Petitioners Reply Brief — Hoffman v. Rauch

Cifice -Sup:are Court, U. S

“FES 12 1937

CHARLES ELMORE CROPLEY

CLERK

-IN THE

Supreme Court of the Anited States

OcToBER TERM, 1936

No. 563.

Park L. Horrman, Substituted for R. G. Hoxsine, Receiver

-of First National Bank of Boswell, Pennsylvania,

Petitioner,

Vv.

Henry I. Ravcu, Administrator, Emiline B. Rauch, late of

Jenner Township, Somerset County, Pennsylvania,

Respondent.

——_ —__

‘REPLY BRIEF OF PETITIONER.

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Grorce P. Barse,

{ Joun F, Anverson,

Attorneys for Petitioner.

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INDEX.

CASES CITED.

Page

Adams v. Champion, 70 Fed. (2nd) 956; 294 U.S. 231.. 4,6

Blakey v. Brinson, 286 U.G..266 ......cccccccccccces 2,3

Brown v. Botkin, 13 Fed. Supp. 1000 ................ 8

Farmers National Bank v. Pribble, 15 Fed. (2nd) 175.. | 7

Frelinghuysen v. Nugent, 36 Fed. 229 .............. 1

Jennings v. U.S. F. & G. Co., 294 U.S. 216...000.... 7,8

- Kershaw v. Jenkins, 71 Fed. (2nd) 647 .............. 1,2

O’Neal v. White, 79 Fed. (2nd) 835, 297 U.S. 706... .. *s &S

Peseta ©. SMM, Be UT. BID ow. cccccccasansscess 1,2

Pottorff v. Key, 67 Fed. (2nd) 833 .................. 3

Schumacher v. Harriett, 52 Fed. (2nd) 817 .......... 1.3

Schuyler v. Littlefield, 232 U.S. 707 ................ 4

Wisdom v. Keen, 69 Fed. (2nd) 349 8

6686468 66 6 6.66 46.6 :0

ANNOTATIONS.

82 A. L. R. 46 to 288 ... 4

2 638 6 2-6 6.00 € 6-660: 896668080 4606664 6

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IN THE

Supreme Court of the Anited States

Octozer Term, 1936

‘No. 563.

Park L. Horrman, Substituted for R. G. Hotsinec, Receiver

of First National Bank of Boswell, Pennsylvania,

Petitioner, ;

v.

Henry I. Ravcu, Administrator, Emiline B. Rauch, late of

Jenner Township, Somerset County, Pennsylvania,

Respondent.

REPLY BRIEF OF PETITIONER.

In his short brief the respondent cites the following four

Federal decisions as supporting the contention that a trust

can be.impressed upon the assets that passed to the. Re-

ceiver in this case:

Peters v. Bain, 133 U. S. 670.

Kershaw v. Jenkins, 71 Fed. (2nd) 647 (C. C. A.

10th).

Schumacher v. Harriett, 52 Fed. (2nd) 817 (C. C. A.

4th).

Frelinghuysen v. Nugent, 36 Fed. 229.

2

On page 2 of his brief the respondent quotes part of the

excerpt from the opinion in Frelinghuysen v. Nugent quoted

by this court at page 693 in its opinion in Peters v. Bain.

Had the respondent continued the quotation plus. this

court’s comment thereon, which we quote from pages 693

and 694, he would have established that Peters v. Bain sup-

ports the position of the petitioner and not that of the re-

spondent :

7

«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.’ The same

difficulty presents itself here, and while the rule laid

down by Mr. Justice Bradley has been recognized and

applied by this court, National Bank v. Insurance Com-

pany, 104 U.S. 54, 67, and cases cited, yet, as stated by -

the Chief Justice, ‘purchas¢s made and paid for out of

the general mass cannot be claimed by the bank, unless

it is shown that its own moneys then in the fund were

appropriated for that purpose.’ And this the evidence

fails to establish as to any other property than that

designated in the decree, * * *”’

In the instant: case we know what happened to the respon-

dent’s bonds. They were used by the bank to reduce its

debts to others. Neither the bonds nor any proceeds there-

from passed to the Receiver.

