Case Name: Standard Asbestos Mfg. Co., Appellant, v. Fulton, Supt. of Banks, Appellee; Crane Co., Appellant, v. Fulton, Supt. of Banks, Appellee
Court: Ohio Court of Appeals
Jurisdiction: Ohio
Decision Date: 1935-05-20
Citations: 53 Ohio App. 279
Docket Number: 
Parties: Standard Asbestos Mfg. Co., Appellant, v. Fulton, Supt. of Banks, Appellee. Crane Co., Appellant, v. Fulton, Supt. of Banks, Appellee.
Judges: Terrell, J., concurs.
Reporter: Ohio Appellate Reports
Volume: 53
Pages: 279–292

Head Matter:
Standard Asbestos Mfg. Co., Appellant, v. Fulton, Supt. of Banks, Appellee. Crane Co., Appellant, v. Fulton, Supt. of Banks, Appellee.
(Decided May 20, 1935.)
Messrs. Thompson, Sine & Flory, for appellants.
Mr. John W. Bricher, attorney general, Mr. Charles F. Carr and Mr. B. B. Sollington, for appellee.

Opinion:
Levine, J.
The plaintiffs ask that a preference he declared in their favor under the following circumstances.
On December 8,1932, The Guardian Trust Company was acting as trustee for the Metropolitan Life Insurance Company and The Cleveland Terminals Building' Company in the financing and construction of The Higbee Company department store building. All the funds coming into its possession as such were deposited by it in its uninvested and undistributed trust fund account in the banking department. The trustee made various payments from the account as the construction of the building progressed. On the 8th day of December, 1932, a dispute arose between The Lundorff-Bicknell Company, general contractors for the building, and The E. B. Kaiser Company, one of the sub-contractors. The claim was compromised at $30,500. The Guardian Trust Company was instructed by letter, signed by The Cleveland Terminals Building Company, and The Lundorff-Bicknell Company, to pay to The E. B. Kaiser Company the sum of $14,000, when E. B. Kaiser Company should fulfill the conditions set forth in the letter, and further directed that the remaining $16,500 should be held in escrow and disbursed to certain named individuals and companies in amounts set forth after their names, when and after there should be deposited by The E. B. Kaiser Company waivers of liens and releases. The plaintiffs, The Crane Company and The Standard Asbestos Manufacturing Company, were two of the companies designated to receive stipulated amounts when such waiver of lien and releases should be filed.
Upon the receipt of such letter of instruction, the trust department of The Guardian Trust Company set up a ledger account designated "escrow account, Cleveland Terminals Building Co. S. B. T. 733." In addition it drew a check on its account with the bank which was charged on the "construction account ledger" and credited on the "escrow account ledger."
The plaintiffs claim through The E. B. Kaiser Company their waivers were not filed until after The Guardian Trust Company was taken over for liquidation by the Superintendent of Banks.
The only question before this court is whether or not, under the circumstances, the plaintiffs established their right to priority and preference. It is contended in behalf of the Superintendent of Banks that the re lationship of debtor and creditor existed between the plaintiffs and defendant.
Reliance is had upon Section 710-165, General Code, as follows:
"No property or securities received or held by any trust company in trust shall be mingled with the investments of the capital stock or other properties belonging to such trust company or be liable for its debts or obligations. Moneys pending distribution or investment may be treated as a deposit in the trust department, or may be deposited in any other department of the bank, subject in other respects to the provisions of law relating to deposit of trust funds by trustees and others." (Italics ours.)
Reference is had to the case of McDonald, Admr., v. Fulton, Supt. of Banks, 125 Ohio St., 507, 182 N. E., 504, which construed the above section as follows in its syllabus:
"1. The provisions of Section 710-165, General Code, authorize a bank organized under the laws of this state, with powers of a trust company, to make a general deposit of money received by it as trustee and held temporarily pending investment or distribution, in the commercial or other department of such bank, unless otherwise expressly provided by the trust agreement creating and controlling such trust.
"2. As to such funds the relation of the bank and trustee is as debtor and creditor, and funds thus deposited may be used by the bank in its general business as other assets.
"3. The rights of the trustee, with reference to the funds so deposited, are no greater than or different from those of other general depositors, and upon liquidation of the bank they all share proportionately in the distribution of the assets."
