Independent School District No. 1 of Benewah County v. Diefendorf

• Decision Date: 11 January 1937
• Docket Number: 6321-6322
• Citation: 57 Idaho 191,64 P.2d 393
• Court: Idaho Supreme Court
• Parties: INDEPENDENT SCHOOL DISTRICT NO. 1 OF BENEWAH COUNTY, IDAHO, Appellant, v. BEN DIEFENDORF, Commissioner of Finance of the State of Idaho, GEORGE WEDGEWOOD, Liquidating Agent of the Lumbermens State Bank & Trust Company and LUMBERMENS STATE BANK & TRUST COMPANY, a Corporation, Respondents

64 P.2d 393

57 Idaho 191

INDEPENDENT SCHOOL DISTRICT NO. 1 OF BENEWAH COUNTY, IDAHO, Appellant, v. BEN DIEFENDORF, Commissioner of Finance of the State of Idaho, GEORGE WEDGEWOOD, Liquidating Agent of the Lumbermens State Bank & Trust Company and LUMBERMENS STATE BANK & TRUST COMPANY, a Corporation, Respondents

Nos. 6321-6322

Supreme Court of Idaho

January 11, 1937

Appeal from District Court, Benewah County; Bert A. Reed, Judge.

Action by Independent School District No. 1 of Benewah County against Ben Diefendorf, Commissioner of Finance of the State of Idaho, George Wedgwood, liquidating agent of the Lumbermens State Bank & Trust Company, and such company for preference of plaintiff's claim against defendant bank's assets. From a judgment for plaintiff in part and for defendants in part, plaintiff appeals and defendants cross-appeal.

Affirmed in part, reversed in part, and remanded, with instructions.

BUDGE J., dissenting.

Whitla & Knudson for Appellant.

Bank insolvent at the time of the transaction makes the account a trust fund. (Peterson v. Porter, 46 Idaho 43, 266 P. 429.)

Where money is left in the bank by one party for benefit of another it creates a trust relationship. (Fralick v. Coeur d' Alene Bank & Trust Co., 36 Idaho 108, 210 P. 586; Ivie v. Jenkins & Co., 53 Idaho 643, 26 P.2d 704; Skinner v. Porter, 45 Idaho 530, 263 P. 993; Prewett v. First Nat. Bank, 45 Idaho 451, 262 P 1057.)

Checks drawn on bank are the same as payment by cash. (Skinner v Porter, supra; Thomas v. Mothersead, 128 Okla. 157, 261 P. 363; First State Bank v. O'Bannon, 130 Okla. 206, 266 P. 472.)

Robert H. Elder for Respondents.

The priority for the payment of cashier's check is definitely determined by the statutory law of the state. (Subd. 3, sec. 25-915, I. C. A.)

Deposit of public funds under the public depository law of Idaho is a waiver of any right of preference over common depositors. ( Bannock County v. Citizens Bank & Trust Co., 53 Idaho 159, 22 P.2d 674; National Surety Co. v. Pixton, 60 Utah 289, 208 P. 878, 24 A. L. R. 1487; In re Central Bank of Wilcox, 23 Ariz. 574, 205 P. 915; Cook County Nat. Bank v. United States, 107 U.S. 445, 2 S.Ct. 561, 27 L.Ed. 537; Board of County Commrs. of San Miguel v. McFerson, 90 Colo. 408, 9 P.2d 614; Shull v. Town of Avant, 159 Okla. 271, 15 P.2d 49.)

GIVENS, J. Morgan, C. J., Holden and Ailshie, JJ., concur. Budge, J., dissents.

OPINION

GIVENS, J.

December 31, 1932, appellant had on deposit in its sinking fund account with the Lumbermens State Bank & Trust Company, the sum of $ 2,293.58. Appellant owed the Department of Public Investments of the State of Idaho $ 2,375. Appellant took the sum of $ 3,000, advance taxes due it from Benewah county, and deposited the same in the bank in the following proportions: $ 333.34 in the sinking fund and $ 2,666.66 in its general fund, and gave its check to and drawn on the bank against the sinking fund in the sum of $ 2,375 for which it received a cashier's check payable to said Department of Public Investment of the State of Idaho. This check was sent to Mr. Diefendorf in payment of the indebtedness due the department. Before the cashier's check cleared, the bank failed as of January 3, 1933. Appellant claims a preference on the theory that the entire amount of the cashier's check was a trust fund, contending that the bank was merely the agent, as to this transaction, to transfer the specific amount of money, and that as to the amount of the cashier's check the appellant was not a depositor.

Respondents, as liquidating agents of the failed bank, classified the entire $ 2,375 under subdivision 3 of section 35-915, I. C. A. The trial court allowed a preference for $ 333.34 on the theory that the bank funds were augmented to that amount and that that fund was left with the bank for the sole and only purpose of transmitting it to the Department of Public Investment.

