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Flynn v. Smith

May 26, 1937


Appeal from the District Court of the United States for the Northern District of Indiana, South Bend Division; Thomas W. Slick, Judge.

Author: Sparks

Before EVANS, SPARKS, and MAJOR, Circuit Judges.

SPARKS, Circuit Judge.

Appellee filed her bill in equity for relief from a breach of a fiduciary relationship by the First National Bank of Peru, Indiana. She alleged that the bank, as executor of her deceased husband's will had induced and permitted her to believe that she was personally liable for her husband's debts, by reason of which she paid and assumed them in the following particulars: She paid $12,805.20 out of her personal deposit account in that bank; as payee she endorsed and delivered to it a check for $2,000 of which she was the owner; she executed to it her note for $7,964.57 in lieu of her husband's note upon which there was due a like amount; and she increased a note and mortgage on her real estate from $1,000 to $5,000, the increase of $4,000 being credited on her note to the bank which reduced it to $3,964.57. The decree allowed a general claim as a deposit creditor for $12,805.20; it allowed her a preferred claim for $2,000; and it rescinded her note and mortgage to the extent of $4,000. The errors relied upon for reversal pertain to the sufficiency of the evidence to support the decree.

The findings contain the following facts: The decedent for many years was an officer of the bank and at the time of his death, on February 28, 1930, was its vice-president and assistant trust officer. By his will he devised and bequeathed all of his property to appellee, his wife, and named the bank as his executor. It qualified and acted as such and made its final report, which was approved, and it was discharged and the estate was closed in the Miami Circuit Court of Indiana at the April term, 1931.

At the time of his death, or within two months thereafter, the estate was insolvent to the extent of more than $9,000. The entire personal estate which was of the value of $21,718.47, consisted principally of stocks, bonds, and a small amount of life insurance. Among the assets were thirty shares of the National City Bank of New York of the appraised value of $5,600, and two bonds of the Fox New England Theatres, Inc., each of the face value of $1,000 and appraised at par. The liabilities aggregated $30,864.56. Included therein were two notes payable to the wabash Valley Trust Company, upon one of which there was about to become due in principal and interest the sum of $7,736.80 and which was collateralized by the thirty shares of the National City Bank; the other was about to become due in the sum of $1,877.75, and was collateralized by the two Fox bonds. Also included in the liabilities were several promissory notes, payable to the First National Bank of Peru, aggregating $19,312.80 principal and interest. These, save a note for $1,000, were secured by various stocks and bonds of a probable value not exceeding $10,000. The note of $1,000 was a joint note of decedent and his wife, and was secured by a mortgage on their home, which was owned by them as tenants by entireties.

The decedent had insurance on his life aggregating $17,000 which was payable to his wife. One of these policies for $15,000 was paid to her by check of the Company on March 17, 1930, which she immediately deposited in the appellant bank, and for which she received a certificate of deposit. The other policy for $2,000, in another company, was subsequently paid by that company's check made payable to her and endorsed by her at the request of the bank. It was collected for her by the bank, but without knowledge on her part that the policy was payable to her. The proceeds thereof were applied by the bank to the payment of decedent's debts.

Soon after decedent's death appellee had frequent consultations with the officers of the bank with respect to the estate. She reposed the utmost trust and confidence in the bank and its officials, and relied explicitly on their advice and judgment, having had no business experience herself, and being unacquainted with the business affairs of her husband. The bank knew of her trust and confidence in it, and at no time suggested to her, or directed her, to seek other advice and counsel.

