Case Name: DEPOSIT GUARANTY NATIONAL BANK v. B.N. SIMRALL & SON, INC.
Court: Mississippi Supreme Court
Jurisdiction: Mississippi
Decision Date: 1987-04-08
Citations: 524 So. 2d 295
Docket Number: No. 56469
Parties: DEPOSIT GUARANTY NATIONAL BANK v. B.N. SIMRALL & SON, INC.
Judges: WALKER, C.J., ROY NOBLE LEE, P.J., and DAN M. LEE, PRATHER, ROBERTSON and SULLIVAN, JJ., concur.
Reporter: Southern Reporter, Second Series
Volume: 524
Pages: 295–308

Head Matter:
DEPOSIT GUARANTY NATIONAL BANK v. B.N. SIMRALL & SON, INC.
No. 56469.
Supreme Court of Mississippi.
April 8, 1987.
Rehearing Denied May 4, 1988.
Joe H. Daniel, J. Price Coleman, Timothy E. Hurley, Daniel, Coker, Horton & Bell, Rhesa H. Barksdale, Butler, Snow, O’Mara, Stevens & Cannada, Jackson, for appellant.
Robert S. Murphree, Jackson, Robert R. Bailess, Wheeless, Beanland, Shappley & Bailess, Vicksburg, for appellee.

Opinion:
HAWKINS, Presiding Justice,
for the Court:
Deposit Guaranty National Bank appeals from a judgment of the circuit court of Yazoo County in favor of B.N. Simrall & Son, Inc., for $84,639.66 for offsetting funds of a cotton buyer's general business account to apply on an indebtedness due the bank by the cotton buyer, and thereby causing the check by the cotton buyer to Simrall for $84,639.66 to be returned for insufficient funds.
Finding the bank had the authority to offset the deposit and apply it against the cotton firm's indebtedness, we reverse and render judgment here for the bank.
FACTS
In the late '70s Holmes & Barrier was a cotton buying firm operating out of Yazoo City. This business began in 1934 and in the '70s two sons, Jerry B. Barrier and B.J. Barrier, III, purchased the firm from their father, and thereafter operated as a general partnership under this trade name.
Barnwell and Hays, Inc., is a close Tennessee corporation, with principal offices in Memphis, also engaged in cotton buying. Its president was Andrew Jackson (Jack) Hays, Jr.
Although the record refers to the Barrier firm as Holmes & Barrier, and Barnwell and Hays, Inc., as Barnwell and Hays, because the close similarity of the names, in this opinion the Holmes and Barrier firm will be referred to as the "Barriers," and the Memphis firm as "Barnwell and Hays."
Also in the late '70s these two firms engaged in a joint venture for the purchase and sale of "gin direct" cotton. A group of Mississippi cotton farmers in and around Yazoo County were contacted by the Barriers to sell their cotton under a "gin direct contract." Several thousand bales of cotton would be bought under these contracts. Barnwell and Hays marketed the cotton thus purchased. The advantage of this type of contract to the farmer was the ability to sell his cotton from the gin without having to store it in a compress, and thereby avoid the storage charges.
Typically the procedures were as follows. In the spring the farmer and the Barriers contracted for the purchase by the Barriers of a certain number of bales of cotton at a cotton futures base price, less a point discount. Discount would also be made based upon the grade of cotton. Thus, a farmer entering a contract with the Barriers in March could choose the prevailing futures price for December cotton. The Barriers would agree to pay him at that price when delivered, less a set, agreed upon discount. The contract was only with the Barriers, and the farmer was never told there was another firm involved, or this was a joint venture. Barnwell and Hays, however, was promptly notified when any contract was executed.
To hedge against market fluctuations, Barnwell and Hays upon the execution of such a contract usually purchased a futures contract to sell a certain number of bales of December cotton.
In the fall when the farmer delivered his bales to the gin, cotton samples would be taken for classing the cotton, and the cotton would be loaded on trucks under bills of lading showing Barnwell and Hays as the owner and a designated cotton textile mill as the destination.
When the cotton was delivered to the mill, if the quality was acceptable the mill accepted the cotton and remitted a check to Barnwell and Hays. Occasionally bales of cotton would be rejected and Barnwell and Hays would have to bear the expense of storing such rejected cotton until sold. Also upon occasion the ginned cotton had to be stored for a brief period in a local compress.
