AMERICAN SURETY CO., ETC. v. FIRST NAT. BANK IN W. UNION

• Decision Date: 30 April 1943
• Docket Number: No. 12.,12.
• Citation: 50 F. Supp. 180
• Parties: AMERICAN SURETY CO. OF NEW YORK v. FIRST NAT. BANK IN WEST UNION.
• Court: U.S. District Court — Northern District of West Virginia

50 F. Supp. 180

AMERICAN SURETY CO. OF NEW YORK v. FIRST NAT. BANK IN WEST UNION.

No. 12.

District Court, N. D. West Virginia.

April 30, 1943.

COPYRIGHT MATERIAL OMITTED

Walter Higgins, of New York City, and Robert R. Wilson, of Clarksburg, W. Va. (Royal F. Shepard, of New York City, on the brief), for plaintiff.

Samuel A. Powell, of Harrisville, W. Va., for defendant.

HARRY E. WATKINS, District Judge.

As surety upon the bond of Clyde C. Ware, trustee in bankruptcy, plaintiff seeks to recover from the defendant bank the sum of $4,843.62, the amount which it was required to and did pay for the default of such trustee. Upon an agreed statement of facts, supplemented by oral testimony, the case was submitted to the court for decision in lieu of a jury.

The theory upon which defendant's alleged liability is predicated is as follows: That the bank permitted the trustee to deposit checks payable to him as trustee in bankruptcy to his personal account in such bank, and thereafter permitted him to withdraw such funds by personal check; that such funds were misappropriated; that the bank had actual knowledge of the trust character of such funds, and actual or constructive notice that they were being misappropriated; that with such knowledge the bank became a party to the fraud by paying the checks, and is liable to the surety who has paid the default, and taken an assignment of the claim; that the bank also cashed certain checks payable to the trustee in bankruptcy, which cash was misappropriated by the trustee, for which the bank is liable to the surety for the same reason. The defendant says that it had no knowledge of either the trust character of the funds or of the misappropriation; that the funds were deposited to Ware's personal account and regularly withdrawn by him; that it was not a designated depository of bankruptcy funds such as to require a countersignature to the checks; that it handled these checks in the ordinary manner; that it did know and was under no duty to inquire or investigate the purpose for which the funds were being used.

Plaintiff is a New York corporation, engaged in the business of executing surety bonds for fiduciaries and other persons for hire. Defendant is a national bank operating in West Union, county seat of Doddridge County, West Virginia, a rural town with a population of about 1,500. At the time in question it had about 2,500 active accounts of depositors, against which about 500 checks were drawn daily. It had four regular employes, consisting of a cashier, assistant cashier, and two bookkeepers. There were two banking institutions in the town, neither of which was a designated and qualified depository for bankruptcy funds.

Clyde C. Ware, an attorney, opened a checking account with the defendant bank on January 23, 1934, by depositing with it a credit balance of $200. It was a general account in the name of "Clyde C. Ware" into which he placed personal and trust funds, without segregating them in any way. Trust funds deposited in the account were disbursed by checks drawn against the account in favor of creditors or other persons legitimately entitled thereto, and all checks were signed "Clyde C. Ware". He and his wife would check on the account when money was needed for personal living expenses or otherwise. He carried a similar account with the other bank. He did not default in any trust account except the one involved in this action.

Between January 23, 1934, and December 8, 1937, Ware deposited an aggregate of $16,535.38 in this account, which was withdrawn by 536 checks ranging from $1 to $701. He was associated in the practice of law with Senator L. A. Henderson, under the firm name of Henderson and Ware. The firm had the largest law practice in town and represented one side of practically every legal action in the courts of the county. Each member of the firm enjoyed an excellent reputation for legal ability, honesty and integrity. Ware was president of a leading civic service club, abstracter for the Home Owners Loan Corporation, and handled checks covering loans made by such corporation. The employes of the bank considered Ware honest and trustworthy, asked no questions concerning his account at the bank, and Ware gave them no information concerning his account.

