Opposition Brief — United States Ex Rel. Willoughby v. Howard

FILE COPY -

ED

a ” MAY 11 1987

ahem a we CHARLES ELMORE OROPLEY

SUPREME COURT OF THE UNITED —

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Rs sy r

no. 30

*

SA

- - UNITED STATES OF AMERICA, On Relation of =

CHESTER A. WILLOUGHBY,:as Trustee in Benk- —

ruptecy of NATIONAL MECHANICAL SERVICE

COMPANY, a. corporation, et al., ay

Mies ; ante . Petitioners,

+ V8.

-" §AM HOWARD and CONTINENTAL CASUALTY

e COMPANY, a corporation, —

Ow Petition for a Writ of Certéorari to The United

. States Circuit Court of Appeals for the

Seventh Circuit. |

- BRIEF OF RESPONDENTS IN OPPOSITION.

| , eo

“Jutrus. Moses,

¥ Lrovp. Hern, °

Wuium P. Saurrs,

pees 3 Cownsel for Respondents. .

=

GHICAGO LAW PRINTING GO., 11! NH. WACKER DRIVE (COR. WASHINGTON ST.) TEL. PRANELIN CERT

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SUBJECT INDEX..

4 ° Pa

‘ PAGE

Subject Index De aE ae SAS. an dliatcmbemaliins i

Table of Cases Cited ............... govcseconesteccnseestesneeesncestecnsseesnnes . a

Opinion ATA ATID Eater owen Pe iil cts ‘1

. Jurisdiction EEE AAT ae vinanssasidocnaeenssnamtensiinnnag cakes | a

Statutes Involved aera i ant. eenneecneeeone- PS ao canine 2

Principal Que RE ee emeetione 2

ES ESPRESSO NET OO x arn

Conditipn of the bank sciateabaigibe lice tieaadeisiSinmsinstiasvatiiecaie 4

a 5 Rea eeI eee Hanae aaa ome Drea se 5

Period preceding Phillip Guin sanieaial ELE Woe 6

Court supervision of the depository ........................ a

TEE UU shrincinncdaisniccntincnssintaned “Hen eedeN De. PORK ee oy

. Argument —.......... aa Sroka een ect eo ee ania.

5, RE CD seciceniieersercsircanistateiiteicscemicen cuneate 8

Reasons assigned for review discussed -.................. 9F

- Decision below upon principal question in harmony

with federal and state authorities -eelidctine 12°

Depository system in bankruptcy. .............................. 16

Petitioners’ brief, pp. 15-18 considered ..................... 21,

Petitioners’ brief, pp. 18-21 considered .................. 24

Petitioners’ brief, pp. 21-25 considered -................. 25

- Petitioners’ brief, pp. 25-30 considered ................. 29 .

» Petitioners’ brief, pp. 30-32 considered ............ 29

Conclusion .......: Dssskis seccincaiacanepen leet canst lclgpnsannda iat 30

IIIT 5 etal seascesiaieGianensiianabanemnalaabsinabsiecnaeinatianani 31

wt

ii

PAGE

TABLE OF Cases any 3

- American Surety Co. of New York v: City of Thomas-

ville, 73 F. (2d) 584, 586-587 (C. CPA. 5) -.........--. er 14

Anguera v. Yturria, 80 F. (2d) 57 (C. C: A. 5) ~........ 13

Barney v. Saunders, 57. U. S. (16 How.) 535 ............ jon’ ae:

Benson v. Am. Sur. Co. of New York, (Minn.) 271

N. W. 125, 126 ....... A DSP OK EE CIRO? Mra AON oT 14

Board of County Com’ rs. v. Mason, 38 Wyo. 1,. 264

i, | eee PRs eet EI NOR THIS) UNAM TAI OPO 20)

Board of Education v. Nelson, 33 N. D. 462, 157 N. W.

ae 14, 16

Board of Finance v. First National Bank, 71 Ind. App.

290, 124.°N. E. 768, 771-772 .......... SEE eri eins 14, 19

Carey v: Safe Deposit & Trust Co. of ‘Nadie, 168

ee __ San en ENON Deen Ean on 13

_ City of Missoula v. Dick, 76 Mont. 502, 248 Pac. 198, =

195 .. ana ON Ont EOE. ODMR OTOP TET, TOMEI 16

City of pan Haven v. Fresenius, 75 Conn. 145, 52 Atl.

Sas, Se ............. EDEN ESE LECCE NN oe et PS IE TAN 14

City of Scranton, Pa. v. Aetna Casualty & Surety Co.,

\11 F. Supp. 986, 988-989 (D. C. M. D. 8 Oma 14, i.

. In re Cobb, 112 Fed. 655 (D. C. N. C. SES ae 18

— v. Logan County, 244 Ky. 296, 50 S. W. (2d) |

Te gat deks Lua Rec senacaiiacestet andes canine DAsaaachasidateie veces 28

Gardner v. Chicagg.Title & Trust Co., 261 U.S. 453... 20

Great Northern Railway Co. v. Weems, 297 U. S. 135,

ON sak eereccaasan TEER a EAE ASA ONAN. MOD OE ORO ae 5.

_~ Harper v. Betis, 177 Ark. 977, 8 S. W. (2d) TE icra 138

Hart v. Savary, 114 Fla. 41, 152 So. 705 22.022... 13-

In re Howard, 130 Fed. 1004 (D. C. Cal.) ete aere 19

In re Hoyt et al., 119 Fed. 987, 988 (D. C. N. @)....17, 18, 27,

In re Hoyt & Mitchell, 127 Fed. 968 (D. OC. N.C.) ........ 17

Huttig Mfg. Co. v. — 160 Fed. 619, 622 (0.0. ¢

A.

2

ii |

PAGE

Illinois —e Co. v. United eaten, 226 . Fed, 665, .

ME as a sd , ae 16, 18

J oint School Dist..No. 105 v. First Natfonal. Bank, 125

° Okla. 243, 257 Pace. 318, 319.00... SAYS Tt Re 14

Jordon'v. Baker, 252 Ky. 40, 66 S. W. (2d) ae 28

In re Kohler’s Estate, 15 Wash. 613, 47 Pae. 30 ............ _ 18

_In re Kyle, 181 Fed. 617, 621 (C. C. D. Mass.) ............ 17

Magee v. Brister, 109 Miss. 183, 68 cis i 14

‘McCrary v. Schenebeck, 191 Ark. 698, 87-S. W. (2d)

Aa, Pe eT inte LE Oe, OC ORT A) 23

Mecklenburg County v. Beales, 111 Va. 691, 69 S. E:

, 1032, 36 L. R. A. (N. S.) 285 ....... RAT See Pope Or 13

*\ Miller. v. Batson, 160 Miss. 642, 134 So. 567, 572 ......14,20 °

, , Mgsoula County v. Larson, 83 Monit. 308, 971 Pace. 710,

cof tt RIES gt bs oN (IPE 83 DS A Fe ROC 16

Neff v. Harmon, 145 Okla. 114, 291 Pao, 318 ....... ees

- In re Ocean City Title & Trust Co.’s. Bond, j F. Supp. °

i - . oe Se eee 19

_ In re Olson’s Estate, 206 Ta. 706, 219 N. W. eae i 13

Perkins v. State, 130 Miss. 512, 94 a OO 20

Perley v. ‘County of Muskegon, 32 Mich. 132, 135 ........ 14

In re Potell, 53 F* (2d) 877, 879 (D. O. N. Y.) .......... 17,19

Purdy v. Bank of America Nat. Trust & Savings:

Ass’n., 2 Cal. (2d) 298, 40 P. (2d) 481, 482 00... 24

EB. d. S nastite Tobacco Co..v. A. B. Jones Co,, 54 F.

