United States Ex Rel. Willoughby v. Howard

Background

Sam Howard was the trustee or receiver for many bankruptcy estates and deposited funds from 123 estates in the small Phillip State Bank after that bank qualified as a court-approved depository. The Phillip Bank later closed while Howard’s deposits far exceeded the bank’s $50,000 depository bond, and the estates recovered only a small dividend funded by the bank’s bond. Howard had also received personal loans from the Phillip Bank. His successor sued Howard and the company that backed his official bonds, alleging Howard negligently placed and kept estate funds in that bank. A jury awarded large verdicts, the Circuit Court of Appeals reversed, and the Supreme Court agreed to review the question.

Reasoning

The core question was whether a trustee who uses a court-designated depository is automatically freed from the ordinary duty to take care of estate funds. The Court said no. Although the Bankruptcy Act requires trustees to deposit estate money in designated depositories, that statutory scheme does not remove the trustee’s common-law obligation to exercise ordinary care in choosing and monitoring where funds are kept. A designated bank may initially be trusted up to its bond, but if the trustee learns facts suggesting the bank is unsafe, he must either remove the funds or inform the court. The Court noted evidence — including personal loans to Howard — was sufficient to let a jury decide whether he breached that duty.

Real world impact

The decision means trustees and the companies that guarantee their bonds can be held responsible for losses when they negligently keep estate money in a failing approved bank. Trustees must watch the financial health of approved banks and notify the court of problems. The Supreme Court reversed the appeals court and remanded for consideration of other trial errors.