Equitable Trust Co. of NY v. First Nat. Bank of Trinidad

1928-01-03

Headline: Court limits bank priority by reversing lower court and ruling foreign credit arrangements gave only assurance of credit, not an earmarked fund or trust, making it harder for draft holders to outrank general bankruptcy claims.

Holding: The Court reversed and held that correspondent bookkeeping and advice only assured credit abroad, did not appropriate a specific fund or create an equitable assignment, so the holder had no priority over the bankrupts' general account.

Real World Impact:

Limits banks’ ability to claim priority from bookkeeping and advice alone.
Treats letters of credit and entries as assurances, not earmarked funds.
Requires proof of actual appropriation before priority in bankruptcy.

Topics: banking disputes, bankruptcy claims, international bank drafts, earmarked funds

Summary

Background

A trustee in bankruptcy for a New York firm collected funds from an Italian bank after small U.S. banks sold drafts on that foreign bank. The First National Bank of Trinidad drew a draft on the Italian bank, sent notice to the bankrupt firm, and remitted a check that the bankrupts deposited in their general account. The bankrupts sent lists to the Italian bank asking it to "honor the above listed drafts," the account was debited and a "Drafts Payable" entry was made. The draft was presented after the bankruptcy petition, was dishonored, and the party who had to pay claimed the foreign credit had been set aside for the draft and so deserved priority.

Reasoning

The central question was whether the steps taken abroad and the bookkeeping entries created an identifiable fund or trust for the draft holder. The Court (majority) concluded they did not. It emphasized that the holder and the Italian bank were ignorant of any special earmarked assets, that stopping interest was simply a bookkeeping way to compensate the bank, and that the bankrupts retained control. The Court read the parties' terms as promising to provide credit or arrange payment as convenient, not to give a specific portion of money to the draft holder. The majority reversed the lower court, treating the arrangement as assurance of credit abroad rather than an equitable assignment of a special fund.

Real world impact

Banks and holders of international drafts cannot automatically claim priority just from letters of advice and account entries; claimants must show a real appropriation of funds. The decision rejects treating routine bookkeeping and promises to provide credit as creating a trust or earmarked asset in bankruptcy.

Dissents or concurrances

Justice Stone dissented, arguing the bankrupts had in fact set apart a credit as promised and equity should treat that credit as security for the draft, giving the holder priority over general creditors.