Brown v. New York Life Ins. Co.
| Decision Date | 12 June 1944 |
| Docket Number | No. 1412.,1412. |
| Citation | 58 F. Supp. 252 |
| Parties | BROWN v. NEW YORK LIFE INS. CO. et al. |
| Court | U.S. District Court — District of Oregon |
James C. Dezendorf, of Portland, Or., for plaintiff.
Robert F. Maguire, of Portland, Or., for defendants.
On November 27, 1935, the New York Life Insurance Company issued two policies of insurance on the life of Edward N. Brown in the sum of $10,000 each, in which policies Ruby M. Brown was named as beneficiary. The premiums on these policies were, with one exception, paid by checks drawn upon the Harney County National Bank of Burns, Oregon, and dated from November 29, 1935, to October 21, 1940.
Edward N. Brown was employed by the Harney County National Bank beginning in the year 1927, as teller, and in other capacities. On January 12, 1932, he became assistant cashier and on January 7, 1936, he also became a director. Upon becoming vice president on January 11, 1938, which office he held until his death on August 6, 1942, he gave up the position of assistant cashier.
During the years of his connection with the bank, Brown embezzled $416,000. The audit shows that the net amount of defalcations from customers' accounts alone amounted to approximately $6,000 before 1935 and to over $12,000 during that year. The schedule of further withdrawals from this source alone, during the stated periods, follows:
1936 $ 3,031.52
1937 17,996.84
1938 40,982.14
1939 93,203.44
1940 39,780.33
Brown carried a personal account, a special account and a commercial account at the bank in which he deposited sums from various sources. At no time was the total amount in all of these accounts, on any particular date, equal to the sum of his defalcations to that date from commercial accounts of the bank alone.
There were showings that Brown owned properties for which he had paid cash, that he had received loans and had sold property and received the purchase price, and that he had received gifts. Taking all these matters into consideration, the total amount thereof did not equal the amount of defalcations at any time. When the defalcations were about to be discovered by bank examiners, Brown committed suicide.
Ruby M. Brown, as beneficiary, made claim for the full amount of the insurance policies. Two checks were issued to her for a total sum of $20,582 by the insurance company. Upon discovery that the Federal Deposit Insurance Corporation had a claim, the insurance company stopped payment upon these checks. Upon commencement of this action by Ruby M. Brown, against the insurance company, it answered by depositing these funds in court and asking for an order requiring the claimants to interplead. Based upon a stipulation, an order was entered discharging the New York Life Insurance Company of liability and setting up adversely the claims of plaintiff and the Federal Deposit Insurance Corporation.
A pretrial conference was held between the Federal Deposit Insurance Corporation, intervenor, which was the assignee of the assets of the Harney County National Bank, and Ruby M. Brown, the mother and beneficiary of the insurance policies on the life of Edward N. Brown. The results of this conference were crystallized in a pretrial order which accurately defines the questions of fact and law to be answered by the court.
The matter thus arises between the beneficiary (who paid nothing therefor) of insurance policies upon the life of an embezzler and the assignee of the assets of the bank from which he embezzled. The cardinal factor is, that no item of the embezzled funds is traced directly into the premiums of the insurance policies, nor into the bank accounts, which Brown maintained with the Harney County National Bank.
This cause is complicated by the geometrical increase of the fact-pattern. Reduced primarily to the lowest terms, it is relatively simple of solution. First, if Brown were alive, could the bank recover from him the moneys paid out by virtue of checks drawn by him and from his transferee without notice, but without consideration.
The sole ground of recovery by the bank against the transferee would be that a trust had been erected by the use of money of the bank in that transfer.
In order to further clear the ground, a distinction must be drawn between transactions which are consensual and in the normal course of business, and those which are colored by a proven fraud.
