Peurifoy v. Continental Finance Co.

Full title: PEURIFOY, RECEIVER, v. CONTINENTAL FINANCE CO. RICE v. CITY OF COLUMBIA

Court: Supreme Court of South Carolina

Date published: Jan 14, 1932

164 S.C. 261 (S.C. 1932)

162 S.E. 458

Opinion

13327

January 14, 1932.

Before RAMAGE, J., Richland, March, 1928. Affirmed.

Action by James E. Peurifoy, appointed Receiver of the American Bank Trust Company, in a suit by John Rice, and others, against the City of Columbia, against Continental Finance Company, seeking instructions as to the payment of a claim filed by defendant with him. From a decree denying defendant a preference, defendant appeals.

Decree of Circuit Judge, directed to be reported, follows:

This was an action brought by the plaintiff Jas. E. Peurifoy, as receiver of American Bank Trust Company, for the purpose of having the Court to pass upon and determine whether or not the defendant was entitled to have its claim under four certificates of deposit declared a trust or preferred claim and to be paid in full out of the assets of American Bank Trust Company which closed its doors on June 25, 1926, as insolvent, and which has been in course of liquidation since that time.

The defendant undertook to file its claim as a preferred one entitling it to payment in full, and the plaintiff Jas. E. Peurifoy, receiver, brought this action in March, 1928, denying that the defendant was entitled to preference and asking the Court to pass upon it.

The defendant appeared and filed its answer which admitted a number of the allegations of the complaint not material to the issues here, and then set up by way of further answer and as a basis of its claim of preference or trust:

(a) Paragraph 5. That on March 25, 1926, defendant borrowed $49,200.00 from American Bank Trust Company and gave notes therefor, payable to itself at the Dayton Savings Trust Company, Dayton, Ohio, in denominations of $1,000.00 for the most part and $100.00 for a part thereof, payable $4,100.00 on April 25, 1926, and a like amount each month thereafter up to March 25, 1927, and that the notes were indorsed by the defendant; and such are the facts.

(b) Paragraph 6. That all of these notes were unconditionally guaranteed as to payment of principal and interest, by the Metropolitan Casualty Insurance Company; and such is the fact.

(c) Paragraph 7. This paragraph alleges also that on each of the notes is a provision on the back thereof, over the signature of the Continental Finance Company, as follows: "To Whom It May Concern: The Metropolitan Casualty Insurance Company is secured hereunder: (1) By pledge of conditional sales contracts, chattel mortgages or lease agreements between The Continental Finance Company and the purchasers of automobiles. (2) By the assets of The Continental Finance Company. (3) By a reserve cash deposit." I find that there is such a provision on the back of each of the notes.

(d) Paragraphs 9, 10, and 11 allege: "That under agreement this defendant was required by the said American Bank Trust Company and the said The Metropolitan Casualty Insurance Company" to have and keep on deposit with American Bank Trust Company fifteen per cent. of the amount so borrowed, to wit, $7,380.00, to be applied in liquidation of the notes, and that this was a condition of the loan to the defendant, or discount of its notes. That at the time of the loan, on March 25, 1926, American Bank Trust Company, in evidence of the 15 per cent. reserve deposit required, issued and delivered its four certificates of deposit, not subject to check, each for the sum of $1,845.00, and each payable to the Metropolitan Casualty Insurance Company on the return thereof properly indorsed, three, six, nine, and twelve months from the dates thereof; and these certificates, duly indorsed, were delivered by the Metropolitan Casualty Insurance Company to the defendant which is the owner and holder thereof.

That this $7,380.00, represented by the four separate certificates of deposit, was left and required to remain on deposit under the contract, agreement, and understanding with American Bank Trust Company, the Metropolitan Casualty Insurance Company, and this defendant for the specific, special, and particular purposes of being paid and applied and credited to the payment and liquidation of the $49,200.00 of notes, one certificate to be surrendered and used in part payment of the notes then due at the expiration of three months from March 25, 1926, and a like certificate at the expiration of each additional three months.

(e) Paragraph 12. That the deposit funds represented by these certificates of deposit were for a special, specific, and particular purpose and were impressed with a special, specific, and particular trust and preference, and are a specific charge for the full amount thereof on the assets of the American Bank Trust Company. And those paragraphs, Numbers 9 to 12, constitute the crucial point in the question before the court.

