Bank of America National Trust & Savings Ass'n v. California Savings & Commercial Bank

The question presented by this appeal is whether the Bank of America National Trust & Savings Association, a national banking association, and Jose Figueroa and Edward G. Brittingham, to. whom the defendant California Savings & Commercial Bank is admittedly indebted in the sum of $27,674.44, are general depositors and creditors of defendant bank or are entitled to receive payment in full as preferred creditors, or special depositors, from the cash in its vaults on July 23, 1930, when it was taken over as an insolvent institution by Will C. Wood, Superintendent of Banks of the state of California. Edward Rainey, successor to Will C. Wood as Superintendent of Banks, has been substituted as a defendant herein in place of Wood. The Superior Court of San Diego County, by the judgment appealed from, has decreed that the sum of $16,000 was deposited for a special purpose, and that Figueroa and Brittingham, and Bank of America are preferred creditors as to said sum, but general creditors for the balance of their claim in the amount of $11,674.44. The Bank of America and- Figueroa and Brittingham have appealed from said judgment in so far as it denies them a preference for the sum of $11,674.44. The defendant Superintendent of Banks concedes that the Bank of America and Figueroa and Brittingham are entitled in the aggregate to a general claim for $27,674.44, but appeals from that portion of the judgment which allows said creditors a preferred claim for $16,000.

By the complaint as originally filed, the Bank of America sought to have its status as a preferred creditor of the California Savings & Commercial Bank established, or, failing such relief, to obtain a personal judgment against Figueroa and Brittingham for the sum of $15,075.62, later reduced to $9,226.73. Figueroa and Brittingham denied personal liability to the Bank of America for any sum whatsoever, and by cross-complaint asserted a preferred claim for $27,674.44

The case herein was tried on a stipulation of facts from which it appears that the rights of the parties are based on a tri-party contract executed by them on April 24, 1930, and herein denominated the exhibit A contract. Figueroa and Brittingham, dealers in cotton, are referred to as the “Shippers”. They needed credit to finance their operations in the buying and selling of cotton on a large scale, which the Bank of America of California, to which plaintiff Bank of America National Trust & Savings Association is successor, was able to extend to them. Said Bank of America of California, with its principal office in the city of Los Angeles, is referred to in said contract as the “Bank”, and the defendant California Savings & Commercial Bank, with its place of business in the city of San Diego, is referred to throughout said contract as the “Trustee”. The Bank of America therein agreed to extend to Figueroa and Brittingham, who appear to have been copartners, “acceptance credits” not to exceed $160,000 during the six months’ period from April 21, 1930, to October 15, 1930. This figure was later reduced to $90,000 by consent. The acceptance credit was to be made available to Figueroa and Brittingham in the following manner: As they needed funds they were to deliver to the California Savings & Commercial

By accepting said drafts prior to sale by it, the Bank of America rendered itself liable to the persons who became the holders thereof. Figueroa and Brittingham agreed to pay all drafts punctually at maturity, and for this purpose to deposit with the Bank of America at least twenty-four hours before noon of the day of payment Los Angeles funds equal to the amount of maturing drafts. To secure performance of this obligation of Figueroa and Brittingham to the Bank of America, the exhibit A contract contains provision for security to be delivered to the California Savings & Commercial Bank as “Trustee”. It is" therein provided that the Shippers should deliver to the California Savings & Commercial Bank “$24,000 in lawful money of the United States”, and also negotiable warehouse receipts and bills of lading evidencing cotton owned by them in such quantities that the value of said cotton, plus the $24,000, should at all times equal Í15 per cent of the amount of outstanding drafts drawn by the Shippers and accepted by the Bank of America. The value of said cotton was to be determined from the price on the New York Cotton Exchange.

The $24,000 represents 15 per cent of the total acceptance credit of $160,000, and the sum of $16,000, to which the deposit was later reduced, is approximately 18 per cent of $90,000, the amount to which the total acceptance credit was reduced by consent.

The agreement further provided that if at any time the value of the “cotton pledged”, plus the deposit in lawful money, fell below 115 per cent of the amount of drafts outstanding, the Bank of America was authorized to direct the California Savings & Commercial Bank, as Trustee, to sell a sufficient quantity to restore the required margin in

The Shippers further agreed to pay all expenses and commissions incident to the contract and to insure the cotton pledged. They agreed that the credit made available to them by the Bank of America should not be used for purposes of speculating or for the manipulation of the market, and that cotton should be purchased only for the fulfilment of bona fide orders received from buyers.

