In re Kountze Bros.
| Decision Date | 01 May 1939 |
| Docket Number | No. 308.,308. |
| Citation | 103 F.2d 785 |
| Parties | In re KOUNTZE BROS. et al. CITY OF LOS ANGELES, CAL., v. IRVING TRUST CO. |
| Court | U.S. Court of Appeals — Second Circuit |
W. Morton Carden, of New York City (Thomson, Wood & Hoffman and John H. Hoffman, all of New York City, of counsel), for appellant.
Allen R. Memhard, of New York City (Henry A. Jones, of New York City, of counsel), for appellee.
Before L. HAND, CLARK, and PATTERSON, Circuit Judges.
This is an appeal by the City of Los Angeles, California, from an order of the District Court which affirmed an order of dismissal by the referee in bankruptcy of the City's petition to reclaim $103,051.63 from the appellee as trustee in bankruptcy of Kountze Brothers. The sum in question is the unpaid balance of a deposit of $150,000, made by the City with the bankrupts shortly before they ceased to do business, for the purpose of providing money for the payment of principal and interest thereafter to fall due on bonds of the City. The City claims that the deposit was a special one in trust in its favor, and hence the balance should be paid to it out of the funds to which the deposit was traced. The referee and the court below both ruled, however, that the deposit created only a debt from the bankrupts to the City, and hence the City had no claim prior to that of other general creditors on any of the assets held by the trustee.
Kountze Brothers, a New York partnership dealing in stocks and bonds, deposits, and collections, acted extensively for cities and counties in the payment of the bonds and coupons of such governmental bodies. At the time of their failure in 1931, the partners were so serving more than 150 cities and counties. For this service they either received a commission from the obligor on the bonds or else procured the deposit of the funds with them for a sufficient time before the obligations were due, that the money might be loaned at interest. As the manager of their banking department testified, they preferred the latter course, since it was more profitable to loan money on call in Wall Street at from 6 to 10 per cent interest than to take commissions limited to 1/8 to ¼ of one per cent of the funds handled.
From 1908 until they failed, Kountze Brothers acted as paying agent for the City of Los Angeles with reference to numerous of the City's bonds. Originally in 1908 the parties entered into a written contract, by which the principal and interest of the bonds there described were to be payable at the City Treasury or at the banking house of Kountze Brothers in the City of New York "at the option of the holder." Later arrangements, although not so formally signalized, were on the same basis. The City paid no commissions for this service, but agreed to keep a balance with the bankers of never less than $25,000 and to remit funds, originally at least twenty, later thirty, days in advance of the due date of the bonds or coupons. Since it was impossible to tell how many obligations would be presented for payment at the City Treasury in Los Angeles, how many to Kountze Brothers in New York, the city treasurer transferred moneys to the bankers in round sums sufficient in his judgment to cover the amounts which would probably be required. The City's account with Kountze Brothers naturally fluctuated, but showed substantial balances, which at one time were in excess of $800,000. No attempt was made to transfer funds for the payment of particular bonds or coupons; indeed at the time of failure the bankrupts were acting as paying agents for 45 of the City's bond issues totalling in excess of $45,000,000, with payments falling due on the first of each month of the year. Customarily a more or less formal notice of the need of funds was given substantially in advance of the time when they were required. Thus, on September 14, 1931, the bankers wrote the city treasurer: "As a matter of routine, we write to call your attention to the fact that it is customary for the City of Los Angeles to place funds with us on October 1, to take care of various bond payments and interest coupons due on November 1." And the City responded on September 18, 1931, by its deposit of $150,000, of which the amount claimed is the balance due the City on October 13, 1931, when an equity receivership closed the business. This amount was traced to the account of the bankrupts with the Central Hanover Bank and Trust Company of New York City.1
If, as pointed out in Marine Bank v. Fulton County Bank, 2 Wall. 252, 69 U.S. 252, 256, 17 L.Ed. 785, the distinguishing characteristics of a general deposit are that the depositor "parts with the title to his money, and loans it to the banker," who, "in consideration of the loan of the money and the right to use it for his own profit," agrees to refund it on demand — if stress is to be placed upon the banker's right to use the fund for his own profit — then it would seem clear from the evidence, as the referee and the District Court found, that the parties themselves treated the City's account as not special, but subject to use by the bankers in normal banking ways. The necessities of the situation due to the uncertainty as to the funds needed at any one time, the mutual advantages to each side, including the interest profit to the bankers and the lack of expense to the City, all these and other circumstances point to this result. Indeed, any other result seems inexplicable. Kountze Brothers were in business to produce profits; they certainly could not be expected to engage in extensive services for the City year after year without payment unless they had the right to use these funds — as they did — to produce the return to which they were fairly entitled.
Moreover, the whole course of dealing of the parties supports this conclusion, reached below. The city treasurer asked for "credit" for his deposits; he made transfer of funds to other banks; he asked for special services on the strength of the favorable balance the City maintained; he objected to a charge for interest for an overdraft; the bankers referred to credits and debits of the account; they gave monthly statements, returning the coupons, interest certificates, and other documents taken up; and so on. In short, both parties acted as they would act with respect to a general account.
The evidence the other way was too slight to be persuasive. It consisted of such matters as the city treasurer's account of some conversation in 1916 with partners now deceased, with reference to the trust nature of the deposits; of a change then made by him from payment of interest on registered bonds by check to payment by interest certificates — a slight and apparently unimportant change in form of the negotiable instrument used; and the claimed trust nature of the tax receipts required by the city ordinances to pay for the bonds as authorized. As to this last, it appeared that however the City's books were set up, no segregation of actual funds was made either in the City Treasury or with the bankers, and no trust was required by the ordinances or was in fact created. Again the treasurer made affidavit in 1931 that there was an agreement to pay the bankers a commission if the funds were not forwarded in advance. This affidavit seems to have been disclaimed later, and it is not clear that it referred to city, as distinguished from county, bonds. In any event, it has little effect other than as pointing to the normal character of the business done by the bankers for the City. Nonpayment of commissions was at most only evidential — though, of course, it was highly persuasive under the circumstances here disclosed. Even had commissions been paid, there would still have been the question of fact for the referee as to the nature of the deposit in the contemplation of the parties.
If, therefore, the deposit is to be treated as a trust, it must be on the basis not of what the parties did, but of the underlying law which perchance they may have failed to respect. By Article XI, Section 16½ of the Constitution of California, as amended in 1918, a municipality within that State may deposit its moneys in banks within the State, under such conditions as the statutes may provide, providing that such a municipality issuing bonds under the laws of the State "may deposit moneys in any bank or banks outside this state for the payment of the principal or interest of such bonds at the place or places at which the same are payable." Chapter 740, p. 1389, Statutes of California 1927, § 1, in force at the time, provided conditions — as to collateral security, minimum interest, and limitation of amount to paid-up capital — under which banks within the State might serve as depositories of city funds, but excepted from these provisions deposits made in banks within or without the State "necessary for the payment of the principal and interest of bonds at the place or places at which the same are payable," and authorized the treasurer to fix the conditions of such deposits with the approval of the City's governing body.2
By the law of California,...
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