Opinion
No. 24708
Decided June 20, 1934.
Banks and banking — Liquidation — "General deposit" and "special deposit" defined — Special deposit not established by acceptance of public or trust funds — Clerk of court may deposit public or trust funds in bank — Deposit not wrongful or illegal, and not preferred upon insolvency.
1. A "general deposit" is the placing of money in a bank by a depositor, to be repaid to him upon demand or to be drawn upon by him from time to time in the usual course of the banking business. Title to the money passes from the depositor to the bank, and such money, mingled with other money, forms a general fund from which depositors of the bank are paid. The relationship of debtor and creditor is thereby created between the bank and the depositor. Such deposit possesses no trust quality, and upon the insolvency of the bank the depositor has no right of preference.
2. A "special deposit" is a deposit for safe-keeping, to be returned intact upon demand. The relationship of bailor and bailee is created between the depositor and the bank. The title remains in the depositor, and the bank acquires no property rights in the deposit. When the deposit consists of money, the bank has no right to use such money in its business or mingle it with its general funds. Upon the insolvency of the bank, a trust is created in favor of such special depositor.
3. To create a special deposit, the depositor and the bank at the time the deposit is made must intend and agree, expressly or by implication, that such deposit shall remain segregated and not be commingled with or made a part of the general funds of the bank, or be subject to its use and control in the usual and customary course of its banking business.
4. The acceptance by a bank of a lawful deposit of public or other trust funds, with express knowledge of their source and the purpose for which they are to be used, is not alone sufficient to establish a special deposit.
5. In the absence of authority forbidding it, and pursuant to prevailing custom in harmony with modern business practice, the clerk of a court in his official capacity possesses a right to deposit public or other trust funds in his custody, in a reputable bank. Such a deposit is not wrongful or illegal within the proper meaning of those terms. Where there is no mutual intention or agreement, express or implied, between the clerk and the bank, that such funds shall be segregated and kept separate and apart, and the bank takes such funds and uses them in its general business, a general deposit results, and upon the insolvency of the bank, the clerk cannot successfully claim a preference for such deposit.
ERROR to the Court of Appeals of Cuyahoga county.
The facts in this case material to a determination of the issues are as follows:
On November 28, 1930, Thomas C. Cook, as Clerk of Courts of Cuyahoga county, Ohio, by one of his deputies, deposited the sum of $69,970 in The Guardian Trust Company of Cleveland, without taking security therefor. There is no suggestion that the trust company at that time was not apparently sound. This deposit represented the amount of a verdict and judgment awarded in the Court of Common Pleas of Cuyahoga county, Ohio, to the Glen Valley Club and others, against the Board of Park Commissioners of the Cleveland Metropolitan Park District, as compensation for the appropriation of certain lands. The amount was paid over to the Clerk of Courts pursuant to the judgment and order of the trial court, pending the outcome of error proceedings prosecuted by the Glen Valley Club and other property owners, and so that the Park Board might take possession of the property as provided by Section 3686, General Code.
It is agreed by the parties that at the time the deposit was made The Guardian Trust Company was definitely informed of the manner in which the money had come into the hands of the clerk, and that such money was being deposited until the final determination of the cause in the courts. It was also understood that the money was to be paid by the Clerk of Courts to the property owners in said cause in the event of an affirmation of the proceedings by the reviewing courts, but was to be returned by the clerk to the Park Board in the event of a reversal.
John J. Busher, the plaintiff in error herein, succeeded Thomas C. Cook as Clerk of Courts, whereupon the sum of $69,970, with accumulated interest, was transferred to another account in the name of John J. Busher, Clerk of Courts, at which time The Guardian Trust Company was advised that the deposit was being continued upon the same terms and conditions under which it was originally made.
It is apparent that the Trust Company commingled the money represented by this deposit with other money in its possession and control.
None of the fund was withdrawn, and it was on deposit in The Guardian Trust Company in February, 1933, when that institution closed its doors because of insolvency. The same situation prevailed when a conservator was appointed, and still later when the defendant in error herein began the liquidation of the Company.
It is further agreed that there is now more than sufficient cash on hand in The Guardian Trust Company to pay the amount of the deposit here involved, with all accruals of interest.
Plaintiff in error filed suit in the Court of Common Pleas on or about May 29, 1933, claiming the deposit constituted a special account and trust fund entitled to preference in payment, and asking the court to order and command its immediate payment to him.
Defendant in error answered, admitting the deposit but alleging that it was placed in an ordinary savings account, drawing an agreed rate of interest, and did not constitute a special or specific deposit and that therefore plaintiff in error was not entitled to a preference.
Upon hearing, the Court of Common Pleas found that the deposit was a special trust account of public funds, and ordered its payment forthwith as a preferred claim. The Court of Appeals reversed this judgment, holding no preference had been established.
