In re Battani, 15

• Court: U.S. District Court — Western District of Michigan
• Writing for the Court: KNIGHT
• Citation: In re Battani, 6 F.Supp. 376 (W.D. Mich. 1934)
• Decision Date: 20 February 1934
• Docket Number: 056.,762,13,14,629,9,No. 15,070,863,15
• Parties: In re BATTANI et al. ECKHOUT v. GUARDIAN NAT. BANK OF COMMERCE OF DETROIT et al.

6 F. Supp. 376

In re BATTANI et al. ECKHOUT v. GUARDIAN NAT. BANK OF COMMERCE OF DETROIT et al.

Nos. 15,070, 13,762, 9,863, 14,629, 14,056.

District Court, E. D. Michigan, S. D.

February 20, 1934.

McLeod, Fixel, Abbott & Fixel, Frederick B. Darden, and William W. Brashear, all of Detroit, Mich., for petitioners.

Frank E. Wood and Harry Kasfir, both of Cincinnati, Ohio, and William C. Allee, of Detroit, Mich., for B. C. Schram, receiver of Guardian Nat. Bank of Commerce.

KNIGHT, District Judge.

The Union Guardian Trust Company, as receiver of Andrew Battani and Julius Battani, doing business as Battani Brothers, bankrupt, on February 11, 1933, filed a petition with the referee in bankruptcy for an order compelling the Guardian National Bank of Commerce, Detroit, to surrender the moneys in the bankrupts' estate deposited with the Guardian National Bank of Commerce, Detroit. Such petition also asked the consolidation of all proceedings commenced by various receivers and trustees for the recovery of moneys similarly deposited in various banks. An order was thereafter made consolidating all the proceedings in the cases mentioned. The various proceedings are of a like nature and relate to the same questions. Subsequent to the bringing of the action, Schram, as conservator, was joined as a defendant. He was appointed receiver subsequent to the taking of the proofs herein but prior to final submission. On April 12, 1933, issue was joined upon the petition by the service of an answer denying the material allegations of such petition. On February 27, 1933, an order was made by the District Court of the Eastern District of Michigan canceling the designation of the Guardian National Bank of Commerce of Detroit as a depository for bankruptcy funds and directing the last-mentioned bank to surrender all such funds held by it to the Union Guardian Trust Company. On May 18, 1933, the referee made an order requiring the respondents immediately to surrender and pay to Union Guardian Trust Company $335.16 on account of the bankruptcy funds deposited with it in the case of Battani and one, bankrupts. At the time of the filing of the petition, such deposit amounted to $558.50. This amount was later reduced to $335.16 by the payment of dividends by the receiver. Such dividends were accepted without waiver of petitioners' right to recover the balance of the deposit. The referee further ordered that on failure of the respondent receiver to pay the aforesaid balance within ten days from the date of the service of such order the United States marshal be authorized to seize assets of said Guardian National Bank of Commerce of Detroit in sufficient amount to pay to the Union Guardian Trust Company the said sum of $335.16.

Certain findings of fact and conclusions of law made by the referee are the basis for such order. The questions for review broadly are: (1) Whether the referee was disqualified to act in this proceeding by reason of an interest in the outcome thereof? (2) Whether funds deposited by a receiver or trustee in bankruptcy in a depository designated pursuant to the Bankruptcy Act are in custodia legis, in effect held in trust, and are to be paid in full by respondent receiver? (3) Whether the bond of the depository was valid, and, if not, did these deposits by operation of law become deposits in custodia legis?

1. Was the referee disqualified to act because he was interested in an increase in his fees by reason of an increase in the amount payable from the depository. Upon reason and authority, the basis for this contention is without foundation. Such a reason for disqualification would to a large extent prevent referees functioning in office. In every proceeding involving accumulations to an estate they would be disqualified. The statute prohibiting referees from acting in cases in which they are directly or indirectly interested (section 39 of the Bankruptcy Act 11 USCA § 67) was not intended to apply to cases like the instant one. The rule is well stated in Black on Bankruptcy, § 39: "The statutory restriction as to referees acting in cases in which they are interested does not apply to the interest of a referee by way of commission on sums paid to creditors as dividends. This is a necessary interpretation of the law." Other pertinent authorities are Remington on Bankruptcy, § 595 (3d Ed.); In re Abbey Press (C. C. A.) 134 F. 51; Bray v. Cobb (D. C.) 91 F. 102; Anchor Grain Co. v. Smith (C. C. A.) 297 F. 204; In re Gardner (D. C.) 103 F. 922; Meyers v. Shields (C. C.) 61 F. 713, 726; and Tumey v. State of Ohio, 273 U. S. 510, 47 S. Ct. 437, 71 L. Ed. 749, 50 A. L. R. 1243, cited by respondents, are not comparable cases. In each case a direct financial benefit would have resulted to the official from his act. Tumey v. State of Ohio also is a criminal case. Here referees' fees may or may not be increased. There are other points distinguishing the cases mentioned. I find that the referee was not disqualified to act.

