Westerly Community Credit Union v. Industrial Nat. Bank of Providence

• Citation: 240 A.2d 586,103 R.I. 662
• Decision Date: 15 April 1968
• Docket Number: No. 132-A,132-A
• Parties: WESTERLY COMMUNITY CREDIT UNION v. INDUSTRIAL NATIONAL BANK OF PROVIDENCE. ppeal.
• Court: United States State Supreme Court of Rhode Island

Page 586

240 A.2d 586

103 R.I. 662

WESTERLY COMMUNITY CREDIT UNION v. INDUSTRIAL NATIONAL BANK OF PROVIDENCE.

No. 132-Appeal.

Supreme Court of Rhode Island.

April 15, 1968.

[103 R.I. 675] Edward F.J. Dwyer, Providence, for plaintiff.

Charles F. Cottam, Providence, for defendant.

OPINION

KELLEHER, Justice.

This is a civil action ¹ equitable in nature wherein the plaintiff seeks to have the defendant bank declared a constructive trustee of $1,200. After a trial before a justice of the superior court, judgment was entered for the plaintiff for $565 together with interest thereon and costs. This case is before us on the plaintiff's appeal from that judgment.

The defendant in the instant case is Industrial National Bank of Providence, successor to Providence Union National Bank, and plaintiff is the Westerly Community Credit Union. Hereafter we shall refer to plaintiff as either plaintiff or credit union and defendant as defendant or bank.

J. William Timperley was superintendent of a large textile plant in Kenyon, Rhode Island, and maintained his checking account in defendant bank. The balance of this account on December 1, 1953 was $987.32. During the ensuing month, an acquaintance of Mr. Timperley named Frederick E. Bemis forged Timperley's signature as maker on a total of 16 checks all of which were made payable to Bemis's order. The checks are divided into two series, with eight checks in each series; the first series was those honored and paid and debited to Timperley's account by defendant and the second series was those checks dishonored and returned by defendant for being forged instruments. Although Bemis was described in plaintiff's complaint as one of its employees, this allegation was denied at the trial by Bemis. In its brief plaintiff asserts that Bemis worked for Timperley. We can find nothing in the record to support this allegation. For purposes of this appeal we are unable to characterize the relationship, if any, between the forger, Bemis, and plaintiff or between the forger and Timperley.

The first series of checks forged by Bemis, numbered eight, occurred between December 17, 1953 and December 22, 1953. While the checks varied in amount, the sum total equaled $635. The checks were endorsed by Bemis and cashed at various commercial enterprises in Westerly, Rhode Island; two of the eight were cashed at plaintiff's office in Westerly. All the checks were deposited in a Westerly bank and followed the usual banking channels to defendant. The last of these checks was honored by defendant on December 30, 1953.

On December 21, 1953, Bemis initiated the second series of bogus checks which also numbered eight. These checks amounted to $2,210 and were all cashed at plaintiff's office in Westerly. With the money he received from plaintiff, Bemis paid a portion of a debt he owed to plaintiff and thereafter on three separate occasions made deposits totaling $1,200 to Timperley's checking account at defendant's office in Wakefield. At the trial, Bemis testified that the $1,200 deposited by him on these occasions represented a part of the proceeds which he derived from the second series of forged checks. The first deposit of $200 was made on December 23, 1953, the second deposit of $400 was made on December 28, 1953, and the last deposit of $600 occurred on December 30, 1953. Officials at the bank were aware that these deposits were made by Bemis but attached no particular significance to that fact. On or about December 30, 1953, however, after receiving a phone call from Bemis relative to Timperley's account, the bank's officers became suspicious and invited Timperley to the bank for discussion on the matter.

Timperley arrived at defendant's Wakefield office on January 2, the first business day of the new year. He examined the bank statement and the eight cancelled checks comprising the first series of forgeries then in the bank's possession. ² After studying the available records, he identified the forged checks and the three deposits made by Bemis to his account. Thereupon, Timperley signed an affidavit in which he averred that the three deposits totaling $1,200 were not made by him nor were they made with his "consent, knowledge or authority"and that eight checks, which he describes and designates with particularity therein, were never issued by him and were forgeries. In the same affidavit, he orders and directs the bank to withdraw from his account the $1,200 of deposits made without his knowledge or acquiescence and authorizes the bank to "cover and reimburse itself" for the eight forged checks he identified.