(f) Paragraph 13 alleges that American Bank Trust Company some time before its failure transferred and pledged these notes to and with South Carolina State Highway Department as collateral security for certain deposits; and there is no issue on this question.

(g) Paragraph 14. That defendant had paid four of its notes, leaving unpaid the sum of $32,800.00.

(h) Paragraph 15. That the bank failed to pay its first certificate of deposit which came due on June 25, 1926, the same day the bank closed.

(i) Paragraph 16 alleges that a 50 per cent. dividend had been paid on the four certificates of deposit and that these payments were made under an express stipulation by which no rights of the defendant were waived to claim a preference or trust. And I find such to be true.

(j) Paragraph 17 likewise alleges that the defendant had paid its remaining $32,800.00 of notes to the State Highway Department under an express stipulation that such payment should not prejudice the defendant's rights. And the Court finds that all the rights of the plaintiff receiver and of the defendant have been duly preserved.

(k) Paragraph 18 claimed that the defendant was entitled to $3,690.00, the remaining 50 per cent. necessary to pay defendant in full, if it was entitled to such payment, after having received the 50 per cent. of dividends up to that time. Since that time defendant admittedly has received a dividend of 10 per cent. and a dividend of 5 per cent. on each of said certificates of deposit, or a total of 65 per cent.

There was offered on the hearing of this cause an agreed statement of facts proposed by defendant, some of which were assented to by the plaintiff and some of which were not. There were also offered by defendant several affidavits, just as if the testimony were being taken in Court and subject to objections to their competency.

From all of the evidence and the admissions of counsel I find:

1. That the defendant borrowed from the American Bank Trust Company on March 25, 1926, the sum of $49,200.00 for which it gave its notes as specifically alleged and set forth in the further answer Paragraph 5.

2. That the said notes were at the time of the execution, as stated on the face, in consideration of an agreed premium, receipt of which was acknowledged, unconditionally guaranteed by the Metropolitan Casualty Insurance Company.

3. That each of said notes bore on its back, over the signature of the defendant, an indorsement as set forth in Paragraph 7 of the further answer.

4. That at the time of borrowing said money and executing said notes, the American Bank Trust Company issued four certificates of deposit, each dated March 25, 1926, each in the sum of $1,845.00, and each certifying that the Metropolitan Casualty Insurance Company "has deposited in this bank Eighteen Hundred and Forty-five ($1,845.00) Dollars, payable to the order of themselves." The first of said certificates was due three months after date, and the others in six, nine, and twelve months, respectively. Each certificate states on the margin at the end in printing: "Certificate of Deposit not subject to check."

Each of said certificates of deposit is indorsed on the back: "Pay to the Order of The Continental Finance Co. (sd) The Metropolitan Casualty Ins. Co., J.M. Hollett, Attorney-in-fact." And then below this is indorsed: "The Continental Finance Co. By A.M. Klepinger, Treas."

5. The certificates of deposit are entered on the records of American Bank Trust Company in a book marked "Certificates of Deposit," which contains no other or further entry than merely the following headings at the top of the columns and the following entries thereunder:

Date Deposited By No. Amt. Time Metropolitan Cas. Ins. Co. ......... 61 1845 -3 Metropolitan Cas. Ins. Co. ......... 62 1845 -6 Metropolitan Cas. Ins. Co. ......... 63 1845 -9 Metropolitan Cas. Ins. Co. ......... 64 1845 -12 6. Defendant, in its further answer, claimed that there was an agreement by which American Bank Trust Company and the Metropolitan Casualty Ins. Company required defendant to keep the amount of these certificates on deposit, such certificates to be used each at the end of the three, six, nine, and twelve months' period in part liquidation of the notes.

When we turn to the affidavit of David Kempner, president of G.B. Bergin Co., Inc., who states that he negotiated on behalf of Continental Finance Company, of Dayton, Ohio, a loan of $50,000.00 from American Bank Trust Company, which was evidently these notes less the discount, he seems with care to state that the Metropolitan Casualty Insurance Company, before guaranteeing the notes, insisted that 15 per cent. of the amount of the loan be left on deposit and that certificates therefor be issued in its name with the understanding that the certificates would be credited to the payment of the notes given by Continental Finance Company to American Bank Trust Company.