Reference is also had to the case of Fulton v. Gardiner, 127 Ohio St.,. 77, 186 N. E., 724, and Fulton, Supt. of Banks, v. University of Dayton, 129 Ohio St., 90, 193 N. E., 758.
It is therefore urged that a relationship of debtor and creditor was thereby established between the trustee and the bank, and that there can be no preferential recovery against the assets of the insolvent institution.
Usually the relationship of debtor and creditor is contractual in its character, and such relationship does not arise as against the express or implied intention of the parties. The various cases - cited by counsel, while recognizing the right of the trustee bank to deposit trust funds in any other department, hold distinctly that when the trust instrument provides otherwise, or the surrounding circumstances show an intention to the contrary, the statute does not apply. Much discussion is expended as to the meaning of the term "escrow," which was the term adopted by the parties to denote this particular transaction. Both sides refer to 16 Ohio Jurisprudence, 368, Section 11, as follows:
"The depositary of an escrow is said to be the agent of both parties for the purpose of making delivery upon the performance of the conditions; strictly speaking, however, the depositary is not an agent at all, but rather the trustee of an express trust, with duties to perform for each of the parties, the performance of which neither can forbid without the consent of the other. The depositary may not perform any acts with reference to handling the deposit, or its disposal, which are not authorised by the contract of deposit. Thus, a depositary holding a deed conveying land and a sum of money to pay therefor, the transaction to be consummated at a definite, fixed time which is made the essence of the contract, may not, in the absence of express authority from the vendee, surrender to the vendor any part of the money held, to enable him to remove encumbrances and perfect his title." (Italics ours.) Glick v. Galier, 116 Ohio St., 41, 155 N. E., 385.
Originally, the term was applied to a deed, bond or other written instrument delivered to a third person to be delivered by him to a grantee only upon the performance or happening of certain conditions upon which the transmission of title is complete but no title passes until the fulfillment of the conditions. It would, therefore, appear that strictly speaking, the term "escrow" does not apply to a deposit of money. We are here to determine the relationship which arose between the parties when the letter of escrow instruction, was forwarded to The Guardian Trust Company, trustee, by The Cleveland Terminals Building Company and the Lundorff-Bicknell Company, and which was followed by the action of the bank in transferring $30,500 from the "construction account" to the "escrow account."
While technically speaking the term "escrow" as used in this transaction may be termed' a misuse, yet there is no denying that the arrangements made between the parties partake of the essential elements of a technical escrow.
When a deed is delivered to a third person to be held by him until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, the depositary acquires no title whatsoever in the instrument so delivered to him. His duty is clear, namely, to obey to the letter the instructions given him. This fund of $30,500, which was taken by The Guardian Trust Company out of the "construction account" and credited to the "escrow account," became an escrow fund in pursuance of a settlement between E. B. Kaiser Company and' the Lundorff-Bicknell Company, and which was followed by a letter of instruction to The Guardian Trust Company. While the money was being held by The Guardian Trust Company in the "construction account" it bore interest. When the same was transferred to the "escrow account" it ceased to bear interest. What was the duty of The Guardian Trust Company with reference to this money which was transferred by it from the "construction account" to the "escrow account?"
The designation of the account as an "escrow account" lends emphatic .support to the contention that it was the intention of the parties that this fund should be treated as a special fund and be distributed only in accordance with definite instructions. The bank then became a medium to accomplish the performance of the agreement of settlement between the parties.
By the transfer of the money to the "escrow account" The Guardian Trust Company entered into an undertaking that it would hold this fund intact subject to instructions only. When a deed is delivered to a third party called an escrow agent, to be delivered only upon the happening of certain events, no discretion is lodged in the escrow agent except to obey the instructions given him concerning it. When this money was deposited in the. "escrow account" under definite instructions The Guardian Trust Company became obligated to do nothing with this money which would be violative of such instructions.
Section 710-165, General Code, which authorizes the trustee bank to deposit trust funds in any other department of the bank, has reference only to cases where no instructions concerning the deposit of the fund were'given to the trustee bank. When the instrument of trust provides otherwise, or where the intention of the parties is clearly to the contrary, such authority must be denied.
