National Indemnity Co. of Omaha v. American Nat. Bank

• Decision Date: 30 April 1954
• Docket Number: Civ. No. 2422.
• Citation: 120 F. Supp. 713
• Parties: NATIONAL INDEMNITY CO. OF OMAHA v. AMERICAN NAT. BANK OF SAINT PAUL et al.
• Court: U.S. District Court — District of Minnesota

120 F. Supp. 713

NATIONAL INDEMNITY CO. OF OMAHA v. AMERICAN NAT. BANK OF SAINT PAUL et al.

Civ. No. 2422.

United States District Court D. Minnesota, Third Division.

February 25, 1954.

As Amended April 30, 1954.

Irvin E. Schermer and Sheldon Gensler, Minneapolis, Minn., for plaintiff.

James H. Geraghty and Milton H. Altman (of Lipschultz, Altman & Geraghty), St. Paul, Minn., for American Nat. Bank of St. Paul.

Charles Weyl, St. Paul, Minn., for Fidelity & Casualty Co. of New York.

DONOVAN, District Judge.

Plaintiff brings this action for an accounting, and will be referred to herein as "plaintiff". In the order set forth in the title of the case, defendants will hereafter be referred to as "the Bank", "Fidelity", "Auch" and "Agency, Inc.", respectively.

By separate answers the Bank counterclaimed against plaintiff. Fidelity pleaded assignment of the Bank's claims against Auch and Agency, Inc., in the sum of $71,338.94, and set up cross-claims against the last two defendants in said sum. Auch and Agency, Inc., made no answer and are in default. Plaintiff's motion to dismiss as to Fidelity was granted. Fidelity's motion for findings and judgment against Auch and Agency, Inc., in said sum was granted.

There is no serious dispute as to the facts. For a number of years prior to the time here concerned with, Auch had been in the insurance business and duly licensed for that purpose. In October, 1952, he caused Auch Agency to be incorporated for the purpose of carrying on said business. Plaintiff and Auch had entered into an agreement pursuant to which Auch and his successor, Agency, Inc., solicited and sold insurance and collected premiums in connection therewith, such premiums to be remitted to plaintiff and like insurers as required. In plaintiff's case premiums, less commissions, were to be forwarded to plaintiff within forty days from the end of the month in which such insurance became effective, as covered by the statements of account and as provided by agreement.¹

Auch and Agency, Inc., maintained but one general checking account with the Bank into which income and premiums were indiscriminately deposited. From this account remittances were made to plaintiff and operating expenses were met by checks issued from the same account.

Upon application made by Auch, the Bank's Loan Committee recommended extension of credit to Auch in the sum of $100,000. A rule requiring the borrower to deposit customers' money directly in the collection account was adopted and consistent therewith the Bank would not accept any Auch checks drawn on his Agency account in payment of notes executed by him. The Bank relied upon the sufficiency of collateral furnished by Auch in the form of deferred premium finance contracts. On the strength of the foregoing, loans were made.

In March of 1952 Auch began to default in the payment of customers' monies into the premium collection account, and as provided by the premium finance contracts. As a result, officers of the Bank called on him in September, 1952, to make inquiry and check the matter. An understanding of reassurance was undoubtedly had at that time.

A recital of all that followed is unnecessary. A few illustrations will suffice. On November 6, 1952, Auch drew a check on his Agency account for $19,000 to cover payments of $12,000 and $7,000 due on notes secured by said collateral. The Bank concedes this violated the rule referred to. Other payments were made under like circumstances. In February, 1953, there was due Auch from Kelley-Haas Agency the sum of $27,450.50 for insurance premiums written by the latter agency for plaintiff during December, 1952, and January, 1953, and Auch simultaneously with the receipt of this payment issued two more checks to the Bank in the sums of $7,000 and $9,013.34, and on March 3, 1953, said checks were charged to the account here concerned with.

