Summary
In Squire v. Branciforti (1936), 131 Ohio St. 344, 6 O.O. 59, 2 N.E.2d 878, the Ohio Supreme Court recognized the existence of a dual capacity in the relationship a bank had to a purchaser of real estate.
Summary of this case from Saad v. RodriguezOpinion
No. 25723
Decided June 24, 1936.
Banks and banking — Liquidation — Escrow between grantor and grantee of real estate, defined — Bank occupies dual capacity of agent and paid trustee, when — Trust unaffected by withdrawing savings account and crediting to escrow deposit account — Trust relationship established and grantee entitled to preference — Money not trust funds in commercial department, subject to distribution — Section 710-165, General Code, inapplicable — Escrow agreement considered in determining whether title passed to bank — Not necessary to follow money in specie or trace to particular fund.
1. An escrow in Ohio, as between grantor and grantee of real estate, is witnessed by a written instrument known as an escrow agreement, delivered by mutual consent of both parties to a third party denominated the depositary or escrow agent, in which instrument certain conditions are imposed by both grantor and grantee, which conditions the depositary or escrow agent, by the acceptance and retention of the escrow agreement, agrees to observe and obey.
2. Where a bank is chosen as such depositary or escrow agent, and for an agreed fee, acting through its trust department, accepts and retains such escrow agreement between grantor and grantee, by force of the terms of which the grantor delivers to it his deed for the lands in question, with directions to deliver the deed to the grantee upon the conditions set out in the escrow agreement, and the grantee delivers the consideration upon conditions likewise set out in the escrow agreement, such bank occupies a dual capacity as agent in so far as the manual duties are concerned, and as a paid trustee in so far as the purchase money is concerned.
3. The fact that the grantee, by means of a withdrawal slip, withdrew from a savings account the money representing such consideration, and delivered it to the bank which was likewise the depositary, which bank credited such sum to an escrow deposit account, in no wise affects the trust. A trust relationship was established as between the parties to the escrow agreement and the bank, and upon such bank being taken over by the Superintendent of Banks for liquidation before the conditions of the escrow agreement had been performed by the depositary, the grantee was entitled to a preference in an amount equal to the amount deposited, provided always that the Superintendent of Banks had in his custody funds of the bank sufficient to satisfy such preference.
4. Section 710-165, General Code, has no application to a case of this character, and, as the money in question was at no time subject to distribution by either party to the escrow, the case of McDonald, Admr., v. Fulton, Supt. of Banks, 125 Ohio St. 507, is not germane to the facts in the instant case.
5. In determining whether title to funds passes to a depositary bank, regard must be had to the agreement under which the deposit is made and to all the conditions and circumstances of the arrangement and the legal character of the transaction. The naked fact that the bank was operating with reference to the money herein involved under an escrow agreement carried much legal significance. (Second paragraph of syllabus in Fulton, Supt. of Banks, v. University of Dayton, 129 Ohio St. 90, approved and followed.)
6. Under the circumstances of this case it was not necessary to follow this money in specie or trace it into a particular fund. It is enough that the Superintendent of Banks has in his custody funds of such bank sufficient to satisfy the preference in full or pro tanto. ( Fulton, Supt. of Banks, v. University of Dayton, supra, approved and followed.)
ERROR to the Court of Appeals of Cuyahoga county.
On August 5, 1933, Giovanna Branciforti and Salvatore Branciforti filed a petition in the Court of Common Pleas of Cuyahoga county, Ohio, against Ira J. Fulton, the then Superintendent of Banks of the state of Ohio in charge of the liquidation of the Union Trust Company of Cleveland, Ohio, which petition is in the words and figures following, omitting the verification therefrom:
"Now come the plaintiffs and say that the 98th Realty Company is a corporation duly organized and existing under the laws of the State of Ohio, and that the defendant Ira J. Fulton is Superintendent of Banks of the State of Ohio in possession of the business and property of The Union Trust Company for purpose of liquidation.
"Plaintiffs further say that prior to said Ira J. Fulton taking charge of said liquidation, The Union Trust Company maintained an Escrow department through which it acted as escrow agents in real estate matters.
"Plaintiffs further state that on or about the 21st day of February, 1933, they entered into a contract with the defendant The 98th Realty Company, by which said defendant agreed to sell and plaintiffs agreed to buy the following described property: 'known as being sub-lot 119, on East 123rd Street, in the Woodhill Park Sanda Allotment, recorded in Vol. 48, Page 10, of Cuyahoga County Records located in Cleveland, Cuyahoga County, Ohio.'
"Plaintiffs further say that thereupon they and the defendant The 98th Realty Company entered into an escrow agreement with The Union Trust Company by which certain instructions were agreed upon and said Union Trust Company became the escrow agent for the above stated transaction.
