Pine Bluff Nat. Bank v. Kesterson

• Decision Date: 17 March 1975
• Docket Number: No. 74--231,74--231
• Parties: , 16 UCC Rep.Serv. 805 PINE BLUFF NATIONAL BANK, Appellant, v. Kenneth KESTERSON et al., Appellees.
• Court: Arkansas Supreme Court

Page 253

520 S.W.2d 253

257 Ark. 813, 16 UCC Rep.Serv. 805

PINE BLUFF NATIONAL BANK, Appellant, v. Kenneth KESTERSON et al., Appellees.

No. 74--231.

Supreme Court of Arkansas.

March 17, 1975.

Jones, Matthews & Tolson, Pine Bluff, for appellant.

Owens & Fikes, Pine Bluff, Tommy H. Russell, North Little Rock, for appellees.

FOGLEMAN, Justice.

This litigation was commenced on May 12, 1971, by Kenneth Kesterson and Harold Norton, who, along with W. A. Harris, were trustees of Pine Bluff Memorial Park Cemetery Permanent Maintenance Fund (to which we will hereafter refer as Trust Fund). Their complaint was against Harris, the sole owner, president and manager of Pine Bluff Memorial Park Cemetery, and against Pine Bluff National Bank to recover for funds allegedly withdrawn from the bank account of the Trust Fund by W. A. Harris, with the approval and consent of Bank, in violation of the trust and without proper authority. They sought an accounting.

Bank answered and made Pine Bluff Memorial Park Cemetery, Inc., (which we will call the cemetery corporation) Arkansas Memorial Gardens, Inc. and Tommy H. Russell, Trustee, third party defendants. The defenses pleaded were the statute of limitations, laches, and the bar of Ark.Stat.Ann. § 85--4--406 (Add.1961). Appellant alleged that it had promptly mailed statements of the account of Trust Fund to the address designated along with all items paid out of the account by it, all of which it contended it had paid in good faith. Bank also alleged that any unauthorized withdrawal by Harris had been ratified by the plaintiffs (who are appellees here) and by the State Cemetery Board. The allegations relating to ratification by the Cemetary Board were that this board had authorized the third party defendant Arkansas Memorial Gardens, Inc. (which we will call Memorial Gardens), to operate the cemetery owned by the cemetery corporation upon the consideration that it would restore the trust fund. Memorial Gardens denied these allegations generally but, admitting that it had agreed to restore the Trust Fund, denied that its agreement relieved the bank from liability. Russell, as Trustee, admitted the transfer to him by Harris of certain assets to apply toward restoration of the Trust Fund, but denied that they were sufficient to do so and resisted a marshalling of assets.

Appellee Fikes, as receiver of Trust Fund, then intervened alleging that Kesterson and Norton were guilty of breaches of their duties as trustees in that they failed to keep themselves informed of the condition and status of the Trust Fund and failed to protect it from loss. He sought to recover $30,000 from them. The intervenor also sought recovery of $11,000 from appellant bank based upon their alleged negligence in permitting Harris on October 16, 1967 to withdraw $11,000 deposited in the Trust Fund on that date by check bearing his signature alone. He alleged that this deposit consisted of the proceeds of three certificates of deposit issued by Bank to Trust Fund which had been endorsed only by Harris. The signature card for both the checking account and the certificates of deposit required the signatures of all three trustees. The receiver also sought to recover $8,000 from Memorial Gardens and Russell, and impress a constructive trust on the cemetery corporation, Memorial Gardens, and any funds received by Russell for restoration of Trust Fund.

To all intents and purposes, Bank pleaded the same defenses to the intervening receiver's complaint. During the course of the litigation, Harris died and a special administrator was appointed to defend, and the receiver's complaint against Russell was dismissed with prejudice. Before trial, the receiver amended his complaint to allege, in the alternative, breach of contract by Bank.

The chancery court rendered judgment against Bank for $11,000 for permitting the certificates of deposit to be cashed on the signature of Harris. The case was tried upon an agreed statement of facts along with the testimony of several witnesses.