It is undisputed that Auch mingled premiums collected in his business with his private funds in his Agency account. He testified that he intended to adhere to the Agency contract of June 1, 1951. Checks drawn by him payable to National Indemnity Company were on check stationery which merely said "Charles T. Auch Agency." Plaintiff's witnesses Ringwalt, Liesche and Wortz testified that in the insurance industry the companies did not require agents to maintain a separate bank account for each company the agent represented, and that the common practice was for the agent to maintain a general premium account into which he put the premiums of the various companies and from which remittances for the premiums were disbursed. They stated that they did not sanction commingling of the funds, but had no knowledge that this was being done. They testified that it was not customary in the industry for agents to designate the nature of the account on the face of the check drawn in disbursement of the premiums, and that until March 19 or 20, 1953, they had no reason to suspect that there was a mingling.

During the latter part of February and the forepart of March, 1953, the Bank first disturbed by Auch's manipulations, later became suspicious of him, and as a result of an inquiry discovered that most of the collateral consisted of forged instruments. The Bank thereupon exercised its right of set off, in the face of a garnishment by plaintiff, and appropriated the entire balance of said account in the sum of $8,390.98. Subsequent to March 20, 1953, Auch continued to make deposits of National Indemnity Company premiums into his Agency account to the extent of $2,761.02. Subsequent to March 20, 1953, the Bank again returned five checks drawn by Auch on his Agency account payable to the order of National Indemnity Company, giving as a reason that the account had been closed.

On May 6, 1953, the Auch account was closed. The monies withdrawn by reason of the off sets of March 12, 1953, and March 23, 1953, had been credited by the Bank to the Charles T. Auch collection account. On June 25, 1953, the Bank applied $10,256.60 to the outstanding Charles T. Auch notes and interest thereon. The balance of the off set in the amount of $3,859.34 remained as surplus funds in the hands of the Bank. Plaintiff instituted suit for an accounting, claiming that the insurance premiums collected by Auch and Agency, Inc., were trust funds, and the property of the plaintiff.

Plaintiff contends that the insurance premiums collected by an agent become a trust fund, thereby creating a trust relationship as opposed to a debtor-creditor relationship. Plaintiff maintains that this is so even if the Bank had no knowledge of the source of the funds.

Defendant Bank contends that the general account in question was subject to its right under the terms of said promissory notes, to offset the balances in said accounts against the indebtedness due said Bank from the maker of said notes.²

The first issue to consider in the instant case is whether the funds deposited in the defendant Bank by Auch and Agency, Inc., constituted money held in trust for plaintiff. In other words, do the facts warrant the conclusion that the Bank had actual or constructive knowledge of the trust character of the funds, as contended herein by plaintiff?

Opposing the claim of plaintiff, the Bank urges that the conduct of the general account in question both by the depositor and the Bank discloses a situation opposed to the character of a trust.³ However, if the Bank knew that premiums were being deposited in the account, then it must be held to know that the account was, at the very least, in part a trust account and to have been put on notice that the monies it appropriated were to that extent a trust account.⁴

There can be no serious dispute but that the Bank knew at all times since the account was established that it was partially made up of premiums collected for and belonging to the plaintiff. In support of this, the Bank's officer testified as follows:

"Q. And you were aware that Auch had been depositing premiums collected on National Indemnity Company policies in that particular account and drawing checks on that account? A. Yes, I was aware of that.

"Q. And that was true during the entire period, was it not? A. That is correct.

"Q. You recognized that there was an agency relation throughout that entire period between the National Indemnity Company and Mr. Auch, did you not? A. I assumed that there was an agency relation between them inasmuch as he was writing their policies.

"Q. And you knew then that these premiums which he collected did belong to National Indemnity Company, isn't that correct? A. I would assume that they did.

"Q. As a matter of fact, you knew that all during this period, isn't that correct? — or you assumed so, let's put it. A. I assumed that the premiums that he had collected on policies sold for the National Indemnity Company were premiums that belonged to the National Indemnity Company. There was never any question about that.

"Q. And that was true the entire period of time? A. That is correct."

The questions and answers above quoted make clear that defendant Bank had knowledge as distinguished from mere suspicion, and was aware that the deposit was a trust fund. This knowledge permits of no presumption to the contrary and upon which the Bank could safely rely.⁵

The facts in this case bring it within the law clearly enunciated and set forth in the cases cited in footnote 5, which in effect hold that where an agent deposits trust funds in his own name in a bank and the bank has express or implied notice of the trust character of...