Am. Fid. Fire Ins. Co. v. Joy (In re Quantum Dev. Corp.)
| Decision Date | 24 March 1976 |
| Docket Number | No. 75-2050,No. 75-2051,75-2050,75-2051 |
| Citation | 12 V.I. 642 |
| Parties | In the Matter of QUANTUM DEVELOPMENT CORPORATION, Debtor AMERICAN FIDELITY FIRE INSURANCE CO., Appellee v. CHARLES JOY, Receiver and CHARLES TAIT, Temporary Receiver, FIRST NATIONAL CITY BANK, Appellant ALBERT C. LANG, Trustee and AMERICAN FIDELITY FIRE INSURANCE COMPANY v. THE BANK OF NOVA SCOTIA, Appellant |
| Court | U.S. Court of Appeals — Third Circuit |
Action by surety of bankrupt, against bank, for recovery of funds belonging to surety, deposited in bank by receiver, and then withdrawn and embezzled by receiver. Circuit Court, Garth, Circuit Judge, held that where bankruptcy fund deposits were made by bankruptcy receiver in banks not designated as depository banks as required by law, banks accepted the funds for deposit with notice of the receiver's breach of trust and were chargeable with the knowledge that such funds could only be deposited in banks designated asdepository banks, and that banks were constructive trustees or trustees ex maleficio of the funds and absolutely liable when receiver embezzled them.
JAMES H. ISHERWOOD, ESQ. (ISHERWOOD, COLIANNI, ALKON & BARNARD), Christiansted, St. Croix, V.I. and MATTHEW C. GRUSKIN, ESQ., (SHERMAN & STERLING), New York City, for appellant
LEO H. HIRSCH, JR., ESQ. (BOYLE, FELLER & HIRSCH), New York City, for appellee
Before ALDISERT, WEIS and GARTH, Circuit Judges
We are called upon to determine the liability of banking institutions which were not designated as official bankruptcy depositories under the Bankruptcy Act but which nevertheless accepted deposits of bankruptcy funds that were subsequently embezzled. We affirm the district court's order which held both banks liable to the bankrupt's surety even though we do so on a theory different than that adopted by the district court.
These appeals arise from litigation caused by the bankruptcy of Quantum Development Corporation in the Virgin Islands. Quantum had entered into a contract in December, 1971 to construct the Croixville Project, a low-cost multiple housing unit development. Prior to the completion of the project, Quantum became insolvent and defaulted under its contract. Plaintiff-appellee American Fidelity Fire Insurance Company (Fidelity), a surety under a payment and performance bond for Quantum, completed the Croixville Project. As a result of its expenditures and performance under the surety bond, Fidelity asserted claims by way of subrogation to funds of the Quantumestate then under the jurisdiction of the bankruptcy court.1
Fidelity initially sought to recover $84,858 which the district court had ordered it to deposit in the Quantum estate on March 21, 1973. Pursuant to the court's order, Fidelity delivered to the district court clerk a certified check in the amount of $84,858 payable to the order of "Charles R. Joy, Receiver." Joy was the duly appointed receiver of Quantum under Chapter XI of the Bankruptcy Act.
The bankruptcy referee had instructed Joy to purchase certificates of deposit at the highest rate of interest available with the major portion of the Quantum funds and to place the balance in a checking account. Joy endorsed the Fidelity check which was payable to the order of "Charles R. Joy, Receiver" as follows:
On April 2, 1973 Joy presented this check to the Christian-sted branch of the Bank of Nova Scotia (BNS) and used $75,000 of the proceeds to purchase three certificates of deposit.1a He left the balance of the funds on deposit in a checking account at BNS. BNS was not a designated depository for bankruptcy funds under Section 61 of the Bankruptcy Act. Joy requested, and BNS issued, the certificates of deposit to "Charles R. Joy", without any reference to, or designation of, his representative capacity.
On October 2, 1973, when the certificates of deposit matured, BNS issued to "Mr. Charles R. Joy" a check for $77,664.54, representing the principal sum of $75,000 plus interest of $2,664.54. Joy embezzled the proceeds of this check. As a result, Fidelity commenced this suit against BNS to recover the $77,664.54.2
On September 10, 1973 Joy presented this check to the Christiansted branch of First National City Bank (Citibank) and used the entire proceeds to purchase a certificate of deposit. Citibank was not a designated depository for bankruptcy funds under Section 61 of the Bankruptcy Act. The application for the certificate of deposit was prepared in the name of "Charles R. Joy, Receiver," but the certificate was made payable to "Charles R. Joy", without any designation of his representative capacity.