Meanwhile, the cotton samples and class cards were sent to Greenwood where U.S. Department of Agriculture employees graded the cotton and wrote the grade on the class cards, and returned them to the gin. In the fall of the year this usually took two or three weeks.
When the farmer got his class cards he would take them to the Barriers' office in Yazoo City where an employee of the Barriers would work up an invoice showing the sale of the cotton to the Barriers, and the Barriers after doing so would make out a check to the farmer for bales of cotton based upon the contract price per pound. On that same day the Barriers would telephone Barnwell and Hays, notifying it of the purchase and the amount to transmit to the Barriers. Barnwell and Hays would then wire the requested amount to the Barriers' bank in Yazoo City to be deposited in the Barriers' general business checking account. The Barriers would request an excess of the amount paid the farmer in order to take care of commissions and United States government charges, usually amounting to a little over two dollars a bale. Barnwell and Hays occasionally made wire transfers to the Barriers for other purposes, such as wiring the Barriers their share of the profits derived from the joint venture. All checks to farmers in payment for cotton purchased under the gin direct contracts were paid out of the general business checking account of the Barriers. This same account was used for all business transactions and payment of all business expenses.
The joint venture's business expenses consisted of trucking, telephone and insurance charges, storage charges for rejected cotton until sold, and employee salaries. The joint venture made profits by selling the cotton for more than the contract price, and also by collecting interest on the money from the time the mill paid Barnwell and Hays until the farmer was paid. Following delivery of the cotton to the mill, the mill would usually make a check to Barnwell and Hays within five days. Interest derived by the joint venture in this manner was called a "float." The Barriers for a much shorter period also got a "float" from the time they wrote the farmer a check until it cleared their account. When all the cotton under the gin direct contracts had been sold, Barnwell and Hays deducted all expenses and the profits were then divided equally between the joint venturers. In 1981 the joint venture made a net profit of approximately $300,000. A copy of one of the gin direct contracts involved in this case is made an appendix to this opinion.
While these gin direct cotton contracts amounted to several million dollars yearly business for both of these firms, it was by no means all the cotton business either of them did.
The Barriers also bought and sold thousands of bales of cotton in the conventional manner. As a result of these dealings, other cotton merchants also wire transferred funds into the Barriers' general business account.
In 1981 the local bank in Yazoo City merged with the Deposit Guaranty National Bank of Jackson (DGB). The Barriers were shareholders in the local bank and following the merger were also shareholders in DGB.
DGB was interested in securing the Barriers' business. DGB not only wanted their deposits, but more importantly, wanted to be their prime lender in all their cotton purchases. DGB actively solicited the Barriers' business and subsequently learned about the financial strength of the Barriers individually and of their firm, Holmes and Barrier. DGB also learned the Barriers' monetary needs in purchasing and selling cotton. The written information and discussions between officers of DGB and Jerry Barrier also clearly revealed that no bank financing would be required in the gin direct cotton transactions. The Barriers only needed to borrow from DGB for the conventional cotton buying in which the Barriers engaged.
In conventional buying when the Barriers bought cotton, ownership was evidenced by compress receipts on each bale of cotton, in which DGB was given a security interest by a security agreement executed by the Barriers. Also DGB was to be given physical possession of the receipts. The Barriers' loan was backed by these compress receipts. Deposit Guaranty Bank extended the Barriers a $15,000,-000 line of credit, and on September 18, 1981, the Barriers executed a $15,000,000 master note unto Deposit Guaranty, and security agreements to secure this indebtedness to the bank. The security agreement specifically gave Deposit Guaranty Bank the right to "appropriate and apply to any indebtedness secured hereby, whether or not then due, any monies now or thereafter held by Bank on deposit or otherwise to the credit or belonging to the debtor
This same arrangement between Deposit Guaranty Bank and the Barriers extended into 1982, except the line of credit was reduced from $15,000,000 to $10,000,000. In 1982 the Barriers had only one checking account in the Yazoo City branch of Deposit Guaranty Bank, a general operating account in the name of Holmes & Barrier, through which all business transactions of this partnership were made and out of which all expenses were paid.
