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In re Bogena & Williams

April 17, 1935


Appeal from the District Court of the United States for the Southern District of Illinois, Northern Division; J. Earl Major, Judge.

Author: Sparks

Before EVANS, SPARKS and FITZ HENRY, Circuit Judges.

SPARKS, Circuit Judge.

This is an appeal from a decree allowing a preferred claim in favor of appellee against the receiver of the Canton, National Bank of Canton, Illinois, hereafter referred to as the Bank, and directing payment of the claim.

On November 3, 1932, the trustee of the bankrupt, Bogena & Williams, doing business as the Leather Shop, deposited with the Bank the proceeds of the sale of certain personalty of the bankrupt estate in the sum of $1308. The deposit consisted of $638 in currency, and one check for $350 drawn on a Peoria bank, and other small checks aggregating about $50 drawn on other banks. A certificate of deposit not subject to check was issued to the trustee bearing 2% interest per annum if the deposit remained four months, and 3% if it remained six months. On February 1, 1933, the trustee made another deposit of cash in the sum of $137.01 and a like certificate of deposit was issued to him for that amount.

Before these deposits were made, H. B. Heald, vice-president of the Bank, stated in good faith to appellee that that bank was a designated United States depository, and that he, Heald, presumed that it had authority to receive deposity of bankruptcy funds. After February 1, 1933, Heald, however, ascertained that the Bank was not a United States depository funds, although it was a designated depository for other United States deposity.

In November, 1932, the $400 in checks was deposited in the regular course of business by the Bank, either in the First National Bank of Peoria, or in the Continental and Commercial National Bank of Chicago.

On March 3, 1933, the Bank closed its doors pursuant to the proclamation of the Governor of Illinois, and it remained closed during the national bank moratorium, and it was not again permitted to open. Heald was thereupon appointed its conservator and acted in that capacity until Lawlor was appointed its receiver on December 13, 1933.

For ten days after the trustee had made his first deposit in the Bank it had a credit with the First National of Peoria and the Continental of Chicago in excess of $1,038, and at the time the Bank closed it had a credit balance with each of the Peoria and Chicago banks named in excess of $1,038. During the bank moratorium, however, its account with the Continental of Chicago was overdrawn due to the dishonoring of certain checks sent in in March 3. From November 3, 1932, to the date the Bank closed it had cash on hand in excess of $2,000, and Heald, the conservator, received from the Bank in cash a sum in excess of the trustee's deposits.

On November 25, 1933, the conservator, by order of the court, sold part of the Bank's assets, known as the "Class A Assets" to the National Bank of Canton, a new organization. The new bank agreed to pay one hundred per cent. of all preferred claims and sixty per cent. of the general claims. Before payment of each preferred claim it was agreed that the conservator should deliver to the new bank a corresponding amount of Class B assets, or available cash, at the option of the new bank. All assets were not transferred to the new bank, and at the time of trial the receiver of the old bank had in his possession cash in excess of $20,000. Appellee did not claim or prove any other funds in the possession of the new bank which might have been available for payment of his claim. It was stipulated that an examination of the court's records would have disclosed the names of the banks designated as United States depositories for bankruptcy funds, and that the trustee made no examination of those records. Proper demands were made upon the conservator and the receiver. The receiver admitted the validity of the claim as a general claim, but denied its right to a preference.

Upon these facts the court held that a trust relation existed between the old bank and the trustee at the times the deposits were made; that since the Bank was not a designated depository for bankruptcy funds it had no right to receive the deposits, hence took them as a trustee ex maleficio; that the relation of debtor and creditory at no time existed between the parties; that the Bank's assets were augmented by the deposits; and that the funds had been traced into the hands of the conservator. It was decreed that appellee's claim was preferred against the old bank and the conservator, and the new bank was ordered to pay the amount of the claim with costs within five days of the entry of the decree. That time was later extended to thirty days.

