Howard v. United States

• Decision Date: 29 January 1937
• Docket Number: No. 5756.,5756.
• Parties: HOWARD et al. v. UNITED STATES et al.
• Court: U.S. Court of Appeals — Seventh Circuit

87 F.2d 243 (1937)

HOWARD et al. v. UNITED STATES et al.

No. 5756.

Circuit Court of Appeals, Seventh Circuit.

January 8, 1937.

Rehearing Denied January 29, 1937.

Julius Moses, Lloyd Heth, and William P. Smith, all of Chicago, Ill., for appellants.

George B. McKibbin, Walter E. Beebe, and Hamilton K. Beebe, all of Chicago, Ill., for appellees.

Before EVANS, Circuit Judge, and LINDLEY and BRIGGLE, District Judges.

LINDLEY, District Judge.

This is an appeal from a judgment of the District Court entered in a consolidated cause in which were merged three suits brought upon several bonds of Howard, as receiver and trustee in bankruptcy, and Continental Casualty Company, as surety, to recover moneys held by such trustee and receiver in bankruptcy on deposit in the Phillip State Bank of Chicago at the time it closed in 1932. Following verdict of the jury, judgment was rendered for $225,740.45.

The condition of each of the trustee's bonds was as follows: "Now, therefore, if the said Sam Howard, Trustee as aforesaid, shall obey such orders as said Court may make in relation to said trust, and shall faithfully and truly account for all the moneys, assets, and effects of the estate of said Bankrupt, which shall come into his hands and possession, and shall in all respects faithfully perform all his official duties as said Trustee, then this obligation to be void; otherwise to remain in full force and virtue."

That of each of the receiver's bonds was as follows: "Now, therefore, the condition of this obligation is such, That if the said Sam Howard shall faithfully discharge the duties of his trust as such Receiver, and shall well and truly account for all moneys and property that shall come into his hands, and shall abide by and perform all things which he in said order is instructed to do, or shall hereafter be by the Court commanded to perform, then this obligation shall be void, otherwise to be in full force and effect."

The complaint charged that Howard negligently, carelessly and improperly deposited in said bank, in his name as receiver and trustee for bankrupt estates, the funds in controversy; permitted said moneys to remain on deposit, and, during said period, deposited further moneys and opened deposit accounts for new estates, when ordinary care and prudence would have required that he desist from such practice and take care that the total deposits in all the estates should not exceed in amount the penalty of the depository bond of $50,000.

The case was tried upon the theory that liability of appellants on the bonds was to be resolved by a determination of whether, under the evidence, Howard had been negligent in making and maintaining deposits of estate funds in the bank. It was the position of appellees, adopted by the court in the trial, that such negligence, if proved, was a breach of the conditions of each of the bonds; and the court, in its charge to the jury, submitted the question of liability upon this premise. It advised the jury that the trustee was bound to exercise reasonable care — the care of a reasonably prudent man, acting as a fiduciary of trust funds.

Appellants contest vigorously the correctness of this theory. They assert that there is no liability upon the bonds because of any lack of due care or diligence upon the part of the trustee, other than the express conditions themselves import. It becomes incumbent upon us, therefore, to determine the extent of liability upon the written instruments and whether the court was in error in its conception of the legal obligation of the principal and surety upon official bonds.

Howard had, for a number of years, been appointed receiver and trustee in bankruptcy cases in the District Court. He formerly kept deposits in the Central Trust Company, one of the designated official depositories. In July, 1930, one Beutel, who had been an official of the Central Trust Company, became president of the Phillip State Bank, on the north side of Chicago, which had been in business for some fifteen years. It was associated in some degree with the Central Trust Company. Beutel suggested that Howard make deposits in the Phillip Bank. Later that bank applied for designation as an official depository of bankruptcy funds, and the court entered an order designating it as such, requiring a bond of $50,000, as such depository, to be executed and filed with the court. The bank qualified under this order, and thereafter from time to time Howard deposited moneys in the bank until it closed in 1932.

