Commercial Nat. Bank of Sturgis v. Smith

• Decision Date: 10 October 1932
• Docket Number: 7291.
• Citation: 244 N.W. 521,60 S.D. 376
• Parties: COMMERCIAL NAT. BANK OF STURGIS et al. v. SMITH, Superintendent of Banks, et al.
• Court: South Dakota Supreme Court

244 N.W. 521

60 S.D. 376

COMMERCIAL NAT. BANK OF STURGIS et al. v. SMITH, Superintendent of Banks, et al.

No. 7291.

Supreme Court of South Dakota

October 10, 1932

Appeal from Circuit Court, Roberts County; Van Buren Perry, Judge.

Suit by the Commercial National Bank of Sturgis and others against F R. Smith, as Superintendent of Banks of the State of South Dakota, as receiver and in charge of the Summit Bank, and others. From the judgment sustaining named defendant's demurrer to complaint, plaintiffs appeal.

Affirmed.

Sterling Clark & Grigsby, of Redfield, for appellants.

Bruell & Henderson, of Redfield, and T. B. Thorson, of Rapid City for respondent.

ROBERTS J.

The complaint alleges that the Summit Bank became insolvent, and on the 16th day of October, 1926, was taken over by the superintendent of banks for the purposes of liquidation; that the defendant Wiley made and entered into a contract with the state highway commission for gravel surfacing of a state trunk highway in Meade county; that the payments received on the contract were delivered to the Summit Bank for deposit in the contractor's checking account for the purpose of drawing checks against the account to pay claims incurred by him for labor and materials; that defendant Wiley issued certain checks to laborers and materialmen on the Summit Bank which were cashed by the plaintiff Commercial National Bank of Sturgis and forwarded for collection in the usual course of business, and payment was refused; that the other plaintiffs named furnished to the contractor materials and supplies which were necessary in carrying out the terms of the contract and that their claims have not been paid; that the Summit Bank knowingly and unlawfully converted a large part of the proceeds of the warrants received in payment on the contract to its own use and benefit and applied the same upon an alleged indebtedness of Wiley to the bank; that the defendant Farmers' & Merchants' Bank of Revillo had on deposit in the Summit Bank a sum of approximately $15,000 on open account; that on or about October 11, 1926, the defendant Wiley received from the state of South Dakota a warrant for the sum of $5,244.72 on his contract which Wiley delivered to the Summit Bank for the purpose of paying claims for materials and labor incurred under the contract, but the said Summit Bank wrongfully delivered and paid over to the Farmers' & Merchants' Bank of Revillo such warrant with the purpose and intent to prefer such bank as a creditor; that the said bank has failed and refused to account for the warrant or the proceeds to Wiley or to the plaintiffs; that the amounts received on the contract by Wiley were received by him from the state for the purpose of paying for labor performed and materials furnished in carrying out the terms of the contract including the claims of the plaintiffs, and constituted a trust fund for such purpose and for the benefit of the plaintiffs; and that the defendant banks and their officers and agents knew that the proceeds of the warrants constituted a trust fund, and at all times had knowledge of Wiley's contract with the state and of the fact that the proceeds of the warrants were deposited by him for the purpose of paying claims for labor and materials in carrying out the terms of the contract. The prayer of the complaint is that the superintendent of banks as receiver of the Summit Bank be required to account for all warrants and the proceeds of warrants received by the bank upon the aforementioned contract and that the warrants and proceeds be declared to be a trust fund for the use and benefit of the plaintiffs; that the sum of $5,244.72 received by the Farmers' & Merchants' Bank of Revillo be also declared to be a trust fund; and that the court direct the superintendent of banks and the Farmers' & Merchants' Bank of Revillo to pay over to the plaintiffs the proceeds of the warrants pro rata according to the amount of their several claims or so much thereof as is sufficient for that purpose.

The superintendent of banks interposed a separate demurrer to the complaint which was sustained by the trial court, and this appeal is from the order sustaining such demurrer. The other defendants named are not before this court. There are a number of grounds of demurrer, but the only ground that need be considered is that the complaint does not state a cause of action.

It is the claim of the plaintiffs that the amount received under the contract was a trust fund for the payment of labor performed and materials furnished in carrying out Wiley's contract with the state; that the plaintiffs are entitled to establish the amount received under the contract as a trust fund and to follow it into the hands of the defendants and to recover so much of the same as is necessary to pay the plaintiffs for materials furnished and labor performed. The plaintiff Commercial National Bank of Sturgis contends that it having cashed checks given to laborers and materialmen is subrogated to the rights of the payees. It is the general rule that if a trust fund can be traced it may be recovered. Does the complaint allege the creation and existence of a trust fund in the Summit Bank? If a trust fund is to be traced, it must be first established. It is the contention of the defendant superintendent of banks that the deposits of the proceeds of the warrants were general deposits and created the relation of debtor and creditor between the Summit Bank and Wiley.

A general deposit has the effect of passing title from the depositor to the bank. Such deposit possesses no trust quality and is mingled with other funds of the bank. If insolvency ensues, the depositor shares pro rata with the general creditors. Where money is deposited for a special purpose, a special deposit is created and the bank becomes a trustee for the depositor. When such a deposit is made for a specific purpose and for the benefit of a third person, a trust relationship is created in favor of the third person. The possession in such instance does not effect a change in title to the money, but the title remains in the depositor. In the case of City of Sturgis v. Meade County Bank, 38 S.D. 317, 161 N.W. 327, 328, this court said: "As a rule, when money is deposited in a bank, title to such money passes to the bank. The bank becomes the debtor of the depositor to the extent of the deposit, and, to that extent the depositor becomes the creditor of the bank. * * * Such deposit then constitutes a part of the assets of the bank, and, in case of insolvency, belongs to the creditors of the bank in proportion to the amount of their respective claims. Exceptions to this rule are: First, where money or other thing is deposited with the understanding that that particular money or thing is to be returned to the depositor; second, where the money or thing deposited is to be used for a specifically...