"Plaintiffs further say that in compliance with the terms of said escrow agreement, they deposited with The Union Trust Company, as escrow agent, the sum of Three Thousand Dollars ($3000.00) in cash, and said Union Trust Company agreed to accept a first mortgage on said real estate for Five Hundred Dollars ($500.00) and pay the cash thereof to The 98th Realty Co., all of which was agreed upon mutually by the parties hereto, and that thereupon in mutual compliance therewith the defendant The 98th Realty Company, gave the deed to said real estate to The Union Trust Company conveying title to said real estate to said plaintiffs, and from the time said escrow agreement was made plaintiffs were allowed to go into the possession of said property from that day to collect the rents and they did collect the rents; and that as a result of the mutual compliance with said Union Trust Company as escrow agent, by both parties to the terms as required, said transaction was consummated; and that inasmuch as the terms of the escrow were fully complied with by the plaintiffs, the title to said real estate became absolute in these plaintiffs immediately upon said compliance.
"Plaintiffs further say that within a short time after they had performed the terms of said escrow agreement and before said Union Trust Company made delivery of said deed to these plaintiffs as was required, said Union Trust Company closed its doors and fell into the hands of liquidators, and that thereupon plaintiffs at all times desirous, willing and able to perform more than their part to effect said negotiation, made tender to the defendant The 98th Realty Company of the sum of Five Hundred Dollars ($500.00) in cash in lieu of said first mortgage for Five Hundred Dollars ($500.00) because of the status of The Union Trust Company.
"Plaintiffs further say that by reason of said Union Trust Company falling into liquidation, said Union Trust Company refused to make delivery of said deed to these plaintiffs and refused to pay the sum of Three Thousand Dollars ($3000.00) to the defendant The 98th Realty Company, all as was ordered in said escrow agreement, and despite the mutual performance on the part of said parties thereto with all of the terms as agreed.
"Plaintiffs further say that said sum of Three Thousand Dollars ($3000.00) in cash deposited with The Union Trust Company, as escrow agent, became the money and property of the defendant The 98th Realty Company and that the title to said real estate became absolute and immediately vested in fee simple in said plaintiffs, and that these plaintiffs have the right to the delivery of said deed to them which now is in the possession of the defendant Ira J. Fulton, and that said defendant The 98th Realty Company has the immediate right to possession of said Three Thousand Dollars ($3000.00) in cash from said defendant Ira J. Fulton; and that by reason of said liquidation the sum of Three Thousand Dollars ($3000.00) is a special deposit and a preferred claim, and a trust fund on behalf of said 98th Realty Company.
"Plaintiffs further say that they have no adequate remedy at law and that unless an injunction is granted as hereinafter prayed for, plaintiffs will suffer irreparable damages."
To this petition the Superintendent of Banks filed the following answer:
"Now comes I.J. Fulton, the duly appointed, qualified and acting Superintendent of Banks of the State of Ohio, in charge of liquidation of The Union Trust Company, Cleveland, Ohio, and for his answer to plaintiff's petition denies, for want of knowledge or information, each and every allegation contained therein except those allegations hereinafter specifically admitted to be true.
"This defendant says that on or about the 21st day of February, 1933, the plaintiffs, Giovanna Branciforti and Salvatore Branciforti, together with the defendant, The 98th Realty Company, executed and delivered to The Union Trust Company certain escrow instructions, a true and correct copy of which is attached hereto, marked Exhibit 'A' and made a part hereof; that subsequent thereto, the plaintiffs and The 98th Realty Company supplemented said escrow instructions by letters dated February 24th, 1933, and February 27th, 1933, copies of which are also attached hereto, marked Exhibits 'B' and 'C' and made a part hereof; that on said date The 98th Realty Company, pursuant to the terms of the escrow, delivered to The Union Trust Company, in escrow, a warranty deed duly signed and acknowledged to Giovanna Branciforti, as Grantee, covering the premises referred to in the petition, and also delivered to The Union Trust Company certain fire insurance policies and title papers and that on said date Giovanna Branciforti delivered to The Union Trust Company a certain passbook representing a then existing savings account in the Banking Department of The Union Trust Company in the name of Giovanna Branciforti, known as 'Foreign Savings Account No. 10046,' accompanied by a withdrawal order against said account in the amount of Two Thousand Nine Hundred Ninety Dollars ($2990), payable to The Union Trust Company. This defendant says that on the same date The Union Trust Company charged said savings account with the amount of the withdrawal order and, in accordance with the usual and customary practice of banks, credited an account known as 'Escrow Deposit Account' in the Banking Department of The Union Trust Company, consisting merely of a transfer of a credit from one account in the Banking Department of The Union Trust Company to another account in the same department.
