Bowie v. Union Bank

• Decision Date: 30 September 1970
• Citation: 90 Cal.Rptr. 103,11 Cal.App.3d 807
• Court: California Court of Appeals Court of Appeals
• Parties: William N. BOWIE, Jr., Trustee in Proceedings Under an Arrangement; J. Robert Maddox and Frank E. Gray, co-partners, doing business as Gray and Maddox, a co-partnership, Plaintiffs and Appellants, v. UNION BANK, a California corporation, Defendant and Respondent. Civ. 34715.

Page 103

90 Cal.Rptr. 103

11 Cal.App.3d 807

William N. BOWIE, Jr., Trustee in Proceedings Under an Arrangement; J. Robert Maddox and Frank E. Gray, co-partners, doing business as Gray and Maddox, a co-partnership, Plaintiffs and Appellants, v. UNION BANK, a California corporation, Defendant and Respondent.

Civ. 34715.

Court of Appeal, Second District, Division 5, California.

Sept. 30, 1970.

J. Robert Maddox and Robert Ferguson, Beverly Hills, for plaintiffs and appellants.

Loeb & Loeb and Robert M. Ruben, Los Angeles, for defendant and respondent.

REPPY, Associate Justice.

The trustee in bankruptcy for Wilson Construction Co., depositor, and counsel, who defended it in an attachment action brought by a third party and who had been given a fee lien by it on the attached funds, appeal a judgment upholding a setoff asserted by Union Bank against the funds after the attachment expired due to the lapse of three years.

Most of the evidence before the trial court was in the form of a stipulation executed by the parties.

Wilson Construction Co. (the company), on March 26, 1962, had a general commercial account with Union Bank (the bank) with a balance of $86,832. The company was at the same time indebted to the bank in the sum of $85,396.67.

Shortly prior to that date the company became a defendant in a contract-type action brought by Joseph D. Kirby (Kirby), and a writ of attachment for $24,290 was issued by the superior court against the company. The writ was served by way of garnishment on the bank on March 26, 1962. The writ of attachment served on the bank directed it to pay to the sheriff any indebtedness from the bank to the company, not exceeding $24,290. The bank exercised its right of offset so that there was left on deposit only $1,435.33.

The next day an agreement was made among the bank, the company and Kirby, whereby Kirby reduced the amount of its garnishment to $14,290, the bank made to the company a 90-day loan of $100,000, the company, out of the $100,000, effected a deposit of $12,854.67 to its commercial account, making its total $14,290, and the bank made a return to the sheriff acknowledging that it was indebted to the company in the sum of $14,290.

The bank, upon acknowledging to the sheriff the existence of the debt to the company, made a bookkeeping entry debiting the company's commercial account and crediting an internal account, entitled 'Union Bank Accounts Attached,' in the amount of $14,290. This account is used to segregate the bank's indebtedness to any depositors subjected to garnishment, and this procedure is the normal practice of the bank with respect to garnishments. The bank's motivation is to prevent inadvertent disbursal of funds subject to garnishment.

On June 25, 1962, the company entered into a retainer agreement with the law On July 30, 1962, about one month after its due date, when the agreement to do so apparently was made, the $100,000 loan was superseded by a $59,134 loan (the amount to which the preceding loan had been reduced), payable at the rate of $1,000 per month on the 25th day of each month. There was an acceleration clause in the new note. The record does not indicate whether the bank thought of, or discussed with Kirby or the company, before renewing the first note, making an offset against the attached funds.

firm of Gray and Maddox (the attorneys), to defend it in the Kirby suit. The attorneys agreed to represent the company through final judgment of the superior court, and the company agreed to pay the attorneys [11 Cal.App.3d 811] on an hourly and per diem basis under monthly billings. To secure its obligation for fees and costs, company granted attorneys a lien 'upon the funds presently held under an attachment.'

Between August 20 and October 22, 1962, the bank received a letter from the company, dated August 20, 1962, advising the bank that on June 25th the company had assigned to its attorneys 'all of (its) * * * interest in * * * the commercial checking account heretofore * * * maintained with your organization.' The letter indicated that the checking account was 'the subject of a prior claim in respect to an attachment * * *.' The bank was directed, upon release of monies from attachment, to pay them to the attorneys.

On October 22, 1962, the bank sent a letter to the company referring to the company's letter of August 20th. The company was reminded that on September 18, 1962, it had been notified that the bank had been served with a 'withhold notice' by the State Department of Employment in the amount of $6,084.67. The company was advised that since the bank was in no position to determine the priority of the company's assignment over the claim of the department, it would be 'unable to release any moneys to the named attorneys.' A copy of this letter went to the attorneys.

