Maryland Cas. Co. v. Cent. Trust Co.

• Decision Date: 22 April 1948
• Citation: 297 N.Y. 294,79 N.E.2d 253
• Parties: MARYLAND CASUALTY CO. v. CENTRAL TRUST CO. UNITED STATES ex rel. MARYLAND CASUALTY CO. v. SAME.
• Court: New York Court of Appeals Court of Appeals

297 N.Y. 294

79 N.E.2d 253

MARYLAND CASUALTY CO.

v.CENTRAL TRUST CO.

UNITED STATES ex rel. MARYLAND CASUALTY CO.

v.SAME.

Court of Appeals of New York.

April 22, 1948.

Appeal from Supreme Court, Appellate Division, Fourth Department.

Consolidated actions by the Maryland Casualty Company, and by United States of America, on relation of Maryland Casualty Company, against the Central Trust Company for an amount paid by plaintiff, as surety on the bankruptcy trustee's bond, in consideration of a substituted trustee's assignment of his claim against defendant for the proceeds of forged checks paid by defendant from bankrupt's estate funds deposited with defendant. From a judgment of the Appellate Division of the Supreme Court, 271 App.Div. 651, 67 N.Y.S.2d 339, which reversed on the law and facts a judgment in favor of plaintiff entered by Supreme Court in Monroe County, upon a decision of the court at a Trial Term, Gilbert, J., without a jury, 51 N.Y.S.2d 65, and directed a judgment in favor of defendant, the plaintiffs and relator appeal.

Judgment of Appellate Division reversed and that of Trial Term affirmed. Ruben A. Dankoff, of Rochester, for appellants.

J. Paul Brennan, of Rochester, for respondent.

CONWAY, Judge.

In 1937, there was referred to one Sanford, Referee in Bankruptcy for Monroe and Wayne Counties, New York, the Matter of Van Vechten Milling Co., Inc., an adjudicated bankrupt. Thereafter one Haidt was appointed trustee. He qualified and filed a bond of the plaintiff company conditioned upon his accounting for all moneys and assets of the estate and the faithful performance of his official duties. He opened an account in the Central Trust Company, the defendant herein, selecting it from the four designated depositories for bankruptcy estate funds in Rochester. Through sales of the bankrupt's property he deposited upwards of $16,000 in that account. It was specifically conceded during the trial that such deposit could be lawfully withdrawn only by check or draft signed by the clerk of the District Court or by Haidt as trustee and countersigned by a judge of said court, or by a referee designated by the court or by the clerk or his assistant when properly authorized. That was by reason of number 29 of the General Orders in Bankruptcy, 11 U.S.C.A. following section 53, 298 U.S. 695, 697, and the amendments in 305 U.S. 681, 695. The consent of the defendant to become one of the designated depositories, the acceptance of the account of Haidt as trustee and the applicable provisions of General Order No. 29 constituted the contract between the defendant and its depositor. Fidelity & Casualty Co. v. Farmers Nat. Bank, 275 N.Y. 194, 9 N.E.2d 833. The defendant kept on a file a sample original signature of Sanford as referee for the purpose of comparing it with his countersignature on all checks drawn upon bankruptcy estate funds on deposit with it. It is conceded that the defendant knew that the deposit was an asset of the estate of Van Vechten Milling Co., Inc., bankrupt, and was made with it by Haidt in his capacity as duly appointed trustee of the bankruptcy estate.

1938 and 1939, Haidt as trustee forged the countersignature of Sanford as referee upon eight checks made payable to his own individual order and illegally appropriated the money when the defendant paid the checks. After such payments, the defendant never returned the vouchers to Haidt. That was due to the fact that Referee Sanford had instructed all the ‘depositors for bankruptcy funds not to release the checks to * * * trustees but to deliver them only to my (his) office.’ Some of the cancelled vouchers were delivered by the defendant on September 16, 1938, to a clerk of the bankruptcy court, who worked under the supervision of Sanford. The others were delivered to Referee Sanford on September 26, 1940. The dates are important since notice of the foregeries was given within one year of the latter date. The vouchers and bank statements after such delivery were put in an unlocked file in the referee's office to which Haidt had access. The statement of account delivered to the clerk with the first group of checks referred to above was later found to have been mutilated so that it did not disclose the payment of the first four forged checks. Those four checks had been abstracted from the file. The second group of checks, which had been delivered to Referee Sanford, was obtained by him because he had become suspicious of the conduct of Haidt. They were available on the trial.

