Case Name: Escanaba Paper Co. v. Ira J. Fulton, et al.
Court: Montgomery County Court of Common Pleas
Jurisdiction: Ohio
Decision Date: 1933-04-12
Citations: 31 Ohio N.P. (n.s.) 361
Docket Number: 
Parties: Escanaba Paper Co. v. Ira J. Fulton, et al.
Judges: 
Reporter: Ohio nisi prius and general term reports (new series)
Volume: 31
Pages: 361–368

Head Matter:
Common Pleas Court of Montgomery County.
Escanaba Paper Co. v. Ira J. Fulton, et al.
Decided April 12, 1933.
McMahon, Corwin, Landis & Markham, for plaintiff.
Iddings & Iddings, and J. W. Bricker, attorney general, for defendant.
Affirmed by the Court of Appeals'.

Opinion:
Snediker, J.
Plaintiff asks that a deposit of $38,147.94, made by it -in The Union Trust Company of Dayton, Ohio be determined and declared to be a valid preferred claim and a lien upon all the assets of The Union Trust Company, to be paid in full after credit is given for a fifty per cent dividend received by plaintiff out of such assets. Plaintiff's case is stated in the petition as follows:
"That it is the owner of a preferred claim against the assets of The Union Trust Company of Dayton, Ohio by reason of a special deposit made for a specific purpose under a written agreement with the trust department of The Union Trust Company; that on or about the first day of July, 1925 plaintiff proposed to The City Trust & Savings Bank of Dayton, Ohio to open an account of The Escanaba Paper Company with that bank, entitled 'Trust Account, Escanaba Paper Company, in trust for Old Colony Trust Company, Boston'; that said account was established with The City Trust & Savings Bank for the purpose of making sinking fund payments on a certain issue of general and refunding 6y2% mortgage bonds maturing serially and secured by deed of trust upon property of the plaintiff of which The Old Colony Trust Company of Boston, Mass, was trustee; that the plaintiff agreed to deposit to said account on the first day of each month a pro-rata proportion of the annual interest on the bonds then outstanding and on the first day of every month beginning December 1, 1926 one-sixth of the principal of the bonds next maturing, so that the payment of all the bonds at each semi-annual maturity might be provided for by six equal monthly installments, such payments on account of interest and principal to be held by The City Trust & Savings Bank and forwarded to said The Old Colony Trust Company not later than the 15th day of May and November in each year; that said The City Trust & Savings Bank on the first day of July, 1925 in writing expressly agreed to accept and hold such deposits made by the plaintiff as a special deposit and expressly covenanted and agreed not to apply said deposits against any claims, indebtedness, or other obligations of the plaintiff; and that pursuant to said written agreement of deposit the plaintiff made regular deposits of principal and interest; Which arrangement was taken over in its entirety and adopted and continued, following the consolidation of The City Trust & Savings Bank with The City National Bank under the name of The City National Bank & Trust Company and the merger of the latter bank with, the defendant, The Union Trust Company of Dayton, Ohio, and the accumulated- deposit transmitted every six months to The Old Colony Trust Company in accordance with the aforesaid written agreement of deposit."
The plaintiff further says that this account was not used as a checking account by it and that the funds deposited with The Union Trust Company were trust funds, so held solely for the specific purpose named; that said funds were funds held in trust for the plaintiff and for the trustee of the bonds issued by the plaintiff, and for no other purpose; and that there was in the general deposits and vaults of The Union Trust Company from the date the deposits were begun to the date of closing a sum of money in excess of the trust fund. The plaintiff then goes on to recite with respect to the amount deposited and not used for the purposes indicated at the time of the closing of the bank by the state banking department, which sum was $38,147.84. A claim was presented to the superintendent of banks by affidavit as of a preferred claim on August 13, 1932 and was rejected by the superintendent of banks; but there was paid subsequently a fifty per cent dividend on the claim, which was received as not in any manner a waiver of the claim of the plaintiff to a preference for the full amount of its deposit.
Defendants filed an answer generally denying all the allegations of the petition.
On the issue thus made up evidence was taken which disclosed that The Escanaba Paper Company, of which The Mead Investment Company is a guarantor, negotiated the sale of an issue of bonds and arranged with The City National Bank & Trust Company to accept monthly payments to meet bonds and bond interest which were to^be forwarded to The Old Colony Trust Company twice a year, in May and in November. For the purpose of setting up an account of these payments a trust account was begun with the bank and from July 1, 1925 until October 2, 1931 monthly payments were made by The Escanaba Paper Company for the purpose indicated and were so received by the bank.
