Keyes v. Paducah & IR Co.
86 A.L.R. 203, 1932 U.S. App. LEXIS 4352, 61 F.2d 611 (1932)
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Rule of Law:
A deposit of funds into a bank, made pursuant to a court order to be held pending the outcome of litigation, is presumed to be a general deposit creating a debtor-creditor relationship, not a special deposit creating a trust, absent a clear mutual understanding or intention to segregate the funds from the bank's general assets.
Facts:
- Paducah & Illinois Railroad Company was required by a court order to deposit $8,000 into the National Bank of Kentucky as a condition for receiving a temporary injunction.
- The court order specified that the deposit was 'to abide the event of this cause' and 'shall be at all times subject to the order of this court.'
- The Railroad deposited a draft for $8,000 with the bank, providing a copy of the court order.
- The bank issued a receipt acknowledging it would hold the fund 'subject as aforesaid to the order of said United States District Court.'
- Several days later, after the draft cleared, the bank informed the Railroad's counsel by letter that it was 'holding the proceeds in form of a cashier’s check.'
- The Railroad company received this letter but made no protest or objection to the bank's method of holding the funds.
- Approximately 17 months after the deposit, on November 16, 1930, the National Bank of Kentucky failed and was closed by order of its board of directors.
Procedural Posture:
- Paducah & Illinois Railroad Company filed suit in U.S. District Court against the sheriff of McCracken county to enjoin tax collection.
- The District Court granted a temporary injunction conditioned on the Railroad depositing $8,000 into the National Bank of Kentucky.
- The District Court later entered a final decree in the tax suit, making the injunction permanent.
- After the National Bank of Kentucky failed, the Railroad demanded the full $8,000 from the court-appointed receiver.
- The receiver refused to pay the full amount, treating the Railroad as a general creditor.
- The Railroad filed a motion in the District Court, which ordered the receiver to show cause why he should not pay the full sum.
- After a hearing, the District Court ordered the receiver to pay the Railroad the full $8,000, treating it as a special deposit.
- The receiver (appellant) appealed the District Court's order to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Does a deposit of money into a bank, made pursuant to a court order to abide the event of a cause, constitute a special deposit that creates a trust fund entitled to preferential payment upon the bank's insolvency?
Opinions:
Majority - Simons, Circuit Judge
No, a deposit of money into a bank pursuant to a court order to abide the event of a cause does not, by itself, constitute a special deposit creating a trust fund. It is presumed to be a general deposit unless there is a clear intention by the court or the parties to segregate the funds. A general deposit creates a debtor-creditor relationship, where title to the money passes to the bank, which can then use the money in its general business. In contrast, a special deposit creates a bailment, where the bank must keep the specific property separate and return the identical item, with title remaining with the depositor. The law presumes that deposits are general, and the depositor bears the burden of proving otherwise. Here, nothing in the court order, the bank's receipt, or the surrounding circumstances indicated an intention to create a special deposit. The bank's letter stating it held the proceeds as a 'cashier's check' explicitly signaled that the funds were commingled with its general assets, as a cashier's check is a debt of the bank. The Railroad's failure to object to this arrangement for over a year further indicates an understanding that this was a general deposit. While the parties could have created a trust using 'apt words of direction,' they failed to do so, leaving the Railroad as a general creditor of the insolvent bank.
Analysis:
This decision reinforces the strong legal presumption that bank deposits are general unless explicitly and clearly designated as special. It places the burden squarely on depositors, even those acting under a court order, to secure preferential treatment in case of bank insolvency by creating an unambiguous agreement to segregate the funds. The ruling clarifies that a deposit's 'specific purpose' is not enough to create a trust; there must be a manifest intent to prevent commingling with the bank's general assets. This protects the principle of ratable distribution among a failed bank's general creditors by preventing parties from retroactively claiming trust status for what was functionally a general deposit.
