¶1 I am of the opinion that the Circuit Judge, Hon. E.C. Dennis, reached the proper conclusion in this case. In this connection I desire to state that while I have not had an opportunity to examine all of the authorities cited in the decree of the Circuit Judge, I agree with the principles of law stated by his Honor. In my opinion, the judgment of the Circuit Court should be affirmed. *36
¶2 NOTE: Decree of the Circuit Judge will be incorporated in the report of the case, provided there shall be omitted the verified statement of the account appearing on page 19 of the transcript. and in lieu thereof these words shall be inserted, to wit: Amount of charges to the People's Bank of Darlington, as executor, $8,883.93; total amount of disbursements, $2,573.78.
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Case posture Posture Before DENNIS, J., Darlington, January, 1931. Judgment reversed and petition dismissed.Action by J. Lide Nettles and another against the People's Bank of Darlington, in which Donald E. Michie, administrator of the estate of J.L. Michie, deceased, intervened. From the judgment, G.B. Brasington, as Receiver of the Peoples Bank of Darlington, appeals.
The decree of the Circuit Judge is as follows:
This is a proceeding against the receiver of the People's Bank of Darlington. It is founded upon an intervening petition in the main cause, with authority of the Court first had and obtained.
The People's Bank of Darlington, hereinafter called the bank, was the duly qualified executor under the will of J.L. Michie, deceased. The receiver for the bank resigned the executorship, and the petitioner was appointed administrator c. t. a. of the goods, chattels, and credits of the said J.L. Michie, deceased. The petitioner claims that the bank as such executor, prior to the closing of its doors, collected and received $6,310.17, in cash over and above its cash disbursements as such executor; and the petitioner claims the right to payment in full of the $6,310.17, less the sum of $2,839.53 paid by the receiver as dividends. A return was served by the receiver, and the matter was heard by me at chambers.
On most of the material issues of fact in the cause, the parties are in substantial agreement. I find the facts to be as follows:
That the bank is a South Carolina banking corporation, at Darlington, S.C. with the power to act as executor and trustee under the law, which power it exercised from time to time.
That J.L. Michie was a director of the bank and secretary of the board for a number of years prior to his death, which occurred .... day of May, 1928. That in his last will and testament he appointed the bank his executor, and on the 21st day of May, 1928, J.L. Michie's will was admitted
to probate and letters were given the bank on June 6, 1928, and it qualified on said day.
At the time of Mr. Michie's death, there was on deposit to his credit in the bank the sum of $1,054.42, in a checking account, and the sum of $7,066.29 in a savings account, but savings accounts in said bank were payable on demand, or at least within 30 days after notice or demand, and, when the bank closed, it had collected, received, and disbursed various sums of money as executor of the estate, all of which, including the said deposits, are shown in the following sworn statement of George Onslow, cashier of the bank, and clerk to the receiver: Amount of charges to the People's Bank of Darlington as executor, $8,883.93; total amount of disbursements $2,573.78.
That on account of withdrawals of deposits for some time prior to and including the 29th day of October, 1928, the bank closed its doors on October 29, 1928, and G.B. Brasington was appointed receiver. That G.B. Brasington resigned the executorship which was duly accepted by the Judge of Probate on November 17, 1928, and the petitioner, Donald E. Michie, was appointed administrator c. t. a., and demanded of the receiver the sum of $6,310.17, and the receiver refused payment as a preference, but allowed the claim as a general claim, and paid thereon the regular dividends which have amounted to $2,839.53.
That said bank at all times had more than $6,310.17, and more than all other trust funds collected and not disbursed, on hand and in other solvent banks; and said bank turned over to its receiver, the said G.B. Brasington, more than $25,000.00 at the time of his appointment and qualification.
That the said bank had the conveniences, means, and facilities of taking care of, providing for, and safely keeping all such funds held and collected as aforesaid intact; in that it had adequate iron and regular bank safes, and a large and substantial safety deposit vault.
The attorneys for the petitioner and receiver agreed by way of stipulation to all of the above-stated facts.
I further find that the bank, upon its acceptance of the executorship, transferred on the bank's books to itself as executor of the estate of J.L. Michie, deceased, the aforesaid deposit accounts standing to the credit of J.L. Michie at the time of his death, and the bank at all times treated the said deposits and all other collections or receipts for the said estate as deposits to the credit of itself as executor, and did not segregate any of the estate funds, and all of the estate funds were mingled with the bank's own funds.
