Evening star., 1937-06-01
RIGGS BANK HELD
L|ABLEFOR$176,039
IN RHEEM CASE
Court of Appeals Relieves
Institution of Responsibility
for $635,O00.
SH0REHAM BUILDING
SALE LED TO SUIT
Noteholders of Defunct Swartzell,
Rheem & Hensey Co. Will
Be Paid Amount.

The United States Court of Appeals
today held the Riggs National Bank
liable for Sl76,O399e to a group of
noteholders of the defunct Swartzell,
Rheem & Hensey Co., who had claimed
s8ll ,039,99 The decision relieved the
bank of liability for the other S638 900
claimed. The litigation arose out of
sale by the investment house of the
Shoreham Building to former Secre-
tary Of War Patrick Hurley in 1880.
Holders of notes secured by first
deed of trust on the building con-
tended the bank should not have al
lowed SWartzell, Rheem g. Hensey to
transfer "earmarked" funds, placed in
the bank to pay noteholder5, to the
company's general account.
The District Court had held that
the bank was not liable to the note
holders for either SITE, ,O3999 or $685..
600, representing the difference be-
tween the flrst-named sum and the
total claims.
The investment company sold a
$2,225 900 note issue on the Shoreham
Building to its customers. and the
notes were secured by first deed of
trust on the property.
Negotiations for Sale.
The firm later acquired title, in the
name of two of its employees in the
building, and early in 1880 Edmund
D. Rheem, executive vice president,
began negotiations with Hurley for
sale of the structure to the former
cabinet officer.
After collapse of the investment firm
later that year Rheem was indicted,
convicted and sentenced to seven
years imprisonment. He recently was
paroled.
AS requirement of the sale, Hurley
required the firm to deposit sufficient
funds to pay with interest the out
standing notes, which amounted at
that time to $2,334 $50, and to ear
mark the deposits of that amount for
the benefit of noteholders. Hurley was
to pay S1,706 645.8O in cash toward
purchase of the building.
The noteholders contended that
Rheem, although knowing his firm was
on the verge of bankruptcy, went to
the Riggs bank and secured a $685., 900
hve-day loan, saying he needed the
funds to close the sale of the Shore
ham Building.
Added to the $1,70S,6458O put up
by Hurley as part of the purchase
price, this loan made available the
full s2,334,750 required by Hurley for
the benefit of noteholders. Rheem
Immediately set up a trust fund for
this amount in the bank without the
knowledge of the banks president,
Robert V. Fleming.
Within short time, however, Flem-
ing returned to the bank after an
absence and wrote to the interested
parties, telling them the bank would
not accept responsibility for disburse-
ment of the fund to the noteholders.
Second Trust on Building.
About this time it developed that
there was a 100000 second trust on
the Shoreham Building which also
had to be released
Rheem, therefore, drew a s262,OOO
check against the firms general ac-
count in the Riggs Bank to pay this
Indebtedness, but it was found later
the investment house had a balance
of only 86,907.50, causing an over
draft of S176o39.e9.
The next day. in order to clear the
overdraft and to repay the $635,OOO
f1ve-day loan, Rheem drew a check for
the entire s2,334,750 trust account and
Endorsed it to the bank for deposit in
the companys general account.
Thus when Swartzell, Rheem g.
Hensey went into bankruptcy shortly
thereafter. the S2,334,750 deposit for
the noteholders had been diminished
by S8l1 039.99, representing the sum
of the repaid loan and overdraft.
Unpaid first-trust noteholders on the
Shoreham Building thereafter brought
suit to require the bank to set up
trust deposit for their benefit in the
sum of s8ll ,03999.
Speaking for the appellate court,
Associate Justice D. Lawrence Groner
said that under the common law the
bank would have been liable for re-
payment of the entire amount be-
cause the bank knew OF the trust de-
posit.
The court said passage in 1928 of
the uniform fiduciaries act relieved
the bank of liability so far as the
$635,000 loan was concerned. AS to
this transaction, the bank could not
be considered to have the actual
knowledge of the transfer of the
funds used for payment of the loan.
The testimony showed only the pay
Ing teller who handled the check
knew OF the transaction, the court
stated.
The court said the iduciaries act
was not applicable to the overdraft
transaction and reversed the trial
court so far as that item was con-
cerned.