J.W. Reynolds Lumber Co. v. Smackover State Bank

• Decision Date: 20 July 1992
• Docket Number: No. 91-212,91-212
• Parties: , 20 UCC Rep.Serv.2d 542 J.W. REYNOLDS LUMBER COMPANY, Appellant, v. SMACKOVER STATE BANK, Appellee.
• Court: Arkansas Supreme Court

Page 853

836 S.W.2d 853

310 Ark. 342, 20 UCC Rep.Serv.2d 542

J.W. REYNOLDS LUMBER COMPANY, Appellant, v. SMACKOVER STATE BANK, Appellee.

No. 91-212.

Supreme Court of Arkansas.

July 20, 1992.

Robert L. Depper, Jr., El Dorado, for appellant.

William L. Prewitt, El Dorado, for appellee.

HAYS, Justice.

This is a civil suit for damages resulting from an embezzlement by Ms. Jimmie Brown, a long time bookkeeper of J.W. Reynolds Lumber Company (plaintiff-appellant). Reynolds filed suit against Smackover State Bank (defendant-appellee), contending the Bank wrongfully permitted Ms. Brown to obtain funds from a Reynolds account in breach of an express trust and of a contractual agreement. Reynolds advanced several theories of liability by the Bank, and those theories are renewed on appeal. Finding no error, we affirm.

Ms. Jimmie Brown began working for Reynolds in 1962 as an assistant to Mr. Toland, bookkeeper for a variety of operations in connection with Reynolds's lumber and other businesses. Checks payable to Reynolds were endorsed "For Deposit Only" and taken to the Bank by Toland. When necessary, Toland would obtain cash by a "less cash" notation on the deposit slip and use it to replenish the cash drawer at Reynolds. Toland was authorizedto write checks on Reynolds's account at the Bank on his signature alone.

On Mr. Toland's retirement, Ms. Brown succeeded him as bookkeeper and she continued the "less cash" procedure, but she had no authority to make withdrawals from the account without an additional signature. Sometime in 1974 Ms. Brown began to take money for her personal use from the cash drawer, which she would then replace with cash obtained from the "less cash" procedure notation on the deposit slips. Between 1974 and 1986, when she resigned to take another job, Ms. Brown's expropriations totaled $74,897.78.

The defalcation went undiscovered over many years because the general manager, N.T. Rutledge, the accountants and other employees, while they audited the bank statements and records of the company's operations, did not examine the deposit slips, which were regularly filed at Reynolds's office.

Ms. Brown's successor noticed the "less cash" notation on some deposit slips and questioned these transactions since she was not accustomed to that procedure. She brought it to the attention of her employer and Ms. Brown was asked for an explanation. She readily admitted the embezzlement and some of Reynolds' loss has been recovered.

I.

Whether The Court Erred In Holding That An Implied Trust Did

Not Exist Between The Appellant And Appellee

The complaint alleged an express trust, but at trial Reynolds relied on the existence of a constructive or implied trust between it and the Bank. Reynolds contends the Bank breached a fiduciary obligation arising from the trust relationship. The chancellor held there was no implied trust between the Bank and Reynolds, rather the relationship was that of debtor/creditor. We believe that holding was correct.

This court has stated that a constructive trust is an implied trust, arising by operation of law to satisfy the demands of justice. Hall v. Superior Federal Bank, 303 Ark. 125, 794 S.W.2d 611 (1990). While a confidential or fiduciary relationship does not in itself give rise to a constructive trust, an abuse of confidence rendering the acquisition or retention of property by one person unconscionable against the other, suffices generally to ground equitable relief in the form of declaration and enforcement of a constructive trust. Id.

"A trust is a fiduciary relationship...." Halliburton Co. v. Owen Family Trust, 28 Ark.App. 314, 773 S.W.2d 453 (1989). In Cherokee Carpet Mills v. Worthen Bank, 262 Ark. 776, 561 S.W.2d 310 (1978) we stated, "[i]t is unquestionably the law that a general deposit of money in a bank passes the title to the bank and establishes the relation of debtor and creditor between the bank and the depositer...." See also B. Clark, The Law of Bank Deposits, Collections and Credit Cards § 2.1 (1981); J. White & R. Summers, Uniform Commercial Code § 18-1 (1988).

It is axiomatic that persons cannot be held liable as a trustee unless they expressly, or by necessary implication, agreed to act as such and are aware of the terms under which the deposit has been made and the conditions upon which it may be released. Lasley v. Bank of Northeast Arkansas, 4 Ark.App. 42, 627 S.W.2d 261 (1982). Reynolds does not cite any evidence which supports the theory of implied trust. As mentioned by the Bank, Reynolds bears the burden of demonstrating that an error occurred at the trial level. Looper v. Madison Guaranty Savings & Loan Associates, 292 Ark. 225, 729 S.W.2d 156 (1987).

