the insolvents’ assets would have been increased that much when thereafter their remittance drafts were' dishonored; and in that event equity would have regarded tho collections as trust funds, followed them into the increased assets and, to the extent of the increase applied them first in discharge of these claims. This is our conception of the rule and the reason for it, applied in the federal courts. It has been repeatedly announced by this court. In the course of tho opinion of this court in Beard v. Independent Dist. of Pella City, 88 F. 375, 31 C. C. A. 562, which presented the same issue we have here, on like controlling facts, it is said :

“Unless it appeal’s that the fund or estate coming into possession of the receiver has been augmented or benefited by tbe wrongful use of the trust fund, no reason exists for giving the owner of the trust fund a preference over the general creditors, * * * and to assume [the position] of the owner of a trust fund, and as such to assert a preferential right to payment in full out of the cash fund coming into the hands of the receiver, to the detriment of the general creditors, it [claimant] ought to be held to satisfactory proof of the fact upon which the right to a preference rests, to wit, that the fund coming into the receiver’s hands has been augmented and increased by the addition thereto of the trust money, not as a matter of inference, nor as a result of mere entries on books of account, but because the fund or property against which the preference is sought to be enforced' has been in fact augmented or benefited by the addition thereto of the trust fund.”

That rule was reannouneed by this court in Empire State Surety Co. v. Carroll County, 194 F. 593, 606, 114 C. C. A. 435, and again in Mechanics & Metals National Bank v. Buchanan, 12 F.(2d) 891, opinion filed April 28, 1926. The Fifth Circuit announced the same principle in Anheuser-Busch Brewing Ass’n v. Clayton, 56 F. 759, 6 C. C. A. 108; the Sixth Circuit in City Bank of Hopkinsville v. Blackmore, 75 F. 771, 21 C. C. A. 514; and the Second Circuit in American Can Co. v. Williams, 178 F. 420, 101 C. C. A. 634. See also Boone County Nat. Bank v. Latimer (C. C.) 67 F. 27; Nyssa-Arcadia Drainage Dist. v. First National Bank of Vale (D. C.) 3 F.(2d) 648.

In No. 7090 the court ruled rightly in denying a preference to the claimant, but erred in dismissing the suit. The claim should have been allowed as a general claim without a preference. In No. 7205 the court erred in giving a preference to the claim. It should have been allowed as a general claim without a preference. Each decree is reversed with instructions to set it aside and to enter a decree in accordance with the views herein expressed.