We are first confronted with appellee's motion to dismiss the appeal on the ground that appellant has not joined the new bank either as appellant or appellee. In Hightower v. American National Bank (C.C.A.) 276 F. 371, it was held that the liability of a bank and its shareholders was several rather than joint, so that the latter could appeal from a decree establishing a claim against the bank and ordering the shareholders to pay it without joining the bank or having severance. The case was affirmed by the Supreme Court without discussion of this point. 263 U.S. 351, 44 S. Ct. 123, 68 L. Ed. 334. The liability there arose out of a statute imposing it upon all shareholders in a national bank, while here it arises out of a contract. The liability of the new bank, if any, was by virtue of its agreement with the conservator to pay preferred claims. This did not create a joint liability. Further, it appears that in fact, although the decree in the case at bar orders the new bank to pay the claim of appellee, the new bank really has no pecuniary interest in the controversy, in view of the fact that under the terms of the contract of reorganization it was entitled to receive from the conservator, before payment of any preferred claims, a corresponding amount of Class B assets or cash. The record discloses the statement of the new bank that it did not contest the validity of the decree, and this, we think, was sufficient to constitute a waiver of its right to appeal, and eliminated the necessity of an order of severance, even if the decree had been joint. Cf. Richards v. American Bank (C.C.A.) 234 F. 300. Appellant, however, has by motion asked permission of this court to allow the new bank to enter its appearance, and for an order of severance. To this motion the new bank appeared and consented to the jurisdiction of this court over its person, and to an order of severance, the same as if it had been entered in the trial court, to the entry of any decision, order or judgment necessary to the determination of any motion presented by either appellant or appellee, or to a final determination of this cause, the same as if it had been one of the parties to this appeal. This, we think, is not necessary, and appellee's motion to dismiss the appeal is denied.

We think a trust ex maleficio did not arise by reason of the old bank accepting the deposits when it was not a designated United States depository for bankruptcy funds. A trustee in bankruptcy is vested by operation of law with the title to all the bankrupt's property, except that which is exempt. 11 USCA § 110; Mueller v. Nugent, 184 U.S. 1, 22 S. Ct. 269, 46 L. Ed. 405. Ordinarily, when money is deposited in a designated depository bank by a trustee in bankruptcy, it is deposited as other money is, and becomes the property of the bank, leaving the bank a debtor for the amount. Gardner, Trustee, v. Chicago Title & Trust Company, 261 U.S. 453, 43 S. Ct. 424, 67 L. Ed. 741, 29 A.L.R. 622. In Hancock County v. Hancock National Bank (C.C.A.) 67 F.2d 421, a bank designated as a despository for state funds accepted deposits of county funds without giving sufficient bond, as required by the statute of Georgia. It was there held that the bank acquired title to the funds deposited, and was not a trustee ex maleficio. In Bridge v. First National Bank of Detroit (D.C.) 5 F. Supp. 442, the facts disclosed that deposits were made by receivers without an order expressly authorizing such receivers to make general deposits, and the deposits were made without any agreement creating a trust or special deposit. The court held that, although the banks had knowledge that the funds deposited were receivership funds, no trust arose, for the banks had no reason to suppose that the making of such deposits was unlawful, and there was no evidence of any negligence, misconduct or bad faith on the part of the banks. See, also, Leach v. Beazley, 201 Iowa, 337, 207 N.W. 374; Fletcher v. Sharpe, 108 Ind. 276, 9 N.E. 142; Appeal of Miller (Commonwealth v. City Trust Company), 218 Pa. 50, 66 A. 995.

Appellee, in support of a contrary doctrine, relies upon In re Potell (D.C.) 53 F.2d 877; In re Weiss (D.C.) 2 F.Supp. 767; In re Ocean City Title & Trust Company's Bond (D.C.) 6 F.Supp. 311; Allen v. United States (C.C.A.) 285 F. 678; Board of Commissioners v. Strawn (C.C.A.) 157 F. 49; In re Battani (D.C.) 6 F.Supp. 376; Adams v. Champion (C.C.A.) 70 F.2d 956. In the Potell Case a trustee had not yet been appointed, and that fact was somewhat stressed in the opinion. The Weiss Case was largely based upon the Potell Case, although the trustee had been appointed and had made the deposit. The court thought that made no difference, saying there might be a distinction for technical reasons, not then important, but there was no difference for present purposes. There was, however, the additional fact that the bank had unequivocally and falsely stated to the trustee at the time the deposit was made that it was a duly designated depository for bankruptcy funds, when in fact it was not. That, indeed, was sufficient to render the distinction for other reasons unimportant. In the Ocean City Case, the court held that a surety on a bond given to secure bankruptcy deposit was entitled to have the bond canceled, where the depository substituted for the depository originally named in the bond was not an official bankruptcy depository. It was further held that the trustees in bankruptcy, in a summary proceeding, could petition the bankruptcy court to direct the receiver of the substituted depository bank to return the deposits. There was no fraud or misrepresentation on the part of the bank, and the court based its ruling on the Potell and Weiss Cases. The Allen Case had to do with public funds of the United States, and the acts complained of were in direct violation of the Criminal Code, R.S. § 5497, 18 USCA § 182.The Strawn Case related to acts of a bank which were in direct violation of the Ohio statute preventing a general deposit of public funds. In the Battani Case the court refers to different decisions of the federal courts under various states of fact. It discusses the Hancock, Potell and Weiss Cases, supra, and refers to the Strawn Case, and generally to numerous other cases in ...

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