National Indemnity Co. v. Spring Branch State Bank

• Decision Date: 26 July 1961
• Docket Number: No. A-8320,A-8320
• Citation: 162 Tex. 521,348 S.W.2d 528,8 A.L.R.3d 229
• Parties: , 8 A.L.R.3d 229 NATIONAL INDEMNITY COMPANY, Petitioner, v. SPRING BRANCH STATE BANK, Respondent.
• Court: Texas Supreme Court

Page 528

348 S.W.2d 528

162 Tex. 521, 8 A.L.R.3d 229

NATIONAL INDEMNITY COMPANY, Petitioner, v. SPRING BRANCH STATE BANK, Respondent.

No. A-8320.

Supreme Court of Texas.

July 26, 1961.

William A. Brown, Houston, Powell, Rauhut, McGinnis, Reavley & Lochridge, Austin, Morgan Hunter & Larry E. Temple of above firm, for petitioner.

Duncan Neblett, Houston, for respondent.

GREENHILL, Justice.

This is a suit by National Indemnity Company, herein called the insurance company, against the bank to recover funds which had belonged to the company and which were on deposit in the bank in the account of one of the agents of the insurance company. The bank had seized the funds to offset a debt owed to it by the agent. The trial court overruled the insurance company's motion for summary judgment. When the company stated that it had no further evidence to offer, judgment was entered for the bank. That judgment was affirmed by the Waco Court of Civil Appeals. 343 S.W.2d 539.

The facts as developed on motion for summary judgment, as relevant here, were these: J. N. Mullan and wife had a joint account in the Spring Branch State Bank which they used for their business and personal affairs. Mullan was general agent for Texas for the National Indemnity Company, the plaintiff below, the petitioner here. In his agency contract, it was agreed that Mullan could collect premiums and hold them as trustee for the company. He was to deduct his commission and remit the balance to the company.

In June of 1956, Mullan collected $3,091.21 in premiums. Mullan was entitled to a commission, and $2,317.14 remained which belonged to the insurance company. It was held in trust by Mullan. He deposited the entire sum in his account at the bank. We shall assume that the deposit was made with the consent of the insurance company under Mullan's agency agreement.

Mullan was indebted to the bank. The nature of the indebtedness does not clearly appear; i. e., whether it was for loans directly to Mullan, or was upon the endorsement by Mullan of notes of others, or both. In any event, there was a pre-existing indebtedness. There is evidence that Mullan had given the bank authority to charge his account upon delinquency in his own indebtedness or upon failure of payment of certain notes which he had endorsed.

The controversy arose when the bank charged Mullan's account for his debt to the bank. The amount taken by the bookkeeping entry included the funds belonging to the insurance company. The question is whether the bank may thus seize funds belonging to the insurance company which were held in trust by one of its depositors, the insurance agent, to satisfy the debt owed by the agent to the bank. While there were some circumstances which, it is argued, gave rise to notice of the trust relationship, we shall assume that the bank had no knowledge that the funds belonged to the insurance company. There are no allegations, and there is no evidnece, that the bank had in any way changed its position to its detriment, that superior equities had arisen in its favor, or that it suffered any loss from the transaction except, of course, the loss it might suffer if it is required to surrender the funds to the insurance company.

(1) When the bank has knowledge that the funds in the account of one of its depositors are trust funds, or if it has knowledge of sufficient facts to charge it with notice, it is the uniform rule that it may not seize and retain the funds held in trust in order to offset a debt of the depositor. Steere v. Stockyards National Bank, 1923, 113 Tex. 387, 256 S.W. 586; Interstate National Bank v. Claxton, 1904, 97 Tex. 569, 80 S.W. 604, 65 L.R.A. 820; 9 C.J.S. 626, Banks & Banking § 302.

(2) When the bank has no such knowledge or notice, there is a sharp division of authority. The split is recognized and discussed in annotations in 13 A.L.R. 324, 31 A.L.R. 756, and 50 A.L.R. 632; in 9 C.J.S. Banks & Banking, § 302, pp. 627, 628; in 7 American Jurisprudence 463; 5A Michie, Banks and Banking, §§ 132, 136, and 141; and notes, 38 Harvard Law Review 800 and 824; 5 Minnesota Law Review 470, and 13 Minnesota Law Review 242.

