Case Title: National Bank of Glenrock v. O'Neal

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 1993-03-24T00:00:00Z

Document:
National Bank of Glenrock v. O'Neal1993 WY 43849 P.2d 711Case Number: 92-102Decided: 03/24/1993Supreme Court of Wyoming
NATIONAL BANK OF 
GLENROCK, 

Appellant 
(Defendant),

v.

John 
O'NEAL,

Appellee (Plaintiff), 

and 

Bob McMackin, 

Appellee 
(Defendant/Cross-Claimant).

Appeal from District 
Court, Converse County, William A. Taylor, J.

Dennis M. "Joe" 
Hand of Hand & Hand, P.C., Casper, for Nat. Bank of Glenrock, appellant 
in No. 92-102; appellee in No. 92-103.

Harold E. Meier 
of Lonabaugh & Riggs, Sheridan, for John O'Neal, appellee in No. 92-102; 
appellant in No. 92-103.

Michael D. 
Zwickl, Beech Street Law Offices, Casper, for Bob McMackin, appellee in No. 
92-102. 

Before MACY, C.J., and 
THOMAS, CARDINE, URBIGKIT* and GOLDEN, JJ.

* Retired January 1, 
1993.

GOLDEN, Justice.

[¶1]      In this appeal, 
we consider the National Bank of Glenrock's (Bank) contention that the district 
court erred in entering judgment against it, and in favor of John O'Neal, on his 
claim that the Bank was liable for permitting the Glenrock Livestock Exchange 
(GLE) to transfer funds from a "custodial," or trust-type checking account, to a 
general checking account. O'Neal contended that as a result of that transfer of 
funds he was not paid for cattle which GLE sold under the terms of the Packers 
and Stockyards Act.

[¶2]      We affirm.1

[¶3]      Appellant Bank 
provides this statement of the issues:

1. Can a depository bank 
be found liable to the payee of a timely dishonored insufficient fund check 
drawn on a nonfiduciary checking account under the circumstances of this 
case?

a. Does a livestock 
seller have a valid claim or cause of action against a depository bank to 
recover sale proceeds under the circumstances of this case?

b. Does a depository bank 
owe a legal duty to a livestock seller under the circumstances of this 
case?

2. Is a partner of the 
drawee of an insufficient fund check entitled to indemnity from the depository 
bank under the circumstances of this case?

[¶4]      Appellee O'Neal 
provides this statement of the issues:

1. Did the Court err in 
finding the depository bank liable to the Plaintiff O'Neal in transferring, or 
permitting and aiding in transferring funds, from a "custodial" or trust 
account, knowing that the transfers were not within the purposes of the 
custodial account, when the transfers caused a dissipation of O'Neal's 
funds?

2. Did the Court err in 
granting a Summary Judgment early in the case when the evidence of the transfer 
of funds from the custodial account and deposit of funds received from the 
O'Neal steers [cattle] into the custodial account was before the Court and the 
Court found at trial that the actions of the bank were committed knowingly and 
willfully?

[¶5]      Appellee Bob 
McMackin states these issues:

1. A depository bank is 
liable for its negligence in handling trust account monies.

2. A partner in a 
debtor/creditor relationship with a bank is entitled to indemnity for that 
bank's negligence in handling trust account deposits pursuant to an agreement 
between the depositor and the bank.

[¶6]      O'Neal was 
engaged in the business of buying and selling cattle. McMackin and his partners, 
Fred and Lynn Williams2, did business as the Glenrock 
Livestock Exchange (GLE)3. GLE operated a livestock auction 
in Glenrock and also bought and sold cattle independent of the auction. GLE had 
several accounts at the Bank, and these included an "order buying account" and a 
"custodial account." The "order buying account" was used to pay for cattle 
purchased directly from a seller. The "custodial account" apparently was 
established to comply with the Packers and Stockyards Administration Act and 
Regulations, which required that GLE deposit the proceeds from the sale of 
livestock consigned for sale at auction in such an account. The evidence 
presented at trial demonstrated that GLE did not use the "custodial account" as 
it was required to do by federal law.