I further find that, while the petitioner filed a claim for $6,310.17, as a general claim, without any claim of preference, but that Samuel Want, Esq., was attorney for both the petitioner and the receiver; and, in this connection, the receiver in his return states: This respondent does not wish to rely upon the defense of waiver or estoppel by reason of filing of the petitioner's claim as a general claim, and the acceptance of dividends thereon, and if in the opinion of the Court, this respondent has the right, as an officer of the Court and the representative of the depositors to waive such defense, he desires to express such waiver herein.
The receiver in his return denies that the cash receipts by the bank as executor exceeded the cash disbursements to the extent of $6,310.17, but admits that the bank had on hand in various accounts to the credit of itself as executor of the will of J.L. Michie, deceased, the sum of $6,310.17, and alleged that almost the whole of said sum represents bank balances held by the said J.L. Michie, prior to his death, and standing to his credit at the time of his death; the receiver further alleged that the funds of the testator's estate were not segregated from the general assets of the bank either directly or indirectly, that the only thing that was done was to make entries on the deposit ledgers of the bank to show the name of the bank, in its capacity as executor, as the depositor, in the place and instead of J.L. Michie.
The receiver also denied that $6,310.17 came into his hands as receiver, as funds of the executor of the will of J.L. Michie, deceased.
The petitioner contends: (1) That the bank collected the said funds; (2) that the bank was a trustee; (3) that the funds were trust funds, and that the bank never at any time acquired title to same; (4) that the fund is traced and identified into the receiver's hands; (5) that, under the law, the bank was required to keep the funds separate; (6) that, on account of the funds being mingled, the trust extends to the combined fund to the extent of the trust, and also created a lien on the entire mass; (7) that, on account of the bank's conduct in mingling the funds, it committed a fraud and constituted an ex maleficio trust; (8) that the term Capital Stock in the sense used by the Legislature in Section 3995, Vol. 3, of the 1922 Code, means the bank's entire assets as security; (9) that under the law he is entitled to be paid in full out of the remaining unpledged assets in the receiver's hands.
The defenses urged by the receiver are: (1) That a bank acting as executor is not required to keep funds separate from its own; (2) that the bank was not a trustee, and that funds held by it as executor were not trust funds; (3) that the bank did not collect the $6,310.17, as claimed by the petitioner, in that almost the whole of the sum represented bank balances standing to the credit of J.L. Michie at time of his death, and that the only thing that was done was to make entries transferring the accounts to itself as executor on the books; (4) that the bank, acting as executor, had the right to deposit the estate funds with itself as a banker; (5) that the phrase Capital Stock referred to in Section 3995 of the Code as security only means the money paid in by the subscribers; (6) that the cash funds turned over to the receiver did not include the claim of the petitioner, except to the extent that said cash included the claims of all other depositors.
I will now consider the defenses urged by the receiver.
(1) To determine the soundness of this defense, it will be necessary to consider Section 3994 of Volume 3 of the 1922 Code. It is my opinion, and I so hold, that this section is a grant, right, or privilege accorded banks, and that it merely gives banks the right or privilege to act as executors, trustees, etc.; and I further hold that this section should be strictly construed. 26 Am. Eng. Cyc. of L., 662, 666; Black, Const. of Laws, 220; State v. City of Columbia , 12 S.C. 370 . Further construing this section, I hold that it does not change or alter the long-established rules governing executors, and the long-established principles should be read into the statute, and subjects banks to the same restrictions and requirements as individuals acting as executors; if the Legislature had intended otherwise, it would have said so in plain and appropriate words. Columbia Real Estate Trust Co. v. Royal Exchange Assur. , 132 S.C. 427 , 128 S.E., 865 ; Black, Const. of Laws, 84, 85, 345, 346, 349, 361; 25 R.C.L., 1054-1056; 26 Am.