"This defendant says that on the 27th day of February, 1933, under an order duly issued by this defendant as Superintendent of Banks, The Union Trust Company was restricted to the payment of only five per cent (5%) of its then existing obligations; that on the 15th day of June, 1933, this defendant took possession of the business and property of The Union Trust Company, as provided by law, for the purpose of liquidation; that subsequently the plaintiffs filed a claim for preference demanding the immediate payment of the sum of Three Thousand Dollars ($3000.00) and the delivery of the several documents received by The Union Trust Company in escrow to The Land Title Guarantee and Trust Company of Cleveland, Ohio, and that said claim has been rejected by this defendant.
"Further answering, this defendant says that on or about the 27th day of May, 1933, The Union Trust Company was served with a writ of replevin issued by the Clerk of the Municipal Court of the city of Cleveland, Ohio, in Cause No. 689,682 upon the docket of said court entitled 'The 98th Realty Company vs. The Union Trust Company, et al.'; that pursuant to said writ of replevin, the Bailiff of said Municipal Court of Cleveland seized the warranty deed, insurance policies and title papers hereinabove referred to and thereafter delivered the same to the 98th Realty Company upon its undertaking to return said papers should the judgment in the replevin action be against it.
"Wherefore, this defendant prays that the petition be dismissed at plaintiffs' cost."
To this answer the Brancifortis demurred, on the ground that it did not state facts sufficient to constitute a defense to the action. This demurrer was sustained by the Court of Common Pleas and, the Superintendent of Banks not desiring to plead further, judgment was pronounced against him.
Appeal was thereupon taken to the Court of Appeals of Cuyahoga county, which court overruled the demurrer and made a finding for the Superintendent of Banks. Thereafter a rehearing was had and thereupon the Court of Appeals upon consideration sustained the demurrer and rendered judgment against the Superintendent of Banks, who prosecutes error to this court to reverse the judgment of the Court of Appeals.
The Superintendent of Banks claims the Court of Appeals erred in the following respects:
1. In sustaining the demurrer to plaintiff in error's answer;
2. In rendering judgment in favor of defendants in error and against plaintiff in error in the manner and as described by the record;
3. That the judgment of the Court of Appeals is contrary to law;
4. For other errors manifest on the face of the record and for which said judgment of the Court of Appeals should be reversed.
As the general demurrer to the answer searches the record, it was deemed advisable to set out a copy of the petition in this statement.
As Exhibits "A," "B," and "C" were made a part of the answer, they must be considered in connection therewith in passing upon the demurrer. These exhibits are too voluminous to include in this statement, but it will be necessary to refer to them in the opinion and when reference is so made they will be designated.
Mr. John W. Bricker, attorney general, Mr. L.F. Laylin and Mr. H.O. Ziegler, for plaintiff in error.
Messrs. Buonpane Buonpane, for defendants in error.
There is really just one question here, namely, do the facts pleaded by the Brancifortis in their petition establish a trust relationship between them and the Union Trust Company? If they do, then the Brancifortis are entitled to a preference and the answer does not state a defense. If they do not, there being nothing to indicate a bailment, then Brancifortis have failed on their petition, as the relation of debtor and creditor would necessarily exist between the bank and Brancifortis, and they would stand in the shoes of a general creditor.
We say there is no bailment here, as the specie was destroyed, if there ever was a specie, when the Brancifortis withdrew their account by the withdrawal slip process and returned it to the bank, which credited it to an account known as the Escrow Deposit Account. If this was a trust fund deposited for distribution, the case comes within the purview of McDonald, Admr., v. Fulton, Supt. of Banks, 125 Ohio St. 507, 182 N.E. 504, 83 A. L. R., 1107, and Fulton, Supt. of Banks, v. University of Dayton, 129 Ohio St. 90, 193 N.E. 758, and the Brancifortis would be general creditors of the bank without claim for preference.
The third paragraph of the syllabus in the case of Fulton, Supt., v. University of Dayton, supra, disposes of the proposition that money placed in a bank must be followed in specie or at least traced to a particular fund before a corpus can be provided for the trust, and we are not disposed to stray from the law therein announced, in this particular case.
We likewise adhere to the fourth paragraph of the syllabus in that case, to the effect that where trust funds were deposited in a bank pending distribution or investment, without an express agreement to the contrary, as to such moneys, the relation of creditor and debtor existed. But do we have such case here?
The same case, second paragraph of the syllabus, states that in determining whether title to funds passes to a depositary bank, regard must be had to the agreement under which the deposit is made and to all the conditions and circumstances of the arrangement. We subscribe to that law.