This business subsequently fell to The Union Trust Company, which was a merger of The City Trust & Savings Bank with another bank. The Union Trust Company was taken over by the superintendent of banks October 31, 1931. On that date there .was in the-, trust account of The Escanaba Paper Company in trust for The Old Colony Trust Company, Boston, the sum of $38,147.94. When the call was made for the presentation of claims against The Union Trust Company, The Escanaba Paper Company, through its vice-president, filed its affidavit and claim in proof of the amount due it, which it asserted as a preference. Upon consideration, the superintendent of banks rejected the claim as presented. Afterwards when the fifty per cent dividend was paid by the superintendent one-half of this trust account was paid, but with the distinct understanding that it should in no way prejudice the plaintiff in the assertion of its claim that it was entitled to a preference on all of the amount. And the superintendent of banks being advised and still persisting in his view that the claim of The Escanaba Paper Company ought not to be recognized as a preference, it became necessary for the plaintiff to bring this action.
The evidence discloses that at all times after the closing of the bank there were sufficient funds to satisfy trust accounts which had accumulated in what is known as the "Uninvested Trust Fund". The theory of plaintiff being that this was a special deposit for a particular purpose and that on that account it is entitled to the preference which it claims, it becomes necessary for us to consider the nature of the agreement made at the time the deposit was commenced and the conduct of the parties subsequently in pursuance of that agreement.
On November 1, 1925 the following offer and acceptance were entered into by The Escanaba Paper Company and The City Trust & Savings Bank:
"Escanaba, Michigan, July 1, 1925.
City Trust & Savings Bank,
Dayton, Ohio.
Attention: Mr. Walter G. Davidson, President.
Gentlemen:
In connection with the issue of $612,000.00 General and Refunding 6y2% Bonds of this company, we agree to deposit with you on the first day. of. each month, beginning with June 1, 1925, a pro rata proportion of the annual in terest on the bonds then outstanding, and on the first day of every month, beginning December 1, 1926, one sixth (1/6'th) of the principal of the bonds next maturing, so that the payment of all the bonds at maturity will be provided for by six equal monthly installment payments; such payments on account of interest and principal to be held by you, and forwarded to the Old Colony Trust Company, Boston, Mass., not later than the 15th day of May and November in each year.
You agree to accept the deposits made by this company as a special deposit and expressly covenant and agree not to apply the same against any claims, indebtedness, or other obligations whatsoever of this company.
You further agree to allow us interest on these deposits, at a rate of not less than 4% per annum.
We reserve the right to change this arrangement at the end of any six months' period.
Your acceptance of this letter will constitute an agreement between us.
Your very truly,
Escanaba Paper Company,
By Sydney Ferguson.
Accepted:
Walter C. Davidson, Pres.,
City Trust & Savings Bank."
It appears from the evidence that the same relation subsisted between the parties throughout. Pursuant to that agreement the funds deposited were used as therein indicated. There was from time to time an accumulation of interest which was credited to the account of The Escanaba Paper Company and did not go to increase the trust account.
We do not regard ourselves as entitled to negative the effect of the agreement of The City Trust & Savings Bank and The Escanaba Paper Company because of the payment and receipt of this four per cent interest per annum. All the while, the same deposits and the same disbursements were being made by The Escanaba Paper Company and the bank. The same trust account was maintained and all the money paid into that account recognized as being paid for the particular purpose of meeting the bonds and bond interest, with the restriction on the bank of using it for that purpose only.
Under Section 710-164, Generál Code "the trust com pany always shall- follow and be entirely governed by the directions contained, in any will or instrument under which it acts.." ' '
Under Section 710-165 "no property or security 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 tr'éated as' á depositan 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 Ijrust funds by trustees and others."
The general rule seems to be that when a fund 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 a party entitled thereto, it may be regarded in all respects as a trust fund and is therefore incapable of being mingled with the general assets of the bank.
So that when the bank falls into the hands of a banking department or of a receiver, such funds in their hands must be devoted to discharging the trust before distribution thereof is made to the general creditors of the bank.
In support of this rule the following cases are referred to counsel: 16 Ohio Appellate, 240; 24 Am. Law Rep., 1107; 49 Neb., 786; 234 Fed., 613; 196 Iowa, 706; and a very recent case of the Ohio Appellate Court of Lucas County, in which the court say:
"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."
In a very well considered case in the 130 Wash., at page 33 the Supreme Court of that state held:
"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."
The opinion of Judge Fulton in that case contains this language:
"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 fpr 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."
Another case that is worth considering in this connection is that of the 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, page 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 to 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 law 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."
We also refer counsel to a Nisi Prius decision found in the 29 O. N. P. (N. S.), 375, in which the court decided that:
"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."
Counsel for the superintendent of banks refers to the case of McDonald, Admr., v. Fulton, Supt. of Banks, 125 Ohio St., page 507. We do not regard that case as applicable to this issue. There was not in that case a special deposit for a particular purpose.
On the whole we are of the opinion that this plaintiff is entitled to have the entire amount which it paid in for the purpose of meeting bonds and bond interest used for that purpose and that the superintendent of banks should allow plaintiff's claim as a preference- over general creditors. We do not, of course, include in this the interest which was made a separate account of The Escanaba Paper Company.