In December, 1930, the bank's resources were about $4,600,000, deposits $3,600,000, capital stock, surplus, and undivided profits $752,000. In the middle of April, 1931, within five days, four banks in the same general community closed their doors, and at that time depositors of the Phillip Bank withdrew $1,000,000 in deposits. The president telephoned Howard and other large depositors of the bank and told them not to feel concerned; saying that the bank was safe and sound and that the Central Trust Company was advancing all cash necessary to meet demands. The Phillip Bank at that time borrowed from the Central Trust about $1,000,000. Two months later this loan had been repaid and deposits were beginning to return to the bank. On June 7, 1931, in an attempt to save its depositors, the National Bank of the Republic merged with the Central Trust Company, and the Foreman State National Bank was taken over by the First National Bank. Following this, on the north side of Chicago, five banks closed, and a new run began on the Phillip Bank and about $500,000 was withdrawn.

Shortly thereafter the court requested of all trustees a statement of their bankruptcy estate deposits. Howard filed a report showing $373,000 deposited in his official accounts in bankruptcy in the Phillip Bank. The District Court, on June 11, directed all receivers to file every three months an official statement showing deposits in banks. Evidence offered, but refused by the court, disclosed that the National Bank of the Republic had similar deposits of $1,103,000, with a depository bond of $50,000; and the Foreman Bank $331,000, with a depository bond likewise of $50,000.

The quarter-annual statement of the Phillip Bank issued in early July showed that the deposits had increased after March 25 about $1,300,000.

The then existing relationship between Howard and the bank continued through the summer and fall of 1931. In October the bank's deposits were $2,335,000. The total resources had decreased about $196,000 — from $3,660,000 to $3,464,000. The situation did not change materially from September, 1931, until June, 1932. There were many withdrawals about Christmas of 1931. On June 18, 1932, the Devon Trust & Savings Bank closed. A run started on the Phillip Bank; on the following Monday, June 20, it continued, and on June 21 the bank closed. It has since been in the hands of a receiver.

The proof showed that Howard was a borrower at the bank to the extent of some $9,000. This evidence was offered on the theory that the existence of such loans prevented Howard from being a free agent, in depositing official funds. These loans, he said, were necessary to furnish him with working capital in handling estates, to supply constantly recurring petty expenses for which he received credit and make reimbursement upon report to the court and approval thereof.

It appears that Howard knew of the runs that were made upon the bank. He borrowed funds, as he said, to effectuate an efficient administration of the estates. With this knowledge, his deposits were not withdrawn, and some new accounts were created. These facts, it is argued, placed him in a position where failure to act was a breach of the diligence and care which he should have exercised as a fiduciary.

We must keep in mind that we are not concerned here with the question of liability of Howard himself to the estates for which he was fiduciary. The question presented to us is the much more narrow one of whether the condition of the bonds sued upon has been broken. We are dealing, not with an action in tort against the trustee, but with the legal liability of a principal and a surety upon an express contract.

The obligors bound themselves to pay losses which might arise (1) from failure of Howard to obey an order of the court; (2) from failure upon his part faithfully and truly to account for the moneys of the estates; and (3) from failure by him faithfully to perform "his official duties as said Trustee." The obligation on the receiver's bonds was, in legal intendment, the same as that upon trustee's bonds.

There is no evidence of breach of condition (1). There is no proof of violation of any order of the District Court or of any loss to an estate arising from disobedience of any court order.

It is contended that the second condition was broken; that Howard did not faithfully and truly account for the moneys of the estates. This language imposes upon the trustee the duty to make honest and accurate reports or accountings of estate funds as required by law, and to dispose of the funds so reported or accounted for in accordance with the law. There is no proof that Howard failed to make or render reports or accounts according to law or that his disposition of the funds, as thus reported and accounted for, was contrary to law, unless it can be successfully maintained that it was his duty to discover an alleged dangerous banking condition and to remove the funds beyond danger therefrom, a phase we shall hereafter discuss. There is no charge of defalcation, embezzlement or other improper distribution of funds.

There remains to be considered the third proviso of the conditions. This is of wide import, and liability attaches thereunder for any loss which may result from a failure faithfully to perform official duties. It is provided under section 47 of the Bankruptcy Act, as to the official duties of the trustee with relation to the handling of funds,...