Most of the facts are undisputed and there is little dispute about any of them. The three trustees purchased a certificate of deposit for $8,900 on June 2, 1965, at which time they signed signature cards for it and for the cemetery corporation checking account requiring signatures of all three on behalf of the Trust Fund. No address was given for the Trust Fund on the signature card, but the Depositor's contract included this clause: 'The bank is authorized to mail statements and cancelled checks to the last address known to the bank.' All three trustees signed a check for $1,100 on the Trust Fund checking account for the purchase of another certificate of deposit on October 11, 1965. This check accompanied the October 1965 bank statement. Statements of the account were mailed by Bank on November 30, 1965, January 31, February 28, March 31, April 29, May 31, August 31, November 30, and December 31, 1966. On November 22, 1966, the checking account was increased from $135 to $1,400.66 to bring the total Trust Fund up to $19,400.66, the amount that should have been paid into it according to an audit for the Arkansas Cemetery Board. The other assets of the fund were the two certificates of deposit which have previously been mentioned, and a deposit in Guaranty Federal Savings & Loan Association at Pine Bluff amounting to $8,000.

On December 13, 1966, a check signed only by Harris was used to purchase a certificate of deposit for $1,100. On December 21, the bank paid a check on the account to W. A. Harris for $400 signed by Harris only. This check and the one for the $1,100 certificate of deposit accompanied the statement mailed at the end of the month which showed the balance to be $0.66. On January 3, 1967, a check of Guaranty Federal Savings and Loan Association for $8,000, bearing the Trust Fund's endorsement by W. A. Harris, trustee and Charles Arnold, trustee, was deposited to the checking account. On the same day a check on the account for the same amount signed only by Harris was deposited to the operating account of the cemetery corporation and used for proper purposes except for $750 used to pay individual income taxes of Harris. The check on the Trust Fund was included in its bank statement for that month.

There were no other transactions involving the Trust Fund account until October 16, 1967, when the proceeds of the certificates of deposit issued by Bank for $1,000, $1,100 and $8,900 were deposited to the Trust Fund checking account on endorsement by Harris only. A check on the account for $11,000 payable to the cemetery corporation signed by Harris only was paid on the same date. A statement showing the deposit to the Trust Fund account and the payment of the check, along with the check itself was mailed to the usual address at the end of the month. It showed a balance of $0.66. There were no further transactions involving this account until March 12, 1970, when it was closed. All bank statements, at least since August 1966, were mailed to 6707 Dollarway Road, Pine Bluff at which the cemetery corporation office was located. This address for Trust Fund was shown on the certificate of deposit issued December 13, 1967, and on Bank's ledger sheet and statements at all times after September 30, 1965. The address shown on the ledger sheet was the address used for mailing statements which were folded so that the address thereon was exposed through the window envelope by which the statement was transmitted.

An audit report made by an auditor employed by the Arkansas Securities Division showed a liability of the cemetery corporation to the Trust Fund of $32,195.94 as of June 24, 1970. The last previous audit had shown a liability of $27,875.06 on September 16, 1969. There was no other audit or examination after that of November 1966. The $19,400.66, shown to be the amount due the Trust Fund then was the only money or assets which ever came into the Trust Fund. The auditor's review of the payroll account of the cemetery corporation into which the $11,000 deposit had been made on October 16, 1967, showed that except for three or four transfers made to other cemeteries and a check for $3,008 to Bank, the money was expended for routine cemetery expenses. It was stipulated that only $5,160.77 of the $11,000 was expended for improper purposes.

The office of the cemetery corporation was located at 6707 Dollarway Road. The two trustees who instituted the action first learned of the problems relating to the Trust Fund account about March 10, 1970, when Norton was present at a meeting of the Arkansas Cemetery Board, after having read a newspaper report about alleged irregularities. He called his attorney from the meeting and directed him to file suit. Norton testified that he never received or requested a statement of the bank account, although he knew they would be rendered and assumed they would go to the cemetery corporation office.

Russell appeared before the Arkansas Cemetery Board on March 10, 1970, on behalf of Memorial Gardens to obtain a permit to continue the operation of the cemetery. He then agreed on behalf of Memorial Gardens to pay a total of 25% of sales proceeds, rather than the required 15%, to Trust Fund, in order to reestablish it. As a result, the permit was issued and Memorial Gardens has continued to operate the cemetery. On March 25, 1970, Harris executed three deeds conveying property to Russell, as Trustee. Russell testified that Memorial Gardens had once owned the lands of the cemetery corporation and had foreclosed the Harris company on an indebtedness which appears to have amounted to $55,000. He stated that from accounts receivable of the cemetery corporation and other funds put into the Trust Fund about $20,000 of a deficit of approximately $40,000 had been restored. A part of this was attributable to the property Harris deeded to Russell, as Trustee, which Russell, in turn, deeded to the receiver....