[¶7]      In December 1989, 
O'Neal consigned 127 steer calves and 88 heifer calves to GLE. On December 27, 
1989, GLE paid for the cattle with checks drawn on its order buying account in 
the amounts of $56,739.30 and $32,468.40, respectively (total $89,207.70). 
O'Neal negotiated the checks, but they were returned marked "insufficient 
funds." O'Neal contacted GLE and, from an examination of the Bank's records, 
determined that $48,257, which originally had been deposited into GLE's 
"custodial account," constituted a portion of the proceeds of the sale of 
O'Neal's livestock. The Bank had routinely permitted GLE to transfer funds to 
and from its various accounts to cover overdrafts, as well as fees for 
overdrafts. The usual procedure was for the Bank's cashier to telephone GLE and 
get authorization to move funds from one account to another to cover the 
overdrafts and fees. These transactions were memorialized on Bank fund transfer 
forms which were initialed by the Bank's cashier.

[¶8]      The Packers and 
Stockyards Act was passed in 1921 and was enacted in response to monopolistic 
practices within the packing and stockyard industries. S.Rep. No. 932, 94th 
Cong., 2d Sess. 1, 4 reprinted in 1976 U.S.C.C.A.N. (90 Stat.) 2267, 2270. As 
changes in livestock marketing patterns occurred, the Act was amended in 
reaction. The 1976 amendments are especially central in the resolution of the 
matter at hand. In January 1975, the American Beef Packers went bankrupt with 
very significant consequences for many livestock producers. General Electric 
Acceptance Corporation, the principal source of financing for American Beef 
Packers, stood ahead of the producers in the line of creditors waiting to be 
paid. 1976 U.S.C.C.A.N. at 2271; and see, e.g., Mahon v. Stowers, 416 U.S. 100, 
94 S. Ct. 1626, 40 L. Ed. 2d 79 (1974).

[¶9]      A portion of the 
legislative history of the 1976 amendments notes:

No individual is engaged 
in a riskier endeavor or one more vital to the national interest than the 
[livestock] producer. And no entrepreneur is so completely at the mercy of the 
marketplace. The livestock producer, if he successfully combats the vicissitudes 
of weather, financing, and skyrocketing costs, must sell when his cattle are 
ready irrespective of the market. His livestock may represent his entire year's 
output. If he is not paid he faces ruin.

1976 
U.S.C.C.A.N., supra at 2272.

[¶10]   In order to provide additional 
measures of protection for livestock producers, the Packers and Stockyards Act 
was amended in 1976 to include, inter alia, preemption of some state 
requirements for perfecting security interests, bonding of market agencies, 
prompt payment requirements, and a provision imposing a trust on funds held by 
market agencies which represented cash sales of livestock purchased from 
producers. That amendment is found in 7 U.S.C. § 196 (1980):

Protection of 
public interest from inadequate financing arrangements

(a) It is hereby found 
that a burden on and obstruction to commerce in livestock is caused by financing 
arrangements under which packers encumber, give lenders security interest in, or 
place liens on, livestock purchased by packers in cash sales, or on inventories 
of or receivables or proceeds from meat, meat food products, or livestock 
products therefrom, when payment is not made for the livestock and that such 
arrangements are contrary to the public interest. This section is intended to 
remedy such burden on and obstruction to commerce in livestock and protect the 
public interest.

Livestock, inventories, 
receivables and proceeds held by packer in trust for benefit of unpaid cash 
sellers; time limitations; exempt packers; effect of dishonored instruments; 
preservation of trust benefits by seller

(b) All livestock 
purchased by a packer in cash sales, and all inventories of, or receivables or 
proceeds from meat, meat food products, or livestock products derived therefrom, 
shall be held by such packer in trust for the benefit of all unpaid cash sellers 
of such livestock until full payment has been received by such unpaid sellers: 
Provided, That any packer whose average annual purchases do not exceed 
$500,000.00 will be exempt from the provisions of this section. Payment shall 
not be considered to have been made if the seller receives a payment instrument 
which is dishonored: Provided, That the unpaid seller shall lose the 
benefit of such trust if, in the event that a payment instrument has not been 
received, within thirty days of the final date for making a payment under 
section 228b of this title, or within fifteen business days after the seller has 
received notice that the payment instrument promptly presented for payment has 
been dishonored, the seller has not preserved his trust under this subsection. 
The trust shall be preserved by giving written notice to the packer and by 
filing such notice with the Secretary [of Agriculture].