ENTER SIMRALL
B.N. Simrall & Son, Inc. (Simrall), is a close corporation engaged in farming in Warren County. Its president was Newell Simrall, III. Simrall was one of the farmers of a group which entered into gin direct contracts with the Barriers in 1982. On March 18, 1982, Simrall and the Barriers executed a gin direct contract for 1,000 bales of cotton (see appendix), which was orally amended on June 30 to add 300 bales. Also on September 1 Simrall and the Barriers executed another gin direct contract for 500 bales of cotton. Simrall duly delivered his cotton to the Satartia Gin for baling that fall, which was transported under bills of lading showing Barnwell and Hays as the owner. Upon receipt of class cards for 268 bales of cotton in late October, Newell Simrall delivered them to the Barriers' firm in Yazoo City and requested payment. An employee at the Barriers prepared two invoices dated November 1, 1982, on a Holmes & Barrier of Yazoo City letterhead, listing the bales of cotton, weight, and purchase price of each bought from "B.N. Simrall & Son." The total of one of the invoices was $58,791.00, and the other $25,848.66.
On November 1 the Barriers mailed Sim-rall a check of the same date for $84,639.66 drawn on the Holmes & Barrier account of the Yazoo City bank. Also on that day by telephone the Barriers requested Barnwell and Hays to make a $119,896.73 wire transfer to their account. This covered the 268 bales of cotton purchased from Simrall and 100 bales from R.E. Coker, plus the additional charges. The funds were promptly wired by Barnwell and Hays describing it as a "transfer from Barnwell and Hays for credit of Holmes & Barrier." On November 2 the Barriers' account in Yazoo City was credited with the $119,896.73 deposit.
Between November 1 and November 9, numerous checks were presented for payment and charged against the general account. These checks were for a number of diverse expenses, ranging from employee salaries and storage charges to cotton purchases from gin-direct and non-gin-direct farmers. During this same timeframe numerous deposits from a variety of sources were credited to the Barrier account. In short, the account was used for a myriad of purposes, like any typical checking account.
Simrall received the $84,639.66 on Friday, November 5, and it was deposited in Simrall's Vicksburg bank the following Monday, November 8.
During this time, cotton prices dropped. Deposit Guaranty Bank had by then become alarmed at the Barriers' financial condition, the status of several thousand compress receipts secured by the security agreement, and an overdraft of the Barrier firm at a Greenwood bank. On November 9 DGB offset the Barriers' deposit in the Yazoo City branch bank and applied it to the Barriers' indebtedness to DGB. When the $84,639.66 check to Simrall was presented to the Yazoo City branch bank for payment, it was not honored but was returned with a notation that the account had insufficient funds.
The record does not reveal precisely what happened to the Barriers' firm, except to indicate that bankruptcy was either begun or contemplated.
Simrall was not paid, and brought this suit against Deposit Guaranty Bank in the circuit court of Yazoo County. The facts as above related were developed at trial. Newell Simrall acknowledged that in all of his dealings regarding the cotton contracts, that they were solely with the Barriers' firm in Yazoo City, and that he had no prior knowledge before November 9 that Barnwell and Hays was involved in any way.
At the conclusion of trial DGB made a motion for a directed verdict. The circuit judge ruled as follows:
THE COURT:
There are two things definite that I have determined from the evidence and that is that we don't have a trust fund nor a special deposit. Neither of those theories have been established by any testimony and evidence that I've heard and, really to the contrary, I think it's been established there was neither. The only possibility that I can see of allowing this case to go to the jury, and I will allow it to go to the jury, is either some theory of constructive trust or conversion. I will allow it to go to the jury on either of those theories and we're going to start with the plaintiff's instructions.
Vol. VIII, pp. 1377, 1378.
LAW
Simrall & Son understood throughout that it was dealing with the Barriers, the firm of Holmes & Barrier of Yazoo City. The contract was with Holmes & Barrier, the class cards were delivered to that firm in Yazoo City, and the cotton invoices were to the Holmes & Barrier of Yazoo City firm. In addition, Simrall was mailed a check for $84,639.66 drawn on the Holmes & Barrier of Yazoo City account in Yazoo City, no doubt as thousands of bales had been bought and sold through this firm over the years. The only thing which suggested any connection with Barnwell and Hays prior to November 9, 1982, was the shipping order, or bill of lading prepared at the gin showing "B & H Cotton Co." as the shipper. Whether anyone connected with Simrall ever saw one of these bills of lading prior to November 9 is not disclosed by the record.
Neither did any of the wire transfers from Barnwell and Hays to the Barriers, including the one for $119,896.73, attempt to specially designate the use of the funds beyond being deposited to the credit of the Holmes & Barrier account in Yazoo City. Simrall was not paid, and obviously is still due the sales price of its cotton from the joint venture. It chose not to sue either Holmes and Barrier, Barnwell and Hays or the joint venture.