_ + (2d) 329, 395 (C. C. A. 8) AA CO ORO EMER 16, ‘47

‘Schenebeck v. McOrary, 298 U. 8. 36... Seana "29

‘Jn re ee Furniture Corp., 47 F. (2d) 780, 783

Se Ge Oe AD ake cel RESTS Cento lites eR eDE 17, 20

State v. Bobleter, 83 Minn. 479, 86 N. W. 461.0... 715

State v. Bowers, 26 Oh. Cir. Ct. 326, Aff’d. 70 Oh. '

* le Sy, We RE ods nics a, 16

State v. pera 96 Tenn. 296, 34 8. wW. 427 MR Rm 14

690 . ERT RR ae aa a

ee = crweseic

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4

PAGE

‘ State v. U. S. Fid. & Guar. Co., 210 Wis. 178, 246° ©

N. W. /434 ......... ER ES De Rees Nannie adeok 19

State of: Kansas v. U. S. Fid. & Guar. Co., 81 Kan.

~ 660, 106 Pac. 1040, 26 L. R. A. (N. S.) 865 2.000022... 19

State _v. McNamer, 62 Mont. 490, 205 Pae. 951 -............... 28

_ Stephens v. City of Ludlow, 159 Ky. 729, 169 S. W. .

EROS cre tec SEE eRe eres seat 14, 28

In re Stoné’s ; Assignment, 220 Ia. 1341, 264 N. W. 604 13

Town of Cameron v. Hicks, 65 W. Va. 484, 64 S. EK.

I ae I IS a. ceemnnercindisithieenlennentonchnn 13

‘ ” Town of Danbury v. Riedmiller, 208 Ia. 879, 226 N. W.

159...

Town of Hamden y.>American Surety Co. of New -

York, 9 F. Supp. 783, 738-739 (D: C. Conn.) -....12, 14, 16

-Town of Lakeland v. Ballmer, 209 Wis. 636, 245 N. W.

SESE Es BERT Lee I ll a 16

United States v. Perkins, 280 Fed. 546 ( O. ©, A. @)...... 27

- In re Welch’s Estate, 100 Mont. 47, 45 Pac. (2d)-681... 13

Wilson v. People, 19 Colo. 199, 34 Pac. 944 00000... | 14

In re Workman’s Estate, 196 Ia. 1108, 196 N. W. 35...... 13

TExtTs.

38 American Law Reports 1512 Pate oa 29

Ruling Case Law, vol. 22, p. 496 :

pe

STaTUTEs.

Bankruptcy Act, Section 47(a) (3), (4), (10), 11 7.4

C. A. 75 (a) (3), A4), UES Se IA Sere eee 2,17, 18, 19

Bankruptcy Act, Section 61, 11 U.S. C. A. 101 ......2,17, 19

Bankruptcy Act General Order 29, 11 U.S. C. A. 53

5 ne ee nn <

ete IN THE

SUPREME COURT OF THE UNITED STATES

Ocroser Term, 1936

ae

UNITED STATES OF AMERICA, On Relation of

CHESTER A. WILLOUGHBY, as Trustee in Bank- *

. ruptey of NATIONAL MECHANICAL SERVICE

COMPANY, a corporation, et al.,

Petitioners;

. V8.

SAM HOWARD and CONTINENTAL nasacinericnicial

COMPANY, a corporation, —

Respondents.

On Petition for a Writ of Certiorari to The United

_ States Circuit Court of Appeals for the

Seventh Cireutt.

4

BRIEF OF RESPONDENTS IN OPPOSITION.

Opinion Below | —— |

The opinion of the Circuit Court of Appeals i is reported

in 87 F. OF 243 (R. 393). :

Jurisdiction -

The jurisdiction of this Court is invoked under Section

240(a) of the Judicial Code, as amended. 28 U.S. ©. A.-

347(a).° The date of the judgment sought to be reviewed

is January 8, 1937 (R, 393). A rehearing was denied on

January 29, 1937 (R. 406). | 1

2

Statutes Involved

Section 47 of the Bankruptcy Act, 1: 0.&-C. A. 75(a)

(3) (4), and General Order 29, 11-U.- "S. C. A. 53, providé

with respect to the official duties of a tr~stee or receiver..

in bankruptcy, insofar as they relate tothe safekeeping

and handling by the officer of bankrupt esta 2 funds com-

ing into his possession pending disbursement or distribu-

tion, as follows: the officer must deposit the funds in

one of the depositories designated by the bankruptcy

court; he-may make disbursements thereof only by check

or draft countersigned by a judge or referee of the bank-:

ruptey court; he must keep regular accounts thereof and

file the required reports.

Section 61 of the Bankruptcy Act, 11 U. S. C. A. 101

provides that courts of bankruptcy shall designate. bank-

ing institutions as depositories for the funds of bankrupt.

estates, shall require and approve bonds to be given by

depositories to secure such deposits and may from. time °

to time increase the amount thereof, and may change de-

positories.

Thelabove provisions are set forth in the Appendix.

Principal Question Presented:

Whether an official surety bond given by a trustee or

receiver in bankruptcy conditioned upon the performance

by the principal of his official duties covers a loss of bank-

rupt estate funds resultimg from a closing of the desig-

tiated depository in which such funds were deposited hy.

the trustee or receiver, on the theory that although not

provided by the Act or general orders, an official duty

rests on -such officer when making or maintaining the de-

posits in the: depository to determine with due care the

stability of the i

ws, 2 .

— “ ee

cman

”

Petitioners seek certiorari to review- the- judgment of -

the Cireuit Court of “Appeals for the Seventh Circuit re-

versing a judgment for the petitioners in the District Court

and granting. the respondents a new trial (R. 402). The

cause involves three suits at law, separately brought and.

thereafter consolidated, to enforce the alleged liability of

the respondent, Howard, as trustee and receiver in bank-

ruptcy, and the respondent, Centinental Casualty Com-

pany, as surety, on certain official trustee’s and receiver’s

bonds, for an amount of bankrupt estate funds deposited

-by Howard, as trustee or.receiver, in the Phillip State Bank

& Trust Company of Chicago, and lost at the time of its _

closing in 1932. The bonds were given in various bank-

ruptcy estates of which Howard acted as trustee or re-

ceiver, and provided in substance that the respondents

_ would pay losses which might-arise from (a) a failure of.

Howard to obey an order of court, (b) a failure of Howard

faithfully and truly to account for all moneys, assets “and? =

effects of the particular bankruptcy estate, and (c) a failure

of Howard faithfully to perform “his official duties as said

trustee’’ or receiver (R. 59-60, 65-66). -

The case was tried by petitioners in the District Court,

"as petitioners say in their brief, p. 21, ‘‘on the theory that

Howard’s duty was that of exercising ordinary care as a

trustee or receiver’ in depositing and maintaining bank-

ruptcy funds’’ in the Phillip State Bank. Their complaint

“alleged. that Howard ‘‘negligently, carelessly and improp-

_ erly. deposited ayd maintained’”’ in the bank the funds in

controversy (R. 8, Par. 11; see also R. 9, Par. 12). Peti-

tioners assumed that a want of ordinary care by a trustee

or receiver in bankruptcy in regarding the financial ‘con-

dition of a designated depository in which estate deposits

4

were thade and in judging the possibility of such deposi-

tory being closed, whether by a bank run or otherwise,

would constitute a breach of his official bond: The District

“Court followed this theory and, as petitioners likewise

point out, p. 25, its ‘‘instructions to the jury were based

on the duty of Howard as trustee or receiver, to use the |

degree of care which would guide a reasonably prudent

man in the conduct of his trustee responsibilities.”’