He also carefully and explicitly states:

"There was never any request by The American Bank Trust Co., for a certificate of deposit, or to leave any part of said loan on deposit with it. The only reason that certificates of deposit were issued was because of the request of the Metropolitan Casualty Insurance Co., and it was with the understanding between the parties that such monies represented by the certificates of deposit should be credited to the payment of the notes.

"The bank never demanded, as already stated, that any monies be left on deposit with it, and I personally negotiated with the Pacific Finance Co., of New York, another loan of Fifty Thousand ($50,000.00) Dollars from The American Bank Trust Co., of Columbia, South Carolina; and in connection with said loan no monies were left on deposit and no certificates of deposit were issued, because the insurance company who guaranteed the payment of said loans did not require any monies to be retained or requested the same.

"The American Bank Trust Co., never requested that any monies be retained on deposit and the certificates of deposit were issued solely on the request of The Metropolitan Casualty Insurance Co., and with the understanding that the monies so on deposit should be credited to the notes executed by the Continental Finance Co., to the American Bank Trust Co. of South Carolina."

This affidavit seems to conflict with some of the allegations of the answer, especially Paragraphs 9 and 11, in so far as they connect the American Bank Trust Company with the agreement for the reserve represented by the certificates of deposit.

An affidavit of A.M. Klepinger, treasurer of the Continental Finance Company, of Dayton, Ohio, was offered, and much of his affidavit is evidently hearsay and his conclusions, without setting forth the facts, and to that extent is incompetent. He does state that the loan of the $49,200.00 was made with American Bank Trust Company through David Kempner.

He undertakes to state that it was understood and agreed that 15 per cent. of the total was to be retained by the bank, represented by four certificates of deposit. Evidently this is his conclusion from hearsay testimony.

The affidavit of J.M. Hollett states that he was vice-president of the Hooven-Huffman Company of Dayton, Ohio, at the time of the loan to defendant of the $49,200.00, and that this Hooven-Huffman Company acted as trustee to hold these four certificates of deposit, as outlined in full in the affidavit of A.M. Klepinger.

I should have stated above that the affidavit of Mr. Klepinger showed that the certificates of deposit were held by the Hooven-Huffman Company, of Dayton, Ohio, as trustee for the Metropolitan Casualty Insurance Company.

Mr. Hollett further undertakes to state that it was understood and agreed that at the time the certificates were placed in the hands of the Hooven-Huffman Company, the fund represented by the certificates of deposit was designated and set apart for the specific and particular purpose above set out and that the certificate of deposit was required by the American Bank Trust Company, of Columbia, to be so held by it for the specific purpose of liquidating said notes.

The latter portion of Mr. Hollett's affidavit, which is a material one, conflicts with the first affidavit, to wit, that of Mr. Kempner does not give the facts from which Mr. Hollett draws his conclusions, does not state with whom it was understood and agreed, and is evidently based on hearsay and most of it not competent evidence.

And besides, most of the matter in all of these affidavits, is an attempt to vary the written contract contained in and on the face of the certificates of deposit, and therefore incompetent.

7. The certificates of deposit themselves show on their face that they are negotiable instruments and could have been transferred at any time by the holder thereof, at least by indorsement. They were indorsed by the Metropolitan Casualty Insurance Company to the Continental Finance Company, and then they were indorsed, as is shown on each, by the Continental Finance Company, apparently in blank.

According to the affidavits submitted, they were turned over to and held by the Hooven-Huffman Company as trustee for the Metropolitan Casualty Insurance Company, though they are now in the possession of the defendant, and there is no dispute about the defendant being the present owner thereof.

8. There is nothing on the face of the certificates of deposit to limit the negotiability thereof. It is provided that they are not subject to check, but this would be true of any note issued by the bank. There is nothing on the records of the bank to show that they are impressed with any special trust or limitation. If they had passed into the hands of a purchaser for value at any time before the maturity of them respectively, such purchaser would have been an innocent holder and entitled to all of the rights of a purchaser in due course under our negotiable instrument law.

9. I am further of opinion that no such special trust attached to the funds represented by the certificates of deposit as would entitle the defendant to payment of them in full, or otherwise than pro rata with other depositors and creditors of the bank.

10. At the moment the bank became insolvent and closed its doors, its assets were impressed with a trust that they be distributed ratably among its creditors, as our Court has frequently said, and there was certainly no notice to creditors and depositors of any reason which would take these certificates of deposit out of the general rule.

