Chang v. Redding Bank of Commerce

• Decision Date: 24 October 1994
• Docket Number: No. C016016,C016016
• Court: California Court of Appeals Court of Appeals
• Parties: Wen CHANG, Plaintiff and Appellant, v. REDDING BANK OF COMMERCE, Defendant and Respondent.

Page 64

35 Cal.Rptr.2d 64

29 Cal.App.4th 673

Wen CHANG, Plaintiff and Appellant, v. REDDING BANK OF COMMERCE, Defendant and Respondent.

No. C016016.

Court of Appeal, Third District, California.

Oct. 24, 1994.

Review Denied Feb. 2, 1995.

Jesse W. Jack, San Jose, Thomas P. Keegan, Hayward, and Kathleen A. O'Reilly, Palo Alto, for plaintiff and appellant.

Pillsbury, Madison & Sutro, Vernon H. Granneman, Kevin M. Fong, Benjamin L. Webster and Kurt Ramlo, San Jose, for defendant and respondent.

BLEASE, Acting Presiding Justice.

Plaintiff, Wen Chang, appeals from a summary judgment in favor of defendant, Redding Bank of Commerce (the Bank), in Chang's action for unjust enrichment and to impose a constructive trust on funds he claims the Bank misappropriated. The action arises out of the Bank's setoff of $200,000 against a debt owed the Bank from the business account of Paragon Development Enterprises, Inc. (Paragon).

Paragon, a general contractor, was constructing a hotel for Chang. Chang paid the funds to Paragon for the purpose of paying subcontractors, and Paragon deposited the money in its business checking account. Paragon issued checks to its subcontractors, the Bank recorded the checks tendered by the subcontractors as paid, then "reversed the transactions," seizing the money to setoff money owed the Bank by Paragon. It did so in reliance on a provision of a loan agreement with Paragon which authorized an offset in the event of a default. Chang settled the subcontractors' mechanics' lien claims and commenced this action to recover the money from the Bank. Chang, having paid the subcontractors, has standing under principles of equitable subrogation to assert their rights.

We will conclude that progress payments received by a general contractor pursuant to a contract which requires that they be paid to subcontractors are held by the contractor in trust for the benefit of the subcontractors. A bank that has knowledge sufficient to require inquiry whether funds deposited by a general contractor to its account with the bank are trust funds cannot, as against the subcontractors, set off the funds to pay an indebtedness owed the bank by the general contractor.

We conclude that there is a triable issue of fact whether the Bank had notice that the funds were trust funds.

Accordingly, the summary judgment must be reversed.

FACTS

In June 1991, Paragon agreed to build a hotel for Chang in Lodi. The contract provided, inter alia, that "[Paragon] shall promptly pay each Subcontractor, upon receipt of payment from [Chang], out of the amount paid to [Paragon] on account of such Subcontractor's Work, the amount to which said Subcontractor is entitled...."

In October 1991, Paragon requested from Chang a $219,000 progress payment to pay subcontractors for work completed on the project. Chang paid Paragon by cashier's checks. On October 9, Paragon deposited the money into its business checking account, which Paragon had maintained with the Bank since 1986.

Paragon, its president, Ralph Stearns, and Paragon subsidiaries (Aukerman Plumbing and BDL Interiors) maintained several accounts and held outstanding loan balances with the Bank. The Bank's credit approval reports for loans to Paragon for working capital indicate the Bank was familiar with the nature of Paragon's business, conducted financial reviews of its operation, and knew Paragon was experiencing cash flow problems.

Paragon had borrowed $500,000 from the Bank on a promissory note due December 31, 1991. The note says Paragon will be in default if the Bank in good faith deems itself insecure. The note was secured by the funds In early October 1991, around the same time as Paragon's deposit of Chang's progress payment, Barbara Hopson, a vice president of the Bank and the loan officer who approved Paragon's loan, received information from several sources that Paragon was financially distressed, filing for bankruptcy, and closing shop. ¹ Hopson informed Russell Duclos, the Bank's executive vice president and senior loan officer, of her findings. Duclos investigated further, then deemed the Bank insecure. On October 11, the Bank declared Paragon's note immediately due and setoff its claim against Paragon's business checking account.

in Paragon's business checking account, against which the Bank could offset Paragon's indebtedness in the event of default.