Kershaw 'v. Jenkins, 71 Fed, (2nd) 647, also supports the

position of the petitioner and not that of the respondent.

Jenkins’ check was charged against his pre-existing credit

balance to purchase Liberty bonds, and the bank’s eashier’s

check was issued but no bonds were purchased or segre-

gated from those held by the bank, prior to its suspension.

The Appellate Court held that the case fell within Blakey v.

Brinson, 286 U.S. 254, and reversed the trial court’s allow-

ance of a trust against the bank’s assets that aanbinis to the

Receiver.

+ «ie

It cannot be denied that Schumacher v. Harriett, 52 Fed.

(2nd) 817, gives the respondent assistance, to the extent that

it holds that if a bank misuses a claimant’s property it must

be deemed to have set apart as a trust res an equivalent

value of its cash assets. We submit, however that, to this

extent, Schumacher v. Harriett does not correctly state the

Federal rule. In commenting upon this phase of the Har-

riett decision, the Cireuit Court of Appeals for the Fifth

Cireuit said in Pottorff v. Key, 67 Fed. (2nd) 833, 834:

‘“‘Such a doctrine amounts to saving that in every

‘ase of misapplied money or money’s equivalent the

wrongdoer’s other eash and eash items stand in its

place so long as he has any, establishing in effect a

general lien on all such. ‘If the plaintiff’s contention

be well founded, and to follow misappropriated moneys

it is only necessary to show that a receiver has, and

that the trustee had, assets, the rule is simply that a de-

mand for such moneys is a preferred claim against anv

substantial estate. To adopt this view is to do awav

with all the equitable principles out of which the rieht

‘to follow trust funds grew.’ American Can Co. v. Wil-

liams (C.. A.) 178 F. 420, at page 423. We hold in

this connection that, if a trust res ean be followed, it

must be; and that a lien by confusion ean be fixed. on ia

fund only when the confusion is actual and when the

fund is shown’ to have really received and to still eon-

tain the trust res or its proceeds. The judgement is re-

versed, with direction to disallow appellee’s claim as

preferred and to allow it asta general claim only.’’

Schumacher v. Harriett was a companion case to Schu-

macher v. Brinson, which was reviewed by this court and

reversed as Blakey v. Brinson, 286 U.S. 254. Judge Parker,

the author of the opinion in Schumacher v. Harriett, wrote

the opinion in O’Neal.v. White, 79 Fed. (2nd) 835, certiorari

denied 297 U. S. 706, discussed in our main brief, page.8,

and denied a trust claim wherein the controlling facts are

almost identical with those in.the instant case, The lib-

eral tracing rule of Schumacher v. Harriett was relied on

by the Cireuit Court of Appeals for the Seventh Cireuit in,

9 rw nnn RE SER

4

impressing a trust on the assets of a National bank that

passed to the Receiver in Adams v. Champion, 70 Fed.

(2nd) 956, but the Harriett rule was in effect rejected by this

eourt when it reversed the Appellate Court in 294 U.S. 231

We do not believe it necessary to discuss the minority

view reflected in the State decisions cited by the respondent.

The reasoning of these State decisions was rejected by this

court in the recent cases cited at pages 6 and 7 in our main

brref and by many decisions of the lower Federal Courts.

This conflict is treated at length in‘a comprehensive anno-

tation in 82 A: L: R., pages 46 to 288, and the State decisions

listed in the opinion of the court below (R. 36) will be found .

at page 50 of the annotation.

On Page 2 of ‘‘appellee’s brief’? respondent seems to sug-

eest a distinction between a trust ‘‘ex maleficio’’? and a |

trust arising by formal agreement of parties. He does not,

however, seem to indicate any difference as to the. necessity

in each case of augmentation and tracing, his discussion

being confined primarily to attempting to establish a lib-

eralization of the augmentation and tracing doctrines.

It may be pointed out here, however, that the necessity

of augmentation and tracing, as a prerequisite to the al-

lowance of a priority or prefer red claim against the assets

of an insolvent estate which is being administered for the

benefit of all eredi tors, is just as rigidly required in the

case of a trust’ex maleficio, as it is in the case of violation

of a trust created by formal agreement.

