On Appeal From Judgment Of The United States District Court Sitting As a Bankruptcy Court For The District Of The Virgin Islands, Division O f S t. C roix.
Aldisert, Weis and Garth, Circuit Judges.
We are called upon to determine the liability of banking institutions which were not designated as official bankruptcy depositories under the Bankruptcy Act but which nevertheless accepted deposits of bankruptcy funds that were subsequently embezzled. We affirm the district court's order which held both banks liable to the bankrupt's surety even though we do so on a theory different than that adopted by the district court.
These appeals arise from litigation caused by the bankruptcy of Quantum Development Corporation in the Virgin Islands. Quantum had entered into a contract in December, 1971 to construct the Croixville Project, a low-cost multiple housing unit development. Prior to the completion of the project, Quantum became insolvent and defaulted under its contract. Plaintiff-appellee American Fidelity Fire Insurance Company (Fidelity), a surety under a payment and performance bond for Quantum, completed the Croixville Project. As a result of its expenditures and performance under the surety bond, Fidelity asserted claims by way of subrogation to funds of the Quantum estate then under the jurisdiction of the bankruptcy court.*fn1
Bank of Nova Scotia (BNS)
Fidelity initially sought to recover $84,858 which the district court had ordered it to deposit in the Quantum estate on March 21, 1973. Pursuant to the court's order, Fidelity delivered to the district court clerk a certified check in the amount of $84,858 payable to the order of "Charles R. Joy, Receiver." Joy was the duly appointed receiver of Quantum under Chapter XI of the Bankruptcy Act.
The bankruptcy referee had instructed Joy to purchase certificates of deposit at the highest rate of interest available with the major portion of the Quantum funds and to place the balance in a checking account. Joy endorsed the Fidelity check which was payable to the order of "Charles R. Joy, Receiver" as follows:
For Deposit in Quantum Acct.
Quantum Bankruptcy, Charles R. Joy
On April 2, 1973 Joy presented this check to the Christiansted branch of the Bank of Nova Scotia (BNS) and used $75,000 of the proceeds to purchase three certificates of deposit.*fn2 He left the balance of the funds on deposit in a checking account at BNS. BNS was not a designated depository for bankruptcy funds under Section 61 of the Bankruptcy Act. Joy requested, and BNS issued, the certificates of deposit to "Charles R. Joy", without any reference to, or designation of, his representative capacity.
On October 2, 1973, when the certificates of deposit matured, BNS issued to "Mr. Charles R. Joy" a check for $77,664.54, representing the principal sum of $75,000 plus interest of $2,664.54. Joy embezzled the proceeds of this check. As a result, Fidelity commenced this suit against BNS to recover the $77,664.54.*fn3
First National City Bank (Citibank)
Fidelity also sought to recover the Croixville Project retainages totalling $115,211. The district court's order of April 13, 1973 directed Behrens Mortgage Company to pay this retainage sum to Joy. A check was issued in the amount of $115,211 made payable to the order of
Charles R. Joy, Receiver Quantum
Development Corporation VI No. 5-1972
In Bankruptcy Pursuant to Court Order of April 13, 1973.
On September 10, 1973 Joy presented this check to the Christiansted branch of First National City Bank (Citibank) and used the entire proceeds to purchase a certificate of deposit. Citibank was not a designated depository for bankruptcy funds under Section 61 of the Bankruptcy Act. The application for the certificate of deposit was prepared in the name of "Charles R. Joy, Receiver," but the ...