In re AM Townson & Co., 12997.

• Decision Date: 05 October 1960
• Docket Number: No. 12997.,12997.
• Parties: In the Matter of A. M. TOWNSON & CO., Bankrupt.
• Court: U.S. Court of Appeals — Third Circuit

283 F.2d 449 (1960)

In the Matter of A. M. TOWNSON & CO., Bankrupt.

No. 12997.

United States Court of Appeals Third Circuit.

Argued January 18, 1960.

Reargued June 20, 1960.

Decided October 5, 1960.

Jerome L. Markovitz, Philadelphia, Pa. (S. Robert Levant, Markovitz, Stern & Shusterman, Philadelphia, Pa., on the brief), for appellant.

J. Horace Churchman, Philadelphia, Pa. (Jack B. Justice, Drinker, Biddle & Reath, Philadelphia, Pa., on the brief), for appellee.

Before BIGGS, Chief Judge, and GOODRICH, McLAUGHLIN, KALODNER, STALEY, HASTIE, and FORMAN, Circuit Judges.

McLAUGHLIN, Circuit Judge.

On March 20, 1957, the Bankrupt filed a Chapter XI petition and Messrs. Klein and East were appointed receivers to carry on the business pending confirmation of the arrangement. On March 28, 1957, they opened a general account with appellee. They opened a second account called "A. M. Townson & Co., Inc. Tax Account, Morton Q. Klein and William East, Receivers", on the same day. On May 13, 1957 they opened a third account "Morton Q. Klein and William East, Receivers, Special Machinery Account." The funds in the latter account were derived from the sale by the Receivers of machinery and equipment which had been distrained by the Bankrupt's landlord; whatever amount of valid liens as existed against the machinery and equipment was confined to those funds. In June and early July 1957, the bankrupt business, operated by the Receivers was losing money. The District Court issued an order to pay twenty-five per cent of employees' vacation money. The Receivers did not have sufficient funds for this purpose. Mr. Schneider, described by Mr. Klein, as "the guiding spirit of the bankrupt concern" according to Mr. Klein's testimony "advanced some $17,000 for the purpose of paying the vacation money and the salaries that were due at that time." This was in the form of checks which were deposited by Mr. Klein in appellee bank and "two or three days later" drawn on by the Receiver for the needed vacation and pay money and paid by the bank. All of the checks given by Mr. Schneider were returned in due course for insufficient funds. On July 8, 1957, the bank transferred the sum of $17,281.38 from the "Special Machinery Account" to the general account to cover the payments of said checks.

Later, liquidation of the Bankrupt was ordered. The Trustee in Bankruptcy applied to the Referee for an order requiring the bank to replace the $17,281.38. After a hearing the application was denied. Neither the Trustee or landlord sought review of the decision. The present appellant, representing the Bankrupt's employees, did so. The District Court affirmed the Referee. This appeal followed.¹

Factually the issue here is one of credibility between the Receiver Klein and the bank. Klein said that he opened all of the receivership accounts with a Mr. Smedley, an officer of the bank. As to the machinery account, Klein stated that he "* * * told him it was a special machinery account; it will be an inactive account; it will not be used for the simple reason that the Court will not permit us to use that money on account of the distraint for rent at the Adams and Leiper property. * * * I think he (Smedley) said, `Why can't you use it?' or something like that. I said, `Because we have a Court Order. We can't use the money. It is a Special Machinery Account, untouchable.'"

Actually, Smedley was not even in the bank's bookkeeping department which latter had the final responsibility for paying checks. Klein, a lawyer and the District Court's specially appointed representative in the receivership involved, does not pretend that he gave the bank any kind of written notice concerning the Special Machinery Account or that he ever said anything to the bookkeeping department concerning it. Smedley, plainly not one to overstate, did not recall that he was ever notified by Klein or anyone else that the account could not be used to take care of overdrafts from the Receiver's general account. He said that the bank often relied on an account marked "special" where it was in the same name and there might be a shortage in the general account. And that in the entire present situation he relied on the Special Machinery Account to take care of overdrafts in the general account. Cottingham, head of the bank's bookkeeping department, testified that if there was a restriction on an account it had to come to him "We have to know about it. If we pay a check unauthorized, it is our responsibility." He said he had no information that would indicate that the machinery account could not be used to cover overdrafts "* * * there was not a thing on this account to indicate that we could not pay a check signed by Mr. Klein." (Emphasis supplied.)