The decision and opinion of this court in Schuyler v.

Little field, 232 U. S. 707, 711, 713, is directly in point, by

analogy so far as the prestnt discussion is concerned. It

appears that Brown and Company, who were brokers in

New York City, obtained certain shares of stock from the

plaintiffs by fraudulent representations. At that moment

a trust ex maleficio or constructive trust arose and Brown

and Company became trustees ex maleficio with the shares

of stock constituting the res of said trust. Thereafter

they sold the stock and received certain checks in payment,

5 . eS

and deposited said checks in bank and subsequently ap-

parently cheeked out the proceeds arising from the sale

of said stock. The court disallowed the preference claim

and in that connection said:

“It thus appeared that the stock fraudulently ob-

tained by Brown & Co. had been sold by them, with

other stock, to Miller who paid for the whole in two

checks—one for $266,600 deposited to Brown & Co.'s

account in the Uf: unover National Bank on August 24th,

and another for $23,000 deposited in the same bank on

August 25th.

1. If the trust fund of $9,600 was ineluded in the

cheek for $266,600, then it was dissipated except to

the extent of $6,180.17, which was the sum left to

Brown & Co.’s credit at the close of business on Au-

gust 24th. And inasmuch as all of that balance wa:

paid out early the next day, the trust fund was there-

by wholly dissipated so far as the bank account was

coneerned, |

If, however, the trust fund of $9,600 is to be treated

as havine been ineluded in Miller’s cheek for $23,000

then a similar result follows, though on this potat the

evidence of the witnesses and the findings of the two

courts are in conflict.

* ; . * * * # *:

It would serve no useful purpose to make a detailed

statement of the testimony. The evidence has been

fully discussed by the Court of Appeals (198 Fed. Rep.

24-33) in eonsidering this claim of appellants along

with that of several other parties seeking, on some-

what similar facets, to trace trust funds into the bank

and thence into collateral which ultimately eame into

the hands of the Trustee. All these claims were dis-

allowed beeause of the failure to make the requisite — «+

proof. Our investigation.of the facets leads us to the

same conelusion so far as concerns the appellants’

claim. They were practically asserting title to $9,600

said to have heen traced into stoek in the possession

of the Trustee. Like all other persons similarly situ-

ated, they were under the burden of proving their title.

If they were unable to carry the burden of identifying

the fund as representing the proceeds of their Inter-

6

borough stock their claim must fail. If their evidence

left the matter of identification in doubt the doubt must

be resolved in favor of the Trustee, who represents

all of the ereditors of Brown & Co., some of whom

appear to have suffered in the same way. Like them,

the appellants must be remitted to the general fund.”’

,

Reference in this connection also may be made to our

discussion on pages 5 and 6 of our main brief of that por-

tion of this court’s opinion rclating to the Veesaert bonds

in Adams vy. Champion, 294 U.S. 231, 239, where this court

said: :

‘3. The fourth contested item, the collection on the

Veesaert bonds, differs from the others in that pay-

ment was received after the trustee in bankruptcy had

elected to avoid the preference and had sued for that

relief,

The payment was made as we have seen, by the de-

posit of $1,597.31 in the First National Bank of Chi-

zo, Illinois.

The balance in that account was redueed in 1931

to $776.57. What became of the difference’ ($820.74)

‘there is nothing to inform us. Evidence is lacking that

it was withdrawn in such a form or for such purposes

as to be represented by any assets forming part of the

estate today. The receiver consents that this item of

$776.57, the balance in the Chicago bank, be paid to

the respondent as a preferred charge upon the fund.

The decree is. reversed and the cause remanded for

further proceedings in accordance with this opinion.”’

(Italics inserted.)

