First National Bank & Trust Co. v. Hood, 204 N.C. 351 (1933)

March 15, 1933 · Supreme Court of North Carolina

204 N.C. 351

FIRST NATIONAL BANK AND TRUST COMPANY OF ASHEVILLE, N. C., Receiver and Trustee of the CENTRAL SECURITIES COMPANY, ASHEVILLE, N. C., v. GURNEY P. HOOD, Commissioner of Banks of NORTH CAROLINA, et al.

(Filed 15 March, 1933.)

Bailies and Banking H d — Purchaser of bonds held entitled to preference under hank’s agreement to hold securities for xirotection of bonds.

Where a bank acting as trustee under a trust indenture to hold securities for the protection of a bond issue receives the proceeds of the bond issue and commingles them with its general funds instead of purchasing securities and holding them for the protection of the bond issue as it was bound to do under the trust agreement, the purchaser of the bonds, relying upon the bank’s statement that it was holding such securities, is entitled to a preference in the bank’s assets in the hands of a receiver.

Civil action-, before Sink, J. From BuNCOmbe.

Tbe question was determined upon an agreed statement of facts. A summary of sueb pertinent facts is as follows: Tbe plaintiff is tbe duly appointed receiver of Central Securities Company of Asheville. Tbe defendant, as Commissioner of Banks, bas in bis possession for liquidation all tbe property and assets of Central Bank and Trust Company. Tbe officers of Central Securities Company and tbe Central Bank and Trust Company were practically tbe same; tbat is to say, ~W. B. Davis was president and active manager for botb companies, and there were other interlocking officers. In December, 1928, tbe bank was trustee in a certain trust indenture, according to tbe terms of which tbe Securities Company assigned, transferred, deposited and pledged unto tbe bank in trust certain notes, bonds, mortgages, cash and other securities. This pledge of securities was for tbe purpose of supporting coupon bonds issued and to be issued by tbe Securities Company. On 28 January, 1930, tbe Securities Company contemplated tbe issue of what is described as Series E. Bonds, and on said date entered into a supplemental trust agreement with tbe bank as trustee. By virtue of this supplemental agreement Series E. Bonds were issued by tbe Securities Company in tbe sum of $380,000. $280,000 of these bonds bad been purchased by A. E. Kusterer and Company of Grand Rapids, Michigan. On 10 September, 1930, negotiations were begun between tbe Securities Company and Kusterer for tbe purchase of $100,000 of said Series E. Bonds. Kusterer agreed to purchase $100,000 worth of said bonds, but before consummating tbe purchase inquired of tbe bond department of tbe bank as to tbe securities held for tbe payment of said bonds. Thereupon tbe bond department of tbe bank on 23 September, 1930, advised Kusterer tbat it then held, among other securities, $117,500 in Liberty Bonds. Relying upon said representations so made by tbe bank, Kusterer paid to tbe bank as trustee on 24 September, 1930, tbe purchase price of $100,000 for said Series E. Bonds. At tbe time of making tbe representations to Kusterer and Company as an inducement to tbe purchase, tbe bank did not have but $27,500 of Liberty Bonds. Thereafter, on various days in September, the Securities Company bought an aggregate of $90,000 of Liberty Bonds. Drafts for tbe purchase price of these bonds were paid by tbe bank. All of these bonds were sold, and it was specifically agreed “tbat tbe funds derived by tbe Central Bank and Trust Company from tbe sale of United States Liberty Bonds, above mentioned, were appropriated and used by Central Bank and Trust Company in tbe course of its business and went to swell tbe assets of said bank.” Tbe bank failed on 19 November, 1930, and tbe receiver for tbe Securities Company filed a claim with tbe defendant contending tbat tbe Securities Company was entitled to a preference. Tbe defendant took a contrary view.

After bearing tbe argument of counsel tbe trial judge was of tbe opinion tbat tbe plaintiff was entitled to a preference for $117,500, and so adjudged. From tbe judgment so rendered tbe defendant appealed.

Alfred 8. Barnard for plaintiff.

J ohnson, Smothers & Rollins for defendants.

Brogden, J.

Eliminating scenery and background, the case is this: The Central Bank and Trust Company was trustee under a trust indenture to hold securities for the protection of a bond issue duly made by the Securities Company. Certain bonds of such issue were sold, and the purchaser paid the money to the trustee. The trustee commingled the money and appropriated the same to its own use. The facts interpreted in the light of recent cases dealing with preferences, disclose that this money had a string tied to it or an invisible legal fence about it, setting it apart from the general funds of the bank. Therefore, the judgment is affirmed upon authority of Parker v. Trust Co., 202 N. C., 230, 162 S. E., 564, and Flack v. Hood, Comr., ante, 337.

Affirmed.