Eng. Cyc. of Law (2d Ed.), 649; Keister's Adm'r v. Keister's Ex'rs , 123 Va., 157 , 96 S.E., 315 , 316 , 1 A.L.R., 439; Strother v. Lynchburg Trust Sav. Bank , 155 Va., 826 , 156 S.E., 426 , 428 , 73 A.L.R., 166; 36 Cyc., 1144, 1145; Millhiser Mfg. Co. v. Gallego Mills Co. , 101 Va., 579 , 44 S.E., 760 ; Kidd v. Bates , 120 Ala., 79 , 23 So., 735 , 41 L.R.A., 154, 74 Am. St. Rep., 17. Having concluded that the statute merely gave banks the right to act as executor, etc., that it should be strictly construed, and that banks so acting are governed by the same rules as individuals, it remains to determine whether or not the bank was required to keep the funds separate. In this connection, it seems to be almost universal law that executors must keep the estate funds separate and cannot mingle them with their own. Rolain's Adm'r v. Darby's Adm'x , 1 McCord Eq., 477; Myers v. Myers , 2 McCord Eq., 265, 16 Am. Dec., 648; 28 Am. Eng. Cyc. of Law (2d Ed.), 1057; 3 Pom. Eq. (3d Ed.), § 1076; 18 Cyc., 291; Englar v. Offutt ,, 2 McCord Eq., 304, the Court said: It must also be added that they [executors] have no right to employ that money, or any other part of the estate of their testator, in their private transactions or speculations.
(2) As to this defense, I conclude and hold that the bank was a trustee of the highest nature, and that the funds were trust funds, first for creditors, and, second, for beneficiaries. Myers v. Myers , 2 McCord Eq., 265, 16 Am. Dec., 648; Lawton v. Hunt , 4 Strob. Eq., 1; Redfearn v. Craig , 57 S.C. 543 , 35 S.E., 1024 ; 11 R.C.L., 23-25, 152, 153; Leach v. Farmers' Sav. Bank. 205 Iowa, 114 , 213 N.W. 414 , 217 N.W., 437 , 56 A.L.R., 801, 23 C.J., 1170, 24 C.J., 48; Morris v. Johnstone , 172 Ga. 598 , 158 S.E., 308 ; City Council of Charleston v. Duncan , 3 Brev., 386. Our own Court has said: [Executors] are considered in Equity as trustees, and are governed by the same rules. Myers v. Myers , 2 McCord Eq., 265, 16 Am. Dec., 648. And: They are regarded as trustees for preserving and securing the rights of those interested under the will. Lawton v. Hunt , 4 Strob. Eq., 1.
(3) As to this defense, I conclude and hold that the bank did collect the $6,310.17, as claimed by the petitioner, and that same had not been disbursed by the bank when it closed. The deposits standing to Mr. Michie's credit at the time of his death and the acceptance of the executorship by the bank, were unquestionably debts owing by the bank to Mr. Michie, and it is unquestionably the law that debts owing
by an executor to his testator are considered as paid and assets in hand instantly upon acceptance of the executorship. Hall v. Hall , 2 McCord Eq., 304; Farys v. Farys , Harp. Eq., 261; Jacobs v. Woodside , 6 S.C. 490 ; Griffin v. Bonham , 9 Rich. Eq., 77; Newman v. Clyburn , 41 S.C. 539 , 19 S.E., 913 ; Joyner v. Cooper , 2 Bailey, 199; Schnell v. Schroder , Bailey, Eq., 339, 11 R.C.L., 114, 115; Bassett v. Fidelity Deposit Co. , 184 Mass. 210 , 68 N.E., 205 , 100 Am. St. Rep., 552; In re. Walker's Estate , 125 Cal., 242 , 57 P., 991 , 73 Am. St. Rep., 41. There is no ceremony to perform, and no mode of doing it. In re. Mason's Estate , 42 Or., 177 , 70 P., 507 , 95 Am. St. Rep., 735; regarded as settled law. Joyner v. Cooper , 2 Bailey, 199. All of the authorities concur. Schnell v. Schroder , Bailey, Eq., 339. As to debts payable on demand, the executor cannot set up that no demand was made, or that he could not make demand on himself. 11 R.C.L., 114. In fact, the bank actually collected and paid out part of the same deposits as is shown by the agreed stipulation of fact. And see Koon v. Munro , 11 S.C. 140 . These principles should apply to any indebtedness by the executor to the estate, originating at any time during the administration period.
