Summary
In State ex rel. Warrensville Heights v. Fulton, 128 O.St. 192, 200, 190 N.E. 383, 386 (1934), in discussing a setoff, the Supreme Court of Ohio stated that ".. the trust company was entitled to apply the deposit of relator in part satisfaction of the past-due obligations which the relator owed it."
Summary of this case from Baker v. National City Bank of ClevelandOpinion
No. 24527
Decided April 11, 1934.
Banks and banking — Liquidation — Municipal funds, deposited under depository law, are general deposits, when — Rights of municipality no greater than individual depositor's — Bank may set off deposits against municipality's indebtedness, when — Mandamus denied to compel delivery of depository securities to indebted municipality.
1. Public funds of a municipality derived from taxation, when deposited in a general account in a bank according to law under a depository agreement, lose their identity and become a part of the general funds of the bank.
2. The ordinary relationship of debtor and creditor is thereby created between the bank and the municipality, and the rights of the municipality are no greater and no different from those of an individual depositor.
3. Where the municipality is indebted to the bank on a past due obligation, the bank may properly apply such deposit against such indebtedness, upon the principle of set-off.
4. In the situation last described, when the state superintendent of banks takes over such bank for liquidation, the municipality is not entitled to a writ of mandamus to compel such superintendent to deliver to it the securities pledged by the bank to secure the public funds of the municipality deposited in the bank under a depository agreement.
IN MANDAMUS.
The incorporated village of Warrensville Heights, Ohio, as relator, brings action in mandamus in this court to require the respondent, Ira J. Fulton, as superintendent of banks of the state of Ohio, engaged in the liquidation of The Union Trust Company, a banking institution in the city of Cleveland, Ohio, to surrender and deliver to it bonds issued by such village in the aggregate face amount of $150,000, which were originally deposited by such Union Trust Company, the owner thereof, to secure the funds of the village placed on deposit in the trust company under a depository agreement entered into pursuant to the provisions of Section 4294 et seq., General Code of Ohio.
The case is submitted upon the petition of the relator, the answer and cross-petition of the respondent, the reply of the relator and an agreed statement of facts.
The depository agreement referred to was dated July 25, 1930, and reads in part as follows:
"All public monies coming into the hands of the treasurer of the village of Warrensville Heights shall be deposited by him with the second party [The Union Trust Company] as depository, for a period of three years commencing upon the 25th day of July, 1930, such funds to be subject to withdrawal by said first party [the village] at all times. Upon all sums so deposited the second party shall pay interest, computed on daily balances, at the rate of 2 1/2% per annum, and shall secure funds so deposited in the manner and to the extent provided by law."
The bonds deposited as security were held in the joint possession and control of the relator and The Union Trust Company.
On October 15, 1930, pursuant to an ordinance passed by the council of the village of Warrensville Heights, said village issued its note in the principal amount of $46,149.12, due on or before two years after date with interest at 5% per annum, payable semi-annually, which note provided on its face that it was issued for the purpose of borrowing money in anticipation of the levy and collection of special assessments, as provided by law.
On November 21, 1930, under like procedure, the village issued another note in the principal amount of $4,225, due on or before two years after date, with interest at 5% per annum payable semi-annually, which also provided on its face that it was issued for the purpose of borrowing money in anticipation of the levy and collection of special assessments as provided by law.
To meet the prompt payment of principal and interest on both of such notes when due, the full faith, credit and revenue of such village were irrevocably pledged.
The Union Trust Company purchased these two notes at full value and before maturity.
On or about March 2, 1933, the relator had public money on deposit in The Union Trust Company amounting to $31,194.20, in one general account, derived from the following sources: the motor vehicle license fund, the gasoline tax fund, the general bond retirement fund, the special assessment bond retirement fund, various construction funds, and the depository interest fund. The Union Trust Company had no knowledge of the source of such funds, other than that they were public funds. Checks were drawn by the village on this account for all purposes, indiscriminately.
On the date last named, the relator made demand upon The Union Trust Company for the payment and withdrawal of a portion of its funds on deposit, which was refused on the ground that the trust company held two unpaid and over-due notes of the relator, being the same notes described above, aggregating a sum in excess of the amount on deposit. The trust company thereupon notified the relator that its deposit constituted a set-off to the past due notes.
