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Joseph v. Village of Downers Grove.

May 17, 1939


Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Philip L. Sullivan, Judge.

Author: Major

Before EVANS, MAJOR, and TREANOR, Circuit Judges.

MAJOR, Circuit Judge.

This is an appeal from a judgment, entered August 26, 1938, in favor of the plaintiff, as Receiver of The First National Bank of Downers Grove, in an action to recover certain moneys claimed to have been erroneously paid to the defendant. The cause was tried by the court largely on a stipulation of facts with oral testimony on one feature of the case. The errors relied on arise out of rulings on evidence and failure to grant the defendant's motion for findings and judgment in its favor.

The First National Bank of Downers Grove (referred to herein as the Bank), a national banking association under the laws of the United States, was found to be insolvent and was closed by order of the Comptroller of the Currency on June 17, 1931. Prior to its closing, the Bank had been actively engaged in accepting deposits and doing a general banking business in the Village of Downers Grove, Illinois. Thereafter, a receiver for the Bank was duly appointed and proceeded to collect and liquidate its assets. The defendant is an Illinois Municipal Corporation and since the year 1917, has operated under the Commission Form of Government pursuant to the Illinois Statute.

The complaint proceeds on the theory that the defendant's treasurer, in his capacity as such, was a depositor of the Bank, and that defendant's funds in the Bank were and always had been a legal deposit; that the moneys sued for were the proceeds of securities of the Bank unlawfully pledged by the Bank to secure such deposit, and were therefore unlawfully paid to defendant and could be recovered. Defendant's amended answer denies that its treasurer was ever a depositor of the Bank; denies that its funds in the Bank were ever a legal deposit, and asserts that such funds in the hands of the Bank were at all times impressed with a constructive trust in favor of the defendant, because of violation by the Bank of the Illinois statute, prescribing the terms and conditions under which the Bank might accept deposit of defendant's funds; that the securities in question were not pledged to secure a bank deposit, but were pledged to secure the liability of the Bank to defendant as trustee of a constructive trust in favor of defendant, which pledge was entirely lawful and proper, and that the proceeds of sale of the securities in question were therefore properly paid to defendant and could not be recovered.

Section 51, Laws 1910, Sp. Sess. p. 37, Smith-Hurd Stats. c. 24, ยง 316, Par. 374, Chap. 24, Cahill's Illinois Revised Statute, 1931, authorizing municipalities to adopt the Commission Form of Government, provides: "In addition to the other duties now imposed by law upon the treasurer of any city or village, the said treasurer shall make his daily deposits of such sums of money as shall be received by him from all sources of revenue whatsoever, to his credit as treasurer of said city or village, in one or more banks situated in said city or village, to be selected by the president of said council, the commissioner of accounts and finance, and the treasurer of such city or village, or by any two of them, and any such bank, before any such deposit is made therein, shall be required to enter into an obligation with the said council to pay into the treasury of such city or village interest on the monthly balances of such deposits at a rate to be fixed by the president of saic council, the commissioner of accounts and finance, and the treasurer, or by any two of them, and which rate may be changed in the same manner - such rate to be not less than three (3) per centum per annum, and shall also execute a good (and) sufficient bond, with sureties to be approved by the president of the said council, and conditioned that such bank will safety keep and account for, and pay over said money."

The Bank and its officers at all times had full and actual knowledge of the fact that the defendant was operating under the Commission Form of Government, and of the existence of the Statute above quoted. At no time did the Bank execute or furnish any bond or enter into any obligation to pay interest on the funds of the defendant as required by this Statute. Without complying therewith the Bank accepted funds of the defendant for deposits as such funds were, from time to time, turned over to it. The funds of the defendant so placed in the hands of the Bank were credited to the account of defendant's treasurer; were not kept separate and apart from other funds in the Bank, but were mingled with the general funds in possession of the Bank and were used for the general purposes of the Bank and were, at all times, subject to withdrawal on order of the defendant by check or draft properly drawn against the account. Withdrawals were made from time to time by the defendant from moneys to its credit in the account with the Bank and such withdrawals were paid by the Bank out of general funds in its possession, the account thereupon being debited in the amounts so withdrawn.