Under these conditions the bank, on March 25, 1930, informed appellee that the Wabash Valley Trust Company intended to proceed immediately to the collection of decedent's obligations to it; that there was likelihood that a judgment would be taken against appellee unless those notes were paid, hence it suggested to appellee that she apply a part of the insurance money which she had received to the payment of them. She believed and relied upon that information and consented to the suggestion that the amount of the notes secured by the National City Bank stock be paid out of her certificate of deposit for $15,000, which was drawing four per cent interest per annum. The bank thereupon issued its draft for $7,736.80 payable to the Wabash Valley Trust Company and charged her deposit account with that amount, which was accomplished by the surrender of her original certificate of deposit and the issuance by the bank to her of a new one for $7,263.20, and a draft payable to the Wabash Valley Trust Company for $7,736.80, which was delivered to, and accepted by, the Trust Company in payment of said indebtedness. Thereupon the Trust Company delivered to the appellant bank for appellee the thirty shares of the National City Bank stock. Subsequently, on August 20, 1932, appellee delivered that stock to the appellant bank for the purpose of having it transferred to appellee on the books of the issuing bank. That was accomplished, and on October 7, 1932, the new certificate in appellee's name was received from the National City Bank by appellant bank which notified appellee that it was holding the new certificate and requested her to assign it to appellant bank as collateral for decedent's indebtedness to it, then represented by notes which it had previously procured appellee to subscribe, as hereinafter set forth. She declined to make the assignment, and the bank declined to deliver the certificate to her, holding it listed on its collateral ledger as security for decedent's debt which she had assumed, until after the institution of this suit, whereupon, at the commencement of the trial appellant tendered it to appellee in open court. The tender was declined and the certificate was deposited with the Clerk of the court for her benefit.

On April 25, 1930, out of funds in its hands as decedent's executor, the bank paid the balance on the notes owing to the Wabash Valley Bank, in the sum of $1,877.75, and thereupon received the two Fox bonds. The bank on July 28, 1930, without the knowledge or consent of appellee, sold these bonds as property of the estate for $1,240, and applied the proceeds to the payment of decedent's debts.

On May 26, 1930, appellee had a credit balance on her certificate of deposit account in appellant bank, upon which she was being credited with four per cent interest per annum. Thereupon the bank advised her that whereas the indebtedness to the bank was drawing six per cent she could save two per cent by making a payment on the indebtedness, to which appellee acquiesced, still believing, and the bank knowing of her belief, that she was liable on her deceased husband's notes. Accordingly she surrendered her certificate to the bank which issued her a new certificate for $1,956.98 and credited $5,068.40 on the indebtedness to the bank, which was secured by pledge of other stocks and bonds of the estate.

On June 19, 1931, interest having accrued on the debt balance in the sum of $701.77, making a total indebtedness secured by collateral of $7,964.57, appellee, laboring under the same erroneous impression created by the bank that she was liable on the obligations of the estate, executed her note to the bank for that amount, whereupon the notes secured by decedent's collateral were marked paid and assigned and delivered to her. At the request of the bank she thereupon reassigned that collateral to the bank as security for the note which she had executed in the sum of $7,964.57 without consideration other than her assumption of her husband's debts.

This note was subsequently criticized by the bank examiner and that information was communicated to appellee by the bank together with a request that she increase the mortgage on her home, which was her separate real estate, from $1,000 to $5,000. She did not at that time comply with that request but sought the advice of her supposed friend, one Chamberlain, who was not then connected with the bank, having severed his connection as cashier and assistant trust officer thereof on June 30, 1931. Before his retirement he had looked after the affairs of the decedent's estate, and had full knowledge of, and much to do with, the transactions hereinbefore recited which occurred prior to his retirement. Upon being advised by him to comply with the bank's request, she executed her two notes to the bank on June 1, 1932, for the total sum of $5,000, together with a mortgage on her home to secure its payment. These, together with $159.69 in cash for accrued interest, were received from her by the bank in payment of the former mortgage of $1,000 on her home, and as a credit of $4,000 on her note to the bank of $7,964.57, which she had given for decedent's indebtedness, thereby reducing that note to $3,964.57. The balance remaining in her certificate of deposit account with the bank, amounting to $2,194.80, was withdrawn by her from time to time for her separate use.

On May 1, 1931, the bank as executor filed its final report showing all debts of the estate paid, together with appellee's statement under oath that she had received the remaining surplus, and that the bank had acted in a satisfactory manner as executor in the settlement of the estate. Neither the final report nor the findings disclose the amount of surplus of personalty, the account not being set forth. The record discloses the amount of surplus to be $187.50. The final report, however, states that decedent died the owner of two city lots in Peru, of which appellee should ...

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