Tlie Circuit Court of Appeals in the opinion below nar-

_ rowed its decision to a determinatien of whether this theory

of the legal responsibility of the respondents on the bonds

was in error (R. 394, 396). The Court, therefore, for the

purpose only of such determination was willing to assume

a failure of Howard to regard the stability and solvency

of the Phillip State Bank as a reasonably prudent person

might have done under the circumstances (R. 398). [It

will benoted that mach of petitioners’ argument on. the

facts. erroneously takes this assumption as a concession. ]

If the theory of liability upon which petitioners pro-

ceeded below and which the District Court adopted in ‘its

charge, was erroneous, the judgment of the Circuit Court

of Appeals reversing the cause was sound. In this view

of the case, any inaccuracy or omission of fact in the

petition for certiorari is of no great significance exeept to

. the extent that-it might obscure the principal question of

law actually decided below and here presented. However,

to correct any misimpression which might arise from peti-

tioners’ statement, reference may be made to the facts

stated in the opinion below (R. 394- 396) and to the fol-

lowing facts:

Condition of the bank .

The Phillip Stdte Bank, at the time Howard commenced

making deposits there in August, 1930, had been in busi-

ness on the north side of Chicago for. over fifteen years

and was of good reputation (R. 286, 256). The bankruptcy

court, in designating it a depository in 1930, placed no re-

striction whatever upon its receipt.of funds, whether upon

the amount of estate deposits it could receive or otherwise .

‘ (R. 143). There is no proof that the depository was in an

insolvent or unsound financial condition at any time prior

- td its closing by the run of June, 1932. The quarter-annual

bank reports filed throughout the period with the state

auditor showed solvency (R. 83-101, 139, see Opinion, R.

395-396). The figures mentioned by petitioners, pp. 4-5,

in respect to the financial position of the depository are

ingomplete as a- comparison with the statistical data set

forth in the opinion below (R. 395-396) and the record ({R.

83-101) will show. For example, the figure stated by _peti-

tioners, p. 5, as the amount of deposits ‘‘at the time said

bank closed,’”’ is the figure after the run had occurred and

withdrawals were e made (R. 72).

The bank runs

The runs at the Wepository were all of fortuitous, ex-

" ternal cause, occurring during the nationwide panic of 1931-

1933.* They resulted from no internal condition of the

bank. The April, 1931 run was precipitated by the closing

of several banks on the north side within a period of five

days after the Builders & Merchants Bank & Trust Com-

pany failed (R. 137, 169, 259). The June run followed the

announcement of the mergers of two of the largest banks

of Chicago both located in the ‘‘loop’’ or business area of ©

the city, with two other ‘‘loop’’ banks, in an attempt to

save several hundred million dollars of deposits (R. 120, i

121, 171, 137, 138). All four of the merging banks were

*Judicial notice mae be taken of the character of the

times. Great Northern Railway Co. v. Weeks, 297 U.S. 135,

149. fale ae

6 P

icine depositories (R. 112-113).~ In the runs which

resulted from the mergers, nine city banks, including three.

-bankruptcy depositories, closed (R. 137, 138, 171, 112- -113).

_ The September run at the.Phillip State Barik occurred when ~

the Ragers Park National Bank, located directly across the

_+ street from it, failed in the aftermath of the closing of the

- so-called ‘‘Bain chain,’’ a group of twelve banks located

in different parts of » city - 173, 138, 195,196).

Period preceding Phillip closing .

In the fall of 1931, the Phillip State Bank was alates

an ‘A’? institution by the Chicago Clearing House Asso-. |

ciation in a general survey then made of the banking situa-

tion (R. 176). Earlier in summer it.took over the Illinois

State Bank of pxvanston. (R. 129-131). During the period

from September, 1931 until the close of the depository by

the run of June, 1932 there was no material change in

the financial condition of: the depository except or ‘a

heavier withdrawal. around Christmas time (R. 177, 196,

_ Opinion, R: 396). In the first four months of 1932, with-

drawn deposits of the preced ag year which had not already

been redeposited (Opinion, R. 395) were returning at :the

rate of $100,000. per month (R. 72). In March, 1932 the

bank reached its highest point of liquidity for the. period,

with quick ‘assets constituting 37.54% of the amount of

total deposits (R. 72).

The Phillip State Bank was closed in June, 1932 in a

run which continued for several days (R. 122). The

withdrawals came without warning. They were not due to

any unsound condition but were caused by a neighborhood

panic which followed the closing of the Devon Trust &

‘Savings Bank, a north side bank (R. 122, 138).

7

Court supervision of thé depository

At the time of \tKe city-wide runs which followed the

merging of the large Chicago banks in mid- 1931, the bank-

ruptcy court jn the district not only requested immediate

- full reports of all trustees of the amount of their bank-

rupt estate deposits at each of the depositories, ‘includ-

ing the Phillip State, and entered the order of June 11,

directing the regular filing thereafter of. quarter- -annual

statements of such deposits, as mentioned 4n the opinion

-of the Circuit Court of Appeals (R. 395), but communicated

and conferred with the president of the Phillip State Bank

concerning the bond furnished by that depository for seeur-

ing bankruptey deposits (R. 173). The bond wag never

_ thereafter increased (R. 113) nor was any order entered

changing the status of the depository. Howard filed the

required Teports (R. 204-206, 264-265, 217, 148, ams, 144,

266). :

The loans

"The so-called ‘‘personal’’ loans which the Phillip State

' Bank made to Howard, adverted to in petitioners’ brief,

pp. 3, 4, 5, 12, 15, 17, 32,.were not for Howard’s individual

use or benefit but for the sole purpose [see opinion below ~

(R. 396) and petitioners’ brief, p. 33] of furnishing the

working capital for administering the bankruptcy estates

of which he was trustee or receiver, capital which was kept

in a special revolving account and employed in making

petty cash advances to the estates in order to meet and pay

estate expenses recurring. in the course of administration,

such as custodian service fees, mimeographing and steno-

graphic fees, insurance, postage, bookkeeping and inven-

” tory service fees, ete. (R. 207, 208, 223, 230, 251-252, 254,

258). Under the practice prevailing in the bankruptcy dis-

trict and approved by the bankruptcy court, trustees and

‘ receivers regularly provided the funds for the making of

such advances and were allowed reimbursement therefor

out of the estates upon approval of their reports dy the

‘ court (R. 254, proof offered). The loans by the Phillip

State Bank to /Howard were usual bank loans, bearing the

regular rate of interest, made upon the perSonal financial .

statement of Howard, and approved by the directors and

loan committee of the bank: (R. 198, 169, 174). The moneys

borrowed from the two other banks. referred to by peti-

. tioners, f. 3, namely, the Foreman Bank and Central Trust

Conipany, were of like character and similarly used to

meet estate expenses (R. 229-230, 258, proof offered).

Argument —

With respect to the principal question presented, p. 2,

supra, the opinion below pointed out that in bankruptcy,

all discretion with respect to the safekeeping of bankrupt

estate funds pending their payment or distribution was

removed from the individual trustee or receiver into whose

possession the funds came and was lodged instead with

the bankruptcy court; that the trustee or receiver could

not retain the funds in his own possession as certain pub-

' lic officers might do with regard to official funds nor. could

he, like the common law fiduciary, place them in any bank

which he reasonably should choose, but, rather, was re-

quired to deposit them promptly in one of the banks desig-

nated as a depository for such funds by the bankruptcy

court,-and might withdraw them only when directed by

the bankruptcy court, and,. then, upon a check counter-

signed by that court; that the bankruptcy court alone in-

vestigated and determined which banks should act as

depositories, determined what bond or security such de-

positories should furnish to secure against a loss of funds

through a bank failure or other risk, and supervised the

.

vf i)

* gupecitorion as officers of the court and determingd: their

~ continuing: status (R. 397-398, 399-401). The opinion fur-

ther pointed out that the individual bond of a trustee or re-

eciver was an official bond and that the undertaking in such.

bond assuring against loss from any failure of the officer to

perform his official duties, referred to the duties stated

and defined by law as pertaining to the office and not any act

in which the officer might become engaged (R. 398, 399).