On April 24, 1930, the same day that the tri-party exhibit A agreement was executed, the Bank of America and the California Savings & Commercial Bank entered into a contract to which Figueroa and Brittingham were not parties and of which they had no knowledge. They urge in the case herein, and more particularly in the companion appeal, L. A. No. 13611, that said contract, exhibit B, was in. fraud of their rights, and altered the terms of the exhibit A contract. We are unable to agree with this contention. Said exhibit B is in effect a contract of guaranty by which the California Savings & Commercial Bank assumed liability for the drafts accepted by the Bank of America for the benefit of the Shippers, and agreed to indemnify and hold the Bank of America harmless on account thereof. It simply afforded the Bank of America additional security, in the form of a guaranty by the California Savings & Commercial Bank, and of this Figueroa and Brittingham had no cause for complaint. There is no showing that the exhibit B contract was intentionally concealed from them.

As noted above, the case was submitted upon stipulations of facts, from which it appears that on April 21, 1930, three days before execution of the exhibit A contract, Figueroa and Brittingham, in contemplation of the provision therein

The California Savings & Commercial Bank drew its cashier’s check for $24,000, dated April 21, 1930, and payable to the order of the Bank of America, and held said check until May 17, 1930, when it substituted a similar check for $16,000, upon reduction of the total acceptance credit to $90,000 and the proportionate reduction of the required deposit. The California Savings & Commercial Bank returned $8,000 to the Shippers at this time. The balance of the proceeds of said check for $24,000, drawn on the El Paso, Texas, bank and paid by said bank, to wit, the sum of $16,000, the Shippers and the Bank of America claim constituted a deposit for a special purpose. The court below allowed said claimants a preference for this sum, which appellant Superintendent of Banks contests on this appeal.

The Shippers had no knowledge that the proceeds of the El Paso check were not remitted to the San Diego bank in cash, but credited to its general account with the Bank of America; nor did they know that the San Diego bank drew and held its cashier’s checks payable to the Bank of America. Neither of said cashier’s checks was ever delivered to the Bank of America. The check for $16,000 has

As to the balance of the joint claim of Fegueroa and Brittingham and the Bank of America, to wit, the sum of $11,674.44, for which the court below held them to be general creditors, the following facts appear: Said sum represents the balance remaining to the credit of Figueroa and Brittingham in an account in the California Savings & Commercial Bank after deducting the sum of $3,401.18, which was credited them after commencement of the action herein, as explained above. Figueroa and Brittingham opened said account on April 21, 1930, by signing the regular form of signature card used by the San Diego bank for partnership commercial accounts. It is the contention of the claimants for a preference that it was contemplated by the exhibit A contract that Figueroa and Brittingham should sell the cotton pledged to secure the Bank of America, and for which warehouse receipts and bills of lading were delivered to the San Diego bank as Trustee, and that the proceeds of sale should be held by the San Diego bank as a special deposit in lieu of the cotton pledged, to assure payment at maturity of the drafts accepted by the Bank of America for the accommodation of Figueroa and Brittingham. This explains the notation Written by the San Diego bank on the ledger sheet for the Figueroa and Brittingham account to the effect that “All cheeks must be O. K. by an officer.” The claimants for a preference contend that the balance to the credit of said account actually represents the proceeds from sale of the pledged cotton.

The Superintendent of Banks contends that there is no proof that said balance represents such proceeds. The stipulations of facts in the case herein are incomplete in that they neither affirm nor deny this fact. In view of the clear showing made in the companion case, L. A. No. 13611, as to said account, it would be unfortunate in the instant case if we were required to reach a conclusion at variance with the decision we would make had the undisputed evidence in the companion case been before us in the case

By the terms of the exhibit A contract “$24,000 in lawful money of the United States” was to be held by the California Savings & Commercial Bank, designated “Trustee” in said contract, as “collateral security” for the payment by Figueroa and Brittingham of all drafts accepted for their benefit by the Bank of America. The cotton represented by the warehouse receipts and bills of lading which were also to be delivered to the California Savings & Commercial Bank is throughout the agreement described as “cotton pledged as security”. That said cotton did not become the property of the California Savings & Commercial Bank or a part of its general assets, but remained the property of the Shippers, subject to a lien or charge in favor of the Bank of America, can admit of no doubt. The right to sell the pledged cotton, in the event of default in the performance of the obligation to secure which it was pledged, is conferred on the Bank of America, any surplus in the proceeds of sale to be returned to the Shippers. Section 2993 of the Civil Code provides: “A pledgor and pledgee may agree upon a third person with whom to deposit the property pledged, who, if he accepts the deposit, is called a pledge-holder.” The California Savings & Commercial Bank, described in the exhibit A contract as the “Trustee”, is in legal effect a pledge-holder.

The precise reason for adopting this mode of procedure rather than delivery of the pledge directly to the Bank of

The requirement of $24,000 in lawful money, to be held as security together with the cotton pledged, was clearly designed to afford security in the form of cash against downward fluctuation in the cotton market. If said security, including the money deposit, had been delivered to an individual as trustee or pledge-holder it would be plain that the relationship of the parties would not be that of debtor and creditor as to said money, and that the pledge-holder would have no right to use such funds in the conduct of his private business. In the case herein, said bank plainly is a pledge-holder as to the pledged cotton. The agreement neither in express terms nor by implication makes a distinction in the capacity in which the said bank is to hold the pledged cotton and the $24,000, also to constitute a part* of the security to protect the Bank of America.