The company's note payment, due on October 25, 1962, was not paid, so the company was then delinquent, and the acceleration clause was applicable. At this point the right of offset against items subject thereto arose again. The bank did not assert such a right against the attached funds until much later in time.

On May 16, 1963, the company filed a petition for an arrangement under the bankruptcy act. William N. Bowie, Jr., (the trustee; at times the trustee and the attorneys will be referred to as 'plaintiffs') was appointed trustee. At that point, as a claim filed by them in the bankruptcy proceeding indicates, the attorneys had performed legal services for the company valued at $878.60 under their fee contract. It would appear that the attorneys then became counsel for the trustee. ¹ On November 16, 1963, the company was adjudicated bankrupt. According to the record before us, no evidence was submitted concerning any claim filed by the bank in the bankruptcy proceeding.

Between October 22, 1962, and March 26, 1964, the company's obligation on the note had been reduced to $18,298.50. On the latter date, the bank wrote off the unpaid balance of said note. What prompted this action at this time is not made clear.

On March 29, 1965, a lapse of more than three years after the issuance of the writ of attachment (see section 542b Code Civ.Proc.) the bank exercised a claimed right of offset against the $14,290. It did this by making an account charge. The bank's charge page shows, 'Charge Account of UNION BANK ACCOUNTS ATTACHED Account Number 10093--0429.' In the upper right hand corner is the designation, '$14,290.00 (Commercial).'

On December 20, 1965, in the Kirby action, apparently on the solicitation of the company, the court ordered that the attachment which had been run against the company's bank account be released and stated that the bank should pay the $14,290 to the trustee. Evidently a copy of this order was transmitted to the bank, but it declined to follow it.

On December 24, 1965, the trustee and the attorneys demanded of the bank that it pay said sum to them. On February 2, 1966, the bank refused to comply. On August 2, 1966, the trustee and the attorneys filed the declaratory relief action now on appeal, asking the trial court to declare that they had a prior right to the $14,290.

CONTENTIONS OF THE TRUSTEE AND THE ATTORNEYS AS APPELLANTS.

(1) The bank waived its right to claim an offset by virtue of its acknowledgment of indebtedness made to the sheriff and to the attaching creditor.

(2) In effect, the funds were put by the bank in what might be termed a 'custody-of-the-law' account which was not subject to offsets.

(3) If the 'Union Bank Accounts Attached' account was not a custody-of-the-law account, it was a special purpose or trust fund account of which the garnishor and the garnishee were beneficiaries and as to which the bank could not claim any offset as against 'the beneficiary' (the company) or its assigns (the attorneys).

(4) The bank should be estopped to assert any paramount claim against the attorneys, because of expressions in its letter of October 22, 1962.

(5) Assuming the attorneys had a good claim, the amount thereof should be $6,878.60 rather than $878.60, the extra $6,000 apparently being what the attorneys earned in legal services after the trustee in bankruptcy was named. Presumably the trustee continued to have the attorneys act for the bankrupt estate.

CONTENTIONS OF THE BANK

The bank, as respondent, contends: that the findings of the trial court are supported by the evidence; that there can be no estoppel to deny the validity of the attorneys' claim, essentially because there was no proof of any intention on its part that the attorneys would do any act to their own detriment on the basis of the material in its letter and the attorneys were not ignorant of the facts and did not rely on the material in the letter; that, in any event, the attorneys should recover only $878.60 since they said in answers to interrogatories that this was all that they were owed by the company, the bank taking the position that the lien and assignment given by the company does not apply to the trustee, but that there was, rather, an independent hiring of the attorneys by the trustee to which the security arrangement did not apply; that the circumstances of the case do not amount to a waiver by it or the right of offset. The bank additionally claims that its bookkeeping entry, debiting the company's account and crediting 'Union Bank Accounts Attached' was solely an internal matter which did not affect the nature of the bank's relationship with the company; that the sole purpose of the entry was to prevent inadvertent disbursal of funds inconsistent with the bank's response to the garnishment and that it did not create an in-legal-custody account or make a special or trust-type deposit. Finally, the bank asserts that, as a nonparty to the Kirby suit, it was not bound by the court's direction to pay the fund which had been under attachment to the trustee, claiming that it could act on its own after the lapse of three years on the...