Paine v. TRUSTEES OF MACALESTER COLLEGE

• Decision Date: 30 June 1925
• Citation: 7 F.2d 174
• Parties: PAINE et al. v. TRUSTEES OF MACALESTER COLLEGE et al.
• Court: U.S. District Court — District of Minnesota

7 F.2d 174 (1925)

PAINE et al. v. TRUSTEES OF MACALESTER COLLEGE et al.

District Court, D. Minnesota, Third Division.

May 27, 1925.

Judgment Amended June 30, 1925.

Selover, Schultz, Mansfield & Bryan, of Minneapolis, Minn., for plaintiffs.

Bishop H. & Paul D. Schriber, of St. Paul, Minn., for defendant.

JOHN B. SANBORN, District Judge.

The plaintiffs, Paine, Webber & Co., are and were a partnership engaged in selling securities. The Capital Trust & Savings Bank is a trust company of Minnesota, and was, up to May 3d of last year, at which time it was closed by the superintendent of banks, engaged in business as such. The Trustees of Macalester College is and was a corporation engaged in maintaining an educational institution, and will be referred to as "the college." For a considerable length of time prior to May 1, 1924, the college had been purchasing securities from the trust company and depositing them with it as custodian.

At one time John R. Mitchell was treasurer of Macalester College and also chairman of the board of directors of the trust company. He resigned in 1921, and Mr. Everett Kirk succeeded him. While Mr. Mitchell was treasurer, he found it convenient to have the trust department of the trust company assist in the collection of interest on the investments made for the college, and to have the securities deposited in the safe deposit vaults of the trust company, where they would be readily accessible. When Mr. Kirk became treasurer, he continued the arrangement Mr. Mitchell had made relative to the care of the securities.

The college paid for the rent of the boxes in which its securities were kept. Mr. Willis Otis was the trust officer of the trust company. He and his secretary did the necessary work in connection with the listing and safe-keeping of the securities, cutting and collecting interest coupons, and depositing the moneys received in the Capital National Bank to the credit of the college. For convenience, the securities were finally moved out of the safe deposit boxes and kept in a separate compartment in the bank vault on the floor above.

Aside from the collection of interest upon the securities, records of such securities were kept, and Mr. Otis had authority to sign checks for Mr. Kirk for the purchase of investments selected by the trustees of the college. The greater part of the securities had been purchased from the trust company, and its compensation consisted in the difference between what it had paid for such securities and the amount it sold them for to the college.

From time to time the college had funds for investment, but instead of purchasing securities it turned over the money to the trust company and took "interim certificates." These, in effect, stated that money had been deposited and that the college might select later on such securities as it desired, and that the securities, when so selected, should bear interest from the date of the interim certificate. On the 1st day of May, 1924, the college had $24,000 of these interim certificates. During the month of April there had been discussion by its trustees as to the advisability of the college carrying these interim certificates, and it was suggested that they were not proper investments for its endowment fund.

Mr. Bigelow, the president of the board of the college, knew that the trust company was heavily loaded down with farm mortgages, which were not salable and many of which were in default, and that it would require shortly a considerable amount of money to enable it to continue to do business. He suggested to Mr. Kirk, the treasurer, that the interim certificates be turned into actual securities. Mr. Kirk went to the trust company the morning of May 1st and got its bond list. Upon this list were $12,000 of Redwood county bonds, payable to bearer, and $12,000 of Northern States Power Company bonds. The list was submitted to Mr. Bigelow, and he advised the purchase of the Redwood county bonds and the Northern States Power Company bonds. Mr. Kirk notified the bond department of the trust company that the college would take these bonds, and would surrender its interim certificates. On the afternoon of May 1st the certificates were surrendered, and the trust company delivered to Mr. Otis, its trust officer, $12,000 of Redwood county bonds for the college, and these bonds were placed in the vault with its other securities.

The college supposed that these bonds belonged to the trust company, and had no reason to believe otherwise. The bonds actually belonged, at the time they were ordered by the college, to Paine, Webber & Co. As soon as the college had selected these bonds, Mr. Matteson, head of the bond department of the trust company, notified Paine, Webber & Co. that the trust company would buy the bonds. Between 2 and 3 o'clock in the afternoon of May 1st, the bonds were delivered to the trust company by a messenger of Paine, Webber & Co., and he received in payment therefor a cashier's check. The check was not cashed at the bank, as might have been done, but he took it to Minneapolis and delivered it to Paine, Webber & Co. It was deposited in due course, and would have been paid on Saturday, May 3d, but for the fact that the superintendent of banks of the state of Minnesota had taken charge of the trust company and closed its doors.

After the closing of the trust company, Paine, Webber & Co....