Smith, Kingsley R.

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Volume 39 Issue 2 Article 11 February 1933 Banks and Banking--Insolvency--Preference of County Funds Where Merger Causes Deposits to Exceed Legal Maximum Kingsley R. Smith West Virginia University College of Law Follow this and additional works at: https://researchrepository.wvu.edu/wvlr  Part of the Banking and Finance Law Commons, and the State and Local Government Law Commons Recommended Citation Kingsley R. Smith, Banks and Banking--Insolvency--Preference of County Funds Where Merger Causes Deposits to Exceed Legal Maximum, 39 W. Va. L. Rev. (1933). Available at: https://researchrepository.wvu.edu/wvlr/vol39/iss2/11 This Recent Case Comment is brought to you for free and open access by the WVU College of Law at The Research Repository @ WVU. It has been accepted for inclusion in West Virginia Law Review by an authorized editor of The Research Repository @ WVU. For more information, please contact ian.harmon@mail.wvu.edu. RECENT CASE COMMENTSB s AND BANKING - INSOLVENCY - PREFERENCE OFCOUNTY FuNDs W ERE MERGa CAUSES DEPOSITS TO EXCEEDLEGAL MAximum. - In West Virginia the legal maximum ofcounty deposits permitted in one bank is $100,000. Two banks,each having county deposits within the maximum, merged, lea'V-ing the surviving bank with county deposits of $160,000. Thisbank failed and on suit by the county the circuit court held thatsince the county funds in the surviving bank exceeded $100,000at the time of the appointment of a receiver, they were there inviolation of law and constituted a trust fund belonging to thecounty,-just as though the entire amount had been originally de-posited in the existing bank. A preference for the excess wasgranted and the decision affirmed by the Supreme Court of Ap-peals. Monongalia County Court v. Bank of the MonongahelaValley.'State governments are usually allowed a preference over in-dividual creditors where the two are otherwise equal because thestate succeeded to the prerogative possessed by the king at com-mon law. Political subdivisions of the state such as counties andmunicipal corporations do not have this priority. They may ob-tain a preference only (1) by special statute or (2) where themoney is unlawfully deposited, on the theory of a constructivetrust.,aOne line of cases holds that where a deposit of public fundsis made under such. circumstances as to constitute a trust in thehands of the bank, it is still essential, to establish a preference onthe trust theory, to show that the general assets of the bank havebeen augnented by such deposit and, in addition, to trace themoney deposited by it into the general residue now in the hands1164 S. E. 659 (W. Va., 1932).2 Page County v. Rose, 130 Ia. 296, 106 N. W. 744, 5 L. R. A. (n. s.) 886(1906).8 San Diego County v. Cal. Nat'] Bank, 52 Fed. 59 (S. D. Calif. 1892);Knighton v. Curry, 62 Ala. 404 (1878); Singleton v. United States Fidelity& G. Co., 194 Ala. 506, 70 So. 169 (1915); Richeson v. Crawford, 94 Ill.165 (1879); Bunton v. King, So Ia. 506, 45 N. W. 1050 (1890); PageCounty v. -Rose, supra n. 2; Brown v. Sheldon State Bank, 139 Ia. 83, 117N. W. "289 (1908); Myers v. Board of Education, 51 Kan. 87, 32 Pac. 658,37 Am. St. Rep. 263 (1893); Fidelity & D. Co. v. Wilkinson County, 109Miss. 879, 69 So. 865 (1915); State v. Midland State Bank, 52 Neb. 1, 71N. W. 1011, 66 Am. St. Rep. 484 (1897); Watts v. Cleveland County, 21Oka. 231, 95 Pae. 771, 16 L. R. A. (n. s.) 918 (1908); Boltz's Estate, 133Pa. 77, 19 AtL 303 (1890).1Smith: Banks and Banking--Insolvency--Preference of County Funds Where MDisseminated by The Research Repository @ WVU, 1933WEST VIRGINIA LAW QUARTERLYof the receiver.' It has been held that no constructive trust canbe raised on such deposits unless they can be traced,' and the bur-den of tracing is on the party seeking the preference.8Another line of cases, however, supports the rule.that wherepublic funds are illegally deposited a constructive trust is estab-lished and such funds constitute a preferred claim without anyproof of augmentation or tracing of the res." Should this rule beapplied both where the excess is created by one original depositand where a merger of several banks caused it, as in the princi-pal case? It is submitted that this is a rational extension of therule since the reason for giving the preference exists equally inboth situations - the illegality of the deposit of public funds.8But is the rule itself sound?The idea underlying the requirement that the res be traced is'The courts are confused as to just what constitutes tracing, however,as the following cases show. Crawford County v. Strawn, 157 Fed. 49, 84C. C. A. 553, 15 L. R. A. (n. s.) 1100 (1907); Primeau v. Granfield, 184Fed. 480 (1911); Fiman v. South Dakota, 29 Fed. (2d) 523 (C. C. A. 8th,1928); First National Bank v. Fidelity & Deposit Co. of Md., 48 Fed. (2d)585 (C. C. A. 9th, 1931); Schumacher v. Harriett, 52 Fed. (2d) 817 (C.C. A. 4th, 1932) (no preference where funds were used to decrease existingliabilities of bank since no augmentation); Hill v. Miles, 83 Ark. 486, 104S. W. 198 (1907); Myers v. Federal Reserve Bank of Atlanta, 134 So. 600(Fla., 1931) ; State v. Bruce, 17 Idaho 1, 102 Pac. 831 (1909) ; Bellevue StateBank v. Coffin, 22 Idaho 210, 125 Pac. 816 (1912); Officer v. Officer, 120Ia. 389, 90 N. W. 826 (1902); Murray v. North Liberty Say. Bank, 196Ia. 729, 195 N. W. 354 (1923); Hudspeth v. Union Trust & Say. Bank, 197Ia. 913, 193 N. W. 279 (1923) (no preference in absence of showing thatthe fund had not been dissipated and had come into receiver's hands as atraceable account or a distince augmentation of the whole); Andrew v.Eddyville Say. Bank, 204 Ia. 431, 215 N. W. 635 (1927) ("The absence ofpleading and proof of the traceability of the fund to the receiver is fatalto the claimant's case even though a trust was properly pleaded and es-tablished").rDaughtry v. International Bank, 18 N. M. 119, 119 Pac. 220 (1913);Shute v. Hinman, 34 Ore. 578, 56 Pac. 412, 58 Pac. 882, 47 L. R. A. 265(1899).GSchuyler v. Littlefield, 232 U. S. 707, 34 S. Ct. (1914); Com'rs. v.Strawn, 157 Fed. 49 (C. C. A. 6th, 1907); Waddell v. Waddell, 36 Utah 435,104 Pac. 743 (1909); Chase and Baker Co. v. Olmsted, 93 Wash. 306, 160Pac. 952 (1916); BOGERT, TRUSTS (1921) 521.7San Diego County v. California Nat'l Bank, supra n. 3 (county funds);Farmers' Savings Bank of Hamburg v. City of Hamburg, 204 Ia. 1083,216 N. W. 748 (1927) (city funds). See also annotations in (1927) 51 A.L. R. 1336 and (1930) 65 A. L. R. 690.8The logical difficulty with this extension is that on merging, the excessof the total account with the surviving bank over the legal amount is simplya general indebtedness and the bank has no funds of the county. The effectof the statute is the creation of a duty to pay out the excess above thelegal maximum. How is it that such a duty can be said to give rise to aproprietary interest in the liquid assets of the bank where none existedbefore?2West Virginia Law Review, Vol. 39, Iss. 2 [1933], Art. 11https://researchrepository.wvu.edu/wvlr/vol39/iss2/11RECENT CASE COMMENTSthat the claimant has an equity in a specific thing which is in thehands of someone else - either his actual property or its proceeds.Hence, tracing the property he claims into the property fromwhich such preference is sought is quite naturally a prerequisiteto the granting of a preferred claim. "Following the res" doesnot mean that the specific dollars deposited must be traced, butonly that the deposited sum must be substantially identified as partof that now in the hands of the receiver.' A showing that thefunds coming into the possession of the receiver as general as-sets of the defunct institution were never, after the original de-posit, less than the amount of the trust funds is usually held asufficient augmentation and tracing? Practical difficulties ex-plain the looseness of the rule as applied in bank cases. Absolutetracing there may be impossible since, for example, the funds de-posited may be paid out at once without having been physicallymingled with other funds of the bank and yet there would be norecord of the fact.It does not appear from the opinion in the principal casewhether the general assets of the bank fell below the amountclaimed as a trust fund, between the time of depositing and theinsolvency of the bank, but the decision is broad enough to implythat a preference would be allowed if tracing were impossible.Such a rule is just another discrimination against the muchneglected general depositor. Since the trust notion is only aformula with which to dress a preference, in this instance wouldit not be better to declare the preference openly as a protection forpublic funds? To clothe the preference in trust language is togive it