(4) This defense is controlled by my conclusion as to the first defense, except that I may add: It is the universal rule that a trustee cannot deal with the trust estate for his own benefit. 26 R.C.L., 1332. To say that a bank, acting as executor itself, can deposit the trust funds with itself, would simply amount to a scheme to acquire control of, mingle the funds with its own, and use them in its business, all of which absolutely violates the general principles governing executors and trustees. In fact, it has been said that the violation of such a trust constitutes fraud and entitles the cestui to prior payment out of the funds in the receiver's hands. 34 Cyc., 348. In the case of St. Paul Trust Co. v. Kittson , 62 Minn., 408 , 65 N.W., 74 , 76 , the trust company issued to itself as executor certain certificates of
deposit bearing interest at 4 per cent., but the Court required it to pay 7 per cent., the legal rate. The Court said: The issuing of the certificates did not change the fact that the amount represented by them was being used by the executor in its private business. Neither does the fact that the statute permits other executors to deposit trust funds with this trust company change the essential character of the transaction. As well might a solvent private banker, who was also an executor, take the trust fund, use it in his business, and issue, as such banker, to himself, as executor, certificates, and then insist that he had not used the fund in his business. The Court further said: Logically it is difficult to see how the character of the executor's business, * * * can change the essential character of the act of a trustee who uses the trust fund in his own business without the approval of the Court or the cestui que trust. As I have just stated, for a bank acting as executor to deposit the trust funds with itself as a banker amounts to only a scheme to mingle and use the trust funds in its own business. As said by the Court in the St. Paul Trust Co. case supra , it should make no difference that other executors were allowed to deposit trust funds with the bank.
(5) The phrase Capital Stock generally refers to the money paid in to a corporation by the stockholders as capital, but it is sometimes used to or means the corporation's entire assets. I am of the opinion that it was the intent of the Legislature in using this term in Section 3995 of the Code to include the bank's entire assets as security for faithful performance. This view of the statute is aided by the fact that the Legislature also attempted to make the stockholders' liability security, though this was beyond its power. This view is further strengthened by the fact that, if the term only included the capital paid in by the stockholders, there would be no security when a bank fails as in this case and its entire capital paid in by the stockholders wiped out. I therefore conclude and hold that the bank's entire assets
operate as security under the statute. For definitions and construction of the term Capital Stock, see Union Pac. Life Ins. Co. v. Ferguson , 64 Or., 395 , 129 P., 529 , 130 P., 978, 43 L.R.A. (N.S.), 959, 5 A. E. (2d Ed.), 137, 14 C.J., 380, 382; People v. Chicago Gas Trust Co. , 130 Ill., 268 , 22 N.E., 798 , 8 L.R.A., 497, 17 Am. St. Rep., 322, 7 R.C.L., 196; Henderson Bridge Co. v. Commonwealth , 99 Ky., 623 , 31 S.W. 486 , 29 L.R.A., 77; State v. Duluth Gas Water Co. , 76 Minn., 96 , 78 N.W., 1032 , 57 L.R.A., 69; Kohl v. Lilenthal , 81 Cal., 378 , 20 P., 401 , 22 P., 689, 6 L.R.A., 522; People v. Chicago Gas Trust Co. , 130 Ill., 268 , 22 N.E., 798 , 8 L.R.A., 497, 17 Am. St. Rep., 319.
(6) As to this defense, I conclude and hold that the said funds, as trust funds, passed into the hands of, and were received by, the receiver, as alleged by the petitioner. Our Court has repeatedly held that trust funds may be recovered if they can be traced and identified. While our Court has not said how or furnished the means for tracing and identification, it has approved the doctrine that, where trust funds have been mingled with the trustee's, it is not necessary to identify the identical trust bills or coins, and the cestui may take out of the bag containing the combined fund so much as belongs to the cestui. White v. Commercial Farmers' Bank , 60 S.C. 127 , 38 S.E., 453 , 86 Am. St. Rep., 802-807, note; Yeldell v. People's Bank , 118 S.C. 442 , 110 S.E., 789 . Proceedings to establish and enforce trusts are, generally speaking, governed by the usual rules as to presumptions, 26 R.C.L., 1368. According to the agreed stipulations, the bank at all times had more than $6,310.17, and more than all other trust funds collected and not disbursed, on hand and in other solvent banks, and that the bank turned over to its receiver more than $25,000.00. It has been said that deposits by a bank in other banks includes its trust funds. State v. Bank of Commerce of Grand Island , 61 Neb. 181 , 85 N.W., 43 , 52 L.R.A., 858; State v.
