92. Wrongful Receipts of Deposit-Following Trust Fund-Pref

erence.

IN GENERAL

87. When a bank, from its inability to meet its obligations in the usual course of business, is insolvent, it is its duty to cease from banking operations.

88. LIQUIDATION-PREFERENCES—The liquidation of insolvent banking corporations is generally regulated by statutes, which prohibit transfers and payments after an act of insolvency, or in contemplation of insolvency, with a view to the preference of one creditor to another.

Dissolution

A banking corporation, like other private corporations, may be dissolved in various ways, as by expiration of its charter, or by forfeiture of its charter for misuser or nonuser of its powers. A forfeiture takes effect only upon the judgment of 2 competent court, unless the legislature has provided otherwise. In most states there are statutes prescribing the manner in which the business of dissolved banking corporations may be liquidated and settled, and the rights and equities of the creditors and stockholders may be enforced.' No discussion

1 See Clark, Corp. (2d Ed.) 230-250. See "Banks and Banking," Dec. Dig. (Key No.) §§ 63-72; Cent. Dig. §§ 125-153.

of these matters will be undertaken, except in relation to national banks.2

Insolvency-In General

A bank is insolvent when its assets are insufficient to pay its obligations as they become due in the ordinary course of business. It then becomes the duty of the bank to cease from further banking operations and to go into liquidation. When it is not otherwise provided by statute, a bank may make an assignment for the benefit of creditors. By the federal bankruptcy act, both state and national banks, but not private bankers, are excepted from the class of persons who may be adjudged involuntary bankrupts." The liquidation of the affairs of banking corporations, voluntary and involuntary, is commonly regulated by statutes, and will not be discussed, except in relation to national banks."

Transfers and Payments Affected by Insolvency-Preferences

It is very generally held that a banking corporation, like an individual, when not forbidden by statute, may lawfully

2 Post, p. 422.

3 Harmanson v. Bain, Fed. Cas. No. 6,072, 1 Hughes, 188; Dodge v. Mastin (C. C.) 17 Fed. 660-665; Hayden v. Chemical Nat. Bank. 84 Fed. 874, 876, 28 C. C. A. 548; State v. Caldwell, 79 Iowa, 432, 44 N. W. 700; State v. Myers, 54 Kan. 206, 38 Pac. 296.

Though a bank, when it suspended, had funds on hand to meet the demands against it on that day, in the ordinary course of business, it was insolvent if its property was insufficient to pay all its debts. Higgins v. Worthington, 12 App. Div. 361, 42 N. Y. Supp. 737. A bank is insolvent when, from the uncertainty of being able to realize on its assets in a reasonable time, a sufficient amount to meet its liabilities, it becomes necessary for the control of its affairs to pass out of its hands. Livingstain v. Columbian Banking & Trust Co., 81 S. C. 244, 62 S. E. 250, 22 L. R. A. (N. S.) 445. See "Banks and Banking," Dec. Dig. (Key No.) § 73; Cent. Dig. § 154. 4 See "Banks and Banking," Dec. Dig. (Key No.) § 78; Cent. Dig. § 177.

5 Act July 1, 1898, c. 541, § 4, 30 Stat. 547 (U. S. Comp. St. 1901, p. 3423), as amended by Act Feb. 5, 1903, c. 487, § 3, 32 Stat. 797 (U. S. Comp. St. Supp. 1909, p. 1309).

6 Post, pp. 411, 413.

prefer certain creditors. Many states, however, by statute prohibit transfers and payments by a bank made after an act of insolvency, or in contemplation of insolvency, with a view to a preference. Such is the provision of the National Bank Act. These statutes make a transfer or payment void, when there is an intention on the part of the bank to prefer a creditor, although the creditor receiving the transfer or payment is without knowledge or suspicion of the insolvency.10

A payment is not necessarily invalid, however, because made after the bank's insolvency, or even after its managers become aware of its insolvency. So long as it is a going concern, carrying on its business as usual, and has committed. no act of insolvency, and a present suspension of business is not contemplated, although the bank is actually insolvent, a payment to a depositor or other creditor in the usual course of business is not made in contemplation of insolvency or with a view to a preference under the statute. It is otherwise

7 Catlin v. Eagle Bank of New Haven, 6 Conn. 233. See Merced Nat. Bank v. Ivett, 127 Cal. 134, 59 Pac. 393. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. §§ 156, 179.

8 See Robinson v. Aird, 43 Fla. 30, 29 South. 633; Brighton v. White, 128 Ind. 320, 27 N. E. 620; Bradner v. Woodruff, 52 Hun, 214, 5 N. Y. Supp. 207. See "Banks and Banking," Dec. Dig. (Key No.) 74; Cent. Dig. § 156.

Post, p. 421.

10 National Security Bank v. Butler, 129 U. S. 223, 9 Sup. Ct. 281. 32 L. Ed. 682; Case v. Citizens' Bank of Louisiana, Fed. Cas. No. 2,489, 2 Woods, 23. See, also, Hayden v. Chemical Nat. Bank, $4 Fed. 874, 28 C. C. A. 548.