[¶11]   The Secretary of Agriculture has 
authority to promulgate rules and regulations to carry out the purposes of the 
Packers and Stockyards Act. Pursuant to that authority the following regulation 
has been put in place:

§ 201.42 Custodial 
accounts for trust funds.

(a) Payments for 
livestock are trust funds. Each payment that a livestock buyer makes to a 
market agency selling on commission is a trust fund. Funds deposited in 
custodial accounts are also trust funds.

(b) Custodial accounts 
for shipper's proceeds. Every market agency engaged in selling livestock on 
a commission or agency basis shall establish and maintain a separate bank 
account designated as "Custodial Account for Shippers' Proceeds," or some 
similar identifying designation, to disclose that the depositor is acting as a 
fiduciary and that the funds in the account are trust funds.

(c) Deposits in 
custodial accounts. The market agency shall deposit in its custodial account 
before the close of the next business day (the next day on which banks are 
customarily open for business whether or not the market agency does business on 
that day) after livestock is sold (1) the proceeds from the sale of livestock 
that have been collected, and (2) an amount equal to the proceeds receivable 
from the sale of livestock that are due from (i) the market agency, (ii) any 
owner, officer, or employee of the market agency, and (iii) any buyer to whom 
the market agency has extended credit. The market agency shall thereafter 
deposit in the custodial account all proceeds collected until the account has 
been reimbursed in full, and shall, before the close of the seventh day 
following the sale of livestock, deposit an amount equal to all the remaining 
proceeds receivable whether or not the proceeds have been collected by the 
market agency.

(d) Withdrawals from 
custodial accounts. The custodial account for shippers' proceeds shall be 
drawn on only for payment of (1) the net proceeds to the consignor or shipper, 
or to any person that the market agency knows is entitled to payment, (2) to pay 
lawful charges against the consignment of livestock which the market agency 
shall, in its capacity as agent, be required to pay, and (3) to obtain any sums 
due the market agency as compensation for its services.

(e) Accounts and 
records. Each market agency shall keep such accounts and records as will 
disclose at all times the handling of funds in such custodial accounts for 
shippers' proceeds. Accounts and records must at all times disclose the name of 
the consignors and the amount due and payable to each from funds in the 
custodial account for shippers' proceeds.

(f) Insured banks. 
Such custodial accounts for shippers' proceeds must be established and 
maintained in banks whose deposits are insured by the Federal Deposit Insurance 
Corporation.

Packers and 
Stockyards Administration, USDA, 9 C.F.R. § 201.42. (1992).

[¶12]   By letter dated April 14, 1989, the 
bank was provided this information by the Acting Regional (Denver) Administrator 
of the Packers and Stockyards Administration:

Our records show that Bob 
McMackin and Fred Williams d/b/a Glenrock Livestock Exchange, Glenrock, Wyoming, 
has established its custodial bank account with your bank. Because some banks 
have failed to recognize and treat this account as a trust account, the Packers 
and Stockyards Administration is notifying banks handling custodial accounts for 
market agencies of the trust nature of such accounts to avoid future problems 
for the banks and to insure protection for livestock consignors at the 
markets.

Bob McMackin and Fred 
Williams d/b/a Glenrock Livestock Exchange is a market agency selling livestock 
on a commission basis subject to the jurisdiction of the Packers and Stockyards 
Act which is administered by the Packers and Stockyards Administration, U.S. 
Department of Agriculture.

Under the provisions of 
the Act and the regulations issued thereunder, market agencies are required to 
establish a custodial account for shippers' proceeds and the gross proceeds from 
the sale of consigned livestock must be deposited in that account. The account 
may be used only for the payment of proceeds to consignors and for the payment 
of lawful marketing charges, such as commission, yardage, trucking, feed and 
brand inspection. The Federal Deposit Insurance Corporation (FDIC) will insure 
each consignor having an interest in the account up to $100,000, if the account 
is maintained properly.

