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Maley v. East Side Bank of Chicago

June 1, 1966

CHARLES DAVID MALEY, TRUSTEE IN BANKRUPTCY OF NATIONAL LUMBER COMPANY, A DIVISION OF C. M. PAUL LUMBER CO., BANKRUPT, PLAINTIFF-APPELLEE,
v.
EAST SIDE BANK OF CHICAGO, AN ILLINOIS CORPORATION, DEFENDANT-APPELLANT



Duffy and Swygert, Circuit Judges, and Grant, District Judge.

Author: Grant

GRANT, District Judge.

This is an action by a trustee in bankruptcy for a corporation to recover from a bank the amounts of checks payable to the corporation but cashed or deposited by the president and sole shareholder of the corporation for his own benefit. The district court entered a summary judgment for the trustee against the bank in the sum of $46,127.18 plus interest and costs.*fn1 We are of the opinion that the decision of the district court should be affirmed, the reasons for which are hereinafter set forth following a statement of the facts.

After several months of existence as a sole proprietorship, the C. M. Paul Lumber Company was incorporated as an Illinois corporation on January 25, 1961. Norman M. Paul, the owner of forty per cent of the outstanding capital stock, was elected president and treasurer and one of the three directors. Leon Rosen and George Rubenstein owned the remaining sixty per cent of the stock and were the other two directors. From its inception, the C. M. Paul Lumber Company used the trade name "National Lumber Company" and the corporation was generally known and referred to in the trade as such.*fn2

The board of directors of National Lumber at its first meeting on January 25, 1961, passed a resolution in the printed form required and supplied by the East Side Bank of Chicago, naming said bank as depositary. The resolution authorized "the officers or employees of said Corporation * * * to endorse, in the name of this Corporation for the purpose of deposit and collection in and with said Bank, checks, drafts, notes and other like obligations, issued or drawn to and owned by said Corporation * * *." The president, Norman M. Paul, was given the sole power and authority to sign checks upon corporate deposits and the bank was authorized to pay out corporate funds on deposit with it "whether said checks are payable to cash, bearer or the order of the Corporation, or to any third party, or to the order of any signing or counter-signing officer of the Corporation or any other Corporation officer, in either their individual or official capacity." The corporate minutes also show that, by resolution of the directors on January 25, 1961, the president of the corporation was authorized to sign checks withdrawing funds from the corporate account and the defendant bank was authorized and directed to "honor, pay and charge to the account of this corporation all checks and orders for the payment of money so drawn when so signed, without inquiry as to the circumstances of their issue or the disposition of their proceeds, whether such checks be payable to the order of or endorsed by any officer or person signing them or whether they are deposited to the individual credit of any officer or person signing them." While the resolution on file with the bank was later rescinded and another filed in its stead, the latter resolution was never revoked nor stricken by the directors from the corporate minutes.

By December, 1962, George Rubenstein had resigned as a director of National Lumber, Rubenstein had been replaced as a director by Frieda Rosen, the wife of Leon Rosen, and Frieda thereupon had been elected vice president of the corporation and Leon Rosen, secretary. By that time, also, the corporation was indebted to Paul and Leon Rosen in the sum of $31,500.00, evidenced by three promissory notes.

During the fall of that year, Paul had mentioned to several people that he was interested in obtaining another participant in the corporation who would be active in operating the lumber business so that Paul could devote more time to outside selling. In early December, Mort Schulman contacted Norman M. Paul and told Paul he was interested in getting into the lumber business, having had previous experience in remodeling situations and selling various allied items. Schulman's purported interest in becoming Paul's business associate received little encouragement from Paul, who was not only unimpressed with Schulman's qualifications but was perplexed by his apparent reluctance to contact him other than by telephone. In all likelihood the relationship between the two would not have progressed further had not Schulman, within the short period of a few days, countered with a proposal to purchase National Lumber entirely, stating that "he was interested in some project that he wanted to use the yard as a buying instrument for" in that "he was buying merchandise and had to have some place to put it."

