Opinion ID: 1148014
Heading Depth: 1
Heading Rank: 3

Heading: Did the chancellor err in finding CBM liable to appellees?

Text: This Court recently held in Deposit Guaranty National Bank v. Simrall, No. 56,469 (Miss. April 8, 1987) (not yet reported) 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. Id., slip op. at 9. The Court in Simrall also held 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. Id. Although the facts of Simrall are similar to the instant case, Simrall is distinguishable and not dispositive of the case at bar. In Simrall, cotton buyers, who were involved in a joint venture with a Memphis buyer, maintained a general business checking account with the Yazoo City branch of the Deposit Guaranty National Bank of Jackson. Referred to in the opinion as Barriers, the Yazoo City cotton buyers were extended a $15,000,000 line of credit by Deposit Guaranty Bank for which Barriers executed a security agreement giving 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 ... Id., slip op. at 5. During the course of its business operations, Barrier purchased cotton from Simrall, who was issued a check on Barriers general business account. Before Simrall presented the check for payment, Deposit Guaranty Bank, who had become alarmed at Barrier's financial condition, offset a deposit intended for payment of Simrall's check. When Simrall presented his check, it was dishonored because of insufficient funds. Simrall was successful against Deposit Guaranty Bank in the Circuit Court of Yazoo County, but this Court reversed, holding that Deposit Guaranty Bank was entitled to set off the funds deposited into Barriers' general business account. Paramount to this Court's decision were several distinguishing factors: (1) The funds deposited to pay Simrall's check were not specifically designated; (2) the Barrier account was a general business account; (3) the funds set off by Deposit Guaranty Bank were not trust funds. When a bank has knowledge of a trust, special deposit, or other type of fiduciary relationship between its depositor and a person, the bank cannot set off such funds against the individual indebtedness of the depositor of the bank. Simrall, slip op. at 11; Lumberton State Bank v. Fortenberry, 222 So.2d 384, 388 (Miss. 1969). See generally, Annot. 8 A.L.R.3d 235 (1966). The facts in Simrall failed to prove the set off funds were trust funds. In the present case, there is no dispute that payments made for livestock are trust funds pursuant to federal law. 9 C.F.R. § 201.42 (1987), promulgated under the Packers & Stockyards Act, 7 U.S.C.A. §§ 181-229 (1980), specifically states, Each payment that a livestock buyer makes to a market agency selling on commission is a trust fund. Funds deposited in custodial accounts are also trust funds. (Emphasis added). The nature of the funds in this case distinguishes the case from Simrall. Unlike the record in Simrall, the instant record is replete with proof that CBM was aware of the trust nature of the funds. This proof is composed primarily of the knowledge of Jim Whitehead, CBM's president, concerning CMLE's business operations. Wesley Hendry testified he had discussed the Packers and Stockyards Act on several occasions with Whitehead. In addition, there is testimony that CMLE's accounts were originally opened at another bank of which Whitehead was an officer, but were moved to CBM when Whitehead was transferred there. CBM argues the cashier's check it drew against CMLE's account did no harm to the Sellers because the checks issued to the Sellers were dishonored prior to the time the funds represented by the $125,747 of checks had been received by CBM from the payor banks. In other words, the checks issued to the Sellers would have been dishonored regardless of the $124,116 cashier's check because the funds designed to cover the checks remained uncollected. CBM's argument overlooks the fact that a trust was imposed on each payment made for the sellers of livestock and those trusts did not dissipate simply because the checks issued to the sellers found their way back to the bank before the trust funds did. While the bank may exercise discretion in paying or not paying accounts into overdraft, it may not retain trust funds properly belonging to other parties once the trust funds are received. There is also mention in the appellant's brief that the set off transaction was made against CMLE's general account instead of its custodial account. It is the nature of the funds, not the name of the account, that controls whether the funds may be set off. In this case, the funds were trust funds and were not subject to set off. To further compound CBM's error of using trust funds to set off a debt, the Wesley Hendry Land & Cattle Company account to which the transfer transaction was made had no business connection with CMLE  the two companies simply shared the same primary stockholder. The two companies are separate and distinct under the law. It is clear that a bank may apply through offset a debtor's deposit to payment of his debt, however, it is not clear that a bank may apply one corporation's funds to offset a debt owed by a separate and distinct corporation. Addressing a similar issue, the Fifth Circuit Court of Appeals held: The right of the bank exists only where with respect to both debt and deposit the bank and the depositor are in debtor-creditor relationship, and there must be mutuality of demands. [Citation omitted]. The debts must be between the same parties and in the same right or capacity, so that, for example, the bank (having notice of the character of the deposit) cannot set off against a depositor's individual debt a deposit made by him in his capacity as a public officer or as executor or administrator. Kaufman v. First National Bank of Opp, Alabama, 493 F.2d 1070 (5th Cir.1974). For the reasons given above, this Court holds there was no error in finding CBM liable to the seller appellees.