11. Further, I hardly think it possible to say that these certificates of deposit made in March, 1926, increased the funds of the bank, and, if so, they certainly went into the general funds of the bank, and there has been no evidence offered to earmark, identify, or trace these funds into the hands of the receiver, and that is an essential prerequisite to claiming a preference by way of special trust.

In this connection the plaintiff's counsel admit that at the time American Bank Trust Company closed it had on hand on deposit in a responsible bank in Richmond, Va., approximately $75,000.00.

12. I see no way to distinguish this case from the principles so often announced that equity requires that the assets of an insolvent corporation be distributed ratably, and that one who claims a departure from this rule must establish a right thereto.

It is therefore ordered and adjudged that the defendant's claim to preference or special trust in the funds of American Bank Trust Company be, and the same is hereby, denied; that the said defendant is entitled to share ratably with the other creditors and depositors in the assets of said bank; that the costs of this action be taxed according to law against the defendant.

Messrs. Sloan Sloan, for appellant, cite: Contract for application of deposit to debt: 77 S.C. 305; 7 C.J., 630. Special deposit can be created by parol: 119 Ala., 64; 24 Sou., 562; 82 S.C. 427. Special deposit gives prior right: 7 C.J., 631, 749; 39 A.L.R., 930. Bank becomes trustee: 126 Wn., 510; 218 Pac., 232; 96 Fla., 181; 117 Sou., 789; 221 N.W., 543; 234 Fed., 613; 130 Wn., 132; 225 Pac., 825; 82 S.C. 427; 152 S.E., 140; 141 S.E., 370; 141 S.C. 227. Receiver acquires same interest debtor had: 144 S.C. 147; 125 S.C. 214; 125 S.C. 332; 60 S.C. 122; 118 S.C. 442; 110 S.E., 789; 136 S.C. 511; 140 S.C. 321.

Messrs. D.W. Robinson and D.W. Robinson, Jr., for plaintiff-respondent, cite: Relevancy of testimony of witness: 109 S.C. 429; 96 S.E., 154; 110 S.C. 346; 96 S.E., 539; 104 S.C. 346; 89 S.E., 354; 1 R.C.L., 481; 146 S.C. 15; 143 S.E., 365. Affidavits to vary written contract incompetent: 129 S.C. 226; 123 S.E., 845; 117 S.C. 60; 108 S.E., 295; 16 R.C.L., 1030; 46 S.C. 372; 24 S.E., 290. Equal distribution of assets: 143 S.C. 538; 141 S.E., 705; 136 S.C. 511; 134 S.E., 510; 77 S.C. 305; 57 S.E., 182; 22 L.R.A. (N.S.), 442; 141 S.C. 386; 139 S.E., 793; 81 S.C. 255; 82 S.E., 249; 22 L.R.A. (N.S.), 445; 3 S.C. 124; 145 S.C. 7; 142 S.E., 788; 124 S.C. 380; 119 S.E., 415. Trust fund be set aside as such: 15 F.2d 586; 12 F.2d 893; 118 S.C. 446; 110 S.E., 789; 15 F.2d 175; 141 S.C. 377; 139 S.E., 793; 156 S.C. 181; 153 S.E., 137; 148 Fed., 420; 101 C.C.A., 634; 194 Fed., 604; 114 C.C.A., 446; 21 F.2d 995; 43 F.2d 779. Holder of negotiable instrument as collateral is holder in due course; Vol. 2, Secs. 3710, 3702; Code 1922; 128 S.C. 75; 122 S.C. 24; 117 Va., 1; 83 S.E., 1080; 120 Va., 812; 92 S.E., 979; 131 S.E., 221; 110 S.C. 107; 96 S.E., 484; 139 S.E., 598; 130 S.E., 566; 133 S.E., 129. When setoff applies: 3 R. C.L., 591; 24 R.C.L., 858; 146 U.S. 507; 36 L.Ed., 1062; 268 U.S. 234; 69 L.Ed., 932; 40 A.L.R., 1095; 124 S.C. 386; 117 S.E., 415; 142 S.C. 6; 142 S.E., 262; 145 S.C. 7; 142 S.E., 788.

January 14, 1932. The opinion of the Court was delivered by

MR. ACTING ASSOCIATE JUSTICE JOHN I. COSGROVE.

