Case Name: University of Dayton v. Ira J. Fulton, Superintendent of Banks, et al.
Court: Montgomery County Court of Common Pleas
Jurisdiction: Ohio
Decision Date: 1933-04-11
Citations: 30 Ohio N.P. (n.s.) 339
Docket Number: 
Parties: University of Dayton v. Ira J. Fulton, Superintendent of Banks, et al.
Judges: 
Reporter: Ohio nisi prius and general term reports (new series)
Volume: 30
Pages: 339–353

Head Matter:
Common Pleas Court of Montgomery County.
University of Dayton v. Ira J. Fulton, Superintendent of Banks, et al.
Decided April 11, 1933.
Murphy & Murphy, for plaintiffs.
John W. Bricker, attorney general, Ku&worm & Shaman, and Daniel W. Iddings, for defendants..

Opinion:
Snediker, J.
These two cases were consolidated. In one case The University of Dayton filed a petition asking for an' order of the court directing the superintendent of banks to allow its claim as a special deposit and trust, to be first paid on distribution 'of the assets of The Union Trust Company of Dayton, Ohio; that it be given a preference over general creditors in its payment, and that a trust be impressed upon the money represented by said claim as a special deposit; and for such further orders as the facts may require which will protect the plaintiff under the provisions of its mortgage deed of trust.
In the Other case, on the same facts as- are alleged in the first, The Union Trust Company, operating through its trust department, asks for the same relief and for the impressment of a trust on all the commercial funds of The Union Trust Company in possession of the defendant superintendent of banks for the sum of $13,750.00, which is the am'ount of plaintiff's claim; and for all other and further relief to which the plaintiff may be entitled in law and equity.
The claims as asserted by the petitioners arise out of a deposit of $13,750.00 made on October 27, 1931 by the University of Dayton with the Union Trust Company of Dayton, Ohio for the payment of bonds and bbnd interest. This deposit was made by check of that date. When it was delivered it was endorsed by the trust department of the Union Trust Company and was deposited by the latter in an account known as the "Univested Trust Fund." On October 31, 1931, before the payment of bond interest for which the check was given, the superintendent of banks took over the Union Trust Company for liquidation. Thereafter the University of Dayton made its claim to the superintendent of banks for the recognition of $13,750.00, the amount of the check, as a preferred claim and filed its affidavit setting forth the facts on which the claim is asserted. It was not so allowed, and thereupon these actions were brought for the relief asked for in the petitions before us.
After admitting certain of the facts set forth in the petitions in both cases, the presentation of the claim to him and its rejection, but denying all right k>f the plaintiffs to a preferred claim as asserted by them, the superintendent of banks says that the deposit mentioned was not of a specific sum of currency but of a check against credit theretofore existing in favor of the University of Dayton, Society of Mary, Province of Cincinnati; that,
"it was not the intention or within the contemplation of the parties to* said trust indenture that said check or any specific, sum or sums of currency should be set aside and kept apart by said trust department of the Union Trust Company of Dayton for the purposes as herein before set forth; but that it was the intention and within the con templation of the parties that, as consideration for said deposit said trust department undertook to pay, by proper order upon the aforesaid general deposit entitled 'Uni-vested Trust Fund,' said bonds and interest Coupons upon proper presentation thereof.
"Further answering, the defendants say that all moneys and other items received from the trust department by the commercial department, including whatever items were received from the plaintiff, became the property of said bank and were utilized in the general business of said bank and commingled with other assets thereof; that when said superintendent of banks took charge of said bank aforesaid it was. impossible for him to tell what if any part of the general assets of said bank had been received by said bank in return for the deposited moneys under the designation of 'Univested Trust Funds' so deposited by the trust department of said bank as. herein before set forth; that there were no money or other items of assets at the time in possession of said bank which could be identified as belonging to the plaintiff as having been deposited by it with said trust department; and that said bank by reason of the transaction aforesaid is indebted to the trust department thereof as trustee in the sum above set forth."
And he asks that the petition be dismissed.