Checks that Paragon had already issued to its subcontractors and that the Bank had recorded as paid were subsequently returned by the Bank; some were stamped as "paid in error." The largest of these was a check for $164,605 to an excavating subcontractor, written on September 30, 1991. Paragon's bank statement indicates the Bank paid this check on October 10, one day after deposit of the progress payment and one day before the Bank offset Paragon's indebtedness against the account. The Bank reversed the payment at the time of offset. After the reversal, the account contained $509,318; the balance due on the note was $499,500.

Subsequently, the subcontractors filed mechanics' liens against Chang's project. Chang settled the subcontractors' claims, then commenced this action against the Bank for unjust enrichment and imposition of a constructive trust. ²

Chang's complaint alleges that he entrusted the $219,000 to Paragon for the sole purpose of paying the project's subcontractors and suppliers, and the Bank knew or should have known that Paragon was a general contractor engaged in work in progress and that the $219,000 deposit was a progress payment for the benefit of the project's subcontractors.

The Bank moved for summary judgment on the grounds that Paragon's deposit of the progress payment into its general business checking account does not, without more, establish the deposit's character as a trust for the subcontractors' benefit; that, even if the funds were held in trust, the Bank had neither actual nor constructive notice of the funds' character; and that Chang has no "standing" in any event, as a noncustomer of the Bank, to challenge the Bank's setoff against Paragon's account.

In support of its motion, the Bank pointed to evidence that no special instructions for handling funds accompanied the opening of Paragon's checking account, that Chang's progress payment was made by cashier's check issued to Paragon by Chang's bank and that Chang's name did not appear on the check, that the check was deposited in the ordinary course of business, and that neither the check nor the deposit slip contained any special instructions or notice that the funds were held in trust or intended for any specific purpose. Hopson declared that she was not informed, nor was there any documentation, the funds were held in trust or otherwise devoted to any special purpose. The declaration of Duclos, who made the setoff decision, omits any similar assertions. Hopson also declared that Chang was not a party to any agreement with the Bank, including any agreement with regard to the funds in Paragon's account.

Chang pointed to evidence (Paragon's dealings with the Bank over several years) that indicated the Bank was familiar with Paragon's business, therefore the Bank knew, or should have known, this sizable deposit was a progress payment intended for the benefit of subcontractors and thus could not be used by At the hearing on the motion, the trial court focused on the issue of Chang's "standing" to sue the Bank, "because I think there's sufficient evidence from the bank's affidavit that they knew or ... should have known that the funds were deposited [for the specific purpose of paying subcontractors]."

                Paragon for any other purpose.   He also pointed to evidence (bank statements and canceled checks written to subcontractors and marked "paid in error" or posted as paid on Bank records and subsequently "reversed") to show the Bank knew Paragon was paying subcontractors from its account
                

The court granted the Bank's motion on the ground that Chang has no "standing," as a noncustomer, to sue the Bank for unjust enrichment and imposition of a constructive trust, "regardless of whether or not there is a triable issue of fact with respect to the BANK'S actual or constructive knowledge of the source and purpose of the funds ... deposited in the subject account." This appeal followed the ensuing entry of judgment for the Bank.

DISCUSSION

I

The Bank contends the trial court was correct in granting summary judgment on the ground that Chang has no "standing" to impose a constructive trust on funds Paragon deposited into a general bank account. The Bank concedes for present purposes ³ that Chang is able to satisfy the elements of equitable subrogation allowing him to pursue whatever rights the subcontractors might have in the disputed funds. ⁴

The Bank also contends the subcontractors lack standing to impose a constructive trust. The contention is predicated on the Bank's claim that a non-customer has no standing to impose a constructive trust on funds in a general account unless it is shown the funds were deposited for a special purpose, i.e., in trust for third parties, and that Chang failed to show the funds in question were deposited for such a special purpose. However, if the funds are shown to have been deposited in trust for the subcontractors and that Bank knew or should have known of the trust, there is no merit to the claim.

The fund in issue consists of money deposited in a general deposit bank account. As between a bank and the depositor such money becomes the property of the bank and the bank becomes the debtor of the depositor for the amount deposited. (Morse v. Crocker Nat'l Bank (1983) 142 Cal.App.3d 228, 232, 190 Cal.Rptr. 839.) If the depositor is indebted to the bank and his note is due, there is a mutuality of obligation from which flows an equitable right of setoff--the bank ordinarily may set off its debt against the depositor's debt by appropriating funds from the depositor's account. (E.g., ...