The American Bank Trust Company, of Columbia, closed its doors in June, 1926, and in the above-entitled cause of Rice v. City of Columbia, Hon. Jas. E. Peurifoy was appointed its receiver.

This action was brought by him, as receiver, in March, 1928, against the above-named appellant, Continental Finance Company, seeking instructions as to the payment of a claim filed by that company with him.

The Court was asked to determine whether or not the finance company was entitled to have its claim under four certificates of deposit declared a trust or preferred claim against the assets of the insolvent bank. His Honor, Circuit Judge Ramage, heard the case upon an agreed statement of facts and affidavits and filed his decree denying the preference. From that decree comes this appeal.

We have given careful consideration to the questions presented by appellant's exceptions. Judge Ramage, in his elabrate and well-considered decree, passed adversely upon the same questions presented by these exceptions. His findings of fact and conclusions of law are satisfactory to this Court. The decree will be reported.

It is the judgment of this Court, therefore, that the order and judgment appealed from be affirmed.

MESSRS. JUSTICES STABLER and CARTER concur.

MR. JUSTICE COTHRAN dissents.

MR. CHIEF JUSTICE BLEASE disqualified.

MR. JUSTICE COTHRAN (dissenting):

This is a proceeding in the main cause above stated, by the receiver of the American Bank Trust Company, for the purpose of having adjudicated a claim of the Continental Finance Company to a preference in the distribution of the assets of the above-named bank, which closed its doors on June 25, 1926, by reason of insolvency, and whose affairs were placed in the hands of Peurifoy, receiver, in July, 1926, in said main cause.

The claim of the Continental Finance Company to a preference is based upon the following facts which are not controverted upon either side:

A few days prior to March 25, 1926, the Continental Finance Company (hereinafter referred to as the finance company), negotiated a loan with the American Bank Trust Company (hereinafter referred to as the American Bank), of $49,200.00; the negotiations for the loan were conducted by David Kempner, president of Bergin Co. (Inc.), brokers in the city of New York; the American Bank required as a condition of making the loan a guaranty by a surety company; the Metropolitan Casualty Insurance Company (hereinafter referred to as the Metropolitan Company), agreed to execute such guaranty upon condition that 15 per cent. of the loan be left on deposit with the American Bank, and that certificates of deposit be issued by that bank in the name of the Metropolitan Company, maturing at different dates and applicable to the notes of the finance company as the maturities were synchronous.

It does not appear that the American Bank made any demand that this deposit be made, or that it knew anything of the condition imposed by the Metropolitan Company, while the negotiations were pending; in fact, I think that it appears that it made no such demand and knew nothing of the condition; it would appear later, however, that when the transaction was being completed, the American Bank fell completely into line with the negotiations; it appears therefore that at that time it had full knowledge of the condition and acquiesced in it.

The finance company was located in Dayton, Ohio, and it is evident that the negotiations for the loan by the American Bank were instituted there with the Dayton Savings Bank Trust Company and that the latter negotiated with Bergin Co. of New York; for we find in the record the following letter, dated March 23, 1926, from the Dayton Bank to the American Bank:

"March 23, 1926.

"American Bank Trust Co., "Columbia, S.C.

"Gentlemen:

"In accordance with instructions from the Continental Finance Company, who received their instructions from G.B. Bergin Company, New York we have today shipped you $49,200.00 Serial Notes of said Continental Finance Company, with draft attached for $47,566.82 (with all exchange and collection charges). Said draft will be presented to you through the National Loan Exchange Bank, Columbia, S.C.

"Description of the notes is given you on the attached sheet, together with the number of days to each maturity and the discount thereon. The face of the draft is computed, as follows:

Par value of notes ............................. $ 49,200.00 Discount ....................................... 1,633.18 ___________ Balance ........................................ $ 47,566.82 "In accordance with agreement there is to be 15% of the face amount deposited with you in certificates. This amounts to $7,380.00 and certificates for such amount will be accepted by the National Loan Exchange Bank, as part settlement on the draft; balance of $40,186.82 to be paid in cash. Please issue certificates of deposit in the name of The Metropolitan Casualty Insurance Company, being four at $1,845.00 each, maturing three, six, nine and twelve months after March 25th, 1926, without interest. In case this draft is not paid on March 25th please add interest on $49,200.00 at 6% for each additional day."

(Signed by the vice-president and trust officer of the Dayton Savings Bank Trust Company.)

