CITY BANK OF HOPKINSVILLE v. BLACKMORE, 75 F. 771

TAFT, Circuit Judge, after stating the facts as above, delivered the opinion of the court. The decree of the circuit court must he affirmed. It may he conceded that the circumstances under which the draft -was received hy the Commercial Bank, and credited to the City Bank, would justify the latter in rescinding the contract of deposit, on the ground of fraud, and that then the City Bank would he entitled to a return of its draft.

If the draft had come Into the hands of the receiver, therefore, it would have been his duty, and the court below would doubtless have compelled him, to deliver up the draft to (he complainant. But the difficulty with the complainant’s position is that neither the draft nor the proceeds of the draft have come into the receiver’s hands. The National Bank of the Republic churned to be a, purchaser of the draft in due course of business, by crediting its amount upon an account due it from the Commercial Bank.

Whether this was a well-founded claim in point of law or not, it is not necessary for us to decide, because the City Bank conceded its validity, a.nd accordingly directed the draft t.o he paid. As against; the Commercial Bank or its receiver, the City Bank cannot be heard to say, then, that Ihe title of the National Bank of the Republic to the draft was not good against itself, and therefore against the Commercial Bank. Hence it follows that the credit; allowed to the Commercial Bank for the draft was properly allowed on the books of the National Bank of the Republic.

The sole question is, therefore, whether the credit thus secured to the Commercial Hank and its receiver by the draft entitles the City Bank to tala' $5,000 out of the assets held by the receiver-. The question must certainly ire answered in the negative, in any view which can ire taken, unless it appears that: the assets were increased $5,000 by the credit, or that the claims against: them were so decreased that: there was $5,000 more for distribution among those who remained creditors after the credit than there would have been had no credit been given to the Commercial Bank for the draft.

This does not air-pear. If no such credit: had been allowed by the National Bank of the Republic, it would merely have been a claimant; for $5,000 more, and would have been entitled, not to $5,000 in full, but only to pro rata dividends on that amount. The benefit to the general fund from the draft, therefore, is limited to the amount of the dividends payable on $5,000, and that amount the receiver has already allowed to the City Bank. It has no ground for complaint, therefore. No authority has been cited to show (hat a claim founded on fraud is entitled to a priority over other claims.

If is only where, by the rescission of the contract out of which the claim arises, on ihe ground of fraud, the specific thing parted with or its proceeds can be sufficiently identified to be returned, that fraud seems to give a priority of distribution. It may not: be necessary to show earmarks upon the proceeds of the thing parted with to justify such a remedy, but it must at least appear that the funds in the hands of the receiver were increased or benefited by the proceeds, and the recovery is limited to the extent of this increase or benefit.

In every case relied on by counsel for appellant, recovery, if decreed, was based on the fact that the property in the hands of the assignee or receiver of the person or bank against whom the claim of fraud, right to rescind, and priority of distribution was made, included in its mass either the very thing parted with or its proceeds. Railroad Co. v. Johnston, 133 U. S. 573, 10 Sup. Ct. 390; Armstrong v. Bank, 148 U. S. 50, 13 Sup. Ct. 533; Cragie v. Hadley, 99 N. Y. 131, 1 N. E. 537. The exact question is discussed with satisfactory fullness in Bank v.

Latimer, 67 Fed. 27; and the necessity for the presence of the proceeds of the very thing obtained by fraud in the mass of assets to be distributed is clearly pointed out. Mr. Justice Bradley, in Frelinghuysen v. Nugent, 36 Fed. 229-239, describes the growth of the equitable doctrine on this head and its limits as follows: “Another difficulty in the complainant’s case is the want of identity of the property claimed with the proceeds of the money abstracted from the bank.

Formerly the equitable right of following misapplied money or other property into the hands of the parties receiving it depended upon the ability of identifying it, the equity attaching only to the very property misapplied. This right was first extended to the proceeds of the property, namely, to that which was procured in place of it by exchange, purchase, or sale; but if it became confused with other property of the same kind, so as not to be distinguishable, without any fault on the part of the possessor, the equity was lost.

Finally, however, it has been held as the better doctrine that confusion does not destroy the equity entirely, but converts it into a charge upon the entire mass, giving to the party in.iured by the unlawful diversion a priority of right over the other credito”s of the possessor. This is as far as the rule has been carried. The difficulty of sustaining the claim in the present case is that it does not appear that the goods claimed — that is to say, the stock on hand finished and unfinished — were either in whole or in part the proceeds of any money unlawfully abstracted from the bank.

On the contrary, the goods and stock on hand were purchased of the other creditors of Nugent & Co. almost entirely, if not wholly, on credit, and really stand in the place of, and represent the debts of, the firm due and owing to said creditors. This is true with regard to all the raw stock on hand, and with regard to all the stock and materials from which the manufactured or partially manufactured goods were produced. If any moneys derived from the bank entered into the latter, they were those moneys which were regularly drawn by checks of the firm weekly for the payment of their hands.

It seems impossible, therefore, to sustain any such general charge or trust upon ihe goods and property of Nugent & Co. as that which has been set up and claimed by the complainant.” See, also, National Bank v. Insurance Co., 104 U. S. 68; In re Hallett’s Estate, 13 Ch. Div. 696. Counsel for appellant contend that the evidence shows that the sending of the draft to the National Bank of .the Republic had resulted in releasing and returning to the receiver collaterals of more value than $5,000, and that these must be treated as the proceeds of the draft.

It is enough to say that there is no competent evidence of this in the record. The only foundation for the claim is 'that the president of the City Bank testifies that a bank examiner told him of the return of the collaterals a considerable time after the event, at a bankers’ convention. This, of course, was hearsay evidence, and wholly incompetent to prove the fact.

Indeed, it was not introduced for that- purpose, but only to explain the apparent laches of the City Bank in making no claim for a preference in accepting dividends as upon an unpreferred claim, and in not filing'the bill iierdii for 18 monihs after the happening of the fact upon which its validity depended. In view of our conclusion upon the merits, we need not consider the question of waiver and laches, which were also formidable obstacles in the path of complainant to success in this case. The decree of the circuit court is affirmed, with costs.