By way of reply it is. averred that the specific deposit for which claim is made was for the one sole and specific purpose, and no other, of redemption, by payment, of all bonds and interest coupons maturing November 1, 1931 that might or wtould be presented as provided by and under a mortgage deed of trust entered into on the first day of November, 1930 by and between the University of Dayton and the Union Trust Company of Dayton, Ohio and the Society of Mary; that the funds so deposited were accepted and received by the Union Trust Company upon the agreement to use the same for said sole and specific purpose and no other; that it also, agreed to hold the fund for the respective owners, until presentation, upon special trust without interest for the period of time limited by law; that the Society of Mary had on deposit to the credit of its checking account in. the Union Trust Company of Dayton on October 27, 1931 a sum between $15,000.00 and $16,000.00, and on said date paid said money by giv ing its check on the Union Trust Company of Dayton and made the same payable to the Union Trust Company, trust department, for the sum of $13,750.00; that the sum of $19.38 was to bé used to pay charges for services of the trust department, to whom the check for the entire amount was made, and that the funds, therefor were paid and received by the trust department, and the check returned by the Union Trust Company and a charge made against the checking deposit account of the Society of Mary. Plaintiffs further say that the deposit was not made and was not accepted as property of the bank to be loaned or otherwise used by the bank in any other manner than as so set forth, and that it was never intended or contemplated by the parties that the relation of debtor and creditor between the bank and the Society of Mary should be continued or newly created as to said funds; that it was paid to and received by the bank solely for a valuable consideration paid in a fiduciary capacity upon an agreement to act as agent for the one purpose; that the funds never became an asset of or belonged to the bank and were received to be held by it as a trust fund; that in commingling the funds with general funds of the bank it was guilty of wilful misconduct or gross neglect of duty in appropriating said funds to its own use. Plaintiffs in their reply claim that they are entitled to follow it into said mixed fund and reclaim it from the defendant, the superintendent of banks, and have a charge impressed upon the whole fund for the amount due; that the defendant never agreed to Or gave its consent to the method of deposit used by the bank, nor to any other method than provided by its contract; and it is defined that the deposit of funds with the general funds of the bank was made or ever agreed to by the Society of Mary; and plaintiffs deny such method was ever in contemplation of the parties. It is further alleged that in adopting the method it did, the Union Trust Company did so in violation of the directions and its contract obligation, and, in view of its contract, in violation of the powers to it granted by Section 710-164, General Code, under which it was organized and authorized to do business.
Upon the issue thus made up evidence was taken which disclosed the following facts:
The University of Dayton, Society of Mary, is a corporation organized and existing under the laws of the state 'of Ohio. The Union Trust Company is a corporation also organized under the laws of Ohio and located at Dayton, Ohio, with a trust department organized under one charter and having one board of directors. On October 31, 1931, the Union Trust Company was taken over for the purpose of liquidation by the superintendent of banks.
On November 1, 1930 a mortgage deed of trust was executed by and between the University of Dayton, the Union Trust Company, and the Society of Mary. By that" deed a conveyance was made to the Union Trust Company (trust department), in trust, of certain property of the University of Dayton to secure the payment of a series of bonds in the total amount of $150,000.00. The first ten bonds of the series, in denomination of $1,000.00 each, matured on November 31, 1931. It was to pay these bonds and the interest accruing on the issue up to that time that the following check was given to the Union Trust Company, trust department, by the Society of Mary:
"THE UNION TRUST CO.
of Dayton' No, 5808
Dayton, Ohio, Oct. 27, 1931.
Pay to the order of Union Trust Co. trust department $13,769.38, thirteen thousand seven hundred sixty nine dollars thirty eight cents.
Society of Mary Geo. Deck."
When this check was delivered, this receipt was given by the vice-president and trust officer of the Union Trust Company:
"THE UNION TRUST COMPANY
Dayton, Ohio, October 27, 1931
RECEIVED OF Brother George Deck, for the Society of Mary thirteen thousand seven hundred sixty-nine and 38/100 dollars covering redemption of $10,000.00 First Mortgage 5% Gold Bonds — payment of quarterly interest due November 1, 1931 on entire issue and our fee for redeeming bonds; and paying coupons.