The above section is, of course, in derogation of the general law of trusts, which commands the trustee not to intermingle trust funds with his own. The section being in derogation of the general law must be strictly construed. It is doubtful whether the legislature can force upon two contracting parties a relationship of debtor and creditor when it is clearly their intention that such relationship shall not arise.
It was accordingly held in the ease of Bank of America National Trust & Savings Association v. California Savings & Commercial Bank, 218 Cal., 261, 274, 22 P. (2d), 704, that "where the purchase price of land or other property or money with which to discharge a mortgage, is delivered to a bank in escrow the deposit is held to be a deposit for a special purpose, and the bank has no right to use the amount thereof in its general business."
Since the statute above referred to is in derogation of the general law it must be given a restricted meaning and will not operate against the clear and manifest intention of the parties. While it is true that The Guardian Trust Company, as such, at no time parted with possession of the money in its hands, but merely caused a change in bookkeeping, yet it must be remembered that the bank is contending that there are two separate entities in the same banking institution, consisting of the trust department and the commercial and savings department. It became clearly the duty of the bank trustee upon the receipt of its letter of instructions either to keep the fund segregated or to at all times' reserve the equivalent in cash which is required to cover the-deposit under specific instructions. Equity regards that as done which ought to be done. In this case, by the operation of the doctrine, the fund deposited in the escrow department became charged with a special obligation, namely, that, the same should be applied only in accordance with the letter of instructions.
The Supreme Court of Ohio in the case of Fulton, Supt. of Banks, v. Paper Co., 129 Ohio St., 90, 193 N. E., 758, quotes with approval at page 104, from 5 Ohio Jurisprudence, 509, as follows:
"Under earlier holdings the mingling of trust funds, with money of the trustee, was held to defeat the owner's title and compel him to stand as a mere unsecured creditor, upon the theory that money was not earmarked, and therefore could not be recovered in specie. But this view seems no longer to obtain in Ohio. It is not, the courts say, the identical dollars that may be pursued, any more than it is the identical grains of wheat put in a warehouse or elevator that the depositor may follow, but the equivalent in dollars ; the rule now is that, where a bank mingles trust money with its own funds, money paid out from such funds for its own purposes will be presumed to have been paid from its own money and not from the trust fund, in a situation where the mingled fund has not been reduced at any time below the amount of the trust fund; this presumption rests upon the idea that the amounts drawn out from time to time were of moneys which the bank had a right to expend in its own business, and that the balance which remained included the trust fund, which the bank had no right to use, and the use of which would have been a violation of its trust, which will not be presumed in the absence of evidence to that effect."
The intention of the parties is quite clear that this amount which by specific instructions was to be taken out of the "construction account" and deposited in the "escrow account" shall be subject to the fulfillment of the specific instructions only.
Considerable discussion is had as to the exact terminology to apply to The Guardian Trust Company in the matter of this escrow account. Counsel for the Superintendent of Banks apply the term "trustee of an express trust." Counsel for plaintiffs apply the term "agent or stakeholder." In our opinion this difference of terminology is not material. Every agent occupies a fiduciary relationship, as does a trustee, but there are different kinds of trusts. Conceding the terminology by counsel for the Superintendent of Banks to be correct, and if Tbe Guardian Trust Company is to be called tbe "trustee of an express trust," it does not alter tbe result. If Tbe Guardian Trust Company is to be regarded with reférence to this escrow account as the "trustee of an express trust" there must be added to it that it is the "trustee of a special express trust."
We conclude that the circumstances surrounding this transaction show clearly that the parties did not intend that the ordinary trust relationship shall arise, but, instead, intended that the fund shall not be used except in strict obedience to the instructions contained in the letter of instructions to the Guardian Trust Company.
We are also of the opinion that Section 710-165, General Code, which enables the bank trustee to deposit trust funds in any other department of the bank, must be given a limited meaning, as the same is in derogation of the general law which prohibits the trustee from commingling trust funds with its own, and, further, that the section is only applicable where the instrument of trust does not otherwise provide or where the circumstances surrounding the transaction do not show an intention of the parties to the contrary.
In view of the above considerations a decree will be entered granting the relief prayed for.
Decree accordingly.
Terrell, J., concurs.