Brown v. New York Life Ins. Co., 11000.

• Decision Date: 24 November 1945
• Docket Number: No. 11000.,11000.
• Citation: 152 F.2d 246
• Parties: BROWN v. NEW YORK LIFE INS. CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

152 F.2d 246 (1945)

BROWN v. NEW YORK LIFE INS. CO. et al.

No. 11000.

Circuit Court of Appeals, Ninth Circuit.

November 24, 1945.

COPYRIGHT MATERIAL OMITTED

Hampson, Koerner, Young & Swett and James C. Dezendorf, all of Portland, Or., for appellant.

Maguire, Shields & Morrison and Robert H. Agnew, all of Portland, Or., and James M. Kane, of Chicago, Ill. (Edward C. Klein, of Chicago, Ill., of counsel), for appellee Federal Deposit Ins. Corporation.

Before DENMAN, BONE, and ORR, Circuit Judges.

BONE, Circuit Judge.

This is an appeal from a judgment of the district court awarding to appellee the major portion of the proceeds of two certain policies of insurance on the life of Edward N. Brown. For a more complete statement of the facts in this case, see the opinion of the lower court. Brown v. New York Life Ins. Co., D. C., 58 F.Supp. 252.

Counsel for appellant states that "the sole question" for (our) determination "is whether the premiums were paid with funds wrongfully embezzled or misappropriated from the Bank." Appellee states that "the basic question in this case is whether the various premium payments were paid with funds belonging to the defaulter or with funds wrongfully embezzled * * * from the Bank." The parties are in practical agreement on the fundamental issue involved.

At the outset we confront the statutory and fiduciary relationship of Brown to the defrauded bank (referred to hereafter as the "Bank"). He was a trusted employee and official of the bank (Harney County National Bank). As such, his duties and obligations were, in vital measure, affected by laws governing the operation of such banks, and their officers and employees. From the record it is clear that he violated the obligations of a trusted officer since the court found that his peculations exceeded four hundred thousand dollars, during his years of connection with the Bank. The directors of the Bank were entirely ignorant of this state of affairs and the truth did not appear until after he committed suicide on August 6, 1942.

The relationship of the Federal Deposit Insurance Corporation to the Bank made this federal corporation an insurer of the deposits of the Bank. When its capital became impaired through Brown's peculations it was unable to meet its deposit liabilities. Two methods were available to the parties by which the Federal Deposit Insurance Corporation might protect the depositors. (1) By paying the claims of depositors if the Bank was placed in receivership. (2) By advancing cash to the insured bank, through the medium of a loan, or by a purchase of the assets to replace substandard assets. In this case, the Federal Deposit Insurance Corporation met the contingency by pursuing the purchase method. Under 12 U.S.C.A. § 264 (n) (4). See discussion in Thomas P. Nichols & Son Co. v. National City Bank, 313 Mass. 421, 48 N.E.2d 49, certiorari denied 320 U.S. 742, 64 S.Ct. 42, 88 L.Ed. 440; Lamberton v. FDIC, 3 Cir., 141 F. 2d 95, dealing with power of FDIC to make such a contract and its rights thereunder.

By so purchasing the assets, the FDIC did not discharge a debt. The depositors assigned nothing to the Bank or to the FDIC and the latter was not a subrogee of the depositors nor did it take, or attempt to take, an assignment of the depositors' claims against the Bank. Nor did FDIC insure the Bank or depositors against Brown's dishonesty. It insured each depositor to the extent of $5,000. Had the Bank closed and FDIC paid the deposit insurance liability to depositors, as required by statute in such cases, it would have been subrogated to their rights against the Bank to the extent of the payments made. 12 U.S.C.A. § 264 (l) (7). FDIC did not do this. Instead, it purchased certain assets rather than permit the Bank to close, and it paid cash therefor.

Among the assets so purchased by and assigned to FDIC was the Bank's claim against Brown which was founded on the loss sustained by the Bank by reason of Brown's peculations while an employee, officer and director of the Bank. FDIC acquired its cause of action herein as a purchaser for value, by express contract with the Bank. The depositors were strangers to this purchase transaction and whatever right of action the FDIC acquired, it acquired through this purchase and assignment. We view this as a transaction for value, and so hold.

When Brown embezzled funds from the Bank, the Bank suffered a loss of its assets, but continued to be indebted to its depositors. Under the state of facts here revealed, the Bank alone acquired a right of action against Brown. The funds of depositors were protected by the transactior carried out in this case¹ and it is plain that FDIC is claiming only through the Bank, not through the depositors.

The relationship between a bank and a depositor is that of debtor and creditor. Dahl & Penne v. State Bank of Portland, 110 Or. 68, 222 P. 1090; Mahon v. Harney County Nat. Bank, 104 Or. 323, 206 P. 224; Steele v. Bank of California, 140 Or. 107, 9 P.2d 1053; In re Edwards' Estate, 140 Or. 431, 14 P.2d 274. The bank acquires ownership of the deposited money and becomes obligated to account to the depositor. A credit entry is made on its books against which it will honor drafts and checks. The bank pays out its own money on these checks and drafts but is entitled by the implied contract of deposit to charge to the account of the customer the amount thereof.

In the case at bar all of the checks except one, which were forwarded by Brown in payment of the premiums on the policies of life insurance, were drawn upon two general accounts he had in the Bank. The funds paid to the insurance company on these checks were part of the funds of the Bank. We find nothing in the record to indicate a contract between Brown and the Bank making any of his accounts anything other than general accounts. See Dahl & Penne, Inc. v. State Bank of Portland, supra; Keyes v. Paducah & I. R. Co., 6 Cir., 61 F.2d 611, 86 A.L.R. 203; Titlow v. Sundquist, 9 Cir., 234 F. 613. Upon the evidence before us it is plain that at all times when Brown paid his premiums, any credit balance in his accounts was a fictitious one because he had deliberately failed to charge his withdrawals and indebtedness to the Bank. Therefore, despite the apparent credit balance in his account, any time the Bank honored his checks it was unknowingly paying out its own funds.

Appellant (mother of Brown) insists that before FDIC (under its purchase and assignment) may share in the proceeds of the policies of life insurance payable to her it would have to be proven that the stolen funds entered Brown's various accounts carried in the Bank, and since these stolen funds were not clearly traced into the accounts out of which premiums were paid, all of the proceeds of the policies must be awarded to her, as beneficiary named in the policies.

In a lengthy opinion (supra) the trial court disagreed with this view of the law, as applied to the facts in this case. It concluded (and we think correctly) that embezzled funds were either indirectly or constructively traced into the premium payments. The court decided that by reason of the wrongful and unlawful use by Brown (see 12 U.S.C.A. § 375a and 12 U.S.C.A. § 592) of the assets and property of the Bank a constructive trust arose in favor of the Bank, and in favor of FDIC, as assignee of the Bank, for the proportion of the proceeds of the two insurance...