Where a fungible, such as money, is made the subject of a pledge, trust or special deposit, in our view it can serve no purpose, and therefore it is not required, that the identity of the particular money delivered be preserved in specie, as by setting it aside in a marked bag or package. The test for determining whether a general deposit or a deposit for a special purpose exists is not, therefore, whether it was intended that specific coins or currency should be kept separate and apart in specie from other funds of the custodian. In ordinary commercial transactions, either with banks or individuals, such an intent almost never will be present, and certainly will not be presumed to exist in the absence of a clear expression thereof. In the case of a general deposit in a bank the relationship of the bank and depositor is that of debtor and creditor, and the funds deposited become a part of the general assets of the bank,

Where money is delivered to a bank to be paid over to a third party upon his fulfilment of a contract with the depositor; where the purchase price of land or other property, or money with which to discharge a mortgage, is delivered to a bank in escrow; where a deposit is made to await the outcome of litigation, or, as in the case herein, as security for performance of an obligation of the depositor to a third person, the deposit is held to be a deposit for a special purpose, and the bank has no right to use the amount thereof in its general business. (Hudspeth v. Union Trust & Sav. Bank, 196 Iowa, 706 [ 195 N. W. 378 , 31 L. R. A. 466 , with note]; Northwest Lumber Co. v. Scandinavian-Amer. Bank, etc., 130 Wash. 33 [ 255 Pac. 825 , 39 A. L. R. 922 , with note]; Corporation Commission of North Carolina v. Merchants’ Bank etc. Co., 194 N. C. 125 [ 138 S. E. 530 , 57 A. L. R. 382 , with note]; Blythe v. Kujawa, 175 Minn. 88 [ 220 N. W. 168 , 60 A. L. R. 330 , with note].) The deposit herein of $16,000 is clearly of this class.

We are aware of expressions in certain cases, in- . eluding decisions of this state (Anderson v. Pacific Bank, 112 Cal. 598 [ 44 Pac. 1063 , 53 Am. St. Rep. 228 , 32 L. R. A. 479 ]; People v. California etc. Trust Co., 23 Cal. App. 199 [ 137 Pac. 1111 , 1115]), to the effect that a special deposit of money is in the nature of a bailment in which the identi

Appellant Superintendent of Banks stresses the fact that the California Savings & Commercial Bank drew a cashier’s check on April 21, 1930, for $24,000 payable to the Bank of America, and later a check for $16,000 when the deposit was reduced, and" informed the Bank of America of these checks. Ordinarily the holder of a cashier’s check is a general creditor of an insolvent bank. Neither the exhibit A contract nor the exhibit B contract in the case herein contains any provision for holding said fund in the form of a cashier’s check. The California Savings & Commercial Bank at all times retained possession of said checks, and the Shippers did not learn that they had been drawn until after the closing of said bank. The California Savings & Commercial Bank by its ex parte act could not alter the rights of the Shippers under the exhibit A contract. (Hudspeth v. Union Trust & Sav. Bank, supra.) Nor do we think that the Bank of America, by assenting to the drawing of said checks in the circumstances of this case, lost the right to rely on the exhibit A contract as creating a deposit for a special purpose. Said checks were mere incidental bookkeeping devices of the San Diego bank and not the controlling factor in the case. (Central Bank & Trust Co. v. Ritchie, 120 Wash. 160 [ 206 Pac. 926 ]; Woodhouse v. Crandall, 197 Ill. 104 [ 64 N. E. 292 , 58 L. R. A. 385 ].)

Nor does the fact that the California Savings & Commercial Bank was not licensed under the laws of this state to do a trust company business compel the conclusion that said funds and cotton pledged were not to be held by it by way of special deposit as a pledge-holder. Although said bank is described in the contract as the “Trustee”, the transaction appears to present an escrow transaction in the line of ordinary bank business, rather than an administrative trust.

We now pass to consider the nature and extent of the preference of special depositors, and herein to treat

The special depositors are in effect tracing and reclaiming their own property, rather than asserting a preference in the bank’s general assets. Hence, where the bank’s cash balance at any time after receipt of the special deposits falls below the amount thereof, the identity of the special funds is lost, and it is held that the preference of the special depositors does not extend to general assets or to subsequent increases in the cash balance, but as to such receipts the special depositors are on a par with general depositors. This statement of the rule is widely accepted. (See Leach v. Iowa State Sav. Bank, supra.)

