Jennings v. United States Fidelity & Guaranty Co.

Background

An insurance company was owed $2,196.89 on a check drawn on a local bank and sent that check for collection through a national collecting bank. The collecting bank passed the item into the local clearing house along with other checks. The clearing-house settlement reduced the collector’s liabilities instead of producing cash in its vaults. Before the collector could send an honored draft back to the insurance company, the collecting bank closed and the Comptroller took possession as receiver. The insurance company sued to have the collected amount treated as a trust on the bank’s assets so it would be paid ahead of other creditors.

Reasoning

The Court framed the question as whether the proceeds of the collected check remained an identifiable trust fund after clearing-house set-off. The opinion explained that when a collecting bank’s business is finished and it has actual cash the proceeds can be identified and held in trust. But here nothing of value came into the collector’s vault; the item was extinguished by set-off in the clearing house. Because there were no identifiable proceeds, the court found no implied trust in fact. The Court also held that a state law provision that creates a trust or preference at insolvency conflicts with the federal rules for distributing the assets of a failed national bank.

Real world impact

The ruling reverses the lower courts’ preference for the insurance company and leaves such claimants to share equally with other creditors in a national bank receivership when collection was by clearing-house set-off. It also prevents a state insolvency preference from overriding federal distribution rules for national banks.