Illinois Cent. R. Co. v. Rawlings

• Decision Date: 16 August 1933
• Docket Number: No. 6679.,6679.
• Citation: 66 F.2d 146
• Parties: ILLINOIS CENT. R. CO. v. RAWLINGS. RAWLINGS v. ILLINOIS CENT. R. CO.
• Court: U.S. Court of Appeals — Fifth Circuit

66 F.2d 146 (1933)

ILLINOIS CENT. R. CO. v. RAWLINGS.

RAWLINGS v. ILLINOIS CENT. R. CO.

No. 6679.

Circuit Court of Appeals, Fifth Circuit.

July 13, 1933.

Rehearing Denied August 16, 1933.

Edward W. Smith, of Clarksdale, Miss., and Chas. N. Burch, of Memphis, Tenn., for appellant.

J. L. Roberson and Sam C. Cook, both of Clarksdale, Miss., for appellee.

Before BRYAN, SIBLEY, and HUTCHESON, Circuit Judges.

HUTCHESON, Circuit Judge.

Under circumstances differing in detail, but not in substance and effect, from those in Texas & P. Ry. Co. v. Pottorff (C. C. A.) 63 F.(2d) 1, the Planters' National Bank, in order to secure the continuance with it of the Illinois Central Railroad Company as a general depositor, pledged with that company certain securities. At this time, December, 1928, the bank was not in difficulties. The pledge agreement provided that the bank might withdraw the securities at any time by substituting a surety bond satisfactory to the company, or by paying to it the full amount of its deposit balance. It authorized the company, in default of the payment on demand of its deposits, to sell sufficient of the securities to make it whole. In interpretation of the agreement, and by way of emphasizing the fact that the arrangement was not for a borrowing by the bank upon security, but for a general deposit with preferential treatment over the other general depositors, the last clause provided: (1) That the company was obligated to keep no particular amount on deposit; (2) that the agreement did not change the deposit from an ordinary checking account to a time deposit; and (3) that "it shall not in any way create any relation between the bank and the railroad company other than as a depositor with the right to withdraw the deposit at any time, with or without notice." This ordinary relation of depositor and banker continued until December 30, 1930, when the bank having found itself unable for want of cash to go on, closed, and was placed in the hands of a receiver. On that day the deposit balance of the company was $5,899.01.

The demand made by the receiver for a return of the securities having been refused, this suit was brought. Alleging the unlawfulness of the pledge agreement, and that the company was about to sell the bonds deposited under it, the bill sought an injunction against the sale, and to recover the securities as assets of the bank. Defending, the company contended that the receiver should not have the bonds because (a) the pledge agreement was valid and enforceable as made, and (b) if it was not, equity and good conscience would not permit the bank to have the bonds back without returning the deposits which had been made on the faith of the pledge. By way of affirmative relief the company sought (1) a decree authorizing it to sell the bonds under the terms of the pledge, and (2) in the alternative, if the court should hold the pledge invalid and deny defendant any relief under it or because of its making, a judgment for the return of its deposits as fraudulently received when the bank was, within the knowledge of its officers, hopelessly and irretrievably insolvent. These deposits it sued for as not general, but special deposits, for which the bank and the receiver were accountable to it, not as debtor, but as trustee. In support of this affirmative claim it was alleged that all of the deposits which it had made with the bank in December, 1930, especially those of December 27 and 29, were made on the faith that it was solvent, induced by the continued representations and holding out of its officers that it was; that on that day when it made the deposits which have resulted in the credit balance in its favor, the bank was hopelessly and irretrievably insolvent, and known to its officers to be so; that the deposits it made on December 27 and 29 went into the bank, and have passed into the hands of the receiver, not as assets of the bank but as the property of the company.