The Circuit Court of Appeals-therefore held that where.

suit was brought on a trustee’s or receivet’s bond to re-

cover the amount of funds lost in the closing of a desig-

nated depository, on the theory that, tic trustee or receiver |

had failed in an official duty to~ examine, agcertain and

judge with ordinary care the financial condition ang sta-

bility of the bank when depositing the funds there, sucli

action was ill-conceived. The basis of this holding is

diseussed more fully. hereinggfter, pp. 12-20.

It is submitted that the case warrants no review by this

Court. , |

The decision below upon the principal question is not

in conflict with the decision of any of the other Circuit

Courts of Appeal, and ‘no such contention is made. It

éonflicts with no rule of law stated in any of the applicable

decisions: of this Court. It is supported by the general

weight of authority and reason. See opinion below (R.

401) and’ pp. 14-16, infra. No question is presented calling

for the exercise by this Court of its powers over procedure

below.

Nor is any issue of public importance, seleel The prin-

cipal issue relates to matters of detail in the deposit of

bankrupt estate funds by the trustee or receiver. Peti-

tioners have sought in their brief to lend importance to

_ the case by suggesting that the rule announced below will

10

place bankrupt estate funds in jeopardy. ‘This suggestion

‘ignores the theory of security underlying depesitpry sys-

tems of the kind employed for. safekeeping bankrupt estate

funds. Protection of such funds pending payment, ad-

ministration or distribution, is sought not in any individual.

discretion or control over them by the 4iduciary or fiscal

officer into whose possession the funds come and in a cor-

relative imposition of liability in the event of his negligent {

handling thereof, but in the provision for depositories and

for the Independent and exclusive exercise of the various

administrative functions over them with which the duthor-

ity that is empowered to select and supervise them is

-charged. It is true that so far as the trustee or receiver _

in bankruptcy is concerned, the system in resting these |

functions with the bankruptcy court has removed them from

‘ the trustee.or receiver. And, equally, the surety on the

. trustee’s or receiver’s bond in the individual estates does

not guarantee the performance of these functions in what

‘ would amount to an underwriting of the solvency of all

the, cdesignated depositories, a risk assumed by the surety

on the bords of the individual depositories. . It does not

follow,, however, that estate deposits are faced with’ ca- —

tastrophe. Greater security is utimately achieved in the

placing with an independent authority, investigatorial and

supervisory powersfover places of deposits | for all estate

funds in the distriet. |

Petitioners assign, p. 8, three reasons for the granting of

the writ First, the-Cireuit Court of Appeals decided an

_ important question of ‘general law in-a w: way probably un-

tenable or in conflict with the cht of authority. *It is — e

submitted that’ the principal question decided below was ve,

“one of federal, not general, law, that it was deeided cor- »*

2 rectly and,’as above stated, was not-of pablic importance.

There is no conflict with the = weight of authority,

when”

.

and petitioners’ assertion to that effect, p. 8, not only is

unsupported but is inconsistent with a portion of their

later argument, pp. 28-29. The holding which petitioners —

ascribe to the court in stating their first reasop/ p: 8, is -

inaccurate. Second, the Circuit Court of Appeals decided.

an important question of federpl law which has not but

should be settled by this Court, p.8. Petitioners, however, /

do not explain in what way the question, were it important,

is unsettled, nor why further pronouncement by this Court

is necessary. Third, the Circuit Court of Appeals decided

a federal question in a way probably in conflict with ap-

plicable decisions of this Court. Petitioners, however,

make no reference to any such decision and,none has been

found. The’ suggestion, p. 8, that the Court of Appeals

reached its decision below as a result of confusing the

duties of a trustee or: receiver in bankruptcy, in Kespect to.

estate’ funds, which petitioners assert to sea funds,

-and those of a public officer in respect to public funds, mis-

apprehends the basis of the decision.: The rule determin-

ative of liability is not concerned with the source or nature

of \the funds, public or private, but with the presence of a

spon system such as that which exists in bankruptcy,

. 14 et seq., infra. Moreover, bankfupt estate ie to be

accurate, are not strictly private funds in the sense in

,° which moneys held by a common law fiduciary or private

person are, but are funds subject to administration pursu-

ant to statutory provision. .

Considerable of the argument of petitioners contained

in the’ supporting brief reduces itself, upon analysis, to a

challenge of the opinion of the Circuit Court of Appeals

by differing with that Court upon facts. Petitioners: re-

peatedly emphasize their own factual characterizations.

It is believed that these“matters are of no general im-

portance and, under the usual rule, alone would afford no

~

12

basis for the issuance of the writ. Hence, only the ques-.

tions of law raised by petitioners’ brief, insofar as here

deemed relevant, will be examined. .

a *

THE DECISION OF THE CIRCUIT COURT OF APPEALS UPON

THE PRINCIPAL QUESTION IS IN HARMONY WITH FEDERAL |

AND STATE DECISIONS INVOLVING THE DUTY OF DEPOSIT-

ING OFFICERS IN DEPOSITORY SYSTEMS SIMILAR TO THAT “

WHICH CONTROLS IN BANKRUPTCY.

In discussing the principal question, petitioners seek to

convey the impression, pp.-25-29, that there is a hopeless

contrariety of opinion amorg state and federal authori-

ties as to the responsibility of fiduciaries and public and

quasi-public officers. for funds, placed in their custody,

‘which are deposited in some bank and thereafter lost in

a bank failure. In Town of Hamden v. American Surety

Company, 9 F. Supp. 733 (D. C. Conn.), this apparent con- .

fusion was explained as folHows,, pp. 738-739: |

‘‘Necessarily the liability of such an official will

‘ depend on state statutes, if such exist; and in the

absence of statute, on the common law of the sfate

_ which in large measure must be deducted . from the

administrative system of the state.

Indeed, this underlying principle “that the liability

of a state official depends upon the local law is the

source of much of the confusion ‘on the subject-matter. |

- For the many variations in the administrative systems

of the several states necessarily lead to different con-

* elusions as to their respective policies; in some states,

as in the federal government, the statutory structure

‘ of administration is such as to compel the conclusion °

that the common law liability of a’ public custodian has

been impliedly modified; in others no such conclusion

is justified. a

13

The cases dealing with the liability of fiduciaries, or

public or quasi-public officers, for funds placed in their

custody and lost in some bank failure, divide themselves

into three classes according to the. rule of responsibility

apphed.

a

In the first class the rule is one of absolute liability. It

is limited in application to public officers:and holds .them

strictly liable as insurers for whatever loss. may occur.

_ Due care is immaterial. Mecklenberg County v. Beales,

Treasurer, 111 Xa. 691, 69'S. E. 1032, 36 L. R. A. (N. 8S.)

285; Town of Cameron v. Hicks, 65 W. Va. 484, 64 S. E.

832, 17 Ann. Cas. 926. In none of theSe decisions, how-

ever, is there involved a depository system of the kind

existing in bankruptcy. :

In the second class the rule of ordinary -care and pru-

dence is followed. Here, the common law fiduciary or the

public or quasi-public official is held liable only in the event

of a failure to exercise ordinary care and prudence as to

the safety of the’ bank when making or maintaining de- —

posits. Common law trustees, Barney v. Saunders, 57 U.

S. (16 How.) 535; Anguera v. Yturria, 80 F. (2d) p7 (C.

©. A: 5); Carey v. Safe Deposit & Trust Co. of Baltimore,

168 Md: 501, 178 Atl. 242, equity receivers, Neff v. Harmon,

145 Okla. 114, 291 Pac. 518, assignees for the benefit of

creditors, In re Stone’s Assignment, 220 Ia. 1341, 264 N. W.

604, executors, In ‘re Kohler’s Estate, 15 Wash. 613, 47

Pac. 30; In re Workman’s Estate, 196 Ia. 1108, 196 N. W.

. 35, administrators, Hart v. Savary, 114 Fla. 41, 152 So.

705; In re Olson’s Estate, 206 Ia. 706, 219 N. W. 401; Har-

per v. Betts, 177 Ark. 977, 8S. W. (2d) 464, and guardians,

In re Welch’s Estate, 100 Mont. 47, 45 Pac. (2d) 681, are

held liable for estate funds lost in a closed bank only if |

they have failed in such duty. In this class, likéwise, are

found those cases of public officers i in which the courts re-

fuse to apply the strict rule and merely hold them liable

e

for a failure to exercise due care. Wilson v. People, 19

Colo. 199, 34 Pac. 944 (involving a clerk of court) ; State v.

Copeland, 96 Tenn. 296, 34 S. W, 427 (town trustee) ; Town

of Danbury v. Riedmiller, 208 Ia. 879, 226 N. W..159 (town

treasurer) ; State v. Gramm, 7 Wyo. 329, 52 Pac. 533, 40

L. R. A. 690 (state treasurer). As with the first class of _

cases, none of the above decisions concerns itself with a

depository system of the kind here involved. . | (

In the third class, the fiduciary or depositing officer is.

not held responsible for funds lost on deposit. Town of

Hamden v. American Surety Co. of New York, 9 F. Supp.

733, 738-739, (D. C. Conn.) ; City of Scranton, Pa. v. Aetna-

Casualty & Surety Co., 11 F. Supp. 986, 988, 989 (D. C. M.

’ D..Pa.); American Surety Co. of New York v. City of

Thomasville, 73 F. (2d) 584, 586; 587 (C. C. A. 5) cert. den.

294 U. S. 721; Perley v. County of Muskegon, 32 Mich. 132,

135; Board of Education v. Nelson, 33 N. D. 462, 157.N. W.

664, 665, 666, 667; Benson v. American Surety Co. of N.

Y., (Minn.) 271 N.-W. 125; 126; Stephens v. City of Lud-

low, 159 Ky. 729; 169 S. W. 473, 475; Magee v. Brister,

109 Miss. 183, 68 So. 77, 78; Board of Finance v. First ‘Na-

tional Bank, 71 Ind. App. 290, 124 N. E. 768, 771-772; Muil-

ler v. Batson, 160 Miss. 642, 134 So. 567, 572; City of New

‘Haven v. Fresenius, 75 Conn. 145, 52 Atl. 823, 825; Joint

School District No. 105 v. First National Bank, 195. Okla.

243, 257 Pace. 318, 319. In each of these cases there is in-_

volved some depository system set up by statute for the ad-

ministration and safekeeping of the funds pending dis-

bursement, payment or distribution. While the systems

vary in structure—depository systems not only differ among

jurisdictions ‘but in the same jurisdiction—all are char-

acterized. by what the Circuit Court of Appeals termed’ in

. its opinion below a ‘‘divided authority’’ over the funds

while in safekeeping (R. 400). The extent of discretion and

15

control over funds which the officer or fiduciary in the first

two classes of cases exercised i is not enjoyed sad the fiduciary

or the depositing: officer.

The principle underlying the systems is iietetinits that

of checks and balances and involves the following features:

(a) the fiduciary or officer who receives the funds and who.

generally is vested with all or some amount of the diisburs-

ing power may not retain the funds in his own possession

during the period of safekeeping or exercise any general

discretion as to.the place where they are to be kept, (b) he

is required to deposit the funds in a depository designated

for that purpose and can make no deposits, or place the

funds, elsewhere, (c) the power to select, designate and

supervise such depository, to revoke its designation and

designate new depositories, is lodged with a person o¢ body .

other than the fiduciary or officer. The requirement that

such fiduciary or officer promptly deposit the funds in a de-

pository chosen for such purpose by the designating au-

thority and the consequent shifting away from him of the -

power or discretion to select and designate the depository,

form the basis upon which ‘the courts hold that the legis-

lative intent was to impose no liability upon the fiduciary

or officer in the event of a loss through the closing of the

depository. The decisions point. out that where the stated

features appear and his discretion. is thus limited, the

fiduciary or officer was not intended to be an insurer of

the fwnds, and what an ordinary prudent. person might

have done with his own moneys in depositing them in the

depository is wholly irrelevant. On the other hand, where

some of the features are not present, as where the deposit-

ing officer is required by statute to deposit the funds in a

bank ‘but has authority to designate what bank shall act

as depository, it is held that the legislative intent was not

to’ relieve him from responsibility for loss. State v. Bob-

16

leter, 83 Minn. 479, 86 N. W. 461. In some jurisdictions

the ‘rule has found its way into an express statutory pro-

vision of exoneration. State v. Bowers, 26 Oh. Cir. Ct.

326, aff’d. 70 Oh. St. 423,72'N. E. 1155. However, express

statutory exoneration is unnecessary. See particularly.

City- of Scranton, Pa. v. Aetna Casualty & Surety Co.,

supra, 11 F. Supp. 986, 988 (D. C. M. D. Pa.).

As a corollary to the rule of these cases, it is held that

where a bond is required by law of the designated deposi-

tory to secure deposits, the fiduciary or depositing officer

is under no duty to inquire into the amount or sufficiency

of such bond if the amount is fixed and terms approved

by some one other than the fiduciary or depositing officer.

Town of Lakeland v. Ballmer, 209 Wis. 636, 245 N. W. 682,

683; Board of Education v. Nelson, 33 N. D. 462, 157 N. W.

664, 667; see City of Missowa v. Dick, 76 Mont. 502, 248

Pac. 193, 195; Illinois Surety Co. v. Umated States, 226

Fed. 665, 667 (C. C. A..7).

The depository system established under the bankruptcy

act and general orders in bankruptcy for the. safekeeping.

of bankrupt estate funds during administration is similar

in its essential features to the federal depository system

provided by the acts of Congress [see Town of Hamden

v. American Surety Co., 9F. Supp. 733, 738 (D.: C. a )],

and the systems involved in the above cases:

The trustee or receiver in benbruptey and his duties with

respect to estate funds coming into his possession for safe-

_ keeping. While the provisions -of the Act and general

orders relating to the safekeeping of bankrupt estate funds

do not expressly apply to receivers, it is well settled that

the duties of receivers in this respect are the same as those

of trustees. -R. J. Reynolds Tobacco Co. v. A. B. Jones

Co., 54 F. (2d) 329, 335 (C. C. A. 8).

Ty

17

Trustees-and receivers are depositing officers. They are

required to ‘‘deposit all money received by them in one of

the designated depositories.’’ Bankruptcy Act, sec. 47 (a),

(3), 11 U.S. C. A. 75 (a) (3). . This duty is mandatory.

. In re Potell, 53. F. (2d) 877, 879, (D. C. N. Y.) ; In re Hoyt,

119 Fed. 987, 988 (D. OC. N. C.); In re Kyle, 181 Fed. 617, -

621 (C. C.-D. Mass.); Huttig Mfg..Co. v. Edwards, 160

. - Fed. 619, 622-623 (C. C. A. 8); R. J. Reynolds Tobacco .

.. Co. v. A. B. Jones Co., 54 F. (2d) 329, 335 (C: C. A. 8).

