Appeal from a judgment of the District Court for the Southern District of New York, Kevin Thomas Duffy, Judge, dismissing plaintiff's complaint. Reversed.
Mansfield, Circuit Judge, and Smith*fn* and Palmieri,*fn** District Judges.
Hyde Park Company (Hyde Park), a limited partnership, owned an apartment house in Connecticut. Herbert Stoll was the general partner. In May of 1971 Stoll sought to borrow from appellant, Hartford National Bank & Trust Company, a national bank with its principal place of business in Connecticut (Hartford). He offered to Hartford as security for the loan a pledge of an account which Hyde Park carried in the Westchester Federal Savings and Loan Association of New Rochelle, New York (Westchester). Stoll exhibited to Hartford a savings account pass book showing a balance of over $38,000.00 in the name of "Hyde Park Company, c/o Herbert Stoll." The pass book contained nothing indicating that the account was a fiduciary account or was in any way restricted. Stoll executed a pledge agreement, describing the savings account, and an uncompleted withdrawal order. Before making the loan Hartford mailed to Westchester the pledge, together with a "Notice of Pledge," and asked Westchester to sign a "Receipt of Notice." Westchester executed the "Receipt of Notice" which read in part:
Westchester Federal Savings and Loan Association acknowledges that a copy of the above order for transfer has been filed with it. The copy of (signatures) as shown above appears to compare correctly with (signatures) on file with us. The present balance in said account is $38,265.00.
I am returning herewith the receipt of the Notice of Pledge of the above savings account consisting of security rents under leases.
Hartford then loaned Stoll $35,000.00. Stoll defaulted. Hartford tried to collect the pledged funds. Westchester refused to pay on the ground that the funds were fiduciary funds. Hartford then filed this action claiming title to the pledged funds.*fn1 The trial court, after a hearing, held that the account was a fiduciary account and that Hartford had knowledge of the fiduciary nature of the account and could not recover.
The proof of the nature of the savings account was very scanty and depended upon two exhibits, admitted as business entries of Westchester - one a signature card, and the other a ledger sheet. The signature card bears the printed words "As landlord with security rents of tenants under leases." These words are underlined in ink. The ledger sheet bears the words "Watch," "Rent Security Account," "Countersignature of Mortgage Dept. Required," and "No Withdrawals."*fn2
The record does not show what contractual obligations were owed by Hyde Park to its tenants at the time the account was created; it does not show what tenants, if any, made rent security deposits with Hyde Park, nor which of the deposits made had been repaid by Hyde Park. The rent deposits did not flow in and out of the savings account. A deposit in one lump sum was made in April 1971 and, except for interest credits, no deposits or withdrawals were made between then and July of 1974. If the relationships between Hyde Park and its tenants are recorded, those records are on Hyde Park's books, which are not in evidence here.
Hyde Park could not, to the extent that this account was fiduciary in nature, use it to secure a personal loan, and certainly as between Hartford, which had the notice, and the tenants, the equitable title of the tenants making the rent deposits is superior to that of Hartford. Leake v. Watson, 58 Conn. 332, 20 A. 343 (1889); Restatement (Second) of Trusts § 288.
Conversely, however, if Hyde Park has in one way or another paid to the tenants the amounts of their rental deposits, then, of course, the trust is discharged to the extent of those payments, and Hartford, as assignee of Hyde Park, is entitled to them. In short, it cannot be determined from the record what portion, if any, of the savings account is required to secure rent deposits made by tenants.
It is our opinion that Westchester, in light of the dealings here, should not have a windfall*fn3 of the whole or that portion of the savings account which is not in fact obligated to the Hyde Park tenants.
The judgment is reversed, and the cause remanded for further proceedings not inconsistent herewith.*fn4 On remand, the parties may make such alignment of the parties as may be ...