Section 201.42 of the 
regulations issued by the Packers and Stockyards Administration, a copy of which 
is enclosed, specifies that the account must be designated as "Custodial Account 
for Shippers' Proceeds" and that funds deposited in the account are trust funds. 
Section 201.42 also specifies the procedure for the proper maintenance of the 
custodial account. Please review your records of this account to assure that the 
account is properly designated and handled as a trust account.

If you have any 
questions, please feel free to contact this office.

[¶13]   The record also reveals that 
neither the Bank president nor its cashier knew anything about "custodial 
accounts" as contemplated by the 1976 amendments to the Packers and Stockyards 
Act. They did not necessarily deny ever having received the letter set out 
above, but clearly neither had read it or understood the nature of GLE's 
"custodial account." In addition, the record makes clear that GLE simply did not 
use its custodial account as it was required to be used. Neither Fred or Lynn 
Williams were available at trial, so we are unaware of what their thoughts were 
on the "custodial account." McMackin was a silent partner in GLE and did not 
know what was going on until after GLE had failed, and all the events at issue 
here were over. Two witnesses who were employed by banks, other than the Bank at 
issue here, and several employees of the Packers and Stockyards Administration, 
testified that the Bank seriously erred in its handling of the GLE "custodial 
account."

[¶14]   We agree with the district court's 
essential finding in this case:

The series of events 
resulting in this loss were occasioned by the transfer of funds out of the 
Custodial Account to cover overdrafts in other accounts held by the Glenrock 
Livestock Exchange. The Court is satisfied that once the funds were deposited in 
the Custodial Account they became the property of Mr. O'Neal and withdrawals 
from the account were in contravention of the regulations of the Stockyard and 
Packers Act.

[¶15]   Although the Bank professed 
ignorance of the requirements of the Packers and Stockyards Act, as well as that 
the "custodial account" was intended to be a trust-type account, we are 
satisfied that the evidence presented to the trial court supports its conclusion 
that the Bank knew, or should have known, that the funds deposited into the 
"custodial account" were not available to pay the overdrafts and Bank fees to 
which they were applied and that the Bank should not have permitted the sort of 
wholesale transfer of trust funds without inquiry. Indeed, in most instances the 
transfers were effected at the Bank's suggestion. We are comfortable that the 
district court's findings are consistent with the intent of the Packers and 
Stockyards Act in this situation. See Cent. Bank of Mississippi v. Butler, 517 So. 2d 507 (Miss. 1987); South Cent. Livestock Dealers v. Sec. State Bank of 
Hedley, 551 F.2d 1346 (5th Cir. 1977); Steere v. Stockyards Nat'l Bank, 113 Tex. 
387, 256 S.W. 586 (1923); 5A MICHIE ON BANKS AND BANKING, § 137 
(1983).

[¶16]   The judgment of the district court 
is affirmed.

FOOTNOTES

1 The appeal in case 
92-103, which challenged the district court's judgment denying punitive damages 
against the Bank and in favor of O'Neal, was dismissed for want of prosecution. 
See Wyo.R.App.P. 5.06 and 5.11.

2 Fred and Lynn Williams 
did not answer the complaint and the district court entered a default judgment 
against them, and in favor of O'Neal, in the amount of $142,207.82, plus $42.25 
as costs. United States Fidelity and Guarantee was also a defendant in the early 
stages of this case. O'Neal received $30,000 from it (representing the bond on 
the GLE's "order buying account"), but a claim for an additional $25,000 
(representing the bond on the "custodial account") was dismissed without 
prejudice. The claims on the bonds were made through the Packers and Stockyards 
Administration in Denver, Colorado.

3 GLE ceased doing 
business in late 1989 and presumably is defunct, though that does not appear of 
record. If personal or business entity bankruptcies resulted from the 
circumstances of this case, there is no evidence of that in the record, nor is 
any mention of it made by the parties, even in passing.