Thus, depositing estate funds in.a bank. will not save the

deposit from being unlawful if the bank is not a designated .

depository. In re Potell, 53 F. (2d) 877 (D. C. N. Y.);

In re Hoyt, 119 Fed. 987 (D. C. N.'C.). Nor will an order

by the district court in bankruptcy specifically directing

' that the deposit be made in a non-designated bank render

the deposit any the less illegal. Huttig Mfg. Co. v. Ed-

wards, 160 Fed. 619, 622 (C. C. A. 8):-R. J. Reynolds

Tobacco Co. v. A. B. Jones Co., 54 F. (2d) 329 (C. C. A. 8).

Similarly, a disbursement by the trustee or receiver out

of funds in his, pdssession, without first depositing. the

funds in a designated depository and then making the |

disbursement, is improper. In re Hoyt & Mitchell, 127

Fed. 968 -(D.-C. N. C.); In re Kyle, 181 Fed. 617 (C.-C. D.

Mass.). On the other hand, there is no need for the trustee

‘ or receiver, before depositing in a designated depository,

to secure an order directing the same. In re Singer Furni- .

ture Corp., 47 F. (2d) 780, 783 (D. C. 8. D. N. Y.).

- The trustee or receiver is obliged to determine whether

the particular banking institution in which he proposes

to make deposits is a designated depository. This he can

do by examining the formal order of designation required

by statute. Bankruptcy Act, sec. 61, 11 U. S. C. A. 101.

Where the order of designation places some restriction

upon the making of deposits, as a limitation upon deposits

” 48

in excess of a stated amount, the.trustee or receiver is

required to observe such restriction. However, if the

order is a general order, the trustee or receiver is free

to make deposits without particular restraint. Illinois

Surety Co. v. United States, 226 Fed. 665, 667 (C. C. A. 7);

see also cases cited p. 16, supra.

Trastees, and consequently receivers, as depositing of-

ficers, are required within the first month after appoint-

ment to file and make every two months thereafter, reports

with the district court in bankruptcy showing the amount

of bankrupt estate funds on hand and what other informa-

tion the court shall require. Bankruptcy Act, sec. 47 (a).

(10), 11 U.S. ©. A. 75 (a) (10). | ;

Trustees and receivers are not merely depositing officers; .

they also make disbursements. However, their power to

- . disburse is limited by statute and general order. Section

47 of the Act provides that disbursements may be ‘made

‘only by check or draft’’ on the depository. 11 U. S. C: A.

75 (a) (4). General Order 29 provides that “No moneys

deposited as required by the act shall be drawn from the

depositor¥ unless by check or warrant, countersigned by

the judge of the court, or by a referee designated for that

purpose, or by the clerk (of the court) or his assistant

under an order made by the judge * * *.’? 11 U.S. C.A.

53. These requirements are likewise mandatory. Huttig

Mfg. Co. v. Edwards, 160 Fed. 619,-622-623 (C. C. A. 8);

In re Hoyt, 119 Fed. 987, 988 (D. C. N. C.). In some dis-

tricts it is held that these provisions prevent the making

of deposits in the name of the trustee or receiver. as such

officer, but require the deposits to be made in the name of

the bankruptcy court. In re Cobb, 112 Fed. 655. .

The bankruptey court as the designating and administra-

tive authority. The district court in bankruptcy has abso-

19

lute authority over the designation and supervision of

depositories for bankrupt estate funds. Bankruptcy Act,

sec. 61, 11 U. S. C. A. 101.. Exclusive discretion and power

are given it to select among banking institutions and desig-

nate those which are to act as depositories. No restriction. .

is placed by the Act upon the terms which may be required

.as a condition to designation except that a depository bond

payable to the United States. shall be furnished. Ibid.

The amount of the bond is left to the approval of the court,

and it may from time to. time increase the amount fhereof.

Ibid. The court has full power to change the depository

and appoint new ones as the occasion may require. /bid.

The court in designating and supervising depositories

acts principally in an administrative rather than judicial

capacity. See discussion Board of Finance v. First Na-

tional Bank, 71 Ind. App. 290, 124 N. E. 768. It ‘employs

summary orders, In re Howard, 130 Fed. 1004 (D. C. Cal.) ;

In re Ocean City Title & Trust Co.’s Bond, 6 F. Supp. 311

“(D. C.N, J.); In re Potell, 53 F- (2d) 877 (D. C.'N. Y.);

; requires reports from trustees, receivers and depositories,

11 U.S. C. A. 75 (a) (10), countersigns all checks drawn,

on depositories, 11 U. S. C. A. 53, Gen. Ord. 29; and fol-

lows a characteristically ‘non-judicial ‘procedure (see R.

148, 173). .

The designated depository and funds in its possession.

' The position of the designated depository in the system

sufficiently appears from what has above been stated. So

far as receiving bankrupt estate funds, its conduct is con-

trolled by the order of designation, other orders made by

_ the bankruptey court, and general law. It is amenable to

summary order. : Designated depositories are themselves

officers of the court. State of Kansas v. U. S, Fid. & Guar.

Co., 81 Kan. 660, 106 Pac. 1040, 26 L. R. A. (N. S.) 865;

State v. U. 8. Fid. & Guar. Co., 210 Wis. 178, 246 N. W.

a }

7

aa

20

434; Miller v. Batson, 160 Miss. 642, 134 So. 567; Perkins

v. State, 130 Miss. 512, 94 So. 460; Board of County Com’rs.

_v. Mason, 38 Wyo. 1, 264 Pac. 93. Funds deposited with

the depository are withdrawn from custodia legis and be-

“come simple debt claims against the bank. Gardner v.

Chicago Title & Trust Co., 261 U. S. 453. The depository

is responsible for any loss which may arise if it permits

a receiver or trustee to withdraw bankrupt estate funds .

by a check that.is not countersigned by the bankruptcy

court. In re Singer Furngure: Corp., 47 F. ae 780

. (D. C. N. Y.).

As the Circuit Court of Appeals pointed out, the deposi-

tory system in bankruptcy ‘is the same type as the federal

and state systems involved in the cases above where the

rule of non-responsibility was applied to the depositing

officer. The removal from the trustee or receiver in bank-

ruptey, within the ambit of his office, of any discretion

with respect to the safekeeping of estate funds in a desig. -

nated depository, places him in a role different from th

of the public officer who could, if he wished,- put official -

’

funds in his own pocket and was- held to an insurer’s

liability in the event they were lost in a bank failure, or

the common law fiduciary making deposits in such bank

as He chose and withdrawing them at will, who was held

- liable for a similar loss if he failed to observe onmannry

care and prudence for their safety.

The decision of the Circuit Court of Appeals upon the

principal question is correct, in harmony with authority

and presents no case warranting review within the mean-

ing of the rules. The opinion itself affords a careful, well-.

considered precedent. . an

21

Il.