Some statutes except from their operation purchases for value without notice of the insolvency. See Hill v. Western & A. R. Co., 86 Ga. 284, 12 S. E. 635; Clarke v. Ingram, 107 Ga. 565, 33 S. E. 802. See, also, Atkinson v. Rochester Printing Co., 114 N. Y. 168, 21 N. E. 178. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. § 156.

11 McDonald v. Chemical Nat. Bank, 174 U. S. 610, 19 Sup. Ct. 787, 43 L. Ed. 1106, affirming Hayden v. Chemical Nat. Bank, 84 Fed. 874, 28 C. C. A. 548; Dutcher v. Importers' & Traders' Nat. Bank,

if the payment is not made in the usual course of business, although the payee is ignorant of the insolvency.12 Thus, a payment to a depositor during a "run" on the bank, while the bank, although actually insolvent, is continuing in business and making payments in usual course, in the expectation that if it can continue in business it will be able to meet all its obligations, has been held not to be a preference.13

While the disposition by a bank of its assets, when insolvent or in contemplation of insolvency, with a view to a preference, is forbidden, liens, equities, and rights arising prior to

59 N. Y. 5 (cf. Atkinson v. Rochester Printing Co., 114 N. Y. 168, 21 N. E. 178); Hayes v. Beardsley, 136 N. Y. 299, 32 N. E. 855; post, p. 423.

A director in a bank, being also the president of defendant corporation, informed it of the impending insolvency of the bank, whereon it drew its check for its balance on deposit in the bank, which was signed by its president, and the full amount of the deposit was secured on the same day that the bank closed. Held, that the transaction was not void, as a violation of a statute prohibiting an insolvent corporation, or any of its officers, from converting its property to its members for other consideration than full value in cash, and from making any assignment preferring creditors, since there was nothing in such provision to prevent a depositing corporation from withdrawing its money on information received by its president, as director, of the bank's insolvency. O'Brien v. East River Bridge Co., 161 N. Y. 539, 56 N. E. 74, 48 L. R. A. 122. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. § 156.

12 James Clark Co. v. Colton, 91 Md. 195, 46 Atl. 386, 49 L. R. A. 698. But see McAfee v. Bland (Ky.) 11 S. W. 439. Under some statutes, although the payment was not in due course, if the payee was ignorant of the insolvency and of the intent to prefer, he is protected. McGregor v. Battle, 128 Ga. 577, 58 S. E. 28, 13 L. R. A. (N. S.) 185. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. § 156.

13 Stone v. Jenison, 111 Mich. 592, 70 N. W. 149, 36 L. R. A. 675; Livingstain v. Columbian Banking & Trust Co., 81 S. C. 244, 62 S. E. 249, 22 L. R. A. (N. S.) 445. See, also, McGregor v. Battle, 128 Ga. 577, 58 S. E. 28, 13 L. R. A. (N. S.) 185. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. § 156.

and not in contemplation of insolvency are not invalidated.“ The prohibition is against giving a preference, and not against giving security when a debt is created for a loan made at the time, and in such case the creditor can retain the security until the debt is paid, though the bank was insolvent to the knowledge of the creditor.15 But the giving of security for an antecedent debt, under such circumstances, is invalid as a preference.10

DEPOSIT AFTER INSOLVENCY

89. The reception of a deposit by a bank with knowledge on its part that it is hopelessly insolvent is fraudulent, and the bank thereby becomes a constructive trustee of the deposit, and the depositor may recover the deposit, if it can be identified in the hands of a receiver or an assignee for the benefit of creditors of the insolvent bank.

The relation between a bank and its depositor being merely that of debtor and creditor, the depositor is entitled to no preference upon the bank's insolvency, but must come in with the other general creditors.17 For a bank to receive deposits with

14 Scott v. Armstrong, 146 U. S. 499, 13 Sup Ct. 148, 36 L. Ed. 1059; post, p. 423. See "Banks and Banking," Dec. Dig. (Key No.) 88 74, 286; Cent. Dig. §§ 156, 1111.

15 See Harris v. Randolph County Bank, 157 Ind. 120, 60 N. E. 1025.

Where a bank executed its note to a clearing house association in return for certificates and deposited collateral, no preference was created. Booth v. Atlanta Clearing-House Ass'n, 132 Ga. 100, 63 S. E. 907. See "Banks and Banking,” Dec. Dig. (Key No.) § 74; Cent. Dig. 156.

16 Burrell v. Bennett, 20 Wash. 644, 56 Pac. 375; post, p. 423. See "Banks and Banking," Dec. Dig. (Key No.) § 74; Cent. Dig. § 156.

17 Bayor v. American Trust & Savings Bank, 157 Ill. 62, 41 N. E. 622; Bank of Blackwell v. Dean, 9 Okl. 626, 60 Pac: 226; In re Franklin Bank, 1 Paige (N. Y.) 249, 19 Am. Dec. 413; ante, p. 12. See "Banks and Banking," Dec. Dig. (Key No.) § 75; Cent. Dig. § 157.