Kane v. First Nat. Bank of El Paso, Tex.

• Decision Date: 01 April 1932
• Docket Number: No. 6258.,6258.
• Citation: 85 ALR 362,56 F.2d 534
• Parties: KANE et al. v. FIRST NAT. BANK OF EL PASO, TEX., et al.
• Court: U.S. Court of Appeals — Fifth Circuit

85 ALR 362, 56 F.2d 534 (1932)

KANE et al. v. FIRST NAT. BANK OF EL PASO, TEX., et al.

No. 6258.

Circuit Court of Appeals, Fifth Circuit.

March 3, 1932.

Rehearing Denied April 1, 1932.

Joseph M. Nealon, Joseph McGill, M. Nagle, and Maury Kemp, all of El Paso, Tex., for appellants.

A. H. Culwell and Allen R. Grambling, both of El Paso, Tex., for appellees.

Before BRYAN, FOSTER and SIBLEY, Circuit Judges.

SIBLEY, Circuit Judge.

H. O. Kane is the trustee in bankruptcy of Ware-Ramey Company, appointed on a petition filed August 3, 1929. First National Bank, of El Paso, Tex., was the bankrupt's banker. The bankrupt was a building contractor having among other contracts one with Alpine independent school district to build a school building, for the performance of which Maryland Casualty Company was surety. On May 15, 1929, the bankrupt indorsed and deposited with the bank a check for $10,000 drawn to its order by Alpine independent school district, it being, as the bank knew, a partial payment on the contract. On May 18, 1929, the bankrupt indorsed and deposited with the bank a check for $18,436.80, drawn to its order by Argonaut Realty Company. Each check was on an out-of-town bank, and was received under a special agreement for collection, but entered as a credit on bankrupt's account; and was indorsed by the bank and sent to a correspondent. On May 21, 1929, the day preceding actual collection of the checks, the bankrupt advised the bank of its inability to continue in business, whereupon the bank credited the entire balance of the bankrupt's checking account which, assuming the collection of these checks, was an amount of $24,291.10, upon notes which the bank held against the bankrupt due May 31st and June 2, 1929, aggregating $50,000. The checks, totaling $28,436.80, were actually collected May 22d, and the money kept by the bank. The difference of $4,145.70 covered checks of the bankrupt paid by the bank between May 15th and May 21st which would have been an overdraft, but for these deposits and collections. Kane as trustee sued at law to recover the $24,291.10 as a voidable preference. Maryland Casualty Company intervened as permitted by Texas practice, and sought a judgment against the bank for the $10,000 arising from the Alpine check. All parties moved for an instructed verdict, and the court gave judgment for the bank. Kane, trustee, and Maryland Casualty Company appeal.

We are not advised of any statute which requires that payments duly made to a contractor for public work be handled by him in any special way, or be given any particular application. No such contractual obligation appears in this case. In the absence of statute or stipulation otherwise the general responsibility of the contractor is credited in contracting with him, and his general resources are drawn on by him in executing the contract. Money or checks paid to him as the work progresses are the property of the contractor unincumbered by any trust, just as are payments to others for goods manufactured or services performed. The contractor's banker may receive such checks and is not bound to see to their application, nor to ascertain the state of the contractor's account with each contract; nor, if he knows it, need he govern himself in any wise with reference thereto. No wrong is done to the contractor's surety in recognizing the contractor's full title to such checks by taking them on deposit with all the consequences ordinarily attaching to such deposit. The cases supposed to establish a trust in favor of the surety are based on Prairie State Nat. Bank v. United States, 164 U. S. 227, 17 S. Ct. 142, 41 L. Ed. 412. That case did not involve a payment made to the contractor, but involved the reserve kept back by the United States to secure the final performance of the contract for which the surety on the bond had also bound himself. The surety having had to complete the contract claimed this reserve, which was still in the hands of the United States. The Prairie State Bank had only an invalid assignment of it. It was decided that this reserve was a security stipulated in the contract to be held by the creditor for the performance of the obligation, to which the surety became subrogated on performing the obligation just as he would be subrogated to any other security. The case has no application to money not reserved as a security but paid over to the contractor. This reserve was also involved in Henningsen v. United States F. & G. Co., 208 U. S. 404, 28 S. Ct. 389, 52 L. Ed. 547, and Hardaway v. National Surety Co., 211 U. S. 552, 29 S. Ct. 202, 53 L. Ed. 321. In London & Lancashire Indemnity Co. v. Endres (C. C. A.) 290 F. 98, the surety performed the contract and sued to enjoin the payment of the reserve to the contractor, who, pending the suit, went into bankruptcy. The judgment for the surety was in accord with the Prairie Bank Case. In Cox v. New England Equitable Insurance Co. (C. C. A.) 247 F. 955, the reserve was involved, but had been paid over to the contractor by mistake while claims were outstanding which the surety paid. The contractor had paid it to his bank, but it was held a preference and the bank lost it to the trustee in bankruptcy. As against the trustee it was held that the surety had the better right. None of these cases extends the surety's rights beyond the reserve. In Columbia Digger Co. v. Sparks (C. C. A.) 227 F. 780, a payment to the contractor was involved. The contractor had paid it over to a materialman to whom he owed a debt for the job and also an old debt. The materialman applied the payment to the old debt and sought to hold the surety for the new one. It was held that as against the surety he must apply the money to the new debt. The decision was on the law of application of payments and does not establish any general trust in the surety's favor by virtue of which he could take the money away from the recipient of it. We think the Maryland Casualty Company has no right to a judgment against the bank.

The trustee contends that the bank in applying to the old notes $24,291.10 which arose from collecting the checks obtained a preference, and that, having at that time reasonable cause to believe such preference would result, the transfer is voidable under Bankruptcy Act, § 60, 11 USCA § 96. The bank contends that it came to owe the bankrupt for the checks in the usual course of business and then exercised its right to offset mutual demands preserved to it even after bankruptcy by Bankruptcy Act, § 68, 11 USCA § 108; and that in addition the checks were held for collection under a banker's lien and by virtue of that lien the proceeds might be applied after knowledge of the customer's insolvency. That a bank may thus set off its liability for deposits even when they were received after the bank knew of the depositor's insolvency was held in New York County Nat. Bank v. Massey, 192 U. S. 138, 24 S. Ct. 199, 48 L. Ed. 380; but the deposits there received stood subject to check for several days and until bankruptcy occurred. In that interval one check was paid, and the court pointed out that there was nothing to show that checks for the entire amount would not have been honored. The case is put upon the ground that by the deposit the bankrupt's estate lost nothing in that the bank's obligation to pay the depositor's checks was substituted in equal amount for what the bank got; that there was then no purpose to obtain a preference by set-off; and the set-off subsequently made was expressly permitted by the Bankruptcy Act. This ruling was followed in Studley v. Boylston Nat. Bank, 229 U. S. 523, 33 S. Ct. 806, 808, 57 L. Ed. 1313, emphasis being laid on the fact that "the deposits were honestly made, in due course of business, and without an intent to prefer the bank." The application of the deposit account to the old notes was made two months before bankruptcy, but was only partial, a substantial account remaining subject to check. These cases indicate that, while the offset is allowed by the Act, if at the time the deposits are received there is not an intent in...