Schneider Fuel & Supply Co. v. West Allis State Bank

• Decision Date: 19 December 1975
• Docket Number: Nos. 582,583,s. 582
• Citation: 236 N.W.2d 266,70 Wis.2d 1041
• Parties: , 18 UCC Rep.Serv. 999 SCHNEIDER FUEL & SUPPLY CO., a Wisconsin Corporation, Respondent, v. WEST ALLIS STATE BANK, Appellant (two cases). (1974).
• Court: Wisconsin Supreme Court

Page 266

236 N.W.2d 266

70 Wis.2d 1041, 18 UCC Rep.Serv. 999

SCHNEIDER FUEL & SUPPLY CO., a Wisconsin Corporation, Respondent, v. WEST ALLIS STATE BANK, Appellant (two cases).

Nos. 582, 583 (1974).

Supreme Court of Wisconsin.

Dec. 19, 1975.

Kluwin, Dunphy, Hankin & McNulty, Milwaukee, for appellant.

Lichtsinn, Dede, Haensel & von Bereghy, S.C., Milwaukee, for respondent; Godfrey & Trump by Hugh R. Braun, Milwaukee, of counsel.

Boardman, Suhr, Curry & Field, Madison, amicus curiae on behalf of Wisconsin Bankers Ass'n.

Tomlinson, Gillman & Travers, S.C., Madison, amicus curiae on behalf of The Surety Ass'n of America.

ROBERT W. HANSEN, Justice.

The defendant-appellant bank raises five issues in its brief on appeal, and with these five issues this opinion will separately deal.

1. Whether plaintiff was a 'claimant' under sec. 289.16, Stats.1967, which states:

'289.16 Theft by contractors. All moneys, bonds or warrants paid or to become due, to any prime contractor or subcontractor for public improvements are a trust fund in his hands; and the use of the moneys by him for any purpose other than the payment of claims on such public improvement, before the claims have been satisfied, constitutes theft and is punishable under s. 943.20.'

Defendant bank contends that under this section a constructive trust is not created until there is a claim by a material supplier to the proceeds. It is argued that the nature of the business relationship between plaintiff and Underground negatived any knowledge on the part of Underground or the defendant bank that plaintiff was demanding any payment of contract proceeds for materials furnished. The contention is that, because plaintiff did not make immediate demands for payment on materials on each specific contract, the plaintiff had not made any claims.

There are several things wrong with this argument. It is raised for the first time on appeal, and the practice of this court is not to consider an issue raised for the first time on appeal. ¹ If this policy rule were not here followed, we would hold that the plain language of the statute makes no such distinction between 'claimant' and 'creditor.' Where a similar statute was involved, ² our court held, where materials had been supplied under an open account and without designation to specific jobs, that the '. . . plaintiff has supplied 'materials used for such improvements * * *,' and the statute requires no more.' ³ On the merits, we would apply the reasoning of this Weather-Tite Case to the situation before us. Under the rule barring consideration of issues raised for the first time on appeal, the issue raised is rejected. If exception were here made, the interpretation of the statute that is suggested by defendant bank would be held to be an incorrect construction of the statute. ⁴

2. Whether the defendant bank was a 'trustee' under sec. 289.16, Stats.1967. The trial court held that the defendant bank '. . . by accepting assignment of receivables, together with the security agreement of September 3, and by accepting payment of the municipal checks, became a trustee under sec. 289.16, Stats. (1967).' The bank contends that this statute applies a constructive trust to the funds only when and while they are in the hands of the contractor. As to the status and duties of the bank, the contention is that they are determined by the Uniform Fiduciaries Act, ⁵ and under such Act the bank here is not liable. Sec. 112.01(10), Stats., does provide for liability of a drawee bank where the funds involved are held in trust. ⁶ But, in other sections of the Act, different responsibilities are provided where drawees, rather than payees, are involved. ⁷ It must be kept in mind that, in the case before us, the defendant bank had a dual role, serving as both the drawee and payee of the checks drawn by Underground to pay the loan notes. This situation arises because Underground deposited the money received into its account and then wrote a check to the bank from that account. The question before us is what are the bank's duties and responsibilities in each role.