THE UNK)N TRUST CO. OF DAYTON
$13,769.38 By Geo. Kern, Vice President."
The check of October 27, 1931 was endorsed, "trust department."
At that time the Union Trust Company kept a control account of all trust funds received by its trust department known as the "Univested Trust Fund," in which it segregated trust funds, subject to the order of the trust department. (Kern's testimony, p. 25). The amount paid by the Society of Mary by its check went into that account. There was kept in the individual ledger of the trust department an account of the money paid in and disbursed in pursuance of the mortgage deed of trust made by the University of Dayton, Society of Mary. It had been the practice of the Union Trust Company, in pursuance of what it regarded as its privilege under Section 710-165, General Code, to deposit and úse trust funds in its commercial department. The uninvested trust fund was in that department when the superintendent of banks closed the Union Trust Company and when the claim was made by the University of Dayton and denied by the superintendent of banks.
Section 710-165, General Code, reads:
"No property or securities received or held by any trust company in trust shall be commingled with the investments of the capital stock or other properties belonging to such trust company, or be liable for its debts and 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 the deposit of trust funds by trustees and others."
In order to determine the obligations accompanying the deposit which was thus made by the Society of Mary with the trust department it is necessary for us to resort to the mortgage deed of trust and to generally consider the nature of the transaction. We discover the following:
"The conveyances hereof are nevertheless in trust for the purpose of securing the payments, equally and ratably, without priority or preference and without regard to date or dates of issue or maturities, on a total authorized issue of three hundred thousand dollar ($300,000) first mortgage gold serial bonds, of which bonds a present series of one hundred fifty (150), hereinafter in Article I, Section I, fully described, are to be presently outstanding, and of which the balance of one hundred fifty thousand dollars ($150,000.00) may be designated, issued and disposed of in the manner and according to the terms of Article I, Section 2, hereinafter described and set forth.
"Said series of bonds, and each and all of the successive installments of interest thereon, shall be payable by the party of the first part and parties of the third part by deposit of the requisite funds with the Union Trust Company of Dayton in the city of Dayton, Ohio, at least thirty (30) days prior to maturity or the due date thereof, without deduction for bank exchange." . *
"Said the Union Trust Company of Dayton shall be entitled to charge party of the first part, and party of the third part will pay for its services in acting as payment agent one-tenth of one percent (1/10 of 1%) of the principal and premium of all series of bonds redeemed before maturity thereof. All series of bonds paid or redeemed and all coupons thereon paid out of the respective deposits therefor at said the Union Trust Company of Dayton shall, upon surrender thereof for such payment or redemption, be cancelled by said Trust Company and returned to the party of the third part.
"With respect to any coupons not presented when due, bonds called for redemption not presented with their requisite coupons on the date fixed for redemption, or bonds not presented at maturity, said the Union Trust Company of Dayton hold the funds deposited for the payment or redemption thereof in special trust, but without drawing interest, for the respective owners thereof until the expiration of the period of limitation in such case made and provided by the laws of the state of Ohio with respect to such bonds and/or coupons, at which time said funds then remaining unclaimed shall be paid to party of the third part.
"It shall be the duty of the mortgage trustee, notwithstanding the fact that some of the bonds may not have been presented for payment out of the deposit so made, (no other default existing) nevertheless to execute deeds, assignments or other instruments releasing such security, containing recitals of the fact of such deposits with the payment agent under the bonds, and such deeds, assignments, and/or other instruments containing such recitals, shall- constitute a valid extinction of the lien hereof.
"When the backer's on the bonds issued hereunder shall have deposited with the said Union Trust Company of Dayton for the benefit of the holders of all the bonds issued and then outstanding hereunder funds sufficient for the payment or redemption thereof, in case of redemption, by compliance with all- the conditions, of Article 1, Section 1, hereof, together with funds for the payment of all interest accrued thereon to the date of payment or date fixed for redemption, as the case may be, such deposit shall be taken to constitute payment so far as release is concerned of the mortgage and collateral security, if any, may be concerned, and it shall be the duty of the mortgage trustee, notwithstanding the fact that some of the bonds may not have been presented for payment out of deposits so made, no other default existing, nevertheless to execute deeds ."