We are not called upon to address what liability the joint venture or either of the joint venturers have to Simrall. Nor, are we required to address what liability, if any, Deposit Guaranty Bank might have in a suit by Barnwell and Hays, and we expressly refrain from doing so.
Our concern is what liability, if any, does Deposit Guaranty Bank have to Simrall.
The Holmes and Barrier account with DGB was a general business account, used by the firm in the usual course of its business. It is well settled that funds deposited to a general account belong to the bank, with the bank becoming a debtor to the owner of the account for the amount on deposit. Deposit Guaranty Bank & Trust Co. v. Merchants Bank & Trust Co., 171 Miss. 553, 158 So. 136 (1934); Deer Island Fish & Oyster Co. v. First Nat'l Bank, 166 Miss. 162, 146 So. 116 (Miss.1933); Moreland v. Peoples Bank of Waynesboro, 114 Miss. 203, 74 So. 828 (1917). As was stated by the U.S. Supreme Court in Davis v. Elmira Savings Bank, 161 U.S. 275, 40 L.Ed. 700, 702, 16 S.Ct. 502 (1896): "The deposit by a customer with his banker is one of loan, with the superadded obligation that the money is to be paid when demanded by a check."
It is equally well settled that a bank, under a "set off" principle, has the right to apply a debtor's deposit to payment of his debt then due aside from any security agreement specifically authorizing it to do so. In Moreland v. Peoples Bank, supra, we stated:
It is well settled that the bank itself has a right, if it so desires, to apply whatever amount the maker of the note has on deposit with it to a payment on the note. Or, in other words, the bank itself has the right to set off the amount it owes the depositor against the amount owed it by the depositor. The relation existing between a bank and a depositor is simply one of debtor and creditor.
114 Miss. at 211-12, 74 so. at 829-30.
It has been stated that it would be inequitable to permit a depositor to carry an open account in the bank which would induce the bank to feel secure in granting a certain line of credit, and then permit the debtor to apply the funds to another purpose than satisfying the debt simply because the debtor-depositor had not expressly agreed to apply the deposit to the debt due the bank. Southwest Nat'l Bank v. Evans, 94 Okl. 185, 221 P. 53 (1923).
The New Jersey Court stated in Marmon Fanning Co. v. People's Nat'l Bank, 106 N.J.Eq. 170, 150 A. 402, 404 (1930):
It is a general rule, that a bank has the right to set off or apply the deposit of its debtor to the payment of his matured debts, upon the theory that, as the depositor is indebted to the bank upon a demand which is due, the funds in its possession may properly and justly be applied in payment of such debt, and it has therefore a right to retain such funds until payment is actually made.
The right of set-off exists even if a bank's indebtedness is secured by collateral pursuant to a security agreement. Duncan v. Coahoma Bank, 397 So.2d 891 (Miss.1981).
This is the rule as between a bank and its depositor. But what about a third party with an outstanding check against the account, but which he has not presented for payment when the bank exercises its right of set-off? In Citizens Nat'l Bank v. First Nat'l Bank, 347 So.2d 964, 968 (Miss.1977), this Court stated:
It is now, and has been for a long time, the law in this State that the relationship between a bank and its depositors is one of debtor and creditor. Since it is a debtor-creditor relationship, the giving of a check by a depositor does not constitute an assignment of the funds on deposit. The bank may refuse to pay the check, although the depositor has sufficient funds to his credit to cover the check and the holder of the check has no cause of action against the bank. The holder of the check must look to the drawer of the check and only the drawer of the check can complain about the bank not honoring the check.
See also: Miss.Code Ann. § 75-3-409; J.B. Ehrsam & Sons Mfg. Co. v. Guaranty Nat'l Bank & Trust Co., 158 Colo. 84, 404 P.2d 844, 847 (1965); Steinbrecher v. Fairfield County Trust Co., 5 Conn.Cir. 393, 255 A.2d 138, 143 (1968); Conn v. Bank of Clarendon Hills, 53 Ill.2d 33, 289 N.E.2d 425, 428 (1972).
