Bank of Marin v. England

• Decision Date: 28 October 1965
• Docket Number: No. 19776.,19776.
• Citation: 352 F.2d 186
• Parties: BANK OF MARIN, Appellant, v. John M. ENGLAND, Trustee in Bankruptcy in the matter of Marin Seafoods, Inc. and Eureka Fisheries, Inc., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

352 F.2d 186 (1965)

BANK OF MARIN, Appellant, v. John M. ENGLAND, Trustee in Bankruptcy in the matter of Marin Seafoods, Inc. and Eureka Fisheries, Inc., Appellee.

No. 19776.

United States Court of Appeals Ninth Circuit.

October 28, 1965.

Edgar B. Washburn, Freitas, Allen, McCarthy & Bettini, San Rafael, Cal., for appellant.

Thomas B. Donovan, Harold A. Block, Dinkelspiel & Dinkelspiel, San Francisco, Cal., for appellee.

John P. Austin, Richard J. Archer, Paul E. Homrighausen, Morrison, Foerster, Holloway, Clinton & Clark, San Francisco, Cal., for amicus curiae Calif. Bankers Association.

Before HAMLEY, JERTBERG and MERRILL, Circuit Judges.

HAMLEY, Circuit Judge:

Bank of Marin appeals from a district court judgment affirming an order of a referee in bankruptcy holding the bank and Eureka Fisheries, Inc., jointly liable to a trustee in bankruptcy for the sum of $2,312.82. The sole question presented is whether a bank which honored checks of a depositor after the depositor had filed a voluntary petition in bankruptcy is liable to the trustee in bankruptcy for the amount of the checks paid where the bank had no notice of the bankruptcy proceeding.

The relevant facts are not in dispute. Between August 27, 1963, and September 17, 1963, Marin Seafoods drew and delivered five checks in favor of Eureka Fisheries upon its commercial account with Bank of Marin, San Rafael, California. The total amount of the checks was $2,318.82. On September 26, 1963, before these checks had been presented to the bank for payment, Marin Seafoods filed a voluntary petition in bankruptcy. The petition was filed in the United States District Court for the Northern District of California, Southern Division. John M. England was appointed as receiver and so acted until October 20, 1963, at which time he became trustee for the bankrupt.

On the date of the filing of the petition, sums of money in excess of $3,200 were due and owing Marin Seafoods from customers for merchandise previously delivered. Beginning on the day after the filing of the petition, and continuing for several days, Marin Seafoods, through its principal officer, collected portions of these outstanding accounts receivable and deposited them in the company's commercial account at the bank. On October 2, 1963, the checks which Marin Seafoods had drawn and delivered to Eureka Fisheries prior to the filing of the petition, were duly presented to the bank by Eureka Fisheries for payment, and were paid.

At the time the bank paid these checks it had received no notice, and had not otherwise obtained knowledge of the filing of the petition in bankruptcy. The bank was not informed of the pending bankruptcy proceeding until October 3, 1963, when it received a letter, dated October 2, 1963, from the receiver. This was one day after the bank had honored the checks referred to above.

Proceeding under section 2, sub. a of the Bankruptcy Act (Act), 52 Stat. 842 (1938), as amended, 11 U.S.C. § 11, sub. a (1964), the trustee applied to the referee for a turnover order. The trustee sought to require the bank to pay over to the trustee a sum of money equivalent to the sum paid by the bank to Eureka Fisheries on October 2, 1963. In the alternative he sought relief against Eureka Fisheries. A show cause proceeding ensued, resulting in the entry of an order by the referee, supported by findings of fact and conclusions of law. The referee determined that the bank and Eureka Fisheries were jointly liable to the trustee for the sum of $2,312.82, the amount paid by the bank to Eureka Fisheries.

In so ruling, the referee held that the bank's lack of knowledge of the filing of the voluntary petition in bankruptcy by its depositor Marin Seafoods, afforded the bank no protection. Eureka Fisheries paid the total amount of $2,312.82 to the trustee and then filed with the bankruptcy court, and served upon the bank, a demand for contribution. The bank petitioned for a review of the referee's order, and on such review, that order was affirmed. This appeal by Bank of Marin followed.

In seeking recovery of the stated amount from the bank, the trustee relied upon section 70, sub. a of the Act, 52 Stat. 879 (1938), as amended, 11 U.S.C. § 110, sub. a (1964). This section provides, in pertinent part, that, upon his appointment and qualification, a trustee in bankruptcy shall be vested "by operation of law" with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding in bankruptcy, with exceptions not here material, to described kinds of property wherever located. Among the kinds of property so described, the statute includes:

"* * * (5) property, including rights of action, which prior to the filing of the petition he bankrupt could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: Provided, * * * not here material."

