1. A suit by a trustee in bankruptcy to recover, under § 60(b)
of the Bankruptcy Act, property, or the value of property, which
the debtor transferred to a creditor, is maintainable at law, but,
if prosecuted in equity without objection, the same relief may be
decreed. P.
294 U. S.
234.
2. A national bank accepted a pledge of securities as collateral
for an existing debt with reasonable cause to believe that a
preference would be effected within the meaning of § 60(b) of the
Bankruptcy Act. The debtor became a bankrupt within four months,
and, while the bankruptcy proceedings were pending but before the
trustee had made any demand upon it based on § 60(b), the bank
disposed of the securities for fair value to some of its
depositors, receiving payment not in cash, but by accepting their
checks drawn on itself and charging them against their accounts.
Some months later, the trustee sued the bank to avoid the
preferences, and, after a protracted litigation, he obtained a
decree for the value of the securities. Although the bank had
become insolvent and was placed in the hands of a receiver six
months before the decree was entered, the receiver had not been
made a party. Afterwards, the trustee sought an order requiring the
receiver to pay the amount claimed, as a preferred charge upon the
bank's assets.
Held:
(1) That the acceptance of the securities and their subsequent
disposition for fair value, before the trustee in bankruptcy
had
Page 294 U. S. 232
elected to avoid the preferences, were not wrongful acts on the
part of the bank, and the bank was not chargeable as a trustee
ex maleficio. P.
294 U. S.
235.
(2) The bank, when it accepted payment for the securities by
cancelling to an equivalent extent debts due by it to the
depositors who acquired them, was under no preset duty to set up a
trust of the proceeds, and as it had then a solvent, going
business, and made the transfer without fraudulent or obstructive
purpose, there is no reason why the transaction should be treated
retrospectively as something other than it was meant to be. P.
294 U. S.
236.
(3) When the transfer was avoided, the bank became chargeable
like any common law debtor with a duty of restitution to the extent
of the value of the property disposed of. P.
294 U. S.
237.
(4) The assets of the bank in the hands of the receiver are not
subject to a trust in favor of the trustee in bankruptcy. P.
294 U. S.
238.
70 F.2d 956 reversed.
Certiorari, 293 U.S. 547, to review the affirmance of a decree
imposing a trust on the funds of an insolvent national bank at the
suit of a trustee in bankruptcy.
MR. JUSTICE CARDOZO delivered the opinion of the Court.
A trustee in bankruptcy asserts a claim against the receiver of
a national bank for the value of property received by the bank as
an unlawful preference. The receiver admits the validity of the
claim if it is placed upon the same level as the claims of
creditors at large. The trustee insists that the claim must have
priority on the ground that the avails of the unlawful preference
are subject to a trust.
Page 294 U. S. 233
In September, 1928, the bankrupt, John Fitzgerald, had overdrawn
his deposit account with the Farmers' National Bank of Pekin, Ill.,
and was also indebted to the bank upon promissory notes. In
response to a demand for collateral security he delivered to the
bank notes of other persons, as well as a certificate of stock, the
whole of the face or par value of about $35,000. Most of the
securities so delivered have been returned to the trustee, and are
not in controversy now. Four items only are the subject of this
suit.
The bank received from Fitzgerald, on September 7, 1928, a
certificate for ten shares of its own stock, a promissory note of
Charles Graff for $3,000, a promissory note of W. C. Sommer for
$1,000, and notes or bonds of Veesaert for $5,000, reduced later by
$1,597.31 paid upon account. Within a period of four months (on
October 26, 1928), creditors of Fitzgerald filed a petition in
bankruptcy, an adjudication following in November of that year. No
election was made by the trustee in bankruptcy to reclaim the
collateral as an unlawful preference till July 20, 1929, or if
there was an earlier election, it is not shown by the record. In
the meantime, the bank, which continued as a going concern until
January, 1932, had disposed of three of the contested items of
security as follows: on February 9, 1929, after having credited the
bankrupt with a dividend of $30, it sold the ten shares of its own
stock to one Cullinan, a depositor. The price was $3,000, by
concession the fair value. Payment was effected by charging the
deposit account of the purchaser with what was owing for the
shares. On April 12, 1929, the bank collected $3,183.78 upon the
note of Charles Graff by charging that amount against the deposit
balance to his credit. On April 16, 1929, it collected $1,059.98
upon the note of W. C. Sommer by a charge against his balance.
Nothing was received upon the Veesaert bonds, the fourth contested
item, till December,
Page 294 U. S. 234
1930. The bank then had a payment on account to the extent of
$1,597.31, the payment being made by the deposit of a check to its
credit in the First National Bank of Chicago, Illinois. The balance
in that account was afterwards reduced to $776.57, which latter
amount, together with the bonds themselves, the receiver stands
ready to transfer to the trustee.