Simrall asserts that the rule of Citizens Bank is inapplicable to his case because the money wire transferred by Barn-well and Hays was his, and DGB knew enough about the joint venture to realize this fact. He supports this contention primarily by the cases collected in 8 A.L.R.3d 235, Bank's Right to Apply Person's Fund, Deposited in Debtor's Name, on Debtor's Obligations. These cases stand for the proposition that when a bank has knowledge of a trust, special deposit, or some other type of fiduciary relationship between its depositor and a third person, the bank cannot set-off such funds against the individual indebtedness of the depositor of the bank. As these cases indicate, before a third party can claim "ownership" of certain funds, that party must make a showing of the special character of the deposit, whether by trust fund, special deposit or fiduciary relationship. See: Lumberton State Bank v. Fortenberry, 222 So.2d 384 (Miss.1969) (trust funds deposited to auctioneer's account); Armour-Cudahy Packing Co. v. First Nat'l Bank, 69 Miss. 700, 11 So. 28 (1892) (funds held in trust in selling agent's account); First Nat'l Bank v. Duncan, 127 Okl. 226, 260 P. 491 (1972) (funds held by commission merchant for client); United States Fidelity & Guaranty Co. v. Adoue, 104 Tex. 379, 137 S.W. 648 (1911) (special designation of deposit). We find no cases in this annotation holding for the third party when a general deposit is made to a general operating account.
Unfortunately for Simrall, the facts of this case failed to make a jury issue on his contention. There was no proof of any kind of special deposit, trust or otherwise. There is a reason for every payment of money. The mere fact that a bank knows A sends money to B, which B deposits in his regular multi-purpose business checking account in order to pay C imposes no obligation on the bank to segregate the funds for C, If A, B or C want some other arrangement, it is the responsibility of at least one of them to specifically notify the bank they wish to handle the funds in some special manner.
As to deposits generally, the Florida Supreme Court stated in McCrory Stores Corp. v. Tunnicliffe, 140 So. 806, 807 (Fla.1932):
Deposits are divided into two classes, general and special. A general deposit is a deposit generally to the credit of the depositor to be drawn upon by him in the usual course of the banking business; a special deposit is a deposit for safe-keeping to be returned intact on demand, or for some specific purpose not contemplating a credit on general account. A deposit in a bank is presumed to be general, in the absence of a special agreement importing a different character into the transaction.
Id. at 807.
It is undisputed that the Barnwell and Hays wire transfer was a general deposit. The funds contained no special designation, no instructions as to the use of the money, and no mention of Simrall. The funds wired to the Barriers' general business account were subject to being withdrawn by any check issued against the account for whatever purpose. The check to Simrall was a check drawn on the account in the usual course of business. Simrall, therefore, had no claim against DGB unless facts and circumstances could be proven which would take this case out of well settled principles. Simrall would have been protected if the funds wired by Barnwell and Hays had been specifically designated to be paid to the farmer. They were not.
Simrall put on no proof that the funds were held in trust for the gin-direct farmers. There was no proof of a special relationship between Simrall and the Barriers, where the Barriers were trustees for Sim-rall the beneficiary. Likewise, there was no showing of any wrong committed by the Barriers necessary to prove a constructive trust. To the contrary, the relationship between Simrall and the Barriers was nothing more than a buyer-seller transaction for the sale of cotton.
Regardless of these factual observations, Simrall insists that he "owned" the funds after the Barnwell and Hays wire transfer. We cannot agree with this assertion. Since the wire transfer in question was nothing more than a general deposit, the true owner of the funds was DGB. Moreland v. Peoples Bank, 114 Miss. 203, 213, 74 So. 828, 830 (1917).
We have, perhaps more than necessary to apply the proper legal principles to this case, set forth at length the manner in which these parties did business, and with sympathy for a cotton farmer who manifestly deserves to be paid. We have no doubt that DGB was aware that thousands of dollars of this account came from gin direct transactions with Barnwell and Hays, totally unrelated to the loan from DGB to the Barriers.
When the bank exercises its right of set-off against a general business account, especially one as here in which hundreds of thousands of dollars were deposited and spent each month, it has to know there are innocent third parties who are going to be injured. This knowledge, however, does not deprive the bank of such right. As we stated in Citizens Nat'l Bank v. First Nat'l Bank, supra, the payee can look only to the maker.
It follows that DGB had a right to set-off the amount deposited in the Barrier's ac count on the debt due it by this firm, and therefore Simrall has no cause of action against the bank. The trial judge erred in allowing this case to go to the jury and the judgment of the circuit court should be reversed and judgment rendered here for Deposit Guaranty National Bank.
REVERSED AND RENDERED.
WALKER, C.J., ROY NOBLE LEE, P.J., and DAN M. LEE, PRATHER, ROBERTSON and SULLIVAN, JJ., concur.
ANDERSON and GRIFFIN, JJ., not participating.