1. Under the Act of October 6, 1917, 5, c. 79, 40 Stat. 383, the
Secretary of War was authorized to advance money to a contractor
for carrying out a contract for producing and furnishing supplies
of picric acid to the War Department, and could provide the
"adequate security" called for by the act by requiring the balances
of the advanced funds be kept in special deposits subject to a lien
in favor of the government, in addition to requiring a collateral
note of the contractor and surety bond. P.
267 U. S.
392.
2. Under a contract for the erection of a plant and manufacture
and delivery to the government of picric acid, the government
advanced the contractor moneys, to be deposited at interest in
special bank accounts separate from the contractor's other funds,
such money to be drawn on only for specified purposes, and the
balance thereof to be accounted for to the government either by
deliveries of the acid at a specified price or by return of the
amount, less authorized deductions.
Held (assuming that the title passed, establishing the
relation of debtor and creditor) that the purpose and effect of the
special accounts were to provide security for the United States,
and that an equitable lien upon them existed in its favor, although
not expressly reserved in the agreement. P.
267 U. S.
393.
3. An equitable lien reserved by the United States as security
for the proper use or return of funds advanced to a contractor,
which under the agreement were deposited in special bank accounts
for the purpose of providing such security,
held superior
to the right of the banks (they having notice of the agreement) to
set off such deposits against debts owed them by the contractor. P.
267 U. S.
394.
297 F. 971 reversed.
Appeal from a decree of the circuit court of appeals affirming a
decree of the district court which dismissed, as to defendant
banks, a suit brought by the United
Page 267 U. S. 388
States against the Butterworth-Judson Corporation and its
receivers, the banks, and several surety companies. The bill sought
an accounting under a contract between the first-named defendant
and the United States, and to apply the balances of special
deposits made by the contractor with the banks to the amount found
due under the contract -- also a decree for any deficiency against
the surety companies on bonds furnished by the contractor. The
contractor, receivers, and surety companies answered and also filed
counter claims against the banks, seeking to have the special
account deposits paid over to the United States. The banks' motions
to dismiss the bill and counterclaims were sustained by the courts
below.
MR. JUSTICE BUTLER delivered the opinion of the Court.
The United States, plaintiff below, and certain surety
companies, defendants below, appeal from a decree of the circuit
court of appeals, 297 F. 971, affirming that of the district court
dismissing the complaint as to certain banks, defendants below, and
dismissing counterclaims set up against the banks in the answers of
the surety companies. The decree also dismissed counterclaims
against the banks, set up in the answer of the
Page 267 U. S. 389
Butterworth-Judson Corporation and its receivers, defendants
below. They have not appealed.
The controversy concerns the right of the banks, as against
appellants, to set off against debts owing to them by the
Butterworth-Judson Corporation the deposit balances remaining with
them in special accounts.
The Butterworth-Judson Corporation, a contractor, and the United
States made an agreement dated May 9, 1918. The contractor agreed
to select a site and, for a profit of $1 and no more, to design,
construct, and equip thereon a plant for the production of picric
acid, and to manufacture for the United States 72,000,000 pounds
for 53 cents per pound. The entire cost of the plant was to be paid
by the United States. The contractor was to make all necessary
expenditures for the construction work, and the United States from
time to time was to reimburse it therefor. The United States agreed
to recommend to the War Credits Board an advance payment to the
contractor of $1,500,000 upon such terms as the board might
prescribe, and also agreed that, if the board should require
interest on the advance payment, it would reimburse the contractor
as a part of the cost and expense of the latter under the contract.
The United States reserved the right to cancel the agreement at any
time that its need for the plant or output ceased. It agreed in
such event to reimburse the contractor for its expenditures, to
assume all its outstanding obligations incurred under the contract,
and to pay for all the picric acid wholly or partly manufactured,
and it agreed, in case of cancellation before 18,000,000 pounds
were delivered, to pay three cents per pound for the undelivered
portion up to that amount.
The same parties made a supplementary agreement, dated May 22,
1918. The United States agreed to advance $1,500,000 to the
contractor. The contractor agreed to account for the advance. with
interest, by applying that
Page 267 U. S. 390
amount to the payment of vouchers covering deliveries of picric
acid. The contractor reserved the right at any time to repay in
cash. If the United States did not recoup, through the deliveries
of picric acid, the total amount of the advance with interest, the
contractor was required to
"return to the government, on demand, any balance of the said
advance and interest after deducting the total of any recoupments
made as hereinabove provided, together with all liquidated accounts
that may be due and owing under the principal agreement from the
government to the contractor."