Two days later, on January 4, 1954, pursuant to Timperley's directives, defendant charged the Timperley account for the $1,200 deposited therein by Bemis and credited it in the amount of $635, which represents the value paid out by the bank when it honored the first series of forgeries. The bank then extracted, again pursuant to Timperley's authorization, $635 from the $1,200 it had withdrawn from Timperley's account to cover and reimburse itself for the loss it sustained in honoring the forged instruments. The balance remaining after these transactions, namely $565, was then deposited in the new account entitled "Timperley-Bemis, Special Account." In the days which followed, the second series of Bemis's forgeries began to arrive at defendant's bank, but they were seasonably dishonored and charged back to plaintiff with a notation that the signatures thereon were forged. Some two months later, plaintiff commenced this litigation.

The plaintiff contends that Bemis's fraudulent conduct was something akin to larceny. Therefore, it argues, no title to the stolen money was ever passed by Bemis to defendant bank when such money was deposited in Timperley's account. The defendant takes the position, on the other hand, that it owed no duty whatsoever to plaintiff until such time that it had notice that the money in its possession belonged to plaintiff and that its sole duty in this case was to turn over to plaintiff the balance contained in the "Timperley- Bemis, Special Account." The defendant makes no claim to the balance remaining in the special account. This appeal therefore is concerned only with the rights of the parties relative to the $635 which the bank used to extinguish the loss incurred by it on account of its honoring the first series of forged checks.

In awarding plaintiff the $565 balance in the account, the trial justice ruled that since the bank must be considered to have given valuable consideration to the extent that it honored the first series of forged checks which totaled $635, and moreover since the defendant bank acted in good faith and without notice of plaintiff's equitable interest in the $1,200 deposits, it rightfully reimbursed itself for the loss that it had incurred.

In arriving at his decision, the trial justice indicated that he relied principally on this court's holding in Smith v. Pendleton, 53 R.I. 79, 163 A. 738, where we said at 86, 163 A. at 740, "One who receives money in good conscience and has practiced no deceit or unfairness in obtaining it is under no legal obligation to return it to one from whom it has been obtained by deceit on the part of another." Although he did not specifically declare that he was permitting the bank the right of setoff against Bemis, the trial justice by implication at least so held.

Generally, the issue to be resolved in this appeal is whether or not the bank could exercise a setoff under the rather peculiar factual circumstances which gave rise to this action. If for any reason it is found that the bank could not employ such a setoff, the decision of the trial justice must necessarily be overturned.

As a general rule a bank may look to deposits in its possession for repayment of any matured indebtedness owed to it on the part of a depositor. Adelstein v. Jefferson Bank & Trust Co., Mo., 377 S.W.2d 247. Such a right in the bank grows out of the contractual relationship existing between the depositor and the bank which arises at the time the depositor delivers and commits money to the bank's custody. In the absence of any specific agreement to the contrary, the contract of deposit causes a debtor-creditor relationship to exist between the bank and the depositor and all the rights and obligations each may owe to the other with respect to the fund deposited are determined by the terms of this contract. Griffin v. Centreville Savings Bank, 93 R.I. 47, 171 A.2d 204; 9 C.J.S. Banks and Banking § 296 at 616-617. On an ordinary general deposit, the law considers the currency so deposited to be the property of the depository bank; quite naturally, therefore the bank is regarded by law to have legal title to the deposited funds and is considered to be indebted to the depositor for such sums. 10 Am.Jur.2d, "Banks and Banking," § 666 at 636.

The right of a bank to apply deposits to extinguish a debt owed to it by a depositor is referable to principles of equity and in some states receives additional support from statutory law; neither source of the right, however, is paramount or absolute and yields in the face of superior equities found in third persons. First Nat'l Bank v. Winkler, 139 Tex. 131, 161 S.W.2d 1053; 5 A Michie, Banks and Banking, chap. 9, § 114 at 274-275; 9 C.J.S. Banks and Banking § 296 at 614-615.

It seems clear under the facts of the present controversy that Bemis, the forger, was a constructive trustee as to the $1,200 he deposited in Timperley's account. In most jurisdictions the right of a bank to apply a deposit consisting of trust funds or funds belonging to one other than the depositor to the individual indebtedness of the depositor, depends upon whether the bank knows or can properly be charged with knowledge of the trust character or true ownership of the funds. 10 Am.Jur.2d, "Banks and Banking," § 675 at 647; see 2 Restatement Trusts 2d, § 324, comment i, p. 121. It is uniformly held that...