In the first category are placed dealings presumed to be innocent between solvent parties and which occur as ordinary commercial transactions. Thus, where a person brings cash into a bank which accepts it, the relation is that of debtor and creditor. When such a customer writes a check, the bank pays out its own money but is entitled by the implied contract of deposit to charge to the account of the customer the amount thereof. If the customer writes and presents a check for more than he has originally turned over to the bank, there is no obligation to honor the demand. If the bank does pay the check, the transaction is a loan to the customer. The drawee, even if he paid no value therefor, is not liable to the bank.
If the bank loans money to the customer and the loan has matured, the bank has a right at any time to set off the amount owed to it against the amount owed by it. The bank thereby becomes liable only for the remaining balance of its debt to the customer, if there be any. But if the bank does not exercise this right of set-off, and, in the face of the obligation of the customer to it, pays the check, it will have no recourse against the drawee of the check and can neither recapture the money nor follow the proceeds thereof.
Likewise, a solvent corporation may pay the personal debts of its officers and directors by corporate check and while there is no doubt of its right, itself or through its assignee, to recover from the officers, it has no right against the payee, although the face of the check conveyed notice of the transaction and even though no value was given therefor.1
Also, a corporation which is solvent may make an agreement with its officers who are the sole stockholders, to make payments on insurance policies upon the lives of each of these respectively. If the agreement is carried out, there will be no right upon the part of the corporation or its assignee to recover the proceeds of the policies,2 when it becomes insolvent.
Now there is a like distinction to be observed in considering relations which are given sanction by the courts as trusts. Shortly, express trusts and implied trusts such as those called resulting trusts, are consensual in origin. With such relationships, the presumptions of innocence and fair dealing apply. A constructive trust, on the other hand, is one imposed by law because of proven fraud, duress or undue influence exercised by the party charged.
In cases of express trusts, since it is assumed the trustee is acting innocently so long as he maintains a balance sufficient to cover the exact amount of the trust fund in a bank account, he is given credit for paying out his own funds in any expenditures.3 Therefore, if he purchases life insurance by check upon the same bank account, the premiums are deemed his and the proceeds of the policies inure to his beneficiary. If the trustee has two trust funds, one of which was given him for the purpose of insurance, and he did purchase insurance and there was not sufficient to cover both funds remaining, it will be presumed that he paid the premiums out of the fund entrusted to him for that purpose.4 It is likewise held that where the trustee of an express trust reduces the amount in the bank where he had deposited his own funds and trust funds, below the sum of the trust moneys, and thereafter introduces into the account his own money, the latter sum is not in restitution, but is assumed to remain his in the absence of clear intention to make restitution. The presumption here again is in favor of fair dealing. It is assumed that the trustee withdrew the moneys from the trust in accordance with the purposes thereof. Finally, it is held that where there is an express trust, and the trustee is dead and cannot explain the mingling of funds, the burden of tracing remains with the cestui que trust.5 Here again, the presumption of innocence prevails.
But the courts are equally clear in holding that where the trustee of an express trust commingles funds and is unable to explain the transaction, the whole becomes a trust fund.6 This is because the presumption has been dissipated.
When the field of constructive trusts is approached, there is a relation imposed by the courts, between parties, to prevent unjust enrichment of one to the detriment of the other.7 The fundamental difference between such different concepts and the sanctions attendant thereon cause a wide divergence of results.
"An attempt to define a trust in such a way as to include constructive trusts as well as express trusts is futile, since a single definition which would include such distinct ideas would be so general as to be useless."8
These basic concepts are then entirely distinct. The failure of the courts, on occasion, to recognize this distinction of the two concepts, called by the general name "trust", leads to confusion. Generally speaking, the courts will compel one who obtains land, personal property or money from another by means of fraud, duress or undue influence, to hold the property as though he were a trustee of an express trust.9 In other words, by analogy, the courts reflect many incidents of an express trust in reasoning about this creation, to prevent unjust enrichment.
While express trusts are fiduciary relationships, a constructive trust need not have its origin in such a bond. But the courts impose a constructive trust upon money or property obtained through breach of the obligations by one who takes advantage of the...
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