All of which, with other stipulations and provisions of the mortgage deed of trust, indicates a special deposit of the check of October 27, 1931 with the trustee, the Union Trust Company, for a specific purpose.
It appears from the evidence that at the time of the closing of this bank there were ample funds in the uninvested trust fund account on the commercial side of the bank to pay not only the check of the Society of Mary but to respond to all other trust deposits then being administered by the trust department of the Union Trust Company.
Having found that this was a special deposit for the specific purposes set out in the deed of trust, it only remains for use to ascertain what "the provisions of law relating to such a deposit of trust funds" by a trustee are.
Section 710-159, General Code, provides :
"A trust company may act as agent and take, accept, and execute- any and all trusts, duties, and powers in regard to holding, management and disposition of any property or estate, real or personal, which may be committed or transferred to or vested in said trust estate" etc.
Under Section 710-164, General Code:
"The trust company always shall follow and be entirely governed by the directions contained in any will or instrument under which it acts."
Perry in his work on Trusts and Trustees lends his approval to the following:
"When, however, the money is paid into the bank for specified purposes, other than that of a loan to the bank, a fiduciary relation is created."
(Here the fiduciary relation had already been created.)
In Capital National Bank and Kent K. Hayden, Rec'r. v. Coldwater National Bank et al, 49 Neb., 786, the court held:
"A fund which comes into the possession of a bank with respect to which the bank has but a single duty to perform, and that is to deliver it to the party thereafter entitled, is a trust fund and is therefore incapable of being mingled with the general assets of such bank subsequently transferred to its receiver. Under the circumstances before indicated the receiver of the bank is merely substituted as trustee, and its funds in his hands should be devoted to discharging such trust before distribution thereof is made to the general creditors of the bank."
In the case of George Morton, v. Albert Woolery et al and Farmers' Bank of Dunn county, 24 American Law Reports, the Supreme Court of North Dakota held:
"Where a person makes a deposit in a bank for the specific purpose of meeting certain checks to be thereafter issued, the bank, on accepting the deposit, becomes bound by the conditions imposed, and, if the money so deposited is misapplied, it can be recovered as a trust deposit.
"Where money is deposited for a special purpose, as, for instance, in this case, where it was deposited for the stated purpose of meeting certain checks to be thereafter drawn against such deposit, the deposit does not become a general one, but the bank, upon accepting the deposit, becomes bound by the conditions imposed, and, if it fails to apply the money at all, or misapplies it, it can be recovered as a trust deposit. Wash. 167, 195 Pac. 13, 196 Pac. 629; Dolph v. Cross, 153 Iowa, 289, 133 N. W. 669; First Nat. Bank v. Barger, Ky., 115 S. W. 726; Smith v. Sanborn State Bank, 147 Iowa, 640, 30 L. R. A. (N. S.) 517, 140 Am. St. Rep. 336, 126 N. W. 779. See also Russell v. Bank of Nampa, 31 Idaho, 59, 169 Pac. 180; First Nat. Bank v. Miller, 46 N. D. 551."
In the 16 Ohio App. at page 240 we find the following, as laid down by the Court of Appeals of Mahoning county (affirmed by Supreme Court) :
"Money deposited in a bank by a party, to be applied by the bank in payment of a specific indebtedness of the depositor to a third party upon the happening of a certain condition, creates a trust fund; and the bank as trustee is required to retain the fund in trust for the discharge of such indebtedness."
In the case of Titlow v. Sundquist, 234 Federal, 613, the Circuit Court of Appeals of the United States, 9th Circuit, held:
"Where plaintiff in behalf of the mortgagor deposited money in the bank for the purpose of discharging a mortgage indebtedness to another, and the bank made, but retained a certificate of deposit in favor of the mortgagee and notified her thereof, the transaction was not a loan but the bank held the money in trust for the mortgagee; and on its failure before execution thereof the plaintiff could recover the sum deposited as against the general creditors of the bank."