Accordingly there were transmitted by the Dayton Bank to the American Bank 60 promissory notes of the finance company, 48 of which were for $1,000.00 each and 12 for $100.00 each, aggregating $49,200.00; four of the $1,000.00 notes and one of the $100.00 notes, aggregating $4,100.00 were made due on the 25th of each month thereafter beginning with April 25, 1926, and ending with March 25, 1927, 12 payments of $4,100.00 each, aggregating the principal sum $49,200.00. They were drawn payable to the order of the finance company and were indorsed by that company and delivered to the bank upon its payment of the draft referred to in the letter of the Dayton Bank.

Prior to the delivery of the notes, and as a condition of the loan, each note was guaranteed by the Metropolitan Casualty Insurance Company. It is of interest and importance to observe the form of the notes and the guaranty of the Metropolitan Company; there follows a copy of one note and of the guaranty as a sample of all:

"The Continental Finance Company "Guaranteed Note

"No. 102 $1,000.00 "Dayton, Ohio, March 25, 1926.

"On April 25, 1926, without grace, we promise to pay to the Order of Ourselves One Thousand Dollars at the Dayton Savings Trust Company, Dayton, Ohio, with interest after maturity, value received."

(Signed and sealed officially by the finance company, by its proper officers.)

The guaranty was in the following form:

"GUARANTEE

"The undersigned in consideration of an agreed premium, receipt of which is hereby acknowledged, unconditionally guarantees the payment of Principal and Interest on the foregoing Promissory Note at Maturity."

(Signed and sealed officially by the Metropolitan Company by its proper officer.)

Upon the back of the guaranty was the following:

"ENDORSEMENT

"To Whom it may Concern:

"The Metropolitan Casualty Insurance Company is secured hereunder:

"(1) By pledge of conditional sales contracts, chattel mortgages or lease agreements between the Continental Finance Company and the purchasers of automobiles.

"(2) By the assets of The Continental Finance Company.

"(3) By a reserve cash deposit."

Upon the same day, at the same time, and manifestly as a part of the single transaction, the American Bank honored the draft and issued to the Metropolitan Company (guarantors), four certificates of deposit, each in the sum of $1,845.00, numbered 61, 62, 63, 64, and maturing respectively June 25, September 25, December 25, and March 25, 1927, without interest. The following is a copy of one of the certificates; the others being identical except as to maturities:

"American Bank Trust Company of Columbia "No. 63 $1,845.00 "Columbia, S.C. March 25th, 1926.

"The Metropolitan Casualty Insurance Company has Deposited in this Bank Eighteen Hundred Forty-five ........ Dollars

"Payable to the Order of Themselves

"On Return of this Certificate Properly Endorsed."

"Interest at the Rate of No per cent. Per annum if allowed to remain 9 months.

"Interest Ceases at Maturity of this Certificate."

(Signed by C.M. Earle, Cashier.)

While these certificates of deposit were negotiable instruments, by an arrangement between the finance company and the Metropolitan Company (which then held the certificates) were indorsed by the Metropolitan Company and deposited with Hooven-Huffman Company of Dayton in trust to hold "for the specific purpose of liquidating a portion of the notes at the said bank (American Bank), falling due on the date of said certificates"; evidently for the purpose (in protection of the interest of the finance company), of destroying the negotiability of the certificates, and of dedicating them to the purpose above indicated. While the American Bank was not a party to this arrangement, it is clear that neither it nor its receiver can claim any benefit from the original negotiability of the certificates. Moreover, as a matter of fact they were not negotiated, and no bona fide purchaser appears to claim any interest in them.

Later the finance company paid off the notes which were held by the State Highway Commission, to whom they had been pledged by the American Bank as security to deposits made by the commission in the American Bank; the Metropolitan Company, having been thus discharged from their guaranty, indorsed the certificates to the finance company.

While the American Bank may not have insisted in the first instance upon the deposit of 15 per cent. of the loan, it evidently was acquainted with its object to protect the guaranty company, and did all that they could do to further that protection of which they were fully advised by the notice on the back of the notes and the letter of transmissal of the Dayton Bank above quoted; the American Bank acquiesced in the scheme and cannot now repudiate the contention that the deposit was made for the specific purpose indicated. Moreover, it was to the distinct advantage of the American Bank that the deposit be made, adding to the security of the loan and giving it the use of $7,380.00 without interest, an arrangement which netted it nearly $300.00.

