Newhouse v. First Nat. Bank

• Decision Date: 22 July 1926
• Docket Number: No. 3856.,3856.
• Parties: NEWHOUSE v. FIRST NAT. BANK OF CHICAGO.
• Court: U.S. District Court — Northern District of Illinois

13 F.2d 887 (1926)

NEWHOUSE v. FIRST NAT. BANK OF CHICAGO.

No. 3856.

District Court, N. D. Illinois, E. D.

July 22, 1926.

Haight, Adcock, Haight & Harris, of Chicago, Ill., and Malcolm O. Mouat, of Janesville, Wis., for plaintiff.

Harold V. Amberg, John N. Ott, and C. Edward Dahlin, all of Chicago, Ill., for defendant.

LINDLEY, District Judge.

Gold-Stabeck Company, of Minneapolis, dealer in securities and investments and trustee under certain trust deeds securing bonds, was, from and after 1909 until its receivership in 1921, a general commercial depositor of defendant in Chicago. On November 8, 1921, the depositor forwarded to defendant for deposit a check for $20,087.70, drawn on the Waterloo, Iowa, Savings Bank, payable to Clarence W. Austin, and indorsed by him to depositor, who in turn indorsed it to defendant, who thereupon entered it to the credit of depositor, whose balance was then several thousand dollars in addition to said deposit. This check was paid on November 12th. Austin had remitted it to the Gold-Stabeck Company to retire certain bonds and interest secured by trust deed upon land, which Austin had purchased, subject to the indebtedness secured by said trust deed, without assuming such indebtedness, so far as this record discloses. Gold-Stabeck Company was trustee under the trust deed, and received the remittance as such trustee, but did not, prior to or at the time of the deposit, notify defendant of the trust character of the deposit. The bonds were not yet due, but the remittance was received to be applied upon the same, and certain tracts of land were thereupon released from the lien of the trust deed, as therein provided. Gold-Stabeck Company then owed defendant $150,000, the indebtedness being evidenced by promissory notes in collateral form (except one of $25,000), containing a provision that, in case of insolvency, defendant might appropriate the balance of the depositor upon the indebtedness represented by said notes, whether then due or not due. The defendant held certain collateral, but not of a sufficient amount to pay the entire debt, and now has a substantial loss.

On November 12, 1921, defendant received a letter calling a meeting of the creditors of Gold-Stabeck Company, to be held at the Northwestern National Bank of Minneapolis on November 15th, and thereupon wired the Gold-Stabeck Company that it would attend the conference, but expected depositor to leave its balance intact until after the conference, and caused entries to be made on its books as to the Gold-Stabeck account as follows: "Refer checks to Essroger," or "Refer checks to Anderson." Essroger was a vice president, and Anderson an assistant vice president, in the department where the account was handled. The Gold-Stabeck Company on November 14th wired to defendant in reply that it had issued no checks since receipt of the telegram of November 12th, and that it would issue none until after the conference of the 15th, but that it would expect defendant to honor checks issued before said wire was received. Essroger attended the creditors' meeting. Two witnesses testified that they told him about 9:45 a. m. of November 15th that the check on the Waterloo Bank constituted trust funds belonging to bondholders. One of these witnesses and a third witness testified that in the evening of November 15th Mr. Essroger was again told several times that the check in question constituted trust funds, and that the bank had no right to appropriate the fund to the bank's debt, and that Mr. Essroger said he would give the matter consideration, and that, if the bank had a right to appropriate the deposit, it would do so. Each of the three witnesses testified that there was no claim upon the part of Mr. Essroger that the balance had already been appropriated. Mr. Essroger admitted that in the afternoon of November 17th he was told by the officers of Gold-Stabeck Company that the check in question constituted trust funds.

All checks drawn by the Gold-Stabeck Company prior to November 12th, reaching defendant after that date, were paid in due course. They amounted to $9,715.21, and left a balance on November 16th to the credit of Gold-Stabeck Company of $38,229.62. When Essroger returned to his office in Chicago on November 16th, he caused entries to be made on his books charging off the entire balance and crediting that amount on the notes of Gold-Stabeck Company. It is to recover the sum of $20,087.70, represented by the Austin check, included in said balance, that this suit is brought.

The depositor was insolvent on November 10th, but the record seems clear that no one realized or knew that fact. An application in equity for a receiver was made in December, and the appointment duly made. The bill therein expressly averred that the Gold-Stabeck Company was not insolvent. Upon the appointment of receiver, the Gold-Stabeck Company resigned as trustee in said trust deed, and the plaintiff succeeded it as the trustee therein, and filed this suit.

In August, 1923, the plaintiff filed proof of claim in the receivership proceedings to recover the amount paid by Austin to the Gold-Stabeck Company on November 7, 1921. This claim was allowed, and dividends thereon aggregating 18 per cent. have been paid, and a further dividend of 2 per cent. will be paid.

To the suit of the plaintiff, the defendant answers that it completely appropriated the sum of money in question on November 12th; that the plaintiff is estopped to maintain this action, because of its election to file its claim in the receivership; and that the plaintiff has no right to maintain this suit, as the funds are not trust funds, because Austin was not liable to pay the debt.

The plaintiff, as the trustee under an express trust, is the real party in interest. As a consequence he may follow the trust funds without joining the beneficiaries. As stated by the Supreme Court in Carey v. Brown, 92 U. S. 171, 23 L. Ed. 469: "The general rule is that in suits respecting trust property, brought either by or against the trustees, the cestuis que trust as well as the trustees are necessary parties. Story's Eq. Pl. § 207. To this rule there are several exceptions. One of them is that, where the suit is brought by the trustee to recover the trust property or to reduce it to possession, and in no wise affects his relation with his cestuis que trust, it is unnecessary to make the latter parties. Horsly v. Fawcett, 11 Beav. 569, was a case of this kind. The objection taken here was taken there. The Master of the Rolls said: `If the object of the bill were to recover the fund with a view to its administration by the court, the parties interested must be represented. But it merely seeks to recover the trust moneys, so as to enable the trustee hereafter to distribute them agreeably to the trusts declared. It is therefore unnecessary to bring before the court the parties beneficially interested.' Such is now the settled rule of equity pleading and practice." Applying this doctrine in various situations are the following authorities: Kerrison v. Stewart, 93 U. S. 155, 23 L. Ed. 843; Wescott v. Wayne Agricultural Works (C. C.) 11 F. 298, 303; Hickox v. Elliott (C. C.) 22 F. 13, 20; Smith v. Portland (C. C.) 30 F. 734, 737; Hunter v. Robbins (C. C.) 117 F. 920; Woodward v. Davidson (C. C.) 150 F. 840, 844; Dalton v. Hazelet, 182 F. 561, 570, 105 C. C. A. 99; Pennington v. Smith (C. C.) 69 F. 188; 39 Cyc. 548-550. Clearly the plaintiff is the proper party to maintain the present suit.

Nor can there be any question that these funds were in fact of trust character. Austin was furnishing this money for the express purpose of retiring bonds. He delivered it to the trustee for the bondholders for that purpose. The trustee received it for that purpose, and the mere fact that Austin had not assumed and agreed to pay the mortgage indebtedness is wholly immaterial. Buying the property subject to the lien securing the indebtedness, he had an interest in procuring the satisfaction of the lien, and proceeded in an entirely proper manner so to do. Article 10 would seem to indicate that the trustee had a right to accept these funds before maturity of the bonds, but it is immaterial whether this be true or not. The trustee certainly had a right to receive funds for the discharge of bonds, even though they were not yet due. There is no reason why one may not anticipate the date of maturity of an indebtedness. No penalty should...