The contractor agreed to give the United States, as collateral
security for the recoupment or return of the above-mentioned
advance and any interest due, its demand note for $1,500,000,
bearing 6 percent interest, and to furnish a bond in the sum of
$750,000, with surety for the performance of the agreement. The
United States reserved the right, in case of failure of the
contractor to comply with the agreement, to sell the note and apply
the proceeds to the repayment of the advance, accounting to the
contractor for the surplus, if any; but it agreed not to negotiate
or demand payment of the note so long as the contractor was not in
default, and to return the note and bond upon complete performance.
And the agreement contained the following:
"The contractor shall deposit the money advanced hereunder in
special accounts in banks, separate from its other funds, and shall
draw on said accounts only in payment of expenditures made and
obligations incurred in designing, constructing and equipping the
plant specified in the principal agreement, and for other equipment
and for material, labor and overhead expense, required in the
direct performance of the principal agreement, unless otherwise
authorized in writing by the War Credits Board."
It was stipulated that the contracting officer might require the
contractor to deposit in the special accounts the funds paid by the
government, reimbursing
Page 267 U. S. 391
the contractor for expenditures made from such advance payment.
The contractor was to collect from the banks with which such
accounts were kept such interest as is usually allowed for similar
accounts, and credit or pay that interest to the government.
The bonds provided for in the principal and supplementary
agreements were furnished. The United States advanced $1,500,000 to
the contractor, and the latter gave its note as agreed. The
contractor deposited the money with defendant banks in special
accounts, and entered upon the performance of the agreement. It
made withdrawals from these accounts for the specified purposes,
and from time to time deposited therein the sums paid to it by the
United States in reimbursement of its expenditures. The banks at
all times knew that the moneys deposited by the contractor in the
special accounts consisted exclusively of the advance payment and
replenishments, and that all deposits and balances in these
accounts were held pursuant to the principal and supplementary
agreements. Shortly after the Armistice, the plant being less than
half completed, the United States terminated the principal
agreement. No picric acid had been manufactured. The United States
reimbursed the contractor and assumed all the latter's obligations
under the principal agreement. It was shown in a creditors' suit in
the district court that the contractor was unable to pay its debts,
and, April 22, 1922, the court appointed receivers, who are
defendants in this case. Neither the contractor nor its receivers
accounted to the United States for any part of the advance of
$1,500,000 or interest, except $348,550, leaving unaccounted for,
as the United States claims, $1,151,450. The total of the balances
in the special accounts on April 22, 1922, was $519,631.99. On that
day, the contractor was indebted to each of the banks in an amount
in excess of the balance in the special account with it, and each
bank set off the amount of such deposit against the debt owed by
the contractor.
Page 267 U. S. 392
The suit was for an accounting, and to have the balances in the
special accounts applied on the amount found unaccounted for and
due the United States on the settlement of the account between it
and the contractor. In affirming the district court, the circuit
court of appeals held that the advance payment was for supplies
purchased and thereafter to be delivered, and that the Secretary of
War had no authority to retain title to the moneys advanced and
make the contractor agent of the United States for its
disbursement; that the supplementary agreement created no relation
of trust or agency between the parties, but only that of debtor and
creditor. It held that the doctrine of trust or equitable lien or
equitable assignment did not apply, and that the banks had the
right of set-off. The appellants maintain that the United States
had an equitable lien on the balances in the special accounts, and
that the banks, having notice of the lien, could not set off the
deposits against the debts owed them by the contractor.
The advance payment was made under the authority of an Act of
Congress of October 6, 1917, § 5, c. 79, 40 Stat. 383, which
provides:
"That the Secretary of War and the Secretary of the Navy are
authorized, during the period of the existing emergency, from
appropriations available therefor to advance payments to
contractors for supplies for their respective departments in
amounts not exceeding thirty percentum of the contract price of
such supplies:
Provided, that such advances shall be made
upon such terms as the Secretary of War and the Secretary of the
Navy, respectively, shall prescribe and they shall require adequate
security for the protection of the government for the payments so
made."
The act was intended to relax during the period of the war the
strict rule against advances of public money.
See R.S. §
3648;
The Floyd
Acceptances, 7 Wall. 666. The act plainly
authorized advance payments, such as that covered by
Page 267 U. S. 393
the supplementary agreement. