FERRO v. CITIZENS NATIONAL TRUST SAVINGS BANK OF LOS ANGELES

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District Court of Appeal, Second District, Division 2, California.

Pietro FERRO, Plaintiff and Respondent, v. CITIZENS NATIONAL TRUST & SAVINGS BANK OF LOS ANGELES, Defendant and Appellant.

MONARCH WINE CO., Inc., a corporation, Plaintiff and Respondent, v. CITIZENS NATIONAL TRUST & SAVINGS BANK OF LOS ANGELES, Defendant and Appellant.

Civ. 20272, 20273.

Decided: October 21, 1954

Cosgrove, Cramer, Diether & Rindge; Leonard A. Diether, Los Angeles, Edward A. Nugent, San Francisco, for appellant. Jerome Weber and Jack Altman, Los Angeles, for plaintiff and respondent Pietro Ferro. Bronson, Bronson & McKinnon, San Francisco, for plaintiff and respondent Monarch Wine Co., Inc.

Plaintiff Pietro Ferro filed an action against the defendant to recover a sum of money alleged to be due him for certain sums of insurance paid to defendant as the result of the destruction by fire of wine owned by plaintiff. A similar action was filed by the Monarch Wine Co. against defendant. These actions were consolidated for trial and resulted in judgments in favor of each plaintiff, from which defendant appeals. Both actions have been consolidated for hearing in this court.

Facts: Sunnyside Winery, a corporation, and its president, Felix Butte, had been clients of defendant bank since 1947. In the course of this association defendant kept informed as to Sunnyside's financial condition and on occasions loaned it sums of money on its wine. For its protection the bank kept in its possession all Sunnyside's insurance policies, including those on the wine in its plant, on which policies the bank was named as a ‘loss payee.’

On February 8, 1950, a fire consumed all wine in Sunnyside's plant. At the time there were 297,117 gallons of wine stored on the premises. Of that amount Ferro owned 200,237 gallons, Monarch owned 83,000 gallons, Federal owned 6,100 gallons, Cella owned 200 gallons and Sunnyside owned 7,500 gallons. Sunnyside's interest in the wine, therefore, was unappreciable and at such time no loans existed against the wine. Monarch had purchased its wine from Sunnyside through the bank within sixty days prior to the fire.

On the date of the fire the following debts were owed to the bank: (1) Sunnyside owed $85,000.00 on a note secured by a deed of trust and chattel mortgage on the plant and equipment, and by $25,000.00 in bonds. As collateral for this loan the bank was loss payee on, and had possession of, insurance policies covering the plant and equipment in the amount of some $800,000.00; (2) Felix Butte owed $23,000.00 on a personal unsecured note; (3) Ferro owed $52,000.00 secured by 200,000 gallons of wine owned by him and stored at Sunnyside. The bank was protected by holding a Lawrence Warehouse receipt for this wine, and by the insurance policies which automatically covered all wine stored in Sunnyside's plant; (4) Monarch owed $42,000.00 on two trade acceptances, representing the purchase price of 100,000 gallons of wine purchased by Monarch and stored at Sunnyside.

The insurance loss as a result of the fire was adjusted as follows: For the wine, $136,000.00; for the buildings and equipment, $202,000.00.

After the fire the bank insisted that Sunnyside endorse off the drafts, that the bank be the final one to endorse the drafts, and that the bank handle all the proceeds received from the fire loss. Before any of this money was paid, unsecured creditors of Sunnyside attached all the money in the hands of the insurers. The attachment was levied on the policies covering the buildings and equipment as well as those covering the wine.

On April 20, 1950, Mr. Butte presented to the bank a claim draft in the amount of $40,000.00 issued by American Insurance Company, one of seven insurers of the wine, which had been endorsed by all payees except the bank and the sheriff of the City and County of San Francisco. The bank endorsed this draft so that the attachment could be released as to the other policies. The bank, after obtaining a written release from Ferro permitted Sunnyside to use the money to pay its unsecured creditors. Monarch knew nothing of this payment. At the time the bank released this $40,000.00 it knew that the money belonged to either (1) the bank in payment of Ferro's loan secured by the wine; (2) Ferro for his equity in the wine or (3) Monarch which owned outright practically all the balance of the wine. It also knew that Sunnyside was going to use the money to pay off its unsecured creditors. The bank also knew that Sunnyside had a substantial sum of money coming to it from the building and equipment insurance, the loan by the bank being only $85,000.00 and the adjusted insurance proceeds for the property loss excluding wine being $202,000.00.