PETITIONERS’ BRIEF, PP.,.15-18 CONSIDERED. ,

The excerpt from the opinion quoted in wetitio qs’

brief, p. 15, is not, as petitioners assert, a su n of —

the Circuit Court of Appeals’ decision, nor is the ‘*implica-

tion’’ which petitioners proceed to find in the words, nor

the suppositious applications which they make thereof,

indicative fairly of the holding. The Court did not treat

of “apparent dangers” to tunds, of ‘‘bad management?”

or ‘‘failing condition’? of depositories, or of trustees caus-

ing depositories ‘‘to bid for such funds by the promise

_ of fees,”’ or ‘‘for corrupt motives.’’ The Court determined -

that in an action on the official bond of the. trustee or

receiver no recovery could be had for bankruptcy deposits

lost in a designated depository which closed, on the theory

that in bankruptcy a trustee or receiver ts under an official

duty when making deposits of estate funds in a depository,

to investigate, ascertain and judge the stability of the

es

—.

bank and the possibility of its closing. me tee

Petitioners ‘apparently contend, p. 16, that the trustee

- or receiver, though under a mandatory obligation to place

estate funds in one of the.designated depositories, never-

theless*has a duty to evalyaté the position of: the various

depositories in-the district and to select among them, that

he must consider such matters as the relation between the -

size of the depository bond of each of the various deposi-

tories and the’ total amount of bankruptcy deposits in all

the various estates which he individually administers. And,

presumably, he must ascertain and consider when making

deposits, the amount of estate funds deposited and main-

. ms + rs

tained on deposit in each: of the depositories from time to

‘ time by all of the other regeivers and trustees in the dis-

trict. Petitioners point, p. 16,-to twenty-one “different

- banks qualified as depositories when the first deposits were

made in 1930, and say that ‘‘at all, times thereafter ere

there: was a substantial fiumber - such’ depositories.”

. Bader the: depository system. in Pree deposi-

tories are in law upon\an equal footing. Each is desig-

nated by the bankruptey. court and centinues under its.

supervision ; each is an officer of the court and subject

to summary order: -In the nature of the — no.duty |

exists for the trustee or receiver to exercise an individual

- discretion as to the relative security” of the Sepositories

and, in-effect, to review the judgment of the designating ~

authority at the risk of being held liable for negligence.

In the ease at bar, the bankruptey: court, supervising the

depositories, entered an ‘order in ‘June, 1931, requiring

Feceivers to file complete’ reports showing the amount

of estate deposits kept in the depositories and the names of

the depositories (R. 145). Reports of this character were

filed by Howard as trustee and receiver with the court,

quarter-annually, throughout the period (R. 204-206, 264-

265, 217, 148; 153). Evidence was ‘Seved of. the compilation

then made by. that’ court of the aggregate sum of the

estate deposits ofall receivers and. trustees in each de-

pository (R. 156- 158). With respect to the Phillip State

Bank the bankruptcy court made particular inquiry of the

depository: in the middle of 1931 (R, 173). Additional or

_inereased depository bonds were required of some of the

depositories but not of the Phillip State Bank (R. 112-115).

| It might be noted that of the twenty-one depositories

mentioned by petitioners, five-sevenths either failed or had —

Ss

| @ | Be

—_ =

.

+

23

‘been or were compelled to merge.* The period involved

- occurred in the midst of a general. bank panic and crisis. .

What the relative safety was, if any, of the various deposi-

tories is not shown by the record. There is no. evidence

of their respective financial positions, their liquidity, the

,amount of estate funds on. hand from fime to time de-

posited by the various trustees and receivers, the relation

_ to such amount of the amount: of thé depository/bonds,

ete. (R. 109, 277). Indeed, evidence of this character

offered by respondents was refused (R. 277-283, - 156-158).

Petitioners’ contention, pp. 17-18, appears*to be that be-

_ cause of the so-called ‘‘personal?’ loans made to Howard

“by the Phillip State Bank, Howard ‘prejudiced his judg-

ment’’ as to that particular depository and that such mat-

ter i8 an element to be considered in determining whether

he acted as an ordinary prudent person. This argument

begs the question. It assumes the existence of a duty.

*Depositories which failed: South Side Trust & Savings

Bank, ewes Park National Bank (R. 138, 113);

Peoples Trust & Savings Bank, South Side Bank & Trust

Company, Transportation Bank of Chicago, Chicago Bank

of Commerce, Cosmopolitan State Bank, Edgewater Trust

& Savings Bank, Jackson Park National Bank, Woodlawn

Trust & Savings Bank. As to the latter banks, see official

report of Illinois State Auditor, Statements Showing Total

Resources and LidkWities of Ilinois State Banks,—at the’

close of business June 29, 1935, pp. 26, 28, 31, 32, of which

°

%

g

24

_Much is said generally by petitioners about the loans

as a basis for challenging the opinion of the Circuit Court

- of Appeals. It will be observed that except for a brief

statement at the very close of petitioners’ -brief, p. 33, all

mention of the-nature of the loans-is avoided. The char-

acter. of tliese loans has been stated, above, pp. 7-8. While

they were personal in the sense that Howard individually

bound himself for their repayment, they were not personal |

in the sense that they were made for his indjvidual gain

or advantage. “The money was borrowed and used solely .

‘for the benefit of-the estates which he administered and

in the interest of their efficient and thrifty management.

The funds were advanced to the estates and used to meet

recurring pftty administrative expenses in order to avoid

continuous petitioning: of the bankruptcy court for allow-

ances to meet such items. This was the general practice

-among receivers and trustees and had the full approval of

the bankruptcy court (R. 254, evidence offered).

. Petitioners argue, p. 33, that Howard was. under no duty

to make such advances. A similar contention made in a

‘ ease where common law trustees had borrowed moneys for

the benefit of their estates, was dismissed by the court

with the words ‘‘It is no answer to say that. they could -

have applied to the court to borrow such funds each time

the necessity arose to do so in order to carry on opera-

-tions.”’ Purdy v. Bank of America Nat. Trust & Savings

Ass’n., 2 Cal. (2d) 298, 40 Pac. (2d) 481, 482.

+ TY.

PETITIONERS’ ‘BRIEF, PP. 18-21 CONSIDERED.

Petitioners’ contentions, pp: 18-21, are not clear. The

* statement, p. 18, that the opinion below intimated that

Howard might be personally liable, is not correct. The

wot

25° -

Court said that the matter was one which it was “‘not

called upon to decide’’ (R. 402). The assertion, p. 19, that

bankrupt estate funds are private funds errs as a matter

of law. Pending their deposit in,a designated depository

the funds are in custodia legis, and upon deposit they

become claims against the depository subject to adminis-

-tration under the bankruptcy act ‘and withdrawal upon

court direction (see opinion, R. 401). The quotation, p. 19,

from Ruling Case Law is the general rule that the under-.

taking of a surety of an official bond is co- extensive with

the officer’s official duties.

The cases cited. by petitioners, p. 20, do not stand for

the propositions ‘stated. In each of the cases there was

_ involved an express statutory limitation upon the amount

of deposits which could be placed in the bank, and the

deposits exceeded the limitation. _The rule in bankruptcy,

as well as the general rule, is’ that. in the absence of an

express restriction the depositing officer need not concern -

himself with the amount or sufficiency of the security

.' given by ms es (see pp. 17-18, 16, sta al ;

IV.

PETITIONERS’ BRIEF, PP. 21-25 CONSIDERED.

2. Howard obeyed all orders of the court.

There is no evidence whatsoever -of. a breach of the

proviso of the bonds to secure performance by Howard

of orders of the bankruptcy court. As the Circuit Court

of Appeals said, ‘‘there is no evidence of a breach of

egndition (1). There is no proof of violation of any order

of the D strict Court:-nor of any loss to an estate arising °

from disobedience of ‘any court order’? (R. 396). The

dissenting opinion expressly states that the issue of the

26

case falls under the proviso dealing with ‘‘ official duties”

(R. 402). »Petitioners’ statement, p. 22, ‘‘the: jury was

entirely justified in believing that Howard had not made

any such report”’ as required: by the June 11, 1931 order,

ignores the fact thatthe trial court below never submitted

to the jury any issue upon a failure to report (R. 295,

et seq.) and in effect directed a verdict contrary to peti-

tioners’ contention. Howard filed with the bankruptcy

court the required reports showing both the am unt and

place of the deposits in the Phillip State Bank, as of June,

September and ‘December, 1931 and March, 1932 (see p.