Haidt was removed from the office of trustee by Referee Sanford who appointed one Herney as substituted trustee. The amount of the forgeries of Haidt was then determined and demand made upon the defendant bank for payment of the unauthorized and forged checks. That sum was paid by the plaintiff, on its bond, to Herney as trustee, who, with the authorization of Sanford, as referee, executed and delivered to plaintiff an assignment of his rights as trustee against the defendant bank. Upon the refusal of the defendant to make good the amount of the forged checks, the plaintiff brought two actions, since consolidated, against the defendant. The first was based upon its rights as subrogee and assignee by reason of its payment to the substituted trustee Herney under its bond. The second action, entitled United States of America on the relation of the Maryland Casualty Company against the defendant, was brought upon the bond which the defendant, as an official depository, was required to give to United States of America conditioned upon the faithful discharge of its duties under the Bankruptcy Act, 11 U.S.C.A. s 1 et seq. the full and faithful accounting for all moneys deposited in it as such depository and obedience to all orders of the court. Defendant does not contend in its brief that plaintiff has not established a prima facie case as to either action. Instead, it contends that recovery is barred, in whole or in part, by one or more of the five defenses pleaded in each action. Neither of the courts below passed upon the second action and we shall not discuss it further.

In the first action, we need only refer to the first two causes of action pleaded. The first was in tort and it was therein alleged that payment by the bank upon checks which it knew or should have known to be unauthorized, enabled the trustee to commit a breach of trust and to convert bankruptcy funds to his own use. In the second cause of action in contract it was alleged that defendant had failed to transfer and credit to the account of Herney, as trustee, the moneys which it had wrongfully paid to Haidt, although due demand had been made therefor, and that defendant was therefore indebted to plaintiff as assignee for such moneys.

A consideration of the first of the five partial defenses interposed in the first action will necessitate the discussion of certain applicable rules of law which will be determinative of all but the fifth partial defense. That defense the negligence of the referee was necessarily rejected, as we shall see, since the two parties concerned were the defendant bank and the trustee, debtor creditor respectively. Even were we to assume that the defense was that the failure of the referee, a judicial officer to supervise closely the trustee's activities constituted the proximate cause of the loss, it must fail. The proximate cause was the payments of the bank upon forged countersignatures.

The first partial defense, pleaded as applicable only to the first four of the forged checks, is based upon the time limitation embodied in section 326 of the Negotiable Instruments Law, Consol.Laws, c. 38, which reads as follows: ‘No bank shall be liable to a depositor for the payment by it of a forged or raised check, unless within one year after the return to the depositor of the voucher of such payment, such depositor shall notify the bank that the check so paid was forged or raised.’

The primary question for our determination is the identity of the ‘depositor’ referred to in section 326, at least so far as to decide whether it is the judicial officer, the Referee in bankruptcy. The Trial Justice, who sat without a jury and who gave judgment to the plaintiff under a stipulation that he could direct a verdict with the same force and effect as though a jury were present, found that Haidt as trustee was the depositor and that the vouchers showing payment of the forged checks had never been returned to him. See Shattuck v. Guardian Trust Co., 204 N.Y. 200, 210, 97 N.E. 517, 520, where we said: ‘If the vouchers are never returned to him (the depositor), the statute (Negotiable Instruments Law, s 326) has no application, for he is only compelled to serve the notice within one year after the return to him of the voucher of each payment upon which the bank relies.’

The Appellate Division specifically reversed that finding being of the opinion that the depositor in this instance was the ‘estate of the bankrupt’. It said: ‘As a depositor, of course, the estate of the bankrupt must work through the representatives of the Bankruptcy Court. A return of the vouchers to any officer of that court, whether he be the referee or the trustee, should make no difference in the application of the section.’ 271 App.Div. 651, 655, 656, 67 N.Y.S.2d 339, 343. We take the other view.

A depositor is one ‘who makes a deposit,’ especially of money in a bank. Vol. 1, Bouvier's Law Dictionary, Rawle's 3d Revision. The evidence discloses that Haidt personally brought the money to the bank, that he chose the depository from the four designated ones without direction, that he signed the signature card, that he was the ‘maker’ of the checks drawn on the account, that the referee never handled money himself and that the referee did not authorize any one to make deposits on his behalf as a representative of the court.

That Haidt was the ‘depositor’ is confirmed by reference to the scheme of the United States...