Thereafter, on December 13, 1962, following upon a series of unusual if not eminently suspicious events,*fn3 a contract was executed by Norman M. Paul and Leon Rosen, described in the contract as the owners of all outstanding capital stock of C. M. Paul Lumber Company, Inc., and by Mort Schulman, whereby Schulman agreed to buy all of the stock and the three promissory notes for $22,000.00. The purchase price was payable $5,000.00 upon execution of the contract and by the delivery of two notes for the balance, which notes were payable to Paul and Rosen in thirty days. Pursuant to the contract, on that date the officers and directors of the corporation resigned and Mort Schulman was elected president. However, to secure payment of the $17,000.00 Schulman notes held by Paul and Rosen, it was further agreed that until such consideration was paid Paul would act as treasurer and Rosen as secretary of the corporation.

On December 17, 1962, Leon Rosen, as secretary of National Lumber, executed a resolution on the printed form used by the defendant bank, certifying that on December 13, 1962, the board of directors had resolved that the president, Mort Schulman, and the treasurer, Norman M. Paul, were authorized to deal jointly with the defendant on behalf of the corporation. This resolution was identical to the original resolution filed with the bank in January of 1961, with the exception that the president's authority to draw upon corporate deposits was limited by the requirement that corporate checks be counter-signed by the treasurer. On or about December 17, 1962, Schulman and Paul went to the defendant bank and delivered the new resolution form, at which time the bank was also informed of the purpose for which Paul was remaining with the corporation in the capacity of treasurer.

Approximately a week after December 17, 1962, the defendant bank began being literally inundated with a flood of credit inquiries regarding National Lumber Company. Whereas the bank had been inquired of with respect to the credit standing of National Lumber on only one or two occasions during the corporation's entire previous existence, such inquiries began averaging two or three per day on or about December 24, 1962. During the ensuing four or five weeks, the bank's chief executive officer stated that he received fifty to one hundred such calls. At no time had such frequent inquiries been made concerning the credit position of other customers of the bank.

These credit inquiries were the result of the purchase, or the attempt to purchase, large quantities of steel and other goods on credit by National Lumber immediately following Schulman's election as president. Between December 13, 1962, and January 4, 1963, at least $66,757.38 of such purchases were made by National Lumber from twenty-seven different suppliers. In each such case in which credit was extended to National Lumber for such purchases it was on the basis of the corporation's respectable past credit rating and history. Upon each credit inquiry, favorable background data was furnished by the defendant East Side Bank.*fn4 In no instance was credit extended on the basis of Schulman's personal credit.*fn5

On or shortly before January 4, 1963, Paul and Schulman again visited the East Side Bank whereupon Paul advised the defendant that Schulman had paid the entire consideration for his purchase of the stock and notes of National Lumber in accordance with the terms of the agreement of December 13, 1962. At that time, also, Schulman delivered to the defendant bank a signature card in the form supplied, on which card his signature as president of the corporation had been inserted. Said card had no other signatures. Upon receipt of the new signature card, the chief executive officer of the bank gave to Schulman a new resolution form, inasmuch as the bank then required new authorization to handle National Lumber's banking transactions in light of the change in its ownership and management. Schulman informed the bank that it might be "a little while" before he returned it to the bank, for the reason that "he did not know who was going to be on the board, and he did not know who the other officers of the corporation were going to be at that time." Schulman never returned the resolution to the bank at any time thereafter.

Then began a series of banking transactions which precipitated this lawsuit. Beginning on January 4, 1963, and extending through January 28, 1963, Schulman took $46,126.98 of certified or cashier's checks, payable to National Lumber, to defendant bank and either cashed them or had the proceeds credited to his personal account.*fn6 Each of the checks was received from a customer of National Lumber in payment for the building supplies purchased after December 17, 1962, and re-sold by National Lumber to such customer. With the exception of the last three checks, in each case when Schulman presented the checks to defendant East Side Bank, the bank's principal executive officer approved their cashing and the payment of the proceeds to or for the benefit of Schulman. The bank teller in the first seven cases demanded the officer's approval before cashing the checks. The teller had never before or since engaged in such a transaction as cashing of a check payable to a corporation. No part of the proceeds of any of the checks was credited to the account of National Lumber, nor did the creditors of National Lumber receive any part of the funds which Schulman obtained in the transactions.

In holding the defendant East Side Bank liable for the amounts of the checks so transacted, the district court below concluded, upon "an avalanche of evidence", that "while there was no actual knowing or intentional fraud committed by defendant or its employees, there was gross negligence." Maley v. East Side Bank of Chicago, 234 F. Supp. 395, 397 (N.D.Ill.1964). The elements of ...


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