Opinion ID: 1251828
Heading Depth: 1
Heading Rank: 4

Heading: The Bank's Assumption of Control over the Trust Funds

Text: During the early months of operations the Bank's involvement with Midwest's trust funds was limited to making sure that Sandpiper notes were repaid before new credit came to be extended. On occasion it made sure that a few of Midwest's suppliers were being paid. When difficulties first arose during the Spring of 1972, Midwest was having cash flow management problems and the Contractor did not always timely send its checks. Several of them were for less than the amount billed. Because less money went toward payment on the Sandpiper notes, the Bank recommended, in July of 1972, that Midwest employ T.R. Garretson to oversee the money outflow. By September, at the Bank's insistence and as a condition precedent to making further loans, Garretson was placed in complete charge of progress payment receipts on the Sandpiper projects. [19] Garretson worked closely with the Bank's officers, and sometime in September or October informed them of several outstanding bills of Midwest. Some materialmen even contacted the Bank to let it know of their outstanding claims. In November of 1972 the Contractor began receiving calls from claimants about Midwest's unpaid bills, some of which the Contractor satisfied before any liens were filed. By this time, Midwest's financial difficulties were so acute that the Bank became directly involved in the disbursement of trust funds for the Sandpiper projects. Garretson and a bank officer directed each disbursement, and a significant portion of the funds were used to pay bills incurred on the projects rather than in repayment of notes. Later, proceeds were no longer applied to any notes, but instead were used only to pay off lienable claims. The evidence also shows that funds from unidentified sources other than the Contractor were applied to the Sandpiper claims. By April of 1973 Midwest became defunct, with its building, inventory and records abandoned. The Bank foreclosed its liens and took complete control. The Contractor continued to send checks until April of 1973. In July all contracts with Midwest came to be terminated. Many lenders commonly monitor certain customers, particularly when the risk seems high or when the interest in the debtor's operations appears substantial. We do not think that when Garretson was hired by Midwest upon the Bank's recommendation the Bank then assumed the control of the trust funds qua trustee even though future advances by the Bank were made dependent on Midwest's compliance with certain requirements and the Bank insisted that Garretson remain in complete charge of Sandpiper operations. It was not until Garretson could no longer disburse funds without first conferring with one of the Bank's officers that the Bank began to exercise that quantum of control which cast it in the role of involuntary trustee. We accordingly hold that the trial court was correct in imposing upon the Bank the liability of an involuntary trustee, but, for reasons to be explained in Part III of this opinion, we must reverse the restitution decree and remand the cause for a specific finding on the point in time when the Bank became an involuntary trustee of the construction fund and on the amount of misapplied funds during the period the Bank exercised control as trustee.