In a very recent case decided by the Ohio Appellate Court in the Lucas county district, (Rehearing of Gardner v. Fulton, 13 Ohio Abst., 484) the first syllabus is:
"The fact that the lessee of property belonging to several co-lessees conveys an instrument of rent to a bank which had agreed to act as trustee for the collection and distribution among the several lessees of the rentals by drawing its check upon its commercial account in the trustee bank to the order of the bank, for credit to the trust account therein, does not prevent the beneficiary lessees, upon the insolvency of the bank before distribution of the rentals, from claiming a preference with respect to the amount of the installment of rent thus paid to the bank."
In the case of Gardner v. Fulton (1st hearing) 13 Ohio Abst. at p. 328 the court say:
"The admitted facts stated in the pleadings disclose that the rentals received by the Ohio State Savings Bank & Trust Company were received for a specific purpose, and by the terms of their receipt it was expressly agreed that distribution of the rentals would be made to those for whom received and to whom payable. Our opinion is that by no manipulation of the bank, either by commingling the rentals with other funds or by otherwise using the same, could the trust imposed by the agreement be divested and the relationship created thereby be converted into that of a mere debtor and creditor."
' Another case which bears upon a specific deposit for a particular purpose is that of Hudspeth, Appellee, et al v. Union Trust & Savings Bank et al, 196 Iowa, 706. The first syllabus reads:
"A deposit of money in a bank constitutes a trust fund when deposited by a vendee on condition that it be paid to a vendor when the latter complies with a certain contract. Such relation is in no ways changed by the fact that the bank, for bookkeeping purposes, issues and retains an ordinary certificate of deposit for the money.
"On the issue whether trust funds in the hands of an insolvent passed into the hands of a receiver, it is sufficient to show, that from the time of the creation of the trust up to the time the receiver took possession the insolvent at all times had on hand a cash balance equal to or in excess of the trust funds."
In the 194 North Carolina at page 125 (June 25, 1927) the Supreme Court of that state, in a case which related to a deposit in an insolvent bank for which the court had appointed a receiver, held:
"A deposit of a check given for the purchase price of real estate subject to a lien, under the agreement that the bank would immediately honor a check against the deposit sufficient to satisfy the lien, is impressed with a trust in the hands of a receiver of the bank to the extent of the lien."
And in Northwest Lumber Company v. Scandinavian-American Bank of Seattle et al v. John P. Duke, Supervisor of Banking, 130 Wash. 33, the Supreme Court of that state in passing upon a question very similar to the one here under discussion held that:
_ "A depositor who sends to his bank a check with directions to apply the proceeds to the payment of interest on bonds which are shortly to mature and are payable at the bank thereby creates a special deposit of the amount of the check which entitles him to preference in case the bank becomes insolvent before the interest is paid."
In discussing the case in the body of the opinion Judge Fulton said:
"All deposits of money made with a banker may be divided into two classes: namely, general deposits and special deposits. The former character of deposit is the more common one, in which the depositor leaves his money with the banker for his own convenience. In effect, the depositor thereby loans his money to the banker and the relation of debtor and creditor is created between them. The banker has the right to use the money deposited, for his own purposes, his only obligation being to return the amount thereof to the depositor either in partial payments or as a whole, as the depositor demands it. A special deposit, on the other hand, is where the depositor leaves his money with the banker for a particular purpose or for a particular use. It does not create the relation of debtor and creditor, but rather that of trustee and cestui que trust. The banker obtains no title to the money and may not use it for his own purposes, his obligation being to apply it to the uses and purposes for which he receives it. The distinction between the two forms of deposit is a wide one, not only as affects the immediate parties thereto but as it affects other creditors of the banker. On the insolvency of a banker all of his general depositors have an equal lien on his general assets, and can have a return of no more than their proportionate share, while the special depositor may reclaim his entire deposit if it is found in tact, or, under the modern modification of the rule may reclaim it from the general mass with which it has been commingled if it appears that the banker has not, subsequent to the time of the intermingling, reduced the mass to an amount less than the amount of the special deposit. These principles, we think, are well established by the authorities.