Further in connection with. the foregoing point we cited

and diseussed, on Page 8 of our main brief, the case of

O’Neal v. White,.79 Fed. (2d) 835, and stated in that con-

nection that the controlling facts therein were almost iden-

tical with the facts in the instant case. The transcript of

reeord in that ease is on file in this honorable court in con-

nection with an application for writ of certiorari (which

was denied,—297 U. S. 706). The reported opinion of the

Circuit Court of Appeals in the case does not give the de-

RST

7

tails concerning the circumstances under which the bonds

were held in trust. poe eg

However, if the Court desires to do so, an examination of

the transeript of record in that case (at Page 13 thereof)

will disclose that the bank held the bonds in its ‘‘safekeep-

ing department’’ for the owner, and that

“4. Thereafter-said bank, on or about 8th and 20th

August, 1929, without the knowledge or consent of said

guardian, took his said bonds and sold them for the sum

of $7,032.47, which it commingled with its assets. Said

guardian never ratified such sale of his bonds and was

ignorant thereof until after the bank closed.’’

It may also be noted that in O’Neal v. White it does not

appear that any attempt was made by the bank to purchase

other bonds in substitution of the bonds, whereus in the in-

stant case the officer of the bank did endeavor, apparently

in entire good faith, on the day after the sale of .the bonds,

to purchase other bonds for replacement. (R. 20)

The respondent says at page 4 of his brief: ‘‘A discliarge

or reduction of a liability produces a corresponding in-

crease in assets.’? This contention has always been re-

jected by the Federal Courts and most of the State courts.

To quote from Farmers National Bank of Burlington v.

Pribble (C. C. A. 8th), 15 Fed. (2nd) 175-176, cited by this

court with approval in Jennings v. U. S. F. & G. Co., 294

U.S. 216, 224: ,

‘“‘The fact that the claimant’s property paid or re-

duced the indebtedness or liability of the insolvent cor-

poration, so that it will pay a larger percentage of the

debts, justifies no lien on its assets by or preference in

payment to the cestui que trust (1) because such a re--

duction of indebtedness does not increase the property

or the value of the property of the insolvent; and (2)

because the property of the claimant so used to pay a

part of the insolvent’s general indebtedness or liability

never: goes into, and therefore cannot be traced into,

the property or assets of the insolvent’ which subse-

quently come into the possession of the receiver. Titlow

v. MeCormick, 236 F. 209, 149 C. C. A. 399; American

, 8

Can Co. v. W iliams (C. C.), 176 F. 816; Lucas County

-¥y. Jamison ((C. ¢ a 170 I’. 338; Multnomah vy. Oregon

National Bank (C. C.), 61°. 912; Beard v. Independent

School District, 88 F. 375, 31 C. C. A. 562; Heeker-

Jones-Jewell Mill. Co. v. Cosmopolitan Trust Co., 242

Mass. 181, 1386 N. 16. 333, 24 A. L. R..1148.”’

The respondent suggests, page 2 of his brief, that the

large number of bank failures in recent years hes led many

courts to adopt more liberal doctrines with reference to

tracing of funds. We deny that this is so. Certainly the

contrary is true of all recent Federal court decisions, inelud-

ing the recent decisions of this court, as pointed out by

Judge Raymond, citing many authorities, in his excellent

discussion of these claims in Brown v. Botkin, 13 Fed:

Supp. 1000, 1003. | °

In concluding that: the decision of the court below is just -

and equitable the respondent fails to consider the equal

equities of the depositors and other creditors who will suf-

fer a substantial loss through their dealings with the bank

and whose funds were in no way enriched by the sale of the

bonds. As stated in Wisdom v. Keen, (C. C. A. 5th) 69

Fed. (2nd) 349, 350, cited by this court with "vigil al in.

Jennings v. U.S. F. & G. Co., 294 U. 8. 216, 224

‘*By their mutual intent the bank’s relation to Keen

was that of a trustee rather than a debtor, but there is

still no identifiable trust res traceable as such, but only

a liability for a breach of trust in failing to create the

res. This liability, absent a statutory priority or lien,

has no higher dignity than other general liabilities. As

to evéry general creditor the bank has failed to do what

it ought to have done and what it promised to do. The

federal statute puts all such claimants on an equality.

ven claims due the United States have no preference.

Cook County National Bank v. United States, 107 U. S..

445, 2S. Ct. 561, 27 L. Ed. 537.”

Respectfully ‘submitted,

“Grorce P. Barse,

Joun F. ANDERSON

Attornes ys for Petitioner.