About October 10, 1934, Ware was named trustee of the estate of Eli Nutter, bankrupt. Bond was furnished by him, in the penalty of $5,000 with the plaintiff as surety. About three years later the trustee received from Pittsburgh & West Virginia Gas Company eight checks aggregating $4,050, drawn upon a Pittsburgh bank, payable to the order of "Clyde C. Ware, Trustee in bankruptcy of Eli Nutter, Stuart Building, West Union, W. Va." The proceeds of these checks constituted assets of the bankruptcy estate and vouchers attached to the checks showed that they were in payment of royalties due bankrupt upon certain gas wells. They were endorsed in blank as follows: "Clyde C. Ware, Trustee in bankruptcy of Eli Nutter", and on August 27, 1937 were presented to J. Freeman, a son of the cashier, by Ware, who requested that the proceeds or commercial value thereof be deposited to the credit of his personal account, which was done, subject to the ultimate payment of the checks. Upon the deposit slip delivered to Ware, the following words were printed: "We use the utmost care in selecting the bank to which we send your checks for collection, but will not be responsible until final payment". Thereafter the checks were paid by the Pittsburgh bank, and Ware withdrew all of such funds by his personal checks and such checks were paid by the bank in due course. Some of the checks were signed by Ware's wife under verbal authority to draw on the account. Between August 27 and December 8, 1937, two additional deposits were made to the credit of this account, one on September 10 of $33.80 and one on December 7 of $105.27. It does not appear from the record whether these deposits were of personal or trust character, but they were not a part of the bankruptcy estate. During this period 109 checks were drawn against the account, which closed the account. None of the checks was countersigned by a referee in bankruptcy or other officer of the court.

During the same period Ware received ten other checks from the same company, aggregating $600, payable to him as trustee in bankruptcy of Eli Nutter, which he endorsed in the same manner, presented to the bank and received cash thereon. He also received two checks aggregating $193.62 from Hope Natural Gas Company, payable to the order of "Clyde C. Ware, Trustee, West Union, W. Va.", which he endorsed in the same manner, presented to the bank, and received cash thereon.

On December 6, 1937, Ware was ordered to make distribution of the funds of the bankruptcy estate, in consequence of which it appeared that a deficit had been made by the trustee in the sum of $4,670.33. Ware was removed as trustee and Lafayette C. Crile was appointed in his stead. Upon application of the new trustee, the surety company was adjudged to be liable to the bankruptcy estate in the sum of $5,000 which it thereafter paid, and took an assignment of the claim from the new trustee. This action was instituted by plaintiff surety company more than four years after it discharged its liability under Ware's bond.

No part of the proceeds of any of such checks, or any other assets of the bankruptcy estate were used to pay overdrafts or other personal obligations of Ware to the bank. The bank did not profit or receive any benefit from the manner in which Ware negotiated and applied the proceeds of these checks, other than that incident to the relationship between bank and depositor. I see no merit in the contention of the plaintiff that the bank did receive a benefit, "in that, since Ware had no money of his own in the account any advances made to him or on his order were in the nature of overdrafts or loans secured, in the eyes of the bank at least, by deposit of trust moneys to which the bank had and took recourse when Ware, contrary to the bank's hopes and expectations, turned out to be financially irresponsible and unable to pay his obligations to the bank or others out of his own money". An overdraft is the payment by a bank from its funds of a check drawn upon it by a depositor who does not have sufficient funds on deposit to pay the check. Whatever else he did, Ware did not overdraw his general account. At all times he had enough money in the account to pay all checks drawn against it.

In an effort to show actual knowledge by the bank of the trust character of the funds and that the bank actually knew that the funds which they were then paying out were being misappropriated by Ware, the surety company called Ware, J. A. Freeman, cashier, and G. W. Hill, assistant cashier of the defendant bank. Ware said he kept a general account in the bank into which he deposited all kinds of funds, personal and otherwise, including money which came into his hands as special commissioner and trustee, which funds were always withdrawn by checks signed "Clyde C. Ware"; that he did not inform the officers or employes of the bank that these checks did not belong to him, and never told them what he was doing with his money. He was asked whether the officers of the bank knew that he was misappropriating any trust funds and replied, "I certainly know they did not".

The cashier testified that he did the "head" work at the bank, made reports and sometimes took in deposits; that he saw the deposit slip for the $4,050 deposit but did not raise any objection; that an examination of the checks would have indicated that they were bankruptcy funds, but he did not know whether they belonged to the bankruptcy estate, or whether Ware could have gotten hold of the funds in some other legal angle of the bankruptcy case. He stated that he never saw the checks withdrawing the money until the morning he testified; that an examination of them...