This provision of the Act, considered by itself, would appear to support the trustee's application for a turnover order against the bank. The bank, however, contends that notwithstanding this statute, it should be held that a bank is not liable to a trustee in bankruptcy when, in good faith, and without actual knowledge of the bankruptcy proceedings, it honors the checks of a bankrupt depositor in the regular course of business after the adjudication of bankruptcy. As authority for this view, the bank cites Rosenthal v. Guaranty Bank & Trust Co., D.C.La., 139 F.Supp. 730, stating that the holding in that case is "determinative" of this appeal.¹

In Rosenthal, on facts quite similar to those of the case before us, the court held that the proviso of section 70, sub. d (5) of the Act, 52 Stat. 882 (1938), 11 U.S.C. § 110, sub. d (5), providing that nothing in the Act "* * * shall impair the negotiability of currency or negotiable instruments "* * *" protects a bank in such circumstances.²

As indicated by the introductory words of section 70, sub. d, all of that subsection applies only to transactions taking place during the interval, if any, between the filing of a petition in bankruptcy and the adjudication or the taking of possession by a receiver, whichever first occurs. But, in the case of voluntary petitions in bankruptcy, such as the one before us, there is no such interval, because the filing of a voluntary petition operates as an adjudication. Section 18, sub. b of the Act, 73 Stat. 109 (1959), 11 U.S.C. § 41, sub. b (1964). Therefore section 70, sub. d (5) of the Act, relied upon by the court in Rosenthal, can have no application here.³

Moreover, the presentation of a check to the drawee for payment, and the payment thereof, is not a negotiation of the check.⁴ If it is not negotiation, an order declaring invalid the presentation and payment is not impairment of negotiation. Accordingly, the "negotiability" proviso of section 70, sub. d (5) has no application.⁵

We conclude that the "negotiability" proviso of section 70, sub. d (5) does not protect the Bank of Marin under the circumstances of this case.

The bank also contends that, in California, a trustee in bankruptcy must give a bank notice of the bankruptcy by complying with section 952 of the California Financial Code before he can hold the bank liable for honoring checks of the bankrupt.

Section 952 provides that notice of an adverse claim to bank deposits may be disregarded until the adverse claimant obtains a restraining order, injunction or other court order against the bank; without such an order the bank may honor checks drawn by the depositor or allow withdrawals by him without incurring liability to the adverse claimant. The bank contends that since the Bankruptcy Act makes no provision for notice to banks, state law should apply to fill this gap. The trustee gave no notice in this case, nor did he make any attempt to comply with section 952.

A claim of this kind, made by the trustee in bankruptcy for a bankrupt depositor, is not an "adverse claim," within the meaning of such a statute. First National Bank of Arizona v. Butler, 82 Ariz. 361, 313 P.2d 421, 62 A.L. R.2d 1113. Thus, even overlooking inconsistencies between section 952 and the Bankruptcy Act,⁶ the California statute does not undermine the district court order under review.

The bank further argues that a court of bankruptcy is governed by equitable principles and, applying those principles to this case, must protect the bank from incurring liability for honoring checks of a depositor where it had no notice of the bankruptcy of the depositor.

Under the trustee's theory of the case the bank must, in order to avoid liability, keep itself informed of the possibility of bankruptcy proceedings involving a depositor. According to the bank, this will require it to keep advised momentarily of bankruptcy filings. This burden is enhanced by the fact that filing in any district court in the United States will have the same effect. The steps demanded for protection are cited as impractical and otherwise burdensome.

The bank's dilemma is real since it is under a duty to depositors to honor checks which are validly drawn; at the same time there is always the possibility that the depositor, without the knowledge of the bank, has become the subject of bankruptcy proceedings. The hardship to the bank of keeping itself apprised of developments in the bankruptcy court is contrasted with the relatively light burden that a notice requirement would place upon the trustee. The trustee or receiver, upon filing, is informed of the bankrupt's accounts and deposits; and notification by him to the bank would be relatively simple.

The trustee, however, takes the position that there would be no great hardship resulting to banks from a ruling imposing liability in this case. It is argued that banks have a vital interest in the credit position of depositors and that banks are well equipped to evaluate, interpret and discover...