United States v. Butterworth Judson Corp.

Background

The United States sued after a contractor, a company building a plant to make picric acid, received a $1,500,000 advance from the Government. The contractor agreed to keep the advance in bank accounts labeled "special accounts" and use those funds only to build the plant. The contractor deposited the money with several banks, and the banks knew the deposits came from the Government advance. The War ended before the plant was finished, the Government canceled the contract, and receivers were appointed for the contractor. At that time the special accounts held about $519,632, but the contractor owed each bank more than the corresponding balance, and the banks set off those deposits against the contractor's debts.

Reasoning

The Court addressed whether the advance and the special accounts gave the Government a court-recognized right to those specific account balances, called an equitable lien (a right to a particular fund). The Court found the statute authorizing wartime advances let the Secretary demand "adequate security," and the written agreements made the special accounts additional security. The contract terms showed the parties intended the accounts to be held as security and to be returned to the Government if deliveries did not cover the advance. Because the banks accepted the funds with knowledge of those agreements, their usual right to set off a depositor's debts was limited by the Government's lien. The Court therefore reversed the lower court decisions.

Real world impact

This ruling prevents banks from using money held in specially designated accounts as automatic payment for a customer's debts when those funds are pledged as security to the Government and the bank had notice.