Commencing about the year 1928, the Bank gave to defendant's treasurer, collateral to secure the funds of defendant in the account, the amount of the collateral being increased and decreased from time to time. On January 24, 1931, the Bank turned over to defendant's treasurer, securities in the form of various bonds in the aggregate sum of $119,500, as security for gunds which had been and which might in the future be delivered to the bank. Such securities were deposited by the treasurer in a safety deposit box in the Bank, the key to the same retained by the treasurer, with a master key in the possession of the Bank. The use of both keys was required to enter the box. Subsequent to the deposit of these securities in the safety deposit box, the Bank, with the cooperation and consent of the treasurer, removed from the box certain of these securities in the aggregate par value of $13,000. These securities so removed were sold by the Bank and the proceeds thereof retained by it as a part of its general funds.

On the 17th day of June, 1931, the treasurer, in cooperation with the Bank, opened the safety deposit box, removed the securities then remaining therein and took the same to the Continental Illinois Bank and Trust Company of Chicago. The treasurer was accompanied by a representative of the Bank who took with him additional securities of the par value of $30,000, which securities were a part of the general assets of the Bank. The securities carried by the treasurer and the additional securities carried by the representative of the Bank were all deposited on June 17, 1931, with the Continental Illinois Bank and Trust Company under an escrow agreement.*fn1 On the same day the Bank closed, with a credit balance on its books, in the sum of $81,390.53, due to defendant's treasurer.

Subsequent to the closing of the Bank, defendant's treasurer made demand upon the plaintiff (Receiver of the Bank) and upon the Continental Illinois Bank and Trust Company, as escrowee, under the Escrow Agreement for the sale of the securities held by the escrowee and for the application of the proceeds of such sale to the credit balance due defendant's treasurer. The sale of such securities was authorized by the Comptroller of the Currency of the United States and by the District Court pursuant to petitions presented by the plaintiff. The securities were thereupon sold and out of the proceeds payments were made to the defendant at various times in the aggregate amount of $81,390.53, being the amount of defendant's funds in the Bank at the time of its closing.

On January 7, 1936, plaintiff made demand on defendant for the repayment of such moneys, which demand was refused, and, thereupon, suit was instituted on January 23, 1936. Prior to the entry of the judgment appealed from, various dividends were paid to depositors of the Bank, aggregating 57% of the total deposit liabilities of the Bank. No dividends were ever paid to the defendant. Judgment was entered against the defendant in the amount of $40,079.32, which amount was arrived at by deducting from the amount of the account at the time the Bank closed the amount of the dividends which defendant would have received as a general creditor of the Bank, together with certain interest items.

Plaintiff, in its replication to defendant's answer, denied that the proper officials of defendant had legally selected the Bank as the depositary in which defendant's treasurer should make his deposits. On this issue, oral and documentary evidence was offered by defendant and admitted subject to objection by plaintiff. Later, on motion of plaintiff, all this evidence was stricken from the record as incompetent.

It is the defendant's contention that the Bank violated the Illinois Statute, in accepting for deposit public funds of the defendant without furnishing the indemnifying bond and entering into the obligation to pay interest prescribed by the Statute, and that by reason of such violation, defendant's funds never became legal deposits and assets of the Bank, with the result that they were impressed with a constructive trust in its favor. Admittedly, this contention constitutes the sole foundation upon which the defense is predicated, and its failure is fatal. Plaintiff replies to this essential contention by denying that it was under any statutory obligation to furnish the defendant with an indemnifying bond for the reason that no proper or legal selection of it as a depositary of the defendant's funds was made by defendant's officials as required by Statute. If, however, a proper selection was made, plaintiff, while not admitting, does not seriously dispute but what a trust relation was created by reason of the Bank's failure to supply the statutory bond. It is further the contention of the defendant that the trust relation having been established, that the securities pledged by the Bank constituted a lien in favor of the defendant and that the funds realized by the escrowee from the sale of the pledged securities were legally paid to the defendant in satisfaction of the Bank's trust obligation, and that, therefore, no recovery of such funds can be had. On the other hand, it is contended by the plaintiff that even though the trust relation be found, that the Bank was without authority to pledge its securities, that no lien attached to the same and that, therefore, the funds realized from the sale of such securities were illegally paid to the defendant and that the court below properly found in plaintiff's favor. It is apparent that the first question which we must determine is whether there was a proper selection of the ...

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