Steele v. Allen

• Citation: 240 Mass. 394,134 N.E. 401
• Parties: STEELE v. ALLEN, Com'r of Banks, et al., and three other cases.
• Decision Date: 10 March 1922
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

240 Mass. 394

134 N.E. 401

STEELE

v.

ALLEN, Com'r of Banks, et al., and three other cases.

Supreme Judicial Court of Massachusetts, Suffolk.

March 10, 1922.

Cases Reserved from Supreme Judicial Court, Suffolk County.

Four suits by Winifred Steele, by Simon Rosen and others, by Myer T. Ornsteen, and by Samuel Ornsteen and others, against Joseph C. Allen, Commissioner of Banks, in possession of the property of the Prudential Trust Company, and the Trust Company, to establish a trust ex maleficio with respect to moneys deposited with the Trust Company while it was insolvent. On reservation, etc., by a single justice. Bills dismissed.

1. Banks and banking k73-‘Insolvent’ when not in condition to pay debts in ordinary course.

A trader or a bank commonly is ‘insolvent’ when not in condition to pay his debts in the ordinary course, as persons carrying on trade or banking usually do.

[Ed. Note.-For other definitions, see Words and Phrases, First and Second Series, Insolvency-Insolvent.]

2. Banks and banking k75-Whether contract of deposit may be rescinded depends on whether insolvent bank had reasonable hope and intention of carrying on business.

Acceptance of deposits by a bank is a representation of solvency, and a bank hopelessly insolvent when it receives deposits is charged with knowledge that it cannot meet its obligations, and commits a fraud by taking the deposits, and the contract may be rescinded, and the deposit or its proceeds, if traced, recovered as trust funds; but simple insolvency does not warrant the rescission of deposits, if there is genuine and reasonable hope, expectation, and intention on the part of the officers of the bank to carry on the business and recover sound financial standing.

3. Banks and banking k75-Persons making deposits during insolvency held not entitled to rescind, where company was continuing to meet its obligations.

Where a trust company, though not complying with the statute as to reserves, and not keeping the assets in its savings department separate and distinct from its general assets, and though it had been apparently in a somewhat shaky condition for several years, had been able to continue business and was continuing to meet its obligations as they arose, and its officers did not anticipate that the commissioner of banks would take possession of its assets and property, under G. L. c. 167, s 22, persons making deposits during insolvency held not entitled to rescind and recover their deposits, thereby obtaining a preference over other creditors.

Jacobs & Jacobs, of Boston, for plaintiffs.

John E. Hannigan, of Boston, for defendant Prudential Trust Co.

RUGG, C. J.

These are suits in equity whereby the several plaintiffs seek to recover from the defendant as commissioner of banks in possession of the property of the Prudential Trust Company the amounts of deposits made by them in the trust company while it was insolvent, on the ground that the trust company was known by its managers to be insolvent at the time of the receipt of the deposits, and that hence the bank became a trustee ex maleficio of the moneys thus deposited. The facts as to the financial condition of the trust company and the knowledge and intention of the executive officers concerning its future were briefly these: The bank was organized and opened for business in June, 1915. During the months of July, August and September, 1916, it had less than the required legal reserve every day (with three or four exceptions) by amounts ranging from $4,000 to $56,000. From October, 1916, through July, 1917, it had the required reserve substantially all the time. From August, 1917, through January, 1918, it frequently had less than the legal reserve. From June, 1918, through September, 1919, there was a shortage in the reserve a good deal of the time. In October and November, 1919, conditions changed for the better. The largest deposit balance was $2,572,000, and the actual reserve reached its highest point, with an excess in round figures of $267,000. Shortly thereafter began a steady general decline of deposits, interrupted occasionally by temporary increases. The reserve almost never equaled the legal requirements. During September, 1920, the deposits were not quite so low as in February, 1919. In April, 1920, a serious condition was discovered, due to the misconduct of the treasurer, who resigned shortly afterward. He had made excessive loans to and suffered large overdrafts by a single depositor and borrower. Early in May the president of the trust company told the situation to the commissioner of banks. In order to tide over, ten directors gave their notes to the bank, aggregating $125,000, which was reported to have been acceptable to the bank commissioner. At about that time two offers, one for $135 per share and the other for $125 per share, were made for the outstanding stock of the trust company, although these offers did not develop into anything tangible. In August, 1920, the assistant treasurer bought 20 shares of stock at $130 per share. The master finds that the treasurer of the trust company knew its condition all the time, that the president knew it in a general way up to the time of the treasurer's retirement, and in detail thereafter, and that the assistand treasurer knew it from the commencement of his service with the bank in March, 1918, until it was closed. All three of these officers knew of the steady shrinkage of deposits, that the commercial...