The case was admitted to this court on motion to certify.
Mr. Frank 2. Cullitan, prosecuting attorney, and Messrs. Locher, Green Woods, for plaintiff in error.
Mr. John W. Bricker, attorney general, Mr. Charles F. Carr, Mr. Richard R. Hollington and Mr. J. Roth Crabbe, for defendant in error.
Plaintiff in error rests his case upon two principal grounds. First, that since the Trust Company accepted the funds for deposit with express knowledge of their source and with knowledge of the purpose for which they were to be used, a special deposit, constituting a trust, was created, which is entitled to preferential payment. Second, that the deposit of the funds was unauthorized, and consequently the well recognized principle applies that where a custodian of public or other trust funds deposits the same wrongfully or unlawfully in a financial institution which knows the nature thereof, such funds are impressed with a trust and given a preferential rating.
We shall discuss these contentions in the order stated, and our first inquiry will be devoted exclusively to the character of the deposit made.
The presumption is that the deposit of money in a bank is general. Bank of Marysville v. Windisch-Muhlhauser Brewing Co., 50 Ohio St. 151, 33 N.E. 1054, 40 Am. St. Rep., 660; In re Warren's Bank, 209 Wis. 121, 244 N.W. 594; People v. Home State Bank, 338 Ill. 179, 170 N.E. 205; 3 Ruling Case Law, 517.
The burden of proof is therefore upon the depositor to show a special deposit. Fralick, Commr. of Finance, v. Couer D'Alene Bank Trust Co., 36 Idaho 108, 210 P. 586; Fred A. Bostwell Post, American Legion, v. Farmers' State Bank (Mo.App.), 61 S.W.2d 761.
Three classes of deposits are recognized by law: (1) general deposits; (2) special deposits, and (3) deposits for a specific purpose. The last named class is frequently included under the head of special deposits. These three classes are succinctly defined in the case of Corporation Commission v. Merchants Bank Trust Co., 193 N.C. 696, 699, 138 S.E. 22, 24, as follows:
"A general deposit is the payment of money into a bank to be repaid upon demand; the deposit creates between the bank and the defendant [depositor] the relation of debtor and creditor; the relation is legal; the money passes from the depositor to the bank and is mingled with other money, the entire amount forming a general fund from which depositors are paid. Deposits of this character are free from any 'trust quality,' and the depositor, in the event of the bank's insolvency, has no right of preference, but must share pro rata with general creditors. * * *.
"A special deposit is a deposit for safe-keeping, to be returned intact on demand — a naked bailment, the bank acquiring no property in the thing deposited and deriving no benefit from its use. The title remains in the depositor, who is a bailor and not a creditor of the bank * * *.
"A deposit for a specific purpose is made when money or property is delivered to a bank to be applied to a designated object, or for a purpose which is particularly defined, as, for example, the payment by the bank of a specified debt. It is neither general nor wholly special. It partakes of the nature of a special deposit to the extent that the title remains in the depositor, and does not pass to the bank. The consequence is that the money, if not applied, or if misapplied, may be recovered as a trust deposit."
To constitute a special deposit the authorities are generally agreed that the depositor and the bank, at the time the deposit is made, must intend that such deposit shall remain segregated and not be commingled with the general funds of the bank, nor used by the bank in accordance with the ordinary customs and usages of banking practice; and, further, there must be an agreement, express or implied, that such deposit shall not constitute a part of the general funds of the bank, subject to its use and control in the usual and customary course and prosecution of its business. Parker v. Central Bank Trust Co. of Asheville, 202 N.C. 230, 162 S.E. 564; First National Bank of Ranger v. Price (Tex.Civ.App.), 262 S.W. 797, 801; Borgess Hospital v. Union Industrial Trust Savings Bank of Flint, 265 Mich. 156, 251 N.W. 363.
The earlier cases adopted the view that a special deposit contemplated the return of the identical thing deposited, even though it was money. They held that if a special deposit of money was commingled with the general funds of the bank its identity was thereby lost and it became a general deposit. Modern authorities are for the most part more liberal, and hold that if a special deposit of money is made, which becomes commingled with the general funds of the bank, the special character of the deposit is not destroyed by that fact alone. Fogg v. Tyler, 109 Me. 109, 82 A. 1008, 39 L.R.A. (N.S.), 847, Ann. Cas., 1913E, 41; In re Warren's Bank, supra. However, we do not understand any of the authorities to hold that a special deposit must not have been originally intended by agreement of the parties, contemplating its segregation and separation from the general funds of the bank. First National Bank of Ranger v. Price, supra, 801.
Bearing in mind what has already been said, was a special deposit accomplished in the instant case?