The notes aggregating $4,100.00, maturing April 25th and May 25th, were duly paid by the finance company. The certificate of deposit maturing June 25th was forwarded in due course to the bank for collection and application to the note due on that day, but it was protested and returned unpaid (that being the very day upon which the bank closed its doors).

It appears incontrovertibly therefore that the deposit was a special deposit.

The case was, by agreement, heard by his Honor, Judge Ramage, upon an agreed statement of facts, substantially as above detailed, and certain affidavits and documentary evidence. On May 29, 1930, he filed a decree denying the appellant's claim to preference, and from this decree due notice of appeal was given, and the case comes before this Court on exceptions thereto.

If the deposit, evidenced by the four certificates of deposit, aggregating $7,380.00, was made for the specific purpose of application, as they severally matured, to the notes of the finance company, it was impressed with a constructive trust, and may be traced, in amount and not necessarily in specie, to funds actually received by the receiver, the finance company is entitled to priority of payment of the balance due upon them, $2,583.00, out of the funds in the hands of the receiver for distribution.

"A deposit may be for a specific purpose, as where money or property is delivered to the bank for some particular designated purpose, as a note for collection, money to pay a particular note or draft, etc. While such a deposit is sometimes termed a 'special deposit' and partakes of the nature of a special deposit to the extent that title remains in the depositor and does not pass to the bank, yet it seems more accurate to look on this as a distinct class of deposit. In using deposits made for the purpose of having them applied to a particular purpose, the bank acts as the agent of the depositor, and if it should fail to apply it at all, or should misapply it, it can be recovered as a trust deposit." 7 C.J., 631, 632.

"Where a deposit was special, was made for a special purpose or was in any way segregated so that title did not pass to the bank, it must, of course, be paid in preference to general creditors." 7 C.J., 749, 750.

"Upon a special deposit a bank is merely a bailee and is bound according to the terms of the special deposit. When a bank receives a deposit for a special purpose it is charged with the duty of applying the money to that purpose, this duty it is under obligation to perform in strict accordance with its instructions and it cannot use or dedicate such deposit for any other purpose." 2d Michie Banks Banking, 1298.

"The bank is bound to keep intact a fund deposited special. A special deposit creates a trust fund and the bank is bound to keep it intact for the purpose specified. A bank having become the special depository of a fund is bound to retain it until it is drawn out for the use designated, or if the purpose of deposit has become incapable of execution to hold the fund to the use of the original depositor." 2d Michie Banks Banking, 1299.

"The reported case * * * sustains the rule laid down in the original annotation, that specific deposit for a particular known purpose is a preferred claim in favor of the depositor, on the insolvency of the bank, and is not to be considered as part of its general assets." 39 A.L.R., 930.

"When the bank accepts a special deposit, it becomes a trustee of the depositor, and holds the money subject to the trust." Washington Shoe Mfg. Co. v. Duke, 126 Wn., 510, 218 P., 232, 233, 37 A.L.R., 611.

To the same effect, Amos v. Baird, 96 Fla., 181, 117 So., 789; Miller v. Andrew, 206 Iowa, 957, 221 N.W., 543.

In Titlow v. Sundquist (C.C.A.), 234 F., 613, money was deposited with a bank for the express purpose of having the bank pay the mortgage indebtedness of a third party, and it was held that this created a special deposit, entitling the depositor to a preference if the bank failed before the transaction was completed.

To the same effect, Northwest Lumber Co. v. Bank, 130 Wn., 33, 225 P., 825, 39 A.L.R., 922.

The doctrine is recognized and approved in Fort v. Bank, 82 S.C. 427, 64 S.E., 405, 406. In that case the owner and purchaser of certain premises agreed with the officials of the bank that funds deposited by the owner should be held by the bank to protect the purchaser against a mechanic's lien. Subsequently the bank paid out the funds on the owner's check. The Court held: "There can be no doubt of the bank's liability if it accepted the deposit with knowledge of and assent to the alleged agreement subjecting it to the claim of Bayly. The agreement made the deposit special to the extent of the Bayly claim, and it was the duty of the bank to retain of the deposit a sum sufficient to pay the Bayly claim." And again: "The contemporaneous agreement among the plaintiff, the depositor, and the bank officers affected the deposit with the trust assumed by the bank to hold sufficient of it to protect plaintiff against the Bayly claim."