There are circumstances under which the debtor/creditor relationship between banks and depositors is altered, but the existence of a trust relationship is dependent upon the bank having knowledge or notice sufficient to put it on inquiry. Cherokee Carpet Mills, supra; In re Brittenum & Associates, Inc. v. Cross County Bank, 83 B.R. 574 (E.D.Ark.1988).

Here there were no facts to indicate that Reynolds and the Bank had any relationship beyond that of debtor/creditor. That being so, there was no fiduciary relationship and the chancellor did not err in dismissing the claim based upon implied trust. II.

Whether The Court Erred In Holding That There Was No

Contract Existing Between The Parties, Therefore,

There Was No Breach Of Contract By The Bank

Reynolds argues that the signature card, executed by it and the Bank establishes the existence of a written contract between the parties which the Bank breached. The relevant part of the signature card states:

TO SMACKOVER STATE BANK, SMACKOVER, ARKANSAS. Below please find duly authorized signatures which you are to recognize in payment of checks on you and in the transaction of any other business on my/our account.

The chancellor held that the signature card did not establish a contract between the parties because it states that certain signatures are required to sign checks but nothing in the signature card deals with deposits. The chancellor noted that if a contract was breached it was an implied contract not in writing. The chancellor further found that Ark.Code Ann. § 4-4-406 (1987), which provides a time limitation in which a customer may notify a bank that it has paid over an unauthorized signature, was not applicable because under the statute the original deposit slip had to have been returned to the customer, whereas here it was retained by the Bank. The chancellor also found that Reynolds's failure over a span of twelve years to discover the embezzlement would constitute contributory negligence on the part of Reynolds that was "at least as much a cause of the loss to plaintiff as was the negligence of the employees of defendant." Finally, the chancellor held the equitable defenses of laches and estoppel would preclude Reynolds from recovery under a contract theory.

The CEO of the Bank testified that it was the Bank's custom to allow a person making a deposit marked "For Deposit Only" to receive "less cash" if the person was authorized to withdraw from the account. A senior vice president-cashier testified that the "less cash" transaction on deposits of "For Deposit Only" items had always been the Bank's policy and was followed generally by other banks. A banking consultant, Don Coker, testifying as an expert witness, stated that in business accounts allowing a person to receive cash from a deposit marked "For Deposit Only" is not a sound or common banking practice. The chancellor held that the bank allowing cash to be given on such deposits was a breach of an implied contract, but Reynolds could not recover because of the defenses of laches and equitable estoppel.

We agree. The theory of laches and equitable estoppel are based on the fact that Reynolds allowed this practice to go on for twelve years without complaining. This court stated that for silence to constitute an estoppel there must be both the opportunity and the duty to speak. Lavaca School Dist. No. 3 v. Charleston School Dist. No. 9, 304 Ark. 104, 800 S.W.2d 703 (1990). The action of the person asserting the estoppel must be the natural result of the silence, and the silent party must be in a situation to know that someone is relying on the silence to his detriment. Id. Laches is based on the theory that it is the unreasonable delay of the party seeking relief under such circumstances as to make it inequitable or unjust for the party to seek relief now. Briarwood Apartments v. Lieblong, 12 Ark.App. 94, 671 S.W.2d 207 (1984).

Appellant does not argue on appeal that the doctrines of equitable estoppel and laches are not applicable. Banks give depositors duplicate deposit slips to verify their actions. For twelve years, Reynolds received duplicate deposit slips which were kept in the company's records but not checked, while the embezzlement went undetected. Only the bank statements, which did not show the "less cash" withdrawals, were checked by the company.

III.

Whether The Court Erred In Holding That Appellant's

Negligence Action Was Barred By Appellee's

Defenses Of Contributory Negligence And

Laches And Estoppel

The chancellor held the Bank was negligent in allowing cash withdrawals against checks deposited with the endorsement "For Deposit Only." We think that was correct because the Bank's actions in paying over the specific endorsement were clearly negligent under Ark.Code Ann. §§ 4-3-205, -206 (1987). However, the chancellor also found Reynolds could not recover damages on the negligence theory because it failed to review the duplicate deposit slips maintained over the twelve years in its office which would have disclosed the dishonesty. Therefore, the court held that the Bank's defenses of contributory negligence, laches and estoppel precluded any recovery.

Relying on First Bank & Trust of Jonesboro v. Vaccari, 288 Ark. 233, 703 S.W.2d 867 (1986),...