the effect of a specific lien which takes priority over ageneral preference' not based on a proprietary theory. ThisGLathrop v. Bampton, 31 Cal. 17, 89 Am. Dec. 141 (1866); DavenportPlow Co. v. Lamp, 80 Ia. 722, 45 N. W. 1049 (1890); Peak v. Ellicott, 30Kan. 156, 1 Pac. 499 (1883); Neely v. Rood, 54 Mich. 134, 19 IT. W. 920(1884); Farmers' Nat'l Bank v. King, 57 Pa. St. 202, 98 Am. Dec. 215(1868); McLeod v. Evans, 66 Wis. 401, 28 N. TW. 173, 214 (1886).10 Leach v. Farmers' Say. Bank, 205 Ia. 114, 217 N. W. 437 (1928) (show-ing by use of bank records that fund coming into hands of receiver wasnever, between time of deposit and insolvency of the bank, less than amountof trust funds, held a sufficient tracing and augmentation); Chapman v.First Nat'l Bank, supra n. 4; In re State Bank of Portland, 110 Ore. 61,222 Pac. 740 (1924); Hitt Fireworks Co. v. Scandinavian American Bank ofTacoma, 121 Wash. 261, 209 Pac. 680 (1922).'While immaterial to general depositors since their rights are secondarilyconsidered in either event, to designate this preference as a trust fundarbitrarily prejudices the rights of those having bona fide trust claims andalso injures the prospects of those holding genuine -ordinary preferences3Smith: Banks and Banking--Insolvency--Preference of County Funds Where MDisseminated by The Research Repository @ WVU, 1933WEST VIRGINIA LAW QUARTERLYresult should and can be obviated by deliberately allowing a sim-ple preference.-KmG LEY R. SmuTH.CONSTITUTIONAL LAw - TAX-EXEMPTION op REALTY PUR-CHASED WITH WAR INSURANCE PAYMENTS. - With money receivedfrom the United States Government under provisions of the WarInsurance Act of 1924,' the petitioners, husband and wife, pur-chased a home located in Atlanta, Georgia. The city assessedtaxes against this property, and an action was brought to restraintax sale. Petitioners sought exemption under § 22' of the WarInsurance Act, providing: "The compensation, insurance, andmaintenance and support allowances payable under Parts II, III,and IV, respectively, shall not be assignable, shall not be subjectto the claims of creditors of any persons to whom an award ismade .... and shall be exempt from all taxation." The Georgiacourt held that realty, purchased with money so received, wastax-exempt. City of Atlanta v. Stokes.'The petitioners' claim for exemption did not arise from anyimplication of dual sovereignty or federal supremacy, as the courtdeclared, but was based on an express statutory provision, sothat only a question of statutory construction was before thecourt. It is a well-established rule that provisions exemptingproperty from taxation must be construed strictissini juris, andthat no exemptions can be made by implication.' Clearly, thesince trust claims must first be paid in full before satisfaction of generalcharges.'The Insurance Act is a part of the Veterans' Relief Act, 38 U. S. C.A. §§ 421-576 (1926).238 U. S. C. A. § 454 (1926).8165 S. E. 270 (Ga., 1932). This decision follows Rucker v. Merck, 172Ga. 793, 159 S. E. 501 (1931). These two decisions stand alone. Contra:State v. Wright, 140 So. 584 (Ala., 1932); State v. Board of Com'rs., 132Kan. 253, 294 Pac. 915 (1931), Cert. denied, 283 U. S. 855, 51 S. Ct. 648(1931); Martin v. Guilford County, 201 N. C. 63, 158 S. E. 847 (1931);Lambert v. Guilford County, 201 N. C. 67, 158 S. E. 849 (1931). For acriticism of Rucker v. Merck, supra, see (1931) 10 N. C. L. REV. 103; (1932)6 CIn. L. REV. 248. But see (1932) 17 CoaN. L. Q. 259.'Memphis Ry. Co. v. Berry, 112 U. S. 609, 5 S. Ct. 299 (1884);Chicago Ry. Co. v. Mo., 120 U. S. 569, 7 S. Ct. 693 (1886); WinonaLand Co. v. Minn., 159 U. S. 526, 16 S. Ct. 83 (1895); Bank v. Tenn., 161U. S. 134, 16 S. Ct. 456 (1885); Phoenix Ins. Co. v. Tenn., 161 U. S. 174,16 S. Ct. 471 (1895); Yazoo Ry. Co. v. Adams, 180 U. S. 1, 21 S. Ct. 240(1900); Morris Canal Co. v. Baird, 239 U. S. 126, 36 S. Ct. 28 (1915);Pacific Co. v. Johnson, 285 U. S. 480, 52 S. Ct. 424 (1931).4West Virginia Law Review, Vol. 39, Iss. 2 [1933], Art. 11https://researchrepository.wvu.edu/wvlr/vol39/iss2/11

Banks and Banking--Insolvency--Preference of County Funds Where Merger Causes Deposits to Exceed Legal Maximum

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Banks and Banking--Insolvency--Preference of County Funds Where Merger Causes Deposits to Exceed Legal Maximum

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