The bare fact that the money was deposited by plaintiff in error in his official capacity as Clerk of Courts did not make the deposit a special one. People v. Farmers State Savings Bank, 338 Ill. 134, 170 N.E. 236; People v. Home State Bank, supra; 7 Corpus Juris, 634; 3 Ruling Case Law, 518. Nor did the additional fact that there was an established trust relationship between plaintiff in error and his cestui que trust have anything to do with establishing a trust relationship between plaintiff in error and the Trust Company. Any trust relationship between the latter two was wholly a matter of independent creation on their part. People v. Farmers State Savings Bank, supra; Paul v. Draper, 158 Mo., 197, 59 S.W. 77, 81 Am. St. Rep., 296. The proposition is stated as follows, in the case of Pethybridge v. First State Bank of Livingston, 75 Mont. 173, 179, 243 P. 569, 571:
"The trust relation, which will impress upon a deposit the character of a special deposit, is not the relation existing between the depositor of a trust fund and his cestui que trust, but that existing between the bank and the depositor."
Of course, what has just been said concerning plaintiff in error as Clerk of Courts is equally applicable to his immediate predecessor in office.
In the instant case, the character of the funds deposited and their intended disposition was communicated to the Trust Company, but there was no request or direction by the depositor to the Trust Company that it should keep the funds separate and apart from other money in the bank. The funds were placed in an ordinary savings account, and the fact that the Company paid an agreed rate of interest upon the account has a decided tendency to show the Company's privilege of using the money without restriction. No agreement of any kind is disclosed between the Trust Company and the depositor as to keeping the funds intact and segregated, and that is the principal factor which constrains us to hold that the deposit was general and not special. The Supreme Court of Illinois reached the same conclusion upon a similar state of facts in People v. Farmers State Savings Bank, supra. And compare Commercial National Bank of Sturgis v. Smith, Supt. of Banks, ___ S.D., ___, 244 N.W. 521.
The information imparted to the Trust Company as to the nature of the funds and the application to be made of them by the Clerk of Courts was a step toward establishing a special deposit, but it did not go far enough to accomplish that object.
There are many illustrative cases. We will cite two of them: In People, ex rel. Nelson, v. Seward State Bank, 268 Ill. App. 32, (certiorari denied by the Supreme Court of Illinois), a township treasurer deposited money in a bank under an agreement declaring the deposit to be a " 'special fund distinct and apart from all other funds held in the said bank by it as a special trustee or agent of the said school and/or Township treasurer'." The bank became insolvent and the township treasurer claimed a preference for his deposit on the ground that it constituted a special deposit. In denying this claim, the court said:
"The moneys of this account were not, and do not appear to have been intended to be, kept separate or in any manner distinguishable from the moneys of any other account in such bank. Nor does it appear that the actual handling of the account either by the petitioner or the bank was materially different from that of any other account."
In Campion v. Big Stone County Bank, 177 Minn. 51, 224 N.W. 258, a village treasurer deposited in a bank the proceeds derived from the sale of certain bonds. The account was designated " 'Village of Graceville (Street and Well Fund)'." There was a definite understanding that the money so deposited was to be used solely for the purpose indicated. The bank failed and the treasurer claimed a preference. His claim was denied, the court taking the view "that the deposit was not a special deposit entitling the treasurer to a preference over other creditors."
A further discussion of the different classes of deposits may be found in 5 Ohio Jurisprudence, 378, et seq.; 3 Ruling Case Law, 516, et seq.; 7 Corpus Juris, 628, et seq.
We now come to the second proposition. Since there was no specific authorization, statutory or otherwise, for the clerk to make a general deposit of the funds, was such deposit wrongful or illegal so as to impress upon it a trust status, within the rule that where a general deposit is wrongful or unlawful no title passes from the depositor to the bank, and the deposit becomes a trust account? The Ohio case lending support to plaintiff in error's claim in this respect is Smith v. Fuller, 86 Ohio St. 57, 99 N.E. 214, Ann. Cas., 1913D, 387, L.R.A., 1916C, 6, decided in 1912, in which it was held that trustees appointed by a court to wind up and settle the affairs of an insolvent savings company, who deposited funds of such savings company in a bank, without a proper court order, were guilty of a violation of duty; but where the funds so deposited were evidenced by a certificate of deposit, not subject to check and bearing no interest, the presumption would be indulged, in absence of proof to the contrary, that the trustees did not mean to violate their duty and that the deposit was intended as a special and not as a general deposit. It was further decided in this case that the bank having mingled the funds of the trustees with its own funds, upon its failure the trustees were entitled to recover their deposit as a preferred claim, providing that at all times from the making of the deposit to the failure of the bank there was in its vaults money of an amount and value equal to the amount deposited by the trustees.