Thereafter, Mr. Butte kept bringing in claim drafts to the bank which the bank collected and reduced to the form of cashier's checks. These moneys were commingled. No attempt was made by the bank to keep separate the money received from the wine insurers and that received from the building equipment insurers.

The bank received claim drafts for an additional $95,508.34 from insurers of the wine, $85,275.30 of which it collected and reduced to cashier's checks payable to itself. The difference, $10,233.04 was a draft on which Lawrence Warehouse Co. was payee and would not endorse. The bank held this draft until July 27, 1950, when it was sent to Sunnyside. In addition the bank received $183,000.00 from the building and equipment insurers.

On June 23, 1950, Mr. Butte brought the bank six or seven claim drafts representing the whole balance of the wine money. By June 27, 1950, the bank had the cash from most of these drafts and it paid off the Ferro note.

In late June, Mr. Wade, Ferro's attorney, heard that the bank had received the insurance money. He asked an officer of the defendant about it and the officer refused to tell him anything, saying he would need Mr. Butte's authorization.

On July 5, 1950, the bank paid itself all the debts owed to it excepting for the building loan account. On the following day the bank, knowing that an additional $45,000.00 was due, kept $60,000.00 to apply on the building loan and sent cashier's checks aggregating $60,000.00 to Sunnyside.

Ferro and Monarch knew nothing of the payments by Mr. Butte to the bank and the bank's payments to him after July 5, 1950. In addition to the $60,000.00 withheld by the bank on July 6, it also possessed the $10,233.04 draft on which Lawrence Warehouse Co. was a payee and received an additional $45,000.00 of insurance money.

On July 19, 1950, Monarch wired the bank as follows: ‘We understand that the insurance moneys were collected on fire loss at Sunnyside Winery, Fresno. Amount due us on fire loss is approximately $35,000.00. We have been informed money is in your possession. Please be informed that we look to you for check in payment of amount due to us on fire loss.’ At this time the bank had in its possession insurance proceeds of $105,000.00 in cash and the $10,233.04 check which included Lawrence Warehouse Co. as payee.

On July 21, 1950, the bank paid off the balance of its building loan of $81,000.00 and on July 24, 1950, wrote Monarch: ‘Please be advised that we do not hold any moneys representing insurance proceeds on loss by fire of wine inventory at Sunnyside Winery, Fresno, California. It is respectfully suggested that you communicate with the Sunnyside Winery and Mr. Felix Butte, Jr., to whom or to whose order such proceeds were paid.’

On July 27, 1950, the bank sent the $10,233.04 draft to Sunnyside.

Questions: First: Was defendant liable for breach of a trust duty which it owed plaintiffs Monarch and Ferro as a constructive trustee of their funds?

Yes. Sunnyside insured Monarch's wine for Monarch's benefit. The insurance of the wine was included in a blanket policy naming Sunnyside and Butte as beneficiaries and American Trust Co. and the bank as loss payees. While Monarch's wine was stored by Lawrence Warehouse Co. on Sunnyside's premises, Sunnyside could not obtain possession or control of it. Only Monarch, the holder of the warehouse receipts could obtain the wine from Lawrence. When the insurers issued their drafts payable to the bank, Sunnyside, Butte and American Trust Co., they were discharging their specified obligations as set forth in the policies. Such drafts could not of course fix or determine the rights of the payees or third party owners as among themselves. When the drafts were endorsed and reduced to cash, the owner of the wine was the owner of and entitled to the cash.