22, supra). The usual trustee’s and receiver’s periodic

reports and accounts of. funds were made by Howard in

each of the estates, and in fact it was [so conceded hie 144,

. 266). op sia

‘b. Howard accounted for the. estate funds.

- The Cireuit Court of Appeals construed the -language

of the proviso of the bonds assuring that Howard would:

account, as follows: ‘‘This language imposes upon the-

trustee the duty to make honest and correct reports or

accountings of estate funds as required by law, and to

dispose of the funds so reported or accounted for in ac-

cordance with the law’’ (R. 397). As above stated and .

as the Court below said, “there is’ no proof that Howard

- failed to make or render reports or accounts according

to law’’ (R. 397). With respect to the disposition of the

funds in accordance with law, the Court pointed out. that

the cause involves no‘charge such as defalcation, embezzle-

-ment or other improper distribution of funds and that the

. sole question which might arise under this proviso would

relate to whether an official duty existed in a trustee or

receiver to judge, with care, the stability of a designated

depository i in — estate funds were deposited (R. 397).

This question has already been considered above and re-

quires no further discussion.

The suggestion, p. 23, that the loss to the estates might

have occurred because of a delay in distribution to eredi- -

tors, apparently finds its source in a similar suggestion

contained in-the dissenting opinion (R. 403). There is

nothing in the record concerning any delay in the regular

| administration and progress of any. of the estates involved,

let alone in which one of the estates such alleged delay

occurred, The complaint did not so aver -(R. 2, et seq.) ;

*- no evidence thereof was ever offered; the trial court did.

not so charge (R. 294, et seq.); and petitioners never so

. contended, whether in the District Court or in the Circuit

Court of Appeals. ;

¢. Howard performed his official duties.

. Petitioners’ contentions, pp. 23-25, have in the main been

- considered in the discussion above upon the principal.

question presented, pp. 12-20, supra. Part of petitioners’

- argument, p. 23, refers confusedly to depository bonds, “

that is, bonds given by the depository itself and whose.

coverage of course assures against loss through insolvency

or bank failure. The case at “bar, however, is concerned

with the personal bond of the ‘trustee or receiver given

in each individual estate to secure performance of the

official duties of the trustee or receiver. The cases cited

by petitioners, pp. 23- 25, do not decide.the question pre-

_ sented. United States v. Perkins, 280 Fed. 546 (C. C. A. 8)

held that a sale by a trustee of estate property with the

wrongful intent: and purpose of paying a prior lien claim- °

ant whose élaim had already been paid in order to defeat

a subsequent lien-holder,, _was a breach of a trustee’s bond.

In re Hoyt, et al., 119 Fed. 987 (D, C.N. ©) held that a

. trustee = not properly make disbursements of bank-

28

-rupt estate funds without first depositing them and then

‘making the disbursements upon order and counter- signed

check. Jordon v. Baker, 252 Ky. 40, 66 S. W. (2d) 84,

held that mandamus would lie to compel the issuance of a

quietus to a fiscal officer who had depésited county funds

ina designated depository which failed, and that decisions

applying the insurérs’ rule would not be followed. By

way of dictum, it was suggested that knowledge in the

officer warranting him taking action with respect to de-

‘posits might amount to ‘‘that degree of negligence’’ im- -

posing a bailee’s liability. Three months after the Jordan

case was decided, the Kentucky legislature enacted into 7

legislation the general rule of non-responsibility which the

court ‘in the earlier case of Stephens * City of Ludlow,

159 Ky. 729, 169 S. W. 473, had announced. Ky. Acts

_ 1934, c. 22. See p. 14, supra. Edwards v. Logan County,

"244 Ky. 296, 50 S. W. (2d) 83, was concerned with a judg-

ment below based upon the insurer’s liability rule. The —

case was reversed for new trial, the court pointing out that

when the bank was designated a depository and the officer

was directed to deposit the funds there and he- obeyed, the

designating authority ‘‘assumed responsibility for the

integrity and solvency of the institution and exonerated

‘him from loss of funds if suffered solely on that account.’’

Ibid. 50 S. W. (2d) p.-86. State v. McNamer, 62 Mont. 490,

205 Pac. 951, held that where the county collector was -

under duty to pay over city funds to the city treasurer

as promptly as they were computed but failed to do so,

and instead permitted them to remain on deposit in a

designated depository, liability for such failure might be

imposed. Other eases and arguments of petitioners cited

pp. 24-25, require no comment. ;

The statement, p. 25, that ‘‘the violation of duties, above

set forth, were all admitted with the exception of the fail-

‘

- 29

>

ure to make reports of total deposits”’ is untrue. Respond-

ents have maintained throughout that even if the duty

assumed by petitioners existed, no violation in fact oc-

curred. Considerable argument-was had in the Circuit

Court of Appeals on this question but waa not considered

by the Court because the supposed duty, as a matter of.

law, did not exist (Opinion, R. 398, 402). ; 3

vs

PETITIONERS’ BRIEF, PP. 25-30 CONSIDERED.

The contention of petitioners’. brief, pp. 25-30, has been

considered in what has been said above.

VI.

PETITIONERS’ BRIEF, PP. 30-32, CONSIDERED:

_ It is self-evident that no constitutional issue is here

- presented. Indeed, the constitutional question which peti-

' tioners urge, p. 31, is raised for the first time in their

petition for certiorari. The proposition that petitioners

_ are being deprived under the decision below of their right

to recover for negligence, and hence of their constitutional

guarantee, errs among many reasons in its assumption of

the supposed official duty. The cases in the note in 38

A. L. R. 1512, to which petitioners refer, are inapplicable.

cf. Schenebeck v. McCrary, 298 U. 8.36.

Regard at ) )

send ee pa

"an

‘Conclusion

Respondents presented in the Circuit Court of Appeals

several additional grounds for a reversal of the judgment

_ of the District Court.(R. 313, et seq.). Error was assigned

. as to the admission and exclusion of certain evidence (R.

313-324), to the giving of certain instructions to the jury

— (R. 329-346), ete. ‘The Circuit Court of Appeals in grant- .

ing a new trial, stated that ‘‘the discussion of other

features is unnecessary’? (R. 402).. The assignment of

these errors below, to which reference is respectfully made, ©

sets out separately and particularly each of the errors and

the specific ground for review. Petitioners have not dis-

cussed these other questions. and. respondents, reserving

all rights, have likewise not done‘so. —

It is respectfully submitted that the cause warrants no.

‘review by this Court and, therefore, the petition for a writ

of certiorari should be denied.

Respectfully snlied.

ro)

- Junius Mosss, |

Luioyp Hers,

—- Wiuram P. @miT#, 2

: - Coungel for Respondents.

31 i os

APPENDIX.

Section 47 of the Bankruptcy Act, 11 U.S. C. A. 75:

‘‘(a) Trustees shall respectively * * * (3) deposit

all money received by them in one of the designated

depositories; (4) disburse money only by check or

draft on the depositories in which it has been de-

posited *? . 9?

General Order XXIX, 11 U. 8. C. A. 53:

‘‘No moneys deposited as required by the Act shall

be drawn from the’ depository unless by check or war-

rant, signed by the clerk of the court, or by a trustee,

and countersigned by a judge of the court, or by a

- refereee designated for that purpose, or by the clerk

or his assistant under an order- made by the judge,

stating the date, the sum, and the account for which

it is drawn * °* *.’’.

‘Section 61 of the Baakruptey Act, 11 U. S.C. A. 101;

“ “Courts of bankruptcy shall designate, by order,

banking institutions as depositories for the money of

bankrupt estates, as convenient as may be to the

residences of trustees, and shall require bonds to the

United States, subject to their approval, to be given

by such banking institutions, and may from time to

time as occasion may require, by like order increase

the number of depositories or the amount of any bond

or change such depositories.”’