U.S. Supreme Court Gardner v. Chicago Title & Trust Co., 261 U.S. 453 (1923)
Gardner v. Chicago Title & Trust Company
Argued March 15, 1923
Decided April 9, 1923
261 U.S. 453
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
A state bank, holding a secured note, the maker of which became a bankrupt, itself went into insolvency proceedings under the state law after it had accepted, with knowledge of the bankruptcy, deposits of funds of the bankrupt estate made by the trustees in bankruptcy, who were not shown to have known of the note at the time.
Held that the bankruptcy court should allow the bank's claim for the amount due on the note, above the value of the security, but withhold dividends until the debt due the trustees had been paid. P. 261 U. S. 56 .
278 F. 509 reversed.
Certiorari to an order of the circuit court of appeals directing dismissal of a petition for set-off made by a trustee in bankruptcy.
MR. JUSTICE HOLMES delivered the opinion of the Court.
This case arises in the matter of O'Gara Coal Company, bankrupt, upon a petition for a set-off presented by the trustee of the bankrupt estate. The respondent is the receiver of the La Salle Street Trust & Savings Bank. When the Coal Company became bankrupt in 1913, the Bank held its note for $15,000, with security. Between November 11, 1913, and June 11, 1914, the trustees of the Coal Company in bankruptcy deposited in the Bank, an authorized depositary, and were credited as such trustees with funds of their estate, which amounted to nearly $20,000 on June 12, 1914, when the Bank suspended business, insolvent. A receiver was appointed by a state Court a few days later. The trustees of the Coal Company filed a claim for the amount of their deposit in 1916, and in 1916 and again in 1918 received dividends upon it. On the other side, the receiver of the bank filed a proof of the bank's claim as unsecured in 1914, but amended it to proof of a secured claim in 1917. The petition
before us seeks to set off the claim of the petitioner for the deposit in the Bank, less the dividends received, against the claim of the Bank upon the note. The circuit court of appeals denied the set-off and ordered the petition to be dismissed. Chicago Title & Trust Co. v. Gardner, 278 F. 509.
We assume that, when money is deposited in a designated bank under § 61 of the Bankruptcy Law of July 1, 1898, c. 541, 30 Stat. 562, it is deposited as other money is, and becomes the property of the bank, leaving the bank a debtor for the amount. But when this money was deposited with this Bank, it seems that the Bank had notice that it was part of a fund appropriated to paying the Coal Company's debts, of which the note held by the Bank was one. We think that it would be inequitable to allow the Bank to proceed to diminish that fund without accounting for the portion that it had received. When the Bank accepted deposits from a fund against which it had a credit, it must be taken to have known that it could not profit by the fact at the expense of other claimants. The Bank knew the whole situation. There is nothing to show that the Trustees of the Coal Company, when they made their deposits, knew that the Bank held the Coal Company's note. If they had known this fact, it would be going far to say that they altered or could alter the position of their cestuis que trust for the worse. On the other hand, the creditors of the Bank can stand no better than the Bank.
The Bankruptcy Court may allow the Bank's claim for such sum only as may seem to the Court to be owing above the value of the security, § 57e, and may withhold dividends upon that sum until the debt due to the trustee has been paid. Western Tie & Timber Co. v. Brown, 196 U. S. 502 , 196 U. S. 511 .