It is established that insurance proceeds take the place of the goods insured and are owned by the owner of the goods. Persons other than the owner acquiring such proceeds with knowledge of the facts are trustees thereof for the benefit of the owner. (American Eagle Fire Insurance Co. v. Gayle, 6 Cir., 108 F.2d 116, 119; California Insurance Co. v. Union Compress Co., 133 U.S. 387, 410, 10 S.Ct. 365, 33 L.Ed. 730.) The rule is accurately stated in American Eagle Fire Insurance Co. v. Gayle, supra, 108 F.2d 119; ‘There is no merit in the contention that the receiver owed no duty and therefore had no legal liability to the appellees in respect to the stored property. As long ago as 1876, in Home Insurance Co. v. Baltimore Warehouse Co., 93 U.S. 527, 544, 545, 23 L.Ed. 868, it was held that a warehouseman, even though he made no charge to customers for insurance, and even though the customer was not informed of the existence of the policy, held the goods ‘in trust’ within the meaning of a similar policy provision, and the goods having been destroyed by fire, the insured was entitled to recover their entire value, applying so much as necessary to cover his own interest and holding the remainder as trustee for the owner.' (Italics added.)

It is therefore apparent that the creditors of Sunnyside or Mr. Butte did not acquire any rights whatsoever, by attachment, to the proceeds of the insurance upon the wine which had been destroyed by fire. (Century Ins. Co. v. First Nat. Bank, 5 Cir., 102 F.2d 726; Burns v. Peters, 5 Cal.2d 619, 625, 55 P.2d 1182; Nishi v. Downing, 21 Cal.App.2d 1, 67 P. 2d 1057.) The rule is thus stated in Century Ins. Co. v. First Nat. Bank, supra, 102 F.2d 728: ‘The contract of insurance was in the name of the bailee, but it was for the benefit of the bailors, and expressly covered cotton in storage for the customers of the warehouse.

‘After the fire had occurred, the bailor was adjudged a bankrupt; but the interest of the bailors in the proceeds of the insurance did not pass to the trustee in bankruptcy. Only the claim of the bailee for charges as warehouseman so passed, and equity will treat the lien for such charges as transferred from the cotton which was destroyed to the proceeds of insurance deposited in court. To this extent only, the trustee was entitled to enforce his claim for charges which had accrued to the warehouseman at the time of the fire.

‘It is true that in an action at law Hervey, under a provision of the policy, was the sole plaintiff entitled to recover on the insurance contract, but his insolvency intervening after the fire, created a condition which entitled the certificate holders to equitable relief. If Hervey had been adjudicated a bankrupt before the fire, it is clear that the cotton would not have passed to the trustee in bankruptcy, although the latter would have acquired the lien thereon for warehouse charges. If the trustee had taken possession of the cotton, the bankruptcy court should have granted a petition of the certificate holders for reclamation upon payment by them of such charges. After the fire, they were entitled to the proceeds of the insurance less charges. If they have not already done so, they are now entitled to reclaim from the trustee in bankruptcy their equitable portion of the fund which has come into his hands.’ (Italics added.)

It thus appears under the evidence in the instant case that the defendant bank knew plaintiffs Monarch and Ferro owned the wine; knew that Sunnyside had no significant interest therein; knew Sunnyside was not entitled to the insurance money; knew Sunnyside was insolvent and knew that a part of the $40,000.00 of the wine insurance had already been wrongfully used to pay general creditors of Sunnyside. Under these circumstances the bank was clearly guilty of a breach of trust in two particulars: First, in joining with Sunnyside in misapplying $40,000.00 of the wine insurance proceeds in order to release building and equipment insurance, as well as the balance of the wine insurance; the bank profited by this because while the wine insurance proceeds (being owned by Monarch and Ferro) were not subject to the attachment, the building and equipment insurance (in which the bank and Sunnyside had a substantial interest) was subject to attachment; second, in disbursing to Sunnyside (after paying itself all secured and unsecured debts) the insurance proceeds, knowing that Sunnyside was insolvent and not entitled to the money.