The objection to Smedley's evidence is that he did not categorically deny Klein's story in much the same fashion that Klein proffered it. To the Referee apparently Smedley's testimony, coupled with the over all picture, had the ring of truth. Clearly nothing had occurred in the whole episode which gave Smedley any recollection of Klein, a lawyer and the court appointed receiver, having taken the fantastic course of merely speaking to him (not in the proper department at all) in order to protect one of his accounts against his own withdrawals which eventually totalled over seventeen thousand dollars. Appellant urges that Klein's story should be accepted at its face value because all other evidence regarding the transaction is "non-negating." We think that the Receiver's story of how he alleges he went about protecting his machinery deposit, under the circumstances, was its own strongest negating force in producing its rejection by the Referee and the District Court.

In the face of the above the Referee had every right to discount the Receiver's testimony. But it is suggested Klein's evidence must be accepted because the Referee disbelieved it for the wrong reason. And the statement is made that it would have been to the Receiver's advantage not to have testified he had advised the bank of the restrictions on his machinery account. It is of course true that if the bank was not charged with Klein's overdrafts, as it was not, it would have no claim against him. It is also true, and most important regarding the Receiver's credibility, that he, by not notifying the bank of the nature of the account, would be responsible for any deficiency arising out of his negligence and subject to surcharge.

The Referee rightly held this conflict in the testimony to be a "basic factual dispute." He said:

"Having examined the witnesses and seen them on the witness stand, and observed their demeanor, the Referee is of the opinion that the restriction on this Special Machinery Account was not brought to the Bank\'s attention, that the Bank was without knowledge of the fact that third persons had an interest in the funds of the depositor, the Bank relied upon the apparent right to offset overdrafts in the general account through the deposit made in the Special Machinery Account."

The Referee found as facts that the bank "had no knowledge that the Receivers could not use the account designated `Special Machinery Account' for general purposes" and that the bank "had no knowledge that any person other than the Receivers had an interest in or lien against said account." He concluded that the bank "was legally entitled to set off an amount in the receivers' account designated `Special Machinery Account' against said indebtedness."

The District Court, sustaining the Referee's findings of fact and conclusions of law, dismissed the petition for review.

We have no right to interfere with the findings of fact as affirmed by the District Court. The testimony above quoted shows the conflict between the Receiver and the bank and the abundant justification for the resolving of that conflict in favor of the bank and for the finding of no notice to the bank to restrict the Receiver's machinery account.

What remains is that the particular account carried the designation of "Special Machinery Account." Was this sufficient to so restrict its balance as to prevent it from being used to cover the overdraft in the general account of the same depositor? We think this is a matter of federal law, with an interested eye toward the Pennsylvania decisions. While there are no federal reported cases exactly in point, those found unmistakably hold that where a bank has neither actual notice nor notice of facts sufficient to put it on inquiry regarding the true character of the deposit it may apply the deposit to the overdrafts in the depositor's general account. In re Greater Pythian Temple Ass'n of New York, D. C.S.D.N.Y.1937, 19 F.Supp. 762, 764 concerned a debtor's "special account" prior to his bankruptcy but Judge Patterson's statement of the legal situation is most helpful. He said:

"The proof taken before the referee shows that the bank\'s adverse claim was substantial. The fact that the account was a `special account\' did not of itself signify that the money in it was the property of some one other than the depositor. The words on the back of the check, `for security on lease,\' would have sufficed to put the bank on notice that another party had an interest in the money; but there is an issue of fact whether those words appeared on the check at the time when it was deposited. It is one man\'s recollection against another\'s. Finally, the testimony on what was said when the account was opened is in conflict. On this record `the weight of evidence\' is probably with the debtor, as the referee reported; but it is quite another thing to say that the proof offered in the bank\'s behalf is not substantial enough to raise an issue of fact.

"On the facts developed there is no jurisdiction to issue a summary order for the payment of the money. The debtor\'s petition will accordingly be dismissed. The expenses of the hearings before the referee will be borne by the debtor."

And see ...