We agree with him that, if the bank had collected anything on the note, it would have held same in trust for the person entitled. See Ellerbe v. Studebaker Corporation of America (C.C.A. 4th) 21 F.2d 993, 995 and cases there cited. But, as said in that case, the owner of a negotiable instrument collected by an insolvent bank is not entitled to have a trust declared on assets in the hands of its receiver, or to preferential payment therefrom, "unless he is able to trace the proceeds of the collection into the hands of the receiver, or to show that the assets which have come into his hands have been directly augmented as a result thereof."
The Mechanics Federal Savings Loan Association of Rock Hill, South Carolina, filed a petition in the action of Simpson J. Zimmerman, as conservator of the Central Union Bank of South Carolina, against the Central Union Bank of South Carolina and others, for a preference in the distribution of the assets of the bank. From a decree disallowing a preference, petitioner appeals. Messrs. Dunlap Dunlap, and Messrs. Spencer Spencer, all of Rock Hill, for appellant, cite: As to notes assigned: 82 S.E., 507 (W.Va.); 14 A.2d 96; 184 S.C. 391, 192 S.E., 400; 21 F.2d 993; 155 S.C. 431; 72 S.C. 458, 52 S.E., 195; 92 A.L.R., 1076. As to set-off: 189 S.E., 483; 211 N.C. 137; 311 Pa., 160; 136 Pa., 111; 7 A.2d 38; 48 F.2d 169; 23 Fed. Supp., 255; 20 F. Supp. 217; 98 F.2d 337; 69 App. D.C., 58; 5 Fed., 390; 123 U.S. 105; 71 Minn., 394; 73 N.W., 1096; 254 Fed., 165; 21 F.2d 993; 74 Va., 623; 82 S.E., 507; 146 U.S. 499; 49 Fed., 337; 126 Ky., 169; 91 Tex., 294; 52 Tex., 253; 7 Zollman on Banks and Banking, Sec. 4492; 40 N.Y.S., 392; 8 App. Div., 40; 150 So., 777: 8 S.W.2d 1030; 73 N.W., 1096; 71 Minn., 394: 39 S.W.2d 704: 185 Ark. 933; 110 S.W.2d 176; Zollman on Banks and Banking, Sec. 4494; 124 Pac., 751. As to paymentunder protest: 8 S.E.2d 359; 128 S.C. 67, 122 S.E., 24; 72 S.C. 458, 52 S.E., 195; 148 S.C. 172, 143 S.E., 646; 162 S.C. 107, 160 S.E., 156. As to equitable principle: 24 R.C.L., 804. As to title of lienholder: Sec. 398, Sec. 6778, Code 1932.
The claim arose out of a draft on the Chatham Manufacturing Company which was sent to the bank for collection. The company last named paid the draft by a check drawn against its deposit account with the bank, and the bank remitted for the collection by draft on one of its correspondents, but failed before this draft could be paid. There was, of course, no augmentation of the assets of the bank as a result of the collection, but merely a shifting of credits, and consequently no basis for the declaration of a trust. Lifsey v. Goodyear Tire Rubber Co. (C.C. 777 A. 4th) 67 F.2d 82, 83; Ellerbe v. Studebaker Corporation of America (C.C.A. 4th) 21 F.2d 993, 995; Larabee Flour Mills v. First Nat. Bank (C.C.A. 8th) 13 F.2d 330, 331. The learned judge below was of opinion, however, that the assets of the bank were subjected to a lien to the amount of the collection by reason of the proviso appearing in section 218(c) (14) of the North Carolina Code of 1927.
When it is sought to impress funds in the hands of a receiver with a trust on account of the wrongful conversion of trust property by an individual or corporation to whose rights he has succeeded, it must be shown that the funds in his hands have been directly augmented by the presence of the trust property or its proceeds, so that a court of equity can see with certainty that the trust property is in his hands. Peters v. Bain, 133 U.S. 670, 693, 694, 10 S. Ct. 354, 33 L. Ed. 696; First National Bank of Ventura v. Williams (D.C.) 15 F.2d 585; Marshburn v. Williams (D.C.) 15 F.2d 589; Smith Reduction Corporation v. Williams (D.C.) 15 F.2d 874; Schumacher v. Harriett (C.C.A. 4th) 52 F.2d 817, 818, 819, 82 A.L.R. 1; Ellerbe v. Studebaker Corporation of America (C.C.A. 4th) 21 F.2d 993; Frelinghuysen v. Nugent (C.C.) 36 F. 229, 239; City Bank of Hopkinsville v. Blackmore (C.C.A. 6th) 75 F. 771; Richardson v. New Orleans Debenture Redemption Co. (C.C.A. 5th) 102 F. 780, 52 L.R.A. 67; American Can Co. v. Williams (C.C.A.2d 178 F. 420; Empire State Surety Co. v. Carroll County (C.C.A. 8th) 194 F. 593, 604; Farmers' Nat. Bank v. Pribble (C.C.A. 8th) 15 F.2d 175, 176; Dudley v. Richards (C.C.A. 8th) 18 F.2d 876. And see exhaustive note in 82 A.L.R. 46, 52, 71, 73, and cases there cited.