The certificate matured on November 12, 1973. On No-vember 19, 1973, Joy informed Citibank that he did not wish the certificate renewed. Instead he instructed Citibank to cable the principal and interest, totalling $117,571.51, to the City National Bank of Miami, payable to himself. Thereafter, Joy absconded with the $117,571.51.
Fidelity initially commenced suit against Joy as receiver of Quantum. After Joy embezzled the funds, Fidelity filed a supplemental complaint against Citibank to recover the $117,571.51 taken by Joy from the Quantum estate.
After trial the District Court for the Virgin Islands, sitting in bankruptcy,3 held BNS liable to Fidelity in the amount of $77,664.54 plus interest and held Citibank liable to Fidelity in the amount of $117,571.51 plus interest. In so holding the district court rejected Fidelity's argument that a bank which accepts bankruptcy funds but has not been designated as a depository under the Bankruptcy Act becomes a trustee ex maleficio to the extent of such funds and is liable without more for all subsequent misappropriations. Rather, the district court predicated the banks' liability on their failure to comply with the restrictive endorsements on the checks. In Re Quantum Development Corp., 397 F.Supp. 329 (D.V.I. 1975).
Although this check was restrictively endorsed,4 BNS is-sued certificates of deposit in the individual name of "Charles R. Joy", with no reference to Joy's representative capacity as receiver.
which was restrictively endorsed "Charles Joy Receiver Quantum Corp." However, Citibank issued a certificate of deposit payable to "Charles R. Joy" as payee.
The district court, relying on Virgin Islands law, 11A V.I.C. § 3—419(4),5 and decisional law,6 concluded that each bank was liable for failing to apply the proceeds of each check consistently with the restrictive endorsements.
Defendants-appellants BNS and Citibank timely appealed from the district court's order of July 24, 19757 adjudging them liable to Fidelity for $77,664.54 plus interest and $117,571.51 plus interest respectively. This Court has jurisdiction pursuant to 28 U.S.C. § 1291.
Since the enactment of the Bankruptcy Act of 1898, Congress has imposed special requirements upon financial in-stitutions selected to receive bankruptcy funds for deposit. While Quantum was in Chapter XI proceedings,8 Section 47(a) (2) of the Bankruptcy Act, 11 U.S.C. § 75(a),9 required that trustees and receivers "deposit all money received by them in designated depositories . . . ." The complement to this requirement was found in Section 61 of the Act, 11 U.S.C. § 101,10 which required that the bankruptcy court designate by order those banking institutions authorized as depositories for the deposit of estate funds. Each depository designated by order was required to provide "a good and sufficient bond with surety, to secure the prompt repayment of the deposit." At the particular times that Joy deposited the Quantum checks in BNS and Citibank, the bonds required under Section 61 were to substantially provide that. . . the banking institution, so designated, shall well and truly account for and pay over all moneys deposited with it as such depository, and shall pay out such moneys only as provided by the Act and applicable general orders and court rules, and shall abide by all orders of the court in respect of such moneys, and shall otherwise faithfully perform all duties pertaining to it of such depository. . . .
General Orders in Bankruptcy No. 53. Federal law thus mandated: (1) that only banks which were designated by court order and which furnished the requisite bond could receive bankruptcy funds for deposit; and (2) that receivers were prohibited from depositing estate funds in other than such designated institutions.
It is undisputed that neither BNS nor Citibank were designated as depositories for bankruptcy funds. Fidelity argues here, on the authority of American Surety Co. v. First National Bank, 141 F.2d 411 (4th Cir.), cert. denied, 322 U.S. 754 (1944), that the acceptance of the Quantum bankruptcy funds by BNS and Citibank without a court order designating them as official depositories under the Bankruptcy Act resulted in both banks becoming trustees ex maleficio of the funds which were subsequently misappropriated by Joy. Not surprisingly, BNS and Citibank dispute the applicability of American Surety, asserting that the mere failure to be designated as an...
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Hamdallah v. Virgin Islands Water & Power Auth., D.C. Civil No. 1987/80
...of the territorial court even though we do so because of different reasons than the trial court. See, e.g., Quantum Devel. Corp. v. Jay, 12 V.I. 642, 658, 534 F.2d 532 (3d Cir. 1976), cert. denied sub nom. First Nat. City Bank v. American Fidelity Fire Ins. Co., 429 U.S. 827 (1977). We add,......