There is another feature that is entitled to consideration, namely, the legal character of the transaction. To amplify: This money was placed with the bank under an escrow agreement wherein the conditions as to the final disposition of the money were fully set out. The naked fact that it was an escrow agreement has some legal significance. An escrow agreement is a creature of the law, the legal requirements of which are well defined and clearly understood by those who deal with them. The bank was an escrow agent. It knew just exactly what liberties it could take with the funds deposited thereunder. It occupied a sort of dual capacity; it was a paid trustee. Paid for what? For carrying out the terms of the escrow agreement. Let us examine the escrow agreement. We quote from the Escrow Agreement, Exhibit "A," made a part of the answer of the Superintendent of Banks:
"The undersigned Giovanna Branciforti and Salvatore Branciforti, hereinafter known as the GRANTEE, herewith deposits or will cause to be deposited with you in escrow: [Italics ours.]
"Cash or checks to your order in the sum of $2990.00."
The Brancifortis imposed the further condition that upon delivery by the grantor of the muniments of title therein specified, the bank was to take from the moneys so deposited certain specific charges, including its own, and remit the balance of the moneys so deposited to the grantor.
An escrow fills a definite niche in the body of the law. It has a distinct legal character. Escrow is defined as follows:
"A written instrument which by its terms imports a legal obligation, and which is deposited by the grantor, promissor, obligor, or his agent, with a stranger or third party, to be kept by the depositary until the performance of a condition or the happening of a certain event, and then to be delivered over to the grantee, promisee or obligee." 10 Ruling Case Law, 621.
It will be noted that the above definition deals with a grantor alone, but the law is progressive and in Ohio the grantee, promisee or obligee may impose conditions in the escrow instrument or agreement that have the same binding effect upon the escrow agent as those of the grantor, promissor or obligor. Cincinnati, Wilmington Zanesville Rd. Co. v. Iliff, 13 Ohio St. 235. This case stands unreversed and unmodified. In the absence of this precedent, custom and usage has made it law.
The law is not in complete harmony as to whether the depositary is an agent or trustee. We are inclined to the belief that he is both. Agent in so far as specific personal duties are to be performed, and trustee in so far as the funds placed in his hands are concerned. We find the following text law in 16 Ohio Jurisprudence, 368, Section 11:
"The depositary may not perform any acts with reference to handling the deposit, or its disposal, which are not authorized by the contract of deposit."
This text is gathered from Glick v. Galier, 116 Ohio St. 41, 155 N.E. 385. This is a per curiam opinion of the court in which six members of the court concurred. A careful analysis of the opinion warrants the text.
Our attention is directed to the following case, viz., Wilson v. Woolverton, 137 Kan. 663, 21 P.2d 313, wherein the court says:
"That an instrument may operate as an escrow, * * * parties must actually contract, and the deposit must be absolute and beyond control of depositor."
Did not the Brancifortis do this very thing? They withdrew the money from their savings account, by withdrawal slip, and delivered it to the bank. The bank then charged the savings account with the amount and credited it to the Escrow Deposit Account. It made little or no difference what the bank called this account. What was it, in fact and in law?
The very name "escrow" gave it the earmarks of a trust, and any other requirement it lacked along that line was accounted for in the conditions imposed and set out in the escrow agreement.
Brancifortis received no interest on this money. They could not check on it; neither could the realty company.
Did the word "deposit" when used in connection with the word "escrow" authorize the bank to convert the amount into its commercial account? We think not. In so holding we are not unmindful of the Ohio banking laws. Section 710-165, General Code, provides:
"No property or securities received or held by any trust company in trust shall be mingled with the investments of the capital stock or other properties belonging to such trust company or be liable for its debts or obligations. Moneys held in the trust department by any trust company, or by any bank having a trust department or doing a trust business, 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 deposit of trust funds by trustees and others."
We find no fault with this enactment. The first sentence imposes the specific duty upon the bank not to commingle trust funds with other funds of the bank. The last sentence gives the bank the right to take liberties with trust funds pending distribution or investment. There is every reason for the latter provision. A trust fund cannot be checked against. In order to distribute or invest, the trustee or fiduciary must either take the fund manually or check against it. A trustee is held to a high degree of care regarding trust funds, and in this day and age he knows that to carry trust funds on his person or place them in his office does not comport with that degree of care required of him; consequently, when the time arrives for him to distribute or invest, the fund must be placed where he can check against it, in other words, in the commercial account, and when it once goes into the commercial account it loses its sanctity as a trust fund and is merely money on deposit.
Brancifortis could not distribute, neither could the realty company. The bank alone was the disburser of this money, according to the terms of a contract which it had accepted. It was not necessary for it to draw a check. As trustee, it was required to have the fund, and all it had to do was hand it over as directed. The replevin action brought by the realty company and set out in the answer of the Superintendent of Banks was not adverted to by counsel and we make no reference thereto as the real issue in the case is between the Brancifortis and the Superintendent of Banks.
Entertaining the view that we do of this case, we do not regard it as necessary to enlarge upon it further.
Judgment affirmed.
WEYGANDT, C.J., JONES, MATTHIAS, DAY and ZIMMERMAN, JJ., concur.
WILLIAMS, J., not participating.