The election by the trustee to reclaim the collateral securities
in behalf of the estate was announced, as we have seen, on July 20,
1929, and was manifested by the beginning of a suit for appropriate
relief. No charge was made that the transaction was voidable for
any actual fraud. The suit was under § 60(b) of the National
Bankruptcy Act (11 U.S.C. § 96(b)) upon the ground that the effect
of the transaction was to prefer one creditor over others, and that
the creditor, the bank, had reasonable cause to believe that such
effect would follow.
* Under
Schoenthal v. Irving Trust Co., 287 U. S.
92, an action at law could have been maintained for the
recovery of the property or its value. Without objection, however,
the suit was tried in equity.
Cf. Buffum v. Peter Barceloux
Co., 289 U. S. 227,
289 U. S. 235.
It ended on June 24, 1932, in a decree invalidating the
transactions of September 7, 1928, as constituting a forbidden
preference, and directing the return of the securities, or the
value of such as had been converted into money.
During the years of litigation the bank had suffered reverses,
and on January 8, 1932, it was closed by the
Page 294 U. S. 235
Comptroller of the Currency. The receiver appointed by the
Comptroller was not a party to the suit to invalidate the
preference. After the entry of a decree, the trustee in bankruptcy
petitioned for an order instructing the receiver that the four
contested items were a preferred charge upon the assets, and that
payment should be made accordingly. The District Court granted the
relief prayed for, and, upon appeal to the Court of Appeals for the
Seventh Circuit, the order was affirmed. 70 F.2d 956. A writ of
certiorari issued from this Court.
If we except a small item conceded by the receiver, we think the
reasons are inadequate for the imposition of a trust in the nature
of a preference upon the funds of this insolvent bank.
1. For convenience, the first of the contested items, the
proceeds of the stock certificate, will be considered by itself,
the conclusion appropriate for this item being typical of the
conclusion appropriate for the others.
The acceptance by the bank of the certificate delivered by
Fitzgerald on September 7, 1928, was not a wrongful act whereby the
bank forthwith became subject to the duties and liabilities of a
trustee
ex maleficio. One who acquires a security with
reasonable cause to believe that the effect will be a preference
does not, from that alone, become a party to a fraud.
Van
Iderstine v. National Discount Co., 227 U.
S. 575,
227 U. S. 582;
Watson v. Adams, 242 F. 441, 444, 445;
Dean v.
Davis, 242 U. S. 438,
242 U. S. 444;
Keppel v. Tiffin Savings Bank, 197 U.
S. 356;
Carson v. Federal Reserve Bank, 254
N.Y. 218, 234, 172 N.E. 475. If bankruptcy is averted altogether,
or postponed beyond four months, the security will stand, though a
preference was intended at the time of its acceptance. So also, a
change of assets or liabilities before bankruptcy arrives may mean
the difference between a preference and a ratable division.
Haas v. Sachs, 68 F.2d 623;
Irving Trust Co. v.
Townsend, 65 F.2d 406, 408;
Mansfield
Page 294 U. S. 236
Lumber Co. v. Sternberg, 38 F.2d 614, 617;
Rogers
v. Page, 140 F. 596, 606;
In re Henry C. King Co.,
113 F. 110, 111;
Rubenstein v. Lottow, 223 Mass. 227, 229
et seq., 111 N.E. 973. The bank took the risk that, in
future and indeterminate contingencies, it might be compelled to
return what it accepted or the value. At the outset, it was not a
trustee,
ex maleficio or otherwise. It was a bailee, and
nothing more.
If a trust was not created in September, 1928, through the
acceptance of a security which has turned out to be a preference,
none was in existence on February 9, 1929, when part of that
security, the certificate of stock, was delivered to a purchaser.
True, by that time, the debtor was in bankruptcy, but the other
uncertainties, for anything here shown, were as indefinite as ever
. The accurate determination of assets and liabilities had still to
wait upon the process of proof and liquidation. At most, the
security was voidable, not void, and the trustee up to that time
had made no move to avoid it. A suit would have been a sufficient
election, even though not preceded by a demand (
Eau Claire
National Bank v. Jackman, 204 U. S. 522,
204 U. S.
534-535;
Stephens v. Pittsburgh Plate Glass
Co., 36 F.2d 953), but, as yet, there had been no suit, nor
statement that a suit was coming. To turn the bank into a wrongdoer
in the absence of actual fraud, to charge it with all the
liabilities growing out of a constructive trust, there was need of
some act of avoidance that would put the brand of guilt upon it.
Cf. Boyd v. Dunlap, 1 Johns.Ch. 478, 482, per Kent, Ch. We
hear of no such act till July, 1929, when the trustee in bankruptcy
brought suit to declare the preference a nullity.
The sale of the stock certificate to Cullinan on February 9,
1929, must be approached and considered in the light of the
relation then existing. There was then no
Page 294 U. S. 237
trust
ex maleficio, whereby the bank was chargeable as
a wrongdoer for parting with the shares. There was no trust implied
in fact unless it be the fiduciary obligation assumed by a bailee
to act with prudence and fidelity in the disposition of the pledge.
The trustee does not assert that this obligation has been violated.
On the contrary, he concedes that the price was equal to the value.