We do not regard Smith v. Fuller as strictly analogous to the case under consideration, and we cannot escape the conclusion that it was closely decided upon its particular facts. The money deposited being represented by a non-interest bearing certificate of deposit probably influenced the decision considerably. If there had been an ordinary savings account bearing interest, the conclusion might well have been different on this point, for such would have been a substantial indication that it was intended the bank should have the right to use the money in its general business. In Smith v. Fuller every doubt was resolved in favor of the trustees, and we are unwilling to extend the doctrine of that case beyond the peculiar facts there developed.
Let us consider briefly the position of plaintiff in error and his predecessor in office in relation to the funds in question. Section 2976-7, General Code, provides that in appropriation proceedings by a board of park commissioners such proceedings shall be conducted in the manner provided for the appropriation of private property by municipal corporations, in so far as the same are applicable. By Section 3686, General Code, a municipal corporation in an appropriation proceedings is authorized to take possession of the appropriated property "As soon as the corporation shall have paid the compensation assessed, or secured its payment by a deposit of money under order of the court."
By virtue of this section the Court of Common Pleas made an order in the case of Board of Park Commissioners of The Cleveland Metropolitan Park District v. The Glen Valley Club et al., after the rendition of a verdict assessing compensation, "that plaintiff upon payment within six months from the entry hereof or the deposit of the aggregate amount of said verdict with the Clerk of Courts" shall be put in possession of the appropriated property.
Section 3695, General Code, provides for the prosecution of error from the trial court to higher courts, and gives the appropriating corporation the right to take and use the appropriated property, upon payment or deposit of the compensation assessed, and upon giving adequate security for any further compensation or costs.
Section 2899, General Code, states the general duties of the clerk of courts, as follows: "The clerk of each of the courts shall exercise the powers conferred and perform the duties enjoined upon him by statute and by the common law; and in the performance of his duties he shall be under the direction of his court."
While Section 12875, General Code, relates to criminal prosecution for embezzlement, it provides that it shall not be unlawful for a clerk of courts to deposit trust funds until such time as he is required to pay them to the one entitled thereto.
There can be no question that the funds came into the hands of the plaintiff in error and his predecessor in office, properly, and we revert to the question: In the absence of express authority, could such funds be lawfully placed in the Trust Company on general deposit?
The precise situation has never been before this court, but it has been met by the Supreme Courts of Kansas, Iowa and Washington. The third and fourth paragraphs of the syllabus in the case of Phillips v. Yates Center National Bank, 98 Kan. 383, 158 P. 23, L.R.A., 1917A, 680, read as follows:
"3. Where public funds are deposited in violation of law in a bank which has knowledge of the facts, the title does not pass, and a trust results which in case of insolvency may be enforceable against the receiver.
"4. In the absence of a statute either expressly allowing or expressly forbidding it, the act of the clerk of the district court in placing the funds in his official custody on general deposit in a bank, to his credit as such officer, is not illegal, and therefore the title passes and no trust results."
The same conclusion was reached in Andrew v. State Bank of New Hampton, 204 Iowa 878, 216 N.W. 1, as to public funds in the hands of the clerk of a court, which he deposited in a bank in his official capacity. And see Kies v. Wilkinson, 101 Wn. 340, 172 P. 351.
Other authorities sustain the general proposition that where public funds or other trust funds come into the hands of a public official, and the law makes no specific provision as to what shall be done with them, such official has the right to place such funds on deposit in a reputable bank. Such deposit is not illegal or wrongful, the deposit is general in the absence of any Sufficient agreement making it otherwise, the relation of debtor and creditor is created between the bank and the official, and upon the insolvency of the bank the deposit is not entitled to preference. City of Sturgis v. Meade County Bank, 38 S.D. 317, 161 N.W. 327; Incorporated Town of Conway v. Conway, 190 Iowa 563, 180 N.W. 677; 7 Corpus Juris, 634.
Of course where a public official makes a deposit of public funds in direct contravention of law, the result is exactly opposite, as is illustrated by the case of Board of Commissioners of Crawford County, Ohio, v. Strawn (6th C. C. A.), 157 F., 49, 84 C.C.A., 553, 15 L.R.A. (N.S.), 1100.
Where there is no express denial of the right, the practice of public officials in making general deposits of public or other trust funds coming into their official custody and control is customary and in accord with modern business usages.
We hold that the deposit of the funds in this case constituted a general deposit, establishing the relationship of debtor and creditor between The Guardian Trust Company and the plaintiff in error; that such deposit, not being prohibited, was neither wrongful nor illegal within the proper meaning of those terms, and that no preference resulted in favor of the plaintiff in error. Having reached this conclusion, it becomes unnecessary to consider or determine other questions presented in the briefs and oral arguments of counsel. Accordingly, the judgment of the Court of Appeals is affirmed.
Judgment affirmed.
WEYGANDT, C.J., STEPHENSON, JONES, MATTHIAS, BEVIS and WILKIN, JJ., concur.