distinct, mixes it with his own, the whole must be taken to be the property of the other, until the former puts the subject under such circumstances that it may be distinguished as satisfactorily as it might have been before. Rolain's Adm'r v. Darby's Adm'x , 1 McCord Eq., 477. This principle has been approved in numerous cases. 26 R.C.L., 1368, 1369; Central Nat. Bank v. Connecticut Mut. Life Ins. Co. , 104 U.S. 54 , 26 L.Ed., 693 , 39 Cyc., 538, 539, Pom. Eq. (3d Ed.), § 1076; Harrison v. Smith , 83 Mo., 210 , 53 Am. Rep., 571; Bohle v. Hasselbroch , 64 N.J. Eq., 334 , 51 A., 508 , 61 L.R.A., 323, 14 Am. St. Rep., 339, note; Philadelphia Nat. Bank v. Dowd (C.C.), 38 F., 172, 2 L.R.A., 480; People's Nat. Bank v. Waggoner , 185 N.C. 297 , 117 S.E., 6 , and it has been held that mixing creates a lien on combined fund, Pom. Eq. (3d Ed.), § 1076; Webb v. O'Geary , 145 Va., 356 , 133 S.E., 570 ; Federal Reserve Bank of Richmond v. Peters , 139 Va., 45 , 123 S.E., 379 , 42 A.L.R., 742; and see Menude v. Delaire , 2 Desaus., 564; Matter of Mumford, 5 N.Y. St. Rep., 303. There are also numerous authorities holding that, where a trustee mingles the trust funds with his own, the trust extends to the entire mass or combined fund. Rolain's Adm'r v. Darby's Adm'x , 1 McCord Eq., 477, 26 R.C. L., 1368, 1369; Board of Sup'rs of Lunenburg County v. Prince Edward-Lunenburg County Bank , 138 Va., 333 , 121 S.E., 903 , 37 A.L.R., 604; Federal Reserve Bank of Richmond v. Peters , 139 Va., 45 , 123 S.E., 379 , 42 A.L.R., 742; Webb v. O'Geary , 145 Va., 356 , 133 S.E., 570 ; People's Nat. Bank v. Waggoner , 185 N.C. 297 , 117 S.E., 6 , 39 Cyc., 538; Edwards v. Lewis , 98 Fla., 956 , 124 So., 746 ; Decennial Digests, Banks and Banking, 380 (1930); Central Nat. Bank v. Connecticut Mut. L. Ins. Co. , 104 U.S. 54 , 26 L.Ed., 693 ; Pom. Eq. (3d Ed.), § 1076. I further conclude and hold that the petitioner has traced and identified the fund into the receiver's hands. 86 Am. St. Rep., 802-807, note; notes to 2 Morse on Bank (6th Ed.), 1242, 1243.
In reply to a memorandum submitted by the attorneys for the petitioner setting forth grounds why they are entitled to relief, the attorney for the receiver claims that it is a fair inference that the bank handled other executorships in the same way, and that Mr. Michie must have known it. This proposition suggests that, by way of inference, the bank handled other trust funds in the same way as it it did the Michie funds, and that Mr. Michie must have known it from the reason that he was secretary to the board of directors; and that, so knowing and making his will appointing the bank his executor, he waived the right or duty to keep funds separate. I conclude and hold that he did not waive any right or duty. In the first place, there is no proof, except possibly by way of inference, or presumption that the bank handled other trusts in the same way, and, if it had, there is no proof that Mr. Michie knew of it, except by way of inference or presumption. And there is no proof that Mr. Michie intended to waive any right or duty except by way of inference or presumption. An estoppel cannot be taken by argument or inference, 11 A.