See Federal Reserve Bank v. Malloy, 264 U.S. 160, 164, 44 S. Ct. 296, 68 L. Ed. 617, 31 A.L.R. 1261; Dakin v. Bayly, 290 U.S. 143, 147, 54 S. Ct. 113, 78 L. Ed. 229, 90 A.L.R. 999. Hence whatever the bank collected upon the note was held in trust for the plaintiff as the latter's agent, and, if traced into the hands of the receiver, might be reclaimed. See Davis v. Elmira Savings Bank, 161 U.S. 275, 289, 16 S. Ct. 502, 40 L. Ed. 700; Commercial Bank v. Armstrong, 148 U.S. 50, 57, 13 S. Ct. 533, 37 L. Ed. 363; Evansville Bank v. German-Am. Nat. Bank, 155 U.S. 556, 562, 15 S. Ct. 221, 39 L. Ed. 259; Massey v. Fisher, 62 F. 958 (C.C.E.D. Pa.); Ellerbe v. Studebaker Corp., 21 F.2d 993, 994 (C.C.A. 4); Turner, "Bank Collections — The Direct Routing Practice," 39 Yale L.J. 468. The difficulty is to trace into the hands of the receiver any identifiable sum of money held on trust when the bank closed its doors.
Thompson v. Orchard State Bank, 76 Colo. 20, 227 P. 827, 37 A.L.R. 115, and note; Gray v. Elliott, 36 Wyo. 361, 255 P. 593, 53 A.L.R. 554, and note. And the check to the bank resulted in a mere shifting of credits and added nothing whatever to its assets. There was consequently no augmentation of assets upon which a trust could be predicated. Lifsey, Receiver of Planters Merchants First Nat. Bank of South Boston, Va., v. Goodyear Tire Rubber Co. (C.C.A. 4th) 67 F.2d 82 (this day decided); Ellerbe v. Studebaker Corporation of America (C.C.A. 4th) 21 F.2d 993, 995; Larabee Mills v. First Nat. Bank (C.C.A. 8th) 13 F.2d 330; American Can Co. v. Williams (C.C.A.2d) 178 F. 420; Mechanics Metals Nat. Bank v. Buchanan (C.C.A. 8th) 12 F.2d 891. And see note in 82 A.L.R. at pages 95 and 101, and cases there cited. It is the contention of plaintiff that where a trust relationship is established, no augmentation or tracing need be shown, but that because of the relationship the cestui que trust is given preferential status in the distribution of assets in the hands of the receiver.
Almost unlimited authorities could be cited to sustain this proposition. Sufficient are Clark Sparks Sons v. Americus Nat. Bank (D.C.) 230 F. 738; Ellerbe v. Studebaker Corp. (C.C.A.) 21 F.2d 993; Mark v. Westlin (D.C.) 48 F.2d 609.
The municipal bonds were collected by the RFC as pledgee, and hence they could not be set off against the city's deposit. Ellerbe v. Studebaker Corporation of America, 4 Cir., 21 F.2d 993, 997. The equity of the RFC was superior, and thus the doctrine of equitable set-off does not aid the sureties.
There was no augmentation. The receipt by a bank of a check drawn against the account of one of its depositors does not bring anything into the bank and does not augment the assets. Ellerbe v. Studebaker Corp. (C.C.A.) 21 F.2d 993. One of the reasons for the holding in Connolly v. Lang, 68 F.2d 199 (C.C.A.7) was that there was no augmentation by the shift in credits. In the case of Blakey, Receiver v. Brinson, 286 U.S. 254, 52 S.Ct. 516, 518, 76 L.Ed. 1089, 82 A.L.R. 1288, the court said: "* * * the mere debiting of his account, without more, for the reimbursement of the bank for the obligation which it was supposed to have incurred or paid, lends no support to such an inference.
The notes of the lumber company with the invoices attached as collateral were pledged by the bank to secure a loan from the Central Hanover Bank in October, 1931; but this loan was paid off by the receivers prior to the hearing in the court below, and the notes with the attached collateral came into their hands subject to existing rights of set off just as though they had never been pledged. Ellerbe v. Studebaker Corporation of America (C.C.A.4th) 21 F.2d 993, 997, and cases there cited. The question presented by the appeal is whether the right to set off its liability against its deposit was a right of the lumber company or a right of the railway company; and we think that the learned judge below was correct in holding that it was a right of the lumber company.