City Council of Charleston, SC v. Elliott

• Decision Date: 19 November 1934
• Docket Number: No. 3783.,3783.
• Citation: 73 F.2d 920
• Parties: CITY COUNCIL OF CHARLESTON, S. C., v. ELLIOTT et al. KRUPNICK v. PEOPLE'S STATE BANK OF SOUTH CAROLINA et al.
• Court: U.S. Court of Appeals — Fourth Circuit

73 F.2d 920 (1934)

CITY COUNCIL OF CHARLESTON, S. C., v. ELLIOTT et al.

KRUPNICK v. PEOPLE'S STATE BANK OF SOUTH CAROLINA et al.

No. 3783.

Circuit Court of Appeals, Fourth Circuit.

November 19, 1934.

J. Waties Waring, of Charleston, S. C., for appellant.

E. W. Mullins and Christie Benet, both of Columbia, S. C. (Benet, Shand & McGowan and Nelson & Mullins, all of Columbia, S. C., on the brief), for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal by the city council of Charleston, S. C., from a decree, entered in the receivership proceedings of the failed People's State Bank of South Carolina, denying priority to a claim for deposits made with the bank to meet tax anticipation notes executed by the city. The claim of the city was that the deposits were trust funds in the hands of the bank; that they augmented the assets which passed into the hands of the receivers; that these assets should be held impressed with a trust to the amount of the deposits; and that the claim of the city should be paid in full therefrom. The judge below in a learned and exhaustive opinion held that the deposits were received by the bank as deposits for a special purpose, not as trust funds to be held and administered in a fiduciary capacity, that the city occupied the status of an ordinary general depositor, and that no circumstances giving rise to a trust had been proven. We think that this holding was correct.

The city had been borrowing from the bank in anticipation of the collection of taxes, executing to the bank tax anticipation notes, which were either held or sold by it. The deposits in question were made under an agreement that tax collections would be deposited in special accounts, separate from the general deposit account of the city, and that the tax anticipation notes of each tax year would be paid from the account in which the taxes for that year had been deposited. The funds so deposited were mingled by the bank with its general assets; and there is nothing to show that it was contemplated by any one that they should be segregated from the general funds of the bank or that the bank should handle them as trust funds held by it as a fiduciary. On the contrary, it appears that the bank paid interest on the deposit balances in the tax accounts. It is true that in December, 1931, there was talk of withdrawing a part of the funds from the bank in order that a division of deposits might be made among the other banks of the city and that at that time the bank opposed the withdrawals on the ground that the deposits were trust funds, as well as on the ground that their withdrawal would ruin the bank; but not even then was there any suggestion that the funds deposited by the city were being segregated from the other funds of the bank or were being handled otherwise than as funds received under general deposits. Request was made at that time that the bank set aside collateral as security for the deposits, and it agreed to do so, but this agreement was never carried out.

The principal argument made in behalf of the city is that the conversations in December show that the deposits in question were trust funds and that they should be so treated by the court, irrespective of such incidental matters as the handling of the funds and the payment of interest thereon. We think, however, that greater weight should be given to the manner in which the deposits were made, to the way in which they were handled by the bank without objection from the city, and to the fact that interest was paid upon them, than to mere language used in describing them, if this language were inconsistent with the nature of the transactions as shown by what the parties did, for it is axiomatic that equity regards substance and not form. But there is no real inconsistency here. It would seem, although we do not pass upon the point, that the credits in the bank arising from the deposits did constitute trust funds for the payment of the tax anticipation notes and that they could not have been withdrawn without the consent of the holder of the notes. But this is far from saying that the cash and cash items delivered to the bank in making the deposits were received by it in a fiduciary capacity with duty on its part to segregate them from its general assets and invest them for the benefit of the cestui que trust under the rule as laid down in Strauss v. U. S. F. & G. Co. (C. C. A. 4th) 63 F.(2d) 174. They were mere general deposits made for a special purpose and creating a credit balance with the bank applicable to that purpose. The city in its arguments ignores the distinction between a trust with respect to such a credit balance and a trust in funds held by the bank in a fiduciary capacity, a distinction we were at pains to...