With its duty thus defined and measured, the bank agreed with
Cullinan to accept payment of the price by cancelling to an
equivalent extent the debt due him as a depositor.
Cf. Jennings
v. United States Fidelity & Guaranty Co., ante, p.
294 U. S. 216;
Old Company's Lehigh, Inc. v. Meeker, ante, p.
294 U. S. 227. We
do not need to consider whether effect would be given to such an
agreement according to its form if the bank at that time had been
under a present duty to set up a trust as to the proceeds to the
use of the bankrupt or of the trustee as his successor. For the
purposes of this case, we assume, though we do not hold, that a
trust in that event would attach to the cash assets in the vaults
to an equivalent amount. A different result follows when there is
neither trust to be set up nor willful wrong to be repaired. The
bank, when it parted with the certificate, had a solvent, going
business, and did not make the transfer with any fraudulent or
obstructive purpose. There is no reason in such circumstances why
the transaction should be treated retrospectively as something
other than it was meant to be.
Jennings v. United States
Fidelity & Guaranty Co., supra. Equity fashions a trust
with flexible adaptation to the call of the occasion.
Other remedies were at hand sufficient for the needs of justice.
When the preference was avoided, the bank became chargeable like
any common law debtor with a duty of restitution to the extent of
the value of the property disposed of. There might even be a duty,
if the proceeds
Page 294 U. S. 238
were intact, to make return in specie. But what is here sought
is very different. By a process of analysis, a unitary transaction,
the cancellation of a debt to a depositor, is treated as if split
up into two parts, a fictitious withdrawal by the depositor of coin
or other currency, and its return to the bank to be applied upon
the purchase. The money so returned is then subjected to a trust
and, though mingled with other money, is viewed as retaining its
identity so long as any portion of the fund is discovered to be
intact. These fictions and presumptions may serve well enough in
their application to one whose act is against equity and conscience
at the time of its commission. They may be implements of justice in
cases of theft or actual fraud. So at least, we now assume. In
circumstances less flagrant, they will be used more charily. They
will not be so applied as to impose a trust by relation upon moneys
that have entered into "the stream of the firm's general property"
(Holmes, J., in
National City Bank v. Hotchkiss,
231 U. S. 50,
231 U. S. 57),
and are distinguishable no longer.
For nearly three years after the sale of this stock, the
situation stood unchanged. An adequate remedy against the bank
through the recovery of an ordinary money judgment belonged to the
trustee continuously, and this whether the award of the value was
to be at law or in equity.
Schoenthal v. Irving Trust Co.,
supra; Buffum v. Peter Barceloux Co., supra. There was no
attempt during those years to separate the proceeds of the sale
from other assets through an injunction or a receivership, nor any
hint of a desire to charge a trust upon the proceeds. Not till the
suit was at an end and the bank was in the hands of the Comptroller
of the Currency did the respondent shift his theory and turn a debt
into a trust. By that time, new duties had arisen, new interests
had intervened. The assets of the bank were now
Page 294 U. S. 239
held by the receiver upon a trust for equal distribution.
Cf. Wisdom v. Keen, 69 F.2d 349, 350;
Fera v.
Wickham, 135 N.Y. 223, 230, 31 N.E. 1028;
Gerseta Corp. v.
Equitable Trust Co., 241 N.Y. 418, 425, 150 N.E. 501. The
shift had come too late.
2. What has been said as to the sale of the stock certificate to
Cullinan applies with equal force to the second and third of the
contested items, the Graff and Sommer notes.
The collections on these notes were made in April, 1929. They
were made not in cash received over the counter, but by
cancellation of a debt owing to the makers upon their deposit
balance in the bank. There was neither trust nor claim of trust
until the bank had suspended and was in the hands of a
receiver.
3. The fourth contested item, the collection on the Veesaert
bonds, differs from the others in that the payment was received
after the trustee in bankruptcy had elected to avoid the preference
and had sued for that relief.
The payment was made, as we have seen, by the deposit of
$1,597.31 in the First National Bank of Chicago, Illinois.
The balance in that account was reduced in 1931 to $776.57. What
became of the difference ($820.74) there is nothing to inform us.
Evidence is lacking that it was withdrawn in such a form or for
such purposes as to be represented by any assets forming part of
the estate today. The receiver consents that this item of $776.57,
the balance in the Chicago bank, be paid to the respondent as a
preferred charge upon the fund.
The decree is reversed, and the cause remanded for further
proceedings in accordance with this opinion.
Reversed.
*
"If a bankrupt shall . . . have made a transfer of any of his
property, and if at the time of the transfer, . . . and . . .
within four months before the filing of the petition in bankruptcy,
. . . the bankrupt be insolvent and the . . . transfer then operate
as a preference, and the person receiving it or to be benefited
thereby, or his agent acting therein, shall then have reasonable
cause to believe that the enforcement of such . . . transfer would
effect a preference, it shall be voidable by the trustee and he may
recover the property or its value from such person. . . ."
§ 60(b), 11 U.S.C. § 96(b).