The bank received from its debtor, Sunnyside, trust money, knowing it was trust money and knowing who was entitled to it. It therefore became a constructive trustee of the money for the benefit of Monarch and Ferro. In 12 A.L.R. (1921) 1048 et seq., the rule is correctly stated thus: ‘The well-established and familiar principles that trusts are enforced against all persons who become possessed of trust property with notice of the trust, and that every purchaser, bailee, or stranger who, for his own profit, joins a trustee in a breach of trust by receiving trust funds or property with notice of the rights of the beneficial owner, becomes liable to that owner, have frequently been applied in cases of creditors of trustee who have obtained from their debtors trust property with notice, express or implied, of the trust and the breach thereof, in payment or on account of the trustees' own antecedent debt.

‘The controlling factor in these cases is, of course, the creditor's knowledge, actual or constructive, that the trustee, in violation of his trust, was applying the trust funds or property to the payment of his own obligation, and the circumstance that they were paid or transferred to discharge or secure his own antecedent debt is merely incidential.’ See also Vol. 2 (1939) Scott on Trusts, section 3243; Civil Code, sections 2219, 2244.

It is clear that since the bank acquired a trust obligation to plaintiffs which it breached, they may maintain a suit against the bank to recover the sums due them under the common counts.

Second: Of the two following quoted instructions, was the first instruction contradicted by the second instruction because it omitted any reference to the acquiescence of plaintiff Ferro?

1. ‘If you believe from the evidence that plaintiff Ferro, his agent or attorney assented to or acquiesced in defendant Bank's payint to Sunnyside Winery the proceeds of the inventory fire insurance here in question, less the balance due on plaintiff Ferro's promissory note to the Bank, you are instructed that plaintiff Ferro is prevented as a matter of law from asserting, and is not now allowed to assert, that defendant Bank had no right to forward said proceeds of the inventory fire insurance to Sunnyside Winery * * *.’

2. ‘Ferro did not personally agree or consent to the payment of the insurance proceeds to Sunnyside. Whether his attorney Wade consented and agreed to such payment and whether he had authority so to do, is a question of fact for you to determine. * * * Ferro therefore is entitled to a verdict in his favor, unless he authorized or consented to the payment made by the Bank to Sunnyside * * *, you will return a verdict in favor of the plaintiff, Ferro, and unless you find that Ferro authorized or consented to the payment to Sunnyside. * * * Therefore you will return a verdict in favor of Ferro unless you find that he consented to the payment of the $32,638.63 to Sunnyside.’

No. It is clear that the foregoing instructions disclose no inconsistencies; that plaintiff Ferro might not have personally agreed or consented to the payment of the insurance proceeds to Sunnyside, but that if his duly authorized agents or attorney assented or acquiesced in defendant's paying to Sunnyside the proceeds of the insurance he would be bound by such act or acts.

Third: Did the trial court err in instructing the jury as follows?

‘There is no doubt that both the Lender and the Insured may make different arrangements for the disposal of the insurance proceeds before or after the receipt of the insurance funds, or may by their conduct and actions under the particular circumstances of the case be required so to do.’

No. This instruction was not erroneous as argued by defendant because there was no evidence that the bank and Sunnyside ‘agreed’ as to the disposition of the insurance proceeds. The instruction does not contemplate an agreement between Sunnyside and the bank; it merely contemplates an agreement by either Sunnyside or the bank. In any event the evidence discloses the bank was given the control of the insurance funds which it desired in return for its promise to extend Sunnyside's building loan. Therefore the record would support a finding that there was an agreement between Sunnyside and the bank.

Fourth: Did the trial court err in failing to instruct the jury adequately as to what was or could be held a ‘wrongful’ payment by the bank to Sunnyside?

No. The jury was fully instructed upon this subject by the following:

‘The gist and substance of Monarch's claim that a constructive trust has been established is that before the Bank endorsed the first draft of $40,000 it had promised and agreed, or by its conduct led and induced Monarch to believe, as a reasonably prudent person, that when it received the insurance proceeds, it would pay to Monarch that portion of the insurance proceeds that represented payment for Monarch's wine, and that when the Bank did receive such proceeds, it distributed them, or allowed them to be distributed to others, knowing at the time that the financial condition of Sunnyside was such that the disposal of these funds other than to them would probably result in Monarch's being deprived of that portion of the proceeds which represented its wine.