The question of priority of payment of public funds in a failed bank was first considered in State v. Thum, 6 Idaho 323, 55 P. 858, wherein priority was given on the theory that the deposit of public funds of the state in a bank by the state treasurer was illegal because contrary to express statutory enactment (sec. 6975-6-7, Rev. Stats., now sec. 17-3201, I. C. A.). Thus, being in violation of law, was in effect a special deposit or trust fund and the state entitled to preference in the distribution of the assets of the bank in the liquidation thereof by the receiver. The same distinction was applied to county funds in First Nat. Bank of Pocatello v. Bunting & Co., 7 Idaho 27, 59 P. 929, 1106, and it was held as to public funds that no tracing or identification was necessary in State v. Bruce, 17 Idaho 1, 102 P. 831, 134 Am. St. 245, L. R. A. 1916C, 1, and that all property of failed banks was impressed with a lien for the payment of such preferred claim, now held limited in its application solely to public funds. ( Bellevue State Bank v. Coffin, 22 Idaho 210, 125 P. 816; Blackman v. Pettengill, 25 Idaho 307, 137 P. 182; Russell v. Bank of Nampa, Ltd., 31 Idaho 59, 169 P. 180; Martin v. Smith, 33 Idaho 692, 197 P. 823; United States Nat. Bank v. Standrod & Co., 42 Idaho 711, 248 P. 16; In re Citizens' State Bank, 44 Idaho 33, 255 P. 300; National Bank of the Republic v. Porter, 44 Idaho 514, 258 P. 544; note, 5 L. R. A., N. S., 886.

In 1903, Session Laws 1903, page 375, a special act with regard to depositing public funds was passed and held unconstitutional because of a defective title. (Turner v. Coffin, 9 Idaho 338, 74 P. 962.) In 1905, Session Laws 1905, p. 305, the legislature again passed an act with reference to the depositing of public funds in banks, but declaring no priorities as affecting public funds. In Re Bank of Nampa, Ltd., 29 Idaho 166, 157 P. 1117, held that an irrigation district not being included in those agencies permitted or authorized by the 1905 act to deposit its funds in a bank did not come within the provisions of the act and that when such deposit was made it was illegal and became a trust fund entitled to priority of payment.

County of Blaine v. Fuld, 31 Idaho 358, 171 P. 1138, held that neither public officials nor bank officers could by bookkeeping take public funds lawfully deposited from under the protection of such security because to do so would be to countenance an illegal transaction.

Fidelity State Bank v. North Fork Highway Dist., 35 Idaho 797, 209 P. 449, 31 A. L. R. 781, held the depository act of 1921, Session Laws 1921, Chapter 42, page 53, unconstitutional as to funds placed in a bank by a highway district prior to its effective date, because giving the act effect would impair the obligation of the asserted only legal contract that could exist, namely, special deposit if there was no security in compliance with the depository act, and hence a trust arose resulting in a preference. And Independent S. Dist., Class A, No. 1, v. Porter, 39 Idaho 340, 228 P. 253, held to the same effect because there was no novation after the date of the act. All transactions involved herein transpired subsequent to section 25-915, I. C. A., becoming effective.

Other decisions by this court involving private funds urged as trust funds being entitled to preference, and questions of necessity of tracing and augmentation are not considered because not in point or controlling. ^[1]

By sections 55-101 to 55-143, I. C. A., school districts may lawfully deposit their funds in a bank on general deposit when properly secured. There was no security at all for appellant's sinking fund account herein.

Section 25-915, subdivision 3, supra, specifying the procedure of liquidating failed banks provides as follows:

"3. Debts due depositors, holders of cashier's checks, certified checks, drafts on correspondent banks, including protest fees, paid by them on valid checks or drafts presented after closing of the bank, prorata. All deposit balances of other banks or trust companies and all deposits of public funds of every kind and character (except those actually placed on special deposit under the statutes providing therefor) including those of the United States, the state of Idaho, and every county, district, municipality, political subdivision or public corporation of this state, whether secured or unsecured, or whether deposited in violation of law or otherwise, are included within the terms of this subdivision and take the same priority as debts due any other depositor; anything in the statutes of the state of Idaho to the contrary notwithstanding. Provided, however, that this section shall not apply to any deposit made by this state or any county thereof, city, town or district of this state prior to the twenty-eighth day of February, 1921."

White v. Pioneer Bank & Trust Co., 50 Idaho 589, 298 P. 933, held subdivision 3 of section 25-915, I. C. A., supra, unconstitutional as applied to county funds illegally deposited because otherwise the act would violate section 4 of article 8 and section 4 of article 12 of the state constitution; i. e., to allow subdivision 3 of section 25-915 to operate on public funds deposited without security and give no preference would in effect be the loaning of the credit of the county. Appellant contends this case applies to school funds and thus a preference should be allowed.

Bannock County v. Citizens B. & T. Co., 53 Idaho 159, 22 P.2d 674, after an exhaustive review of cases touching upon the point, holds that deposits made where there is security are not loans. Appellant has pointed out no distinction between security or lack of security to make the deposit, in the one instance not a loan and in the other a loan. Being construed a loan was the only basis of unconstitutionality in White v. Pioneer Bank & Trust...