On or about June 15, 1933, the respondent, Ira J. Fulton, as superintendent of banks, etc., took possession of The Union Trust Company for the purpose of liquidation, and is now engaged in such pursuit. About July 28, 1933, the relator demanded that the respondent surrender and deliver to it the said bonds securing its deposit, which demand was refused; hence this action.
Messrs. Locher, Green Woods, for relator.
Mr. John W. Bricker, attorney general, Mr. Lewis L. Laylin and Mr. Carl F. Shuler, for respondent.
A purely legal question is presented for determination. Is the relator entitled to receive from the respondent the bonds pledged by The Union Trust Company as security for deposit of relator's funds when the indebtedness of the relator to the trust company is in a sum larger than the amount of such deposit? Or, putting the proposition in another way, can a deposit of public funds, representing moneys derived from taxation, be applied by a bank against past due obligations owed to it by the political subdivision which is the owner of such deposit?
The relator argues with much force that under Section 5 of Article XII of the Constitution of Ohio, and certain specified statutes, the tax funds on deposit in The Union Trust Company were appropriated and set apart for the specific purposes directed by the laws and authority through which they were collected, and cannot be used in any other way; that any other disposition thereof would constitute a misapplication and would be unlawful. Hence, under no hypothesis are they subject to be used in reduction of the indebtedness owed The Union Trust Company.
The respondent is equally insistent that the relator is in no different position in respect to these funds than an individual or a private corporation, and that the general rules relating to set-off govern.
In the case of Fidelity Casualty Co. v. Union Savings Bank Co., 119 Ohio St. 124, 162 N.E. 420, it was claimed that state funds deposited in a bank according to law are entitled to priority of payment upon the insolvency of the bank. However, in refusing priority, this court took the position that in depositing such funds the state was acting in a proprietary capacity, and that the relationship of borrower and lender was created between the bank and the state, the transaction being no different than if it had been between two individuals.
Again, in the case of Ward, Treas., v. Fulton, Supt. of Banks, 125 Ohio St. 382, 181 N.E. 815, this court held that where a county treasurer lawfully deposits county moneys in a bank, and takes security therefor, such deposit becomes general in character, and may be treated and used by the bank as a part of its general funds. Hence, when the bank is taken over by the state superintendent of banks, the latter is without authority to grant the county treasurer priority in payment as against general creditors of the bank.
An examination of numerous authorities convinces us that these holdings express the majority view.
Thus, in State v. First State Bank of Alliance, 122 Neb. 502, 240 N.W. 747, 79 A. L. P., 576, denying priority of payment, the court stated:
"Intervener contends that county funds, derived from the collection of taxes, are trust funds in the hands of the county treasurer; that a bank receiving same for deposit, with such knowledge, must account for the same as trust funds, and that claims for such trust funds are entitled to payment before the payment of claims of other depositors."
Answering this argument, the court continues:
"Clearly the statute authorizes the county treasurer to place the county funds in his hands in depositary banks on general deposit and provides for taking security therefor. The title to the moneys or other credits deposited passes to the bank and may be used by it as other funds deposited in the bank. It follows that the bank did not hold the deposit as a trust fund, * * *."
The rule of most general adoption appears to be that where there is an authorized general deposit of public funds in a depository, the transaction is in effect a loan creating the relationship of debtor and creditor, and such public funds are not entitled to preference under the claim that they constitute a trust. 18 Corpus Juris, 579; 3 Ruling Case Law, 555, 521; 22 Ruling Case Law, 223; Phillips v. Yates Center National Bank, 98 Kan. 383, 158 P. 23, L.R.A., 1917A, 680; New Amsterdam Casualty Co. v. Robertson, 129 Ore., 663, 278 P. 963, 64 A.L.R., 1396, 1401; State v. McGraw, 74 Mont. 152, 240 P. 812; Denny v. Thompson, 236 Ky. 714, 33 S.W.2d 670; U.S. Fidelity Guaranty Co. v. Carter, 161 Va. 381, 170 S.E. 764.
Our next inquiry is, what is the situation, as in the instant case, where a depository containing public funds derived from taxation seeks to apply these funds on a matured obligation owed it by the depositor of such funds?