2. Are the funds deposited by the receivers or trustees in bankruptcy in the several cases in a depository designated pursuant to the Bankruptcy Act held in custodia legis and as such entitled to preference in payment?

It is my opinion that the deposits of the receivers and trustees in these bankruptcy estates are general deposits and are not held in custodia legis.

There is no question that a receiver or trustee in bankruptcy is an officer of the court, that a bankrupt's title to property passes to the receiver or trustee as of the date of the filing of the petition, and that the receiver or trustee is vested with all the rights "of a creditor holding a lien by legal and equitable proceedings."

Respondent bank was designated a depository pursuant to section 61 of the Bankruptcy Act (11 USCA § 101), and the deposits made in the bankrupt's estate were subject to withdrawal only on checks countersigned by the Judge or the Referee. General Order 29 (11 USCA § 53). Rule 18 of the Eastern District of Michigan also specifies certain particulars to be observed by the depository with reference to keeping of accounts, reports, and withdrawals. It is undisputed that the deposits in question were kept in commercial checking accounts upon which interest was paid the estates under agreement with the court. The account was handled as were all other general accounts of the bank, save the checks were required to be countersigned as heretofore stated, and periodical reports to the court required. John Bridge, Receiver, v. First National Bank-Detroit (D. C.) 5 F. Supp. 442, involved the question as to whether funds deposited by an equity receiver constituted general or special deposits. It seems to me the reasons therein given and the authorities cited are applicable here, and that deposits made by the receivers or trustees in bankruptcy herein are general and not special deposits. It is uniformly the holding of the courts that to constitute a special deposit an express agreement must be shown, and such agreement must clearly be implied from the conditions surrounding the deposit. No express agreement is shown nor does the evidence sustain the claim that there was an implied agreement that this would be a special deposit. Proof of a claim as preferred must be clear and convincing. The idea of a special deposit is one held for a particular purpose in identical or equivalent form as when deposited, subject to return at any time and not commingled by the depository with the other funds. Neither the fact that the deposit was made by one as receiver or trustee, nor the fact that the depository knew the fiduciary character of the depositor is sufficient to impress the deposit as a trust fund. In Gardner v. Chicago Title & Trust Co., 261 U. S. 453, 43 S. Ct. 424, 67 L. Ed. 741, 29 A. L. R. 622, Justice Holmes, delivering the opinion, said: "We assume that when money is deposited in a designated bank under section 61 of the Bankruptcy Law, * * * it is deposited as other money is, and becomes the property of the bank, leaving the bank a debtor for the amount." While this statement may be considered dictum, nevertheless it is entitled to great weight and is in harmony with a great majority of the decisions on the point involved here. In re Bologh (D. C.) 185 F. 825; Minard et al. v. Watts (C. C.) 186 F. 245; In re Potell (D. C.) 53 F. (2d) 877. In Florida Bank & Trust Co. v. Union Indemnity Co. (C. C. A.) 55 F.(2d) 640, 641, 83 A. L. R. 1102, referring to deposits made by receivers and trustees in bankruptcy, the court said: "The deposits now in question created debts owing by the depository bank to the representatives of the several bankrupt estates. * * *" National Bank of the Republic v. Millard, 10 Wall. (77 U. S.) 152, 19 L. Ed. 897; Keyes v. Paducah & I. R. Co. (C. C. A.) 61 F.(2d) 611, 86 A. L. R. 203; Northern Sugar Corp. v. Thompson (C. C. A.) 13 F.(2d) 829; American Surety Co. v. Akron Savings Bank, 212 U. S. 557, 29 S. Ct. 686, 53 L. Ed. 651; Michie on Banks & Banking, vol. 5, § 328, c. 9.

The court's attention is called to the recent decision In the Matter of The Standard Company of Raleigh, Inc., In Bankruptcy No. 2182, decided by District Judge Meekins, United States District Judge for the Eastern District of North Carolina, January 22, 1934.¹ The record in that case indicates facts comparable with those at bar as regards the type of deposits. With the conclusion that the funds there were held in custodia legis, this court cannot agree.

The respondent bank closed February 11, 1933, pursuant to a bank holiday declared by the Governor of the state of Michigan. It continued closed upon renewal of such holiday until a national banking holiday was proclaimed by the President on March 5, 1933. Respondent conservator was appointed on March 11, 1933, and continued to act as such until May 11, 1933, at which time respondent bank was declared insolvent and the conservator appointed a receiver. On February 27, 1933, an...