‘In this regard you must determine what facts and circumstances have been proved, and whether the facts and circumstances found to be proved, are themselves of such a nature as to establish a trust, the breach of which would entitle Monarch to judgment in the action.

‘The question of liability must be determined by what happened before the Bank disbursed the money. Whatever conversations took place or events occurred after the money passed from the hands of the Bank is not to be considered by you in determining the question of liability of the Bank.’

‘In order for Monarch to recover it must be established by a preponderance of the evidence:

‘The Bank knew of the ownership of Monarch in the wine destroyed:

‘The Bank agreed to pay Monarch, or led or induced Monarch to believe that it would pay Monarch, out of insurance proceeds that came into its possession, the insured value of Monarch's wine.

‘That the Bank thereafter paid, or allowed to be paid, to others all of the insurance proceeds, except the amount of Ferro's indebtedness to it, knowing at the time, or having such knowledge that, as a reasonably prudent person it should have known, that by such action Monarch would not be paid for its wine, or that such payment would be doubtful and hazardous.’

Fifth: Did the trial court commit error in instructing the jury as follows:

‘If you should return a verdict for one or more of the plaintiffs against the defendant, you shall determine the amount of money the particular plaintiff is entitled to, and return a verdict for that amount, together with interest thereon from the 6th day of July, 1950. * * *

‘Plaintiff Monarch seeks to recover the amount paid per gallon by the insurance companies for its wine stored in the Sunnyside warehouse.’

No. There is no question but that Monarch lost 83,000 gallons of wine, and that the insurance proceeds actually paid over because of Monarch's loss amounted to $38,114. When Monarch recovered the $2,975.37 from the $40,000 wrongfully paid to creditors, its claim was reduced to $35,138.63. This was the resulting loss from the payment of insurance proceeds for Monarch's wine. Monarch was entitled to recover $35,138.63. The jury however awarded Monarch the exact amount which Monarch paid for the destroyed wine, that is, 83,000 gallons at 42 cents per gallon. These facts were not in dispute. This amounted to $34,860, or a lesser amount than the jury could have awarded. The instruction was correct.

Nor is there any merit in defendant's contention that Monarch was not entitled to interest until the date of the judgment. Section 3287 of the Civil Code provides:

‘Person entitled to recover damages may recover interest thereon. Every person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right to recover which is vested in him upon a particular day, is entitled also to recover interest thereon from that day, except during such time as the debtor is prevented by law, or by the act of the creditor, from paying the debt.’

In the present case the amount of damages could be arrived at by the simplest computation, to wit, the number of gallons of wine destroyed multiplied by the amount paid by the insurer per gallon. (See House Grain Co. v. Finerman & Sons, 116 Cal.App.2d 485, 497[17], 253 P.2d 1034.)

An examination of the instructions to the jury discloses that when read as a whole they are correct and in no instance were any of the alleged errors prejudicial to defendant. Therefore we must disregard any technical error which appears therein pursuant to the mandate of Article VI, section 4 1/2 of the California Constitution.

Sixth: Did the trial court err prejudicially in overruling defendant's objections to three questions asked plaintiff Ferro by his counsel upon the ground that the answers were immaterial to any of the causes of action alleged in plaintiff Ferro's complaint?

No. It is obvious that if the answers were immaterial to any cause of action alleged in plaintiff Ferro's complaint, in the absence of a showing of prejudice which defendant has failed to do, such error must be disregarded pursuant to the provisions of Article VI, section 4 1/2 of the California Constitution.

Seventh: Did the trial court err in receiving in evidence the Lawrence Warehouse report as to the amount of wine stored with it on the date of the fire?

No. The document was properly admitted, together with the testimony of Sunnyside's president, Mr. Butte, to prove notice to the bank of Monarch's interest in the wine. The testimony was likewise merely cumulative of other evidence to the same effect.

In view of our conclusions it is unnecessary to discuss other minor questions presented by defendant.

Affirmed.

McCOMB, Justice.

MOORE, P. J., and FOX, J., concur.