The answer to this question involves the principle of set-off, which is thus defined in 24 Ruling Case Law, at page 792: "Set-off, both at law and in equity, must be understood as that right which exists between two parties, each of whom, under an independent contract, owes an ascertained amount to the other, to set-off their respective debts by way of mutual deduction, so that, in any action brought for the larger debt, the residue only, after such deduction, shall be recovered."
It is said in 5 Ohio Jurisprudence, at page 456: "Ohio statutes secure the right of set-off between parties sustaining the relation of debtor and creditor between whom there are cross demands, and those existing between banks and their customers are not ex-copied from its operation. A bank may, therefore, apply a deposit of its debtor, or such portion thereof as may be necessary, to the payment of the debt due, * * *."
And see 3 Ruling Case Law, 488; 7 Corpus Juris, 653.
What has been said applies unquestionably to individuals; but is the rule the same when public bodies tire involved? Our answer is in the affirmative.
The first case to which it is desired to call attention is United States v. Bank of the Metropolis, 40 U.S. (15 Pet.), 377, 392, 10 L.Ed., 774, 779, where the Supreme Court of the United States said:
"When the United States, by its authorized officer, become a party to negotiable paper, they have all the rights, and incur all the responsibility of individuals who are parties to such instruments. We know of no difference, except that the United States cannot be sued. But if the United States sue, and a defendant holds its negotiable paper, the amount of it may be claimed as a credit, if, after being presented, it has been disallowed by the accounting officers of the treasury; and if the liability of the United States upon it, be not discharged by some of those causes which discharge a party to commercial paper, it should be allowed by a jury, as a credit against the debt claimed by the United States."
The Supreme Court of Pennsylvania in the case of Georges Township v. Union Trust Co., 293 Pa. 364, 143 A. 10, held that a bank in which the public funds of a township are placed in a general account takes them without responsibility as to the appropriations made thereof by the taxing authorities, and may treat them like any other funds. Therefore, such funds may be charged with a municipal order, in the bank's possession for collection, in the same manner as if they belonged to an individual or a corporation.
In Board of Drainage Commissioners v. City National Bank of Paducah, Ky., 231 Ky. 670, 22 S.W.2d 94, the board of drainage commissioners of McCracken county had on deposit in the City National Bank of Paducah, moneys of the district, collected through taxation, amounting to $17,886.78. The drainage district owed the bank $8,539.01, with interest. The court allowed the bank to charge its debt against the deposit, holding that the board occupied no different position than any other depositor. It was further held that the bank was not required to learn from whence the money came; nor did it hold the money as trustee for the taxpayers.
Also, sustaining the principle that a deposit of public funds can be applied by a bank to the payment of a matured obligation due the bank, are the cases of Hemphill v. Florida National Bank (5th C.C.A.), 30 F.2d 892, and Gray v. School District of Borough of Brownsville (3rd C.C.A.), 67 F.2d 141.
The latest and strongest case found supporting the position of relator is that of Township Committee of Piscataway Township v. First National Bank, 111 N.J. Law, 412, 168 A. 757, in which the court decided that a bank holding an over-due improvement note of a municipality could not take the municipality's general bank account in payment thereof, for the reason that such account "is, in reality, a trust fund into which the current revenues are placed for disposition in accordance with the appropriations previously made * * *. The bank can no more take these funds for a purpose for which they were not dedicated than it could take trust funds to pay the debt of the individual who happened to be trustee."
There is a vigorous dissenting opinion in the last-named case, in accord with the majority holdings cited above.
In the present case the funds of the relator, no matter from what source derived, when deposited in The Union Trust Company under the depository agreement, lost their identity and became a part of the general funds of the trust company, which it could use accordingly. The ordinary relationship of debtor and creditor was created between the bank and the relator, and the rights of the relator were no greater and no different than those of an individual depositor. Therefore, the trust company was entitled to apply the deposit of relator in part satisfaction of the past due obligations which the relator owed it. The funds of the relator were no more sacred than those of any other depositor.
Having failed to establish its right to the bonds in question, the writ prayed for by the relator will be denied.
Writ denied.
WEYGANDT, C.J., ALLEN, STEPHENSON, JONES, MATTHIAS and BEVIS, JJ., concur.