And then we have the case of Wayne County National Bank v. Predmore-Henry Motor Company, decided by the Wayne county Court of Appeals and found in Vol. 28 Ohio Law Reporter, 139. In that case the court in concluding the opinion said:
"It may be said that the deposit is one to be repaid on demand in money, and the title to the money deposited passes to the bank. The mere deposit of money in the bank on account of the depositor without being complicated by a special agreement or contract as ito when, how, to whom, or under what circumstances it is to be paid out, or upon whose order such is to be done, is a general deposit. However, the deposit may be one other than general when it is made so by special agreement between the bank and the depositor, as claimed by plaintiff in its petition. While, prima facie, every deposit is general yet it may become a special or limited deposit under and by agreement of the depositor and the depository. Applying this to the instant case, we find under the allegations of the petition and the proof offered in support of same that the deposit now under inquiry was and is a special or limited one and not general, and that the material statements of fact in the petition have been fully established by the record evidence. Banks as well as individuals are bound in km by their contracts and agreements, and when such are established by the evidence must be enforced by our courts. Page v. National Bank, 12 Ohio App. 196."
A Nisi Prius case, Gulf Land Company v. The Union Savings & Trust Company, 29 O. N. P. (N. S.), 375, holds:
"The character of trust funds deposited with a bank to meet interest payments coming due under a mortgage of which the bank is the trustee is such as to render the deposit a preferred claim upon the bank being taken over by the superintendent of banks for liquidation."
All these authorities give direction to the disbursement of these funds which the superintendent of banks must follow.
Full evidence of the specific purpose for which the check was given by the Society of Mary to the trust department of the Union Trust Company is afforded by the language of the receipt therefor given by the Trust Company and here made an exhibit.
But it is insisted by counsel representing the state banking department that that part of Section 710-165, General Code, which provides that "Moneys pending distribution or investment may be treated as a deposit in the trust department or may be deposited in any 1other department of the bank" gave the Union Trust Company and its trust department the right to deposit the money paid to it on October 27, 1931 in the uninvested trust fund and the right to use it in the commercial side of the bank and thereby to so commingle the trust fund with its other funds that it is now indistinguishable, not segregated; and that this plaintiff, because of this provision of law and because of these facts, is only entitled to such dividend as may be allowed to a general depositor.
In making this claim counsel forget that this was a special deposit of a trust fund with a trustee for a specific purpose. Commingling does not lose such a trust fund as to the trustee or the beneficiaries of the trust. As said in the 32 A. L. R,, page 951:
"Where a fund has been set apart for the payment of an obligaJtion or class of obligations, or a fund in the hands of a third person has been so designated as to require the latter to make payment out of it to a creditor, the general rule seem to be that the person for whose benefit the funds were so set apart or designated acquires a right to have it applied or directed, which right will be given a preference over the rights of other creditors in case of the debtor's insolvency, provided, of course, that no element of fraud or other superior equity enters into the transaction."
This fund was not literally commingled. The account of uninvested trust funds is a separate segregated account on the books of the Union Trust Company. In order to determine as to what each trust is entitled to out of that account resort may be had to the books of the trust department, which are carefully kept for the purpose of setting up in detail all trust accounts. Nor was this money given to the trustee, the trust department of the Union Trust Company, with the privilege of exercising discretion as to its use or investment. As is claimed, and as we have said and repeated, it was directed to a particular purpose; it was a special deposit for that purpose and should be held and distributed under the provisions of law relating to the deposit of such a fund for such a purpose.
As stated in the decision of the Supreme Court in the Claustermeyer case, 89 Ohio St., 149:
"Equity regards the substance and not the style of things, the fact and not the form."
We are of the opinion that under the conditions present in this case there is a lien to the extent of the claims of plaintiffs upon the funds in the hands of the superintendent of banks for the payment of this special deposit made by the Society of Mary and that a preference should be accorded plaintiffs over general creditors of the Union Trust Company of Dayton, Ohio; and, it appearing that sufficient funds are available for the purpose, the entire amount of this deposit to pay bonds and bond interest ought to be used to pay these obligations.
An entry may be drawn in accordance with this opinion of the court.