If the Bank of America upon payment to it of the El Paso check had remitted the proceeds thereof by shipment of currency to the California Savings & Commercial Bank at San Diego, it is conceded that there would be a sufficient tracing to entitle the claimants to priority, with like effect as if Figueroa and Brittingham had personally delivered cash or currency to said bank. But the California Savings & Commercial Bank directed the Bank of America to credit its account. The proceeds of collections in modern banking practice are very generally remitted by the collecting bank sending to the transmitting bank its own draft, or cashier’s check, or its draft on another bank, or where reciprocal accounts are maintained, as in the case herein, by the collecting bank crediting the account of the transmitting bank. The San Diego bank adopted this mode of procedure for collecting the check for $24,000, the proceeds of which were to be held as a special deposit. As it checked against its account with the Bank of America, it was under a duty to

The credit resulting from deposit of the proceeds of the $24,000 cheek to the general account of the California Savings & Commercial Bank was the equivalent of cash, and was checked against and used by said bank as cash. Said credit augmented the assets of said bank over and above what they were before the collection by the same amount as a shipment of currency would have increased them. Those cases which hold that where the bank’s cash balance is reduced below the amount of the special deposits by paying debts and in general course of its business, the special depositors do not have a preference in the general assets of the bank are not here controlling. (Bradley v. Chesebrough, 111 Iowa, 126 [ 82 N. W. 472 ]; Hill v. Miles, 83 Ark. 486 [ 104 S. W. 198 ]; Cavin v. Gleason, supra; Leach v. Iowa State Sav. Bank, supra.) The cash in the vaults of the bank herein at all times exceeded the total claim of Figueroa and Brittingham and the Bank of America. The court

We have previously stated that their claim for a preference for the balance to the credit of Figueroa and Brittingham in their partnership commercial account with the California Savings & Commercial Bank was properly disallowed by the court below, notwithstanding it be conceded in disposing of this appeal that said balance represents the proceeds from the sale by Figueroa and Brittingham of cotton originally pledged as security. At the time of the closing of the California Savings & Commercial Bank only the last one of the drafts drawn by Figueroa and Brittingham under the $90,000 acceptance credit remained unpaid. This draft was for $20,000. As security therefor, the California Savings & Commercial Bank held the $16,000 special deposit, and also retained control of certain bills of lading and warehouse receipts for cotton pledged and later sold by Figueroa and Brittingham, which documents of title were in transit together with a draft on the purchaser or his agent for $7,372.09 and were to be surrendered only on payment by the purchaser. This draft was paid after the closing of the bank and has been credited on the $20,000 acceptance. The sum of $16,000 plus $7,372.09, aggregating $23,372.09, is more than 115 per cent of $20,000. No portion of the balance in the Figueroa and Brittingham partnership commercial account at the date of the closing of the bank was required to make good the 115 per cent margin of security. Figueroa and Brittingham at any time would have been entitled to demand payment to them of all sums in excess of the amount required to maintain the margin of security. As to such excess the account is a general partnership commercial account. (Corporation Commissioners of North Carolina v. Merchants’ Bank etc. Co., supra.)

The claimants for a preference have already received $3,401.18, which represents the full amount of the balance to the credit of the insolvent bank with the Bank of America on July 23, 1930. As noted above, by stipulation it was agreed that said balance should be applied on the joint claim of Figueroa and Brittingham and the Bank of America to reduce said claim from $31,075.62 to $27,674.44.

The court below allowed interest on the sum of $16,000 from October 10, 1930, when demand was made on the trustee in liquidation for payment. Anderson v. Pacific Bank, 112 Cal. 598 [ 44 Pac. 1063 , 53 Am. St. Rep. 228 , 32 L. R. A. 479 ], may seem to support such an allowance. However, we are of the view that in the case herein interest should not be allowed. It cannot be allowed as compensation for the use of the fund, since it was a special deposit of which no use could lawfully be made. Where the Superintendent of Banks’ resistance to payment is not unreasonable or vexatious, but an exercise of reasonable discretion in the interest of all parties, the funds available for the general depositors should not be reduced by allowing the special depositors interest by way of damages. (Northwest Lumber Co. v. Scandinavian-Amer. Bank, etc., supra; Butler v. Western German Bank, 159 Fed. 116 ; Richardson v. Louisville Banking Co., 94 Fed. 442 , 449; Clark Sparks & Sons etc. Co. v. Americus Nat. Bank, 230 Fed. 738 ; People

The judgment is modified by reducing the amount for which additional payment on a preferential basis is decreed from $16,000 to $12,598.82, and by correspondingly increasing (by $3,401.18) the amount for which the general claim is allowed from $11,674.44 to $15,075.62. Said judgment is further modified by striking therefrom the allowance of interest. As thus modified it is affirmed. The motion of Figueroa and Brittingham to dismiss the appeal of Edward Rainey, as Superintendent of Banks, and of the California Savings & Commercial Bank is denied.

Rehearing denied.