In the case of Fant v. Home Bank, 152 S.C. 140, 149 S.E., 599, 600, attention may be called to the opinion of Mr. Justice Blease (now Chief Justice), in which it is stated: "If the agreement in the case at bar had provided absolutely that the bank was to deliver the moneys to Prothro, or to the Hill Chevrolet Company, the situation would be different."

And to the opinion of Mr. Justice Stabler: "It was agreed by all parties that the moneys received from the Hill Chevrolet Company were to be deposited in the bank in the name of Prothro, subject to his order, or for the purpose of readvancement to the company. It is therefore clear that Prothro, under the terms of the agreement, could check out of the bank at any time, for purposes other than for readvancement to the company, the whole or any part of the funds so deposited, and that the bank would be bound to honor his orders."

It is insisted by the receiver that the finance company is not entitled to preference for the reason that it is unable to trace and impose a trust and earmark its funds; that they must go further than to show a trust deposit, by following and earmarking the fund.

It is admitted that the assets of the American Bank which were taken over by the receiver amounted to approximately $1,000,000.00, including $75,000.00 in cash on deposit in a bank in Richmond.

The finance company contends, I think correctly, that a substantial identification of the fund is all that is necessary to perfect its priority. The issuance under the circumstances of the certificates of deposit was the same as if the finance company had drawn from the American Bank the net proceeds of the loan in cash and immediately returned to the bank $7,380.00 in cash for which certificates were to be issued. This cash necessarily swelled the assets of the bank and was a special deposit, a trust fund, which never became the property of the bank, and in which therefore the creditors of the bank acquired no interest.

In White v. Bank, 60 S.C. 122, 38 S.E., 453, 455, the Court said: "The doctrine now held being that in following a trust fund it is not necessary to trace the identical coins or bills of which it is composed. Substantial identity is all that need be proved and therefore a cestui que trust may pursue and recover a trust fund originally received by the trustee in the form of money, so long as its identity as a fund can be ascertained, although he may be unable to trace the identical coins or bank bills in which such money was originally paid to the trustees. As an illustration of this, it is said in some of the cases that if a trustee receives a sum of money impressed with a trust, and puts such money into a bag along with other money which belongs to the trustee in his own right, the cestui que trust has a right to take out of that bag the amount of the trust fund which the trustee had put in the bag; and this for the reason that so much of the money in the bag belongs to the cestui que trust and not to the trustee, and the fact that in taking out the money he may get some of the coins or bills which belonged to the trustee in his own right cannot affect the question, as he gets no more than what belongs to him. Indeed, the fundamental principle upon which the doctrine that a cestui que trust may follow property in which his trust funds have been invested into the hands of any person, except a bona fide purchaser for valuable consideration, rests, is that such property, in equity, belongs to him, and he has a right to reclaim it." Approved in Yeldell v. Bank, 118 S.C. 442, 110 S.E., 789; Ex parte Bank of Aynor, 144 S.C. 147, 142 S.E., 239.

In Northwest Lumber Co. v. Bank, 130 Wn., 33, 225 P., 825, 39 A.L.R., 922, it was held, quoting syllabus: "In the case of a general deposit the relation of debtor and creditor between bank and depositor exists, and in the event of insolvency depositor is entitled only to a pro rata amount of assets, while in the case of special deposit the relation of trustee and cestui que trust arises, and in case of insolvency depositor is entitled to reclaim the whole from the general mass with which it has been commingled if such mass has not subsequent to the deposit been reduced to an amount less than the special deposit." In the opinion the Court said: "By presenting the check to the bank, and directing what disposition should be made of the fund represented by it, the lumber company sought to collect this part of the debt due it from the bank and deposit the fund for a special purpose. In other words, it sought thereby to change a part of its general deposit into a special deposit. The bank, by accepting the check with knowledge of the purposes of the lumber company, consented to the change."

In Miller v. Andrew, 206 Iowa, 957, 221 N.W., 543, 544, it was held, quoting syllabus: "Where amount of cash assets of insolvent bank at all times exceeded the amount of trust fund, and where assets of bank were not decreased from time of receipt of trust fund to the time of the receivership, fund was sufficiently traced into receiver's hands, entitling claimant to preference."

For these reasons I think that the decree of the Circuit Court should be reversed, and judgment of preference awarded to the finance company upon its claim.