According to the above authorities, most states have held that when the bank has no knowledge or notice, it has the right to apply the funds on deposit against the fiduciary's individual indebtedness. The holdings are based upon the 'ancient foundation that money has no earmarks and therefore when honestly takent can be kept.' What is meant is that when money has been honestly received, for what is regarded by these authorities as a consideration and without notice, in the independent right of the taker, himself, as in payment of a debt it may be kept. See 6 Williston, Constracts (Rev. ed. 1936), 5124, § 1805.

But a substantial minority of states which apply the 'federal' or 'equitable' rule have held that the bank may not apply such funds to the individual debt of the depositor if there has been no change in the bank's position to its detriment and no superior equities have been raised in its favor. See Annotations, 13 A.L.R. 324 at 330, 31 A.L.R. 756 at 757, and 50 A.L.R. 632 at 634. Among the jurisdictions following this view are federal cases and the states of South Dakota, Minnesota, Nebraska, Oklahoma, Rhode Island, Colorado, Michigan, and Indiana. ¹

One of the early leading cases is Shotwell v. Sioux Falls Savings Bank, 1914, 34 S.D. 109, 147 N.W. 288, L.R.A. 1915A, 715, where the South Dakota Supreme Court held:

'* * * where a bank has innocently taken from one not the true owner thereof money, drafts, or checks, and applied the same upon a debt or overdraft, and, relying upon such deposit and application thereof, has placed itself in a position where it would be inequitable to require it to account to the true owner of the fund, the bank should not be holden to the true owner of such fund. We deny that there is any recognized principle of law, or even any reason founded upon that necessity which is said to know no law, that will sustain either the justice or necessity of holding that, when a fund, even though it consists of money, can be fully and clearly tracted into the hands of one who has neither paid a valuable consideration therefor nor changed his relation to the person from whom the fund was received, so as to give rise to any equitable defense against the claims of the true owner of such fund-when one man has money which in equity and good conscience belongs to another-such fund should not be recovered by the equitable owner thereof. Applying, without limitation, the rule contended for by respondent would permit a bank to retain, as against the true owner, money procured through highway robbery, and deposited by the robber to meet an overdraft * * * We refuse to adopt any rule that must lead to such results.' 147 N.W. at page 290.

The question was recently before the Supreme Court of Colorado. That court had previously adhered to what is referred to as the majority rule. The question to be decided by that court included these elements: '* * * and the bank accepts the deposit without knowledge that the agent holds the money in trust for the benefit of his principal, and sets off the amount of the debt of the agent against the deposit * * *.' The court stated:

'We have read many reported decisions from several jurisdictions and are of the firm conviction that the so-called 'federal' or 'equitable' rule is best supported by reason and best serves the demands of justice. Notwithstanding that former decisions of this court may have seemed to commit us, we have given the problems presented a thorough re-investigation and have determined now, and hereafter, to follow the 'equitable' rule.' Cox v. Metropolitan State Bank, Inc., (1959) 336 P.2d 742, at page 747.

Likewise the Supreme Court of Oklahoma has held:

'* * * the lack of notice to the bank of the trust character of such deposit is unimportant, unless that by reason of the lack of notice and relying upon the depositor's apparent ownership * * * the bank has changed its position to its injury.' 1926, 250 P. 1006, at page 1008.

While there have been no opinions by this Court on this question, the Texas Courts of Civil Appeals have uniformly adopted the 'equitable' rule. In the early case of Davis v. Panhandle National Bank, 1895, Tex.Civ.App., 29 S.W. 926, (no writ history) the court held:

'* * * appellant requested a charge to the effect that he was entitled to judgment against the bank for the $857.82 applied to Hancock's indebtedness, irrespective of the question of notice on the part of appellees that the money so applied belonged to him. Under the facts of this case, we are of (the) opinion that...