E. (2d Ed.), 388. Neither can an estoppel bind a stranger, such as creditors and beneficiaries. 11 A. E. (2d Ed.), 439. Nor can a waiver operate so as to infringe upon the rights of others. 27 R.C.L., 907. A presumption of a waiver cannot rest on a presumption that the right alleged to have been waived was known. 29 A. E. (2d Ed.), 1095. A presumption of fact cannot rest upon another presumption. International Travelers' Ass'n v. Bettis (Tex. Sup.), 35 S.W.2d 1040 . Then, too, the will is made the evidence — the sole and the best evidence — of the testator's intentions. Abbott, Proof of Facts (4th Ed.), 704; Patterson v. Wilson , 101 N.C. 594 , 8 S.E., 341 , 342 , and see, 28 R.C.L., 269, 270; In re. Ryan's Estate, 136 Misc., 261 , 241 N.Y.S., 82 , 84 ; Clarke v. Clarke , 46 S.C. 240 , 24 S.E., 202 , 57 Am. St. Rep., 675. Intent is rarely to be inferred as a matter of law. Danville Lumber Mfg. Co. v. . It has been held: Even where the trustee honestly believes that the intention of the maker of the trust was otherwise, he must do nothing to prejudice the interest of his beneficiaries. Trustee's Handbook by Loring, 105. Also see 3 Pom. Eq. (3d Ed.), § 1077. Also the mingling of trust funds with the trustee's own fund would probably be against public policy, as the rule is designed to protect the trustee from temptation, from the hazard of loss, and of being a possible defaulter. Pom. Eq. (3d Ed.), § 1076.
With reference to waiver by filing a general claim and accepting dividends, I do not think that the petitioner's rights have been altered; especially in view of the general principles with reference to estoppel and waiver, and the fact that the same attorney represented and advised both the receiver and the petitioner. Also a waiver is not allowed to operate where it would infringe upon the rights of others (creditors of the estate and beneficiaries). 27 R.C.L., 907. An administrator cannot even compromise a debt without approval of the Court 5 R.C.L., 886; Section 5413, 1922 Code. This principle was decided in a defunct bank preference case, Hammons v. Nat. Surety Co. , 36 Ariz., 459 , 287 P., 292 , the Court saying: We are of the opinion that a guardian accepting dividends on the same basis as a general creditor, cannot on behalf of his ward waive any substantive right of the ward or by his conduct estop the ward from recovering what is due the latter, and cited 28 C.J., 1125.
The following principles also seem to be applicable to this case:
Trust property is not subject to trustee's debts. 11 R. C.L., 112, 11 A. E. (2d Ed.), 986, 39 Cyc., 227, 228.
Receiver takes property subject to burdens, and has no greater right than trustee; is subject to his obligations; and stands in the shoes of the trustee. 34 Cyc., 191; In re. American Slicing Machine Co. , 125 S.C. 214 ,.
It makes no difference that receiver has paid out trust funds; other property, unpledged, takes place of. Hammons v. Nat. Surety Co. , 36 Ariz., 459 , 287 P., 292 ; Standard Oil Co. of Kentucky v. Hawkins (C.C.A.), 74 F., 395, 402, 33 L.R.A., 739; note, 34 Cyc., 348.
It appears that mingling of fiduciary funds is a violation of fiduciary duty and constitutes fraud and ex maleficio
trust. 34 Cyc., 348; Myers v. Board of Education of Clay Center , 51 Kan., 87 , 32 P., 658 , 37 Am. St. Rep., 267; Harrison v. Smith , 83 Mo., 210 , 53 Am. Rep., 571; and see note No. 4, § 1030, Pom. Eq. (3d Ed.), 1983.
I therefore conclude and hold: (1) That the fund was a trust fund, and that same has been traced and identified into the receiver's hands; (2) that the mingling of the fund with the bank's own fund was a violation of fiduciary duty, and constituted a fraud and ex-maleficio trust; (3) that Section 3995 of the 1922 Code gives the petitioner a lien on all of the bank's assets.
It is therefore ordered, adjudged, and decreed that the receiver, G.B. Brasington, pay over to the petitioner, Donald E. Michie, Administrator, the sum of $3,470.64 out of the remaining unpledged assets, real or personal, in his hands, same being the amount claimed by the petitioner, less the sum of $2,839.53, paid on same by way of dividends; the said payment to be made in preference to the claims of the unsecured depositors and other creditors of the bank.
It is further ordered, adjudged, and decreed that the petitioner have a lien on all of the unpledged assets, both real and personal, in the hands of G.B. Brasington, receiver. Source: CourtListener