Upon issue joined, it was shown without dispute, that the pledge agreement was made in good faith while the bank was solvent, and that, by its making, the bank secured the continuance with it of the deposits of the company. It was also shown in the same way, that for the greater part of the year 1930 the bank had been in straitened circumstances, which had compelled it to make heavy borrowings from the Federal Reserve Bank, and other shifts from time to time, to supply the needs of its customers, and keep the bank in going condition. In the latter part of 1930 the situation had become critical, and its officers well understood that unless an additional loan of around $200,000 could be secured, the bank could not keep open. Negotiations and arrangements, however, were on foot for this loan, and on December 27 and 29, when the deposits which resulted in the balance in controversy were made, the officers of the bank, though realizing the gravity and seriousness of the situation, really believed in good faith that arrangements could be made so that the bank could go on. In good faith they kept the bank open, receiving deposits and honoring checks and drafts as they came in, and it was only on December 30, when they learned that the negotiations for the loan had failed, and two checks calling for an aggregate withdrawal of $35,000 in cash were presented, that they determined that they could no longer go on, but must shut down.

The creation of the $5,899.01 deposit balance for which the company sues came about in this way. On the morning of December 27 the company having a deposit balance of $833.23 presented its check in the amount of $8,000 which was paid by the bank leaving an overdraft of $7,166.77. Thereafter on the same day the company made two deposits aggregating $8,914.50 leaving a balance of $1,747.73. On Monday, the 29th, the company deposited $4,151.28. All of these deposits, except $942.50 on the 27th and $349.26 on the 29th in cash and currency, were checks. These checks, drawn some on the Planters' Bank, some on out of town banks, were collected mainly by the Memphis Branch of the Federal Reserve Bank of St. Louis, to which the Planters' Bank was indebted, and when the bank closed its doors, that bank credited these collections on the indebtedness.

The District Judge, finding the agreement invalid as in effect the creation of an unlawful preference in event of insolvency of one general depositor over others, denied it effect, either defensively or by way of affirmative relief, and ordering it vacated and set aside, directed the company to deliver the securities to the receiver. On the affirmative claim of the company that because of the hopeless and irretrievable insolvency of the bank when the deposits were received they should be regarded as held in trust for it, he found that on December 29, 1930, the bank was, within the knowledge of its officers, hopelessly and irretrievably insolvent, and that the receipt of the deposits of that day as general deposits was a fraud upon the company, operating to make them trust funds. That a part of them, to wit, $2,381.93, had been traced into the receiver's hands and that defendant should have judgment for them. Finding that no part of the general deposits of December 27 had been properly traced into the hands of the receiver, he found it unnecessary to decide whether their receipt on that day as general deposits was fraudulent so as to make them trust funds. Finding, however, that certain collection items aggregating $279.81, which, in process of collection when the bank closed, were finally collected by the receiver, had been deposited with the bank on the 27th upon a deposit slip having printed on its back a general notice of the terms under which the deposits were received,¹ had been received by the bank, not as general deposits for the account of the bank, but as special deposits, to be collected as agent of the company, he gave the company judgment for that amount also.

This decree has satisfied neither plaintiff nor defendant. Defendant, appealing, attacks the finding that the pledge agreement was illegal and that the securities must be surrendered, assails as unsupported by the evidence, the finding that none of its general deposits of December 27, and only $2,381.93 of those deposited on December 29, were identified as having come into the receiver's hands and complains of the failure of the court to find the bank hopelessly and irretrievably insolvent on December 27.

Plaintiff by cross-appeal, insisting that none of the deposits were trust funds, attacks the finding of hopeless and irretrievable insolvency on December 29, and the finding that the items aggregating $279.81 were received on special deposit.

Appellant concedes that the conclusion of the trial court that the pledge agreement was invalid and unenforceable is fully supported by our decision in the Pottorff Case. It insists, however, that that decision is not authority for the further finding of the trial court that the receiver could retake the bonds, without returning the deposits. It points, as distinguishing that case from this, to the fact that here the receiver is the actor, seeking to retrieve the securities from the possession of the company, whereas there the company was the actor, seeking to obtain them from the possession of the bank's trust officer, and therefore suing on the contract.

We do not think the cases can be so distinguished. By the Pottorff Case it was meant to decide, and it was decided, that such an arrangement, looking to creating, in the event of insolvency, preferences among general depositors, was fundamentally invalid; that no rights could be predicated on it, or on the physical possession of the pledged bonds acquired by virtue of it. In that case the bonds were no more in the possession of the bank than they were in this case. They were in the possession there of the trust officer, who held them, not as agent for the bank, but in trust for the company....