The distinction between responsibilities as drawee and as payee is made clear in the Annotations to the Uniform Fiduciaries Act, ⁸ from which the Wisconsin enactment is taken and on which it is patterned. When a fiduciary makes withdrawals by check, the depository bank is not bound to inquire for what purpose the withdrawals are made. ⁹ But when the check is payable to the depository bank and delivered in payment of or as security for a debt of the fiduciary, the bnak is put upon inquiry. ¹⁰ Thus, where the fiduciary makes a deposit in his personal account and subsequently pays a personal debt to the bank by a check on that account, the bank must ascertain what is done with the funds withdrawn. ¹¹ The cited portions of the Commissioners' Note to the Uniform Fiduciaries Act correctly state the law in our opinion.

For its contention that sec. 112.01(10), Stats., applies and that the bank here cannot be held liable in the absence of 'actual knowledge' of a breach or 'bad faith,' the defendant bank relies upon two Wisconsin cases, the Murphy Case ¹² and the London & Lancashire Case. ¹³ In Murphy, the plaintiff was a subcontractor who was owed money by a general contractor. The bank was impleaded, and it was established that, during the job, the general contractor had executed to the bank an assignment of the paving contract. Our court held that, when the general contractor received the funds, it was acting as bailee for the bank, and the bank was not relieved from liability. ¹⁴ We see that decision as limited to the special circumstances of that case, and not reaching the situation now before us. The second case, London & Lancashire, involved money received by a contractor being deposited in the contractor's account, with checks drawn from that account to the bank to pay for the loan owed the bank by the contractor. At the demurrer stage, this court held that the funds involved were clearly trust funds, stating that liability of the bank depended upon its having actual knowledge that the fiduciary was committing a breach of his obligations. ¹⁵ While suggesting that allegations in the complaint as to actual knowledge were 'matters of mixed law and fact,' ¹⁶ the court concluded that they were 'conclusions of law which are not admitted on demurrer.' ¹⁷ We view that holding as establishing only that, if sec. 112.01(10), Stats., does apply, as the complaint there appears to have conceded, there still exist 'matters of mixed law and fact' to be decided at time of trial. While neither Murphy nor London & Lancashire deal with the exact situation or issue presented in the case before us, we reject any implication in either that, in the situation now before us, sec. 112.01(10) frees the bank from liability in the absence of actual knowledge of a breach or bad faith.

Instead, we affirm the trial court holding that the defendant bank, under the facts here, became a trustee under sec. 289.16, thus rejecting the defendant bank's contention that such statute applies a constructive trust to funds only while they remain in the hands of the contractor. We affirm the trial court finding of fact that the defendant bank 'knew that the proceeds of these checks originated from public improvement contracts,' such holding found not to be against the great weight and clear preponderance of the evidence, which is the test on review. ¹⁸ Given such fact of notice, given the status of the bank as payee as well as drawee, given the responsibilities deriving from the constructive trust established by sec. 289.16, we agree with the trial court holding that the defendant bank here was liable, under these facts and circumstances, as a trustee under sec. 289.16, Stats.

3. Whether the defendant bank was a 'holder in due course.' The trial court held that: 'The bank was not a holder in due course.' The statute as to holders in due course provides:

'403.302 Holder in due course. (1) A holder in due course is a holder who takes the instrument:

'(a) For value; and

'(b) In good faith; and

'(c) Without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person.'

The first requirement of this statute is that a person claiming the protection of the statute must qualify as a 'holder,' defined in sec. 401.201(20) Stats., to mean a person who is '. . . in possession of a document of title or an instrument or an investment security drawn, issued or indorsed to him or to his order or to bearer or in blank.' We deal here with checks paid from Underground's account and canceled or stamped 'Paid' by the bank. There is nothing in this record to negative the usual banking practice of returning canceled checks to the person on whose account they were drawn. No attempt was made at the trial to suggest or establish that the defendant bank was 'in possession' of such canceled checks. Also, under sec. 403.603(1), Stats., such 'Paid' or canceled checks are considered '. . . discharged to the extent of his payment or satisfaction to the holder even though it is made with knowledge of a claim of another person to the instrument . . ..' We find it difficult to hold that the defendant bank here was established to be 'in possession' of the canceled checks so as to qualify as a 'holder.'

Both parties concentrate, as to this issue raised, on the 'notice' requirements of the 'holder in due course' statute, particularly as it relates to 'claim to it on the part of any person.' It is true that at the time it received the funds involved, the defendant bank was not aware of the plaintiff's claim as a supplier of materials for the public improvement work. However, we have upheld that trial court finding that the bank knew the source of the funds it was receiving from Underground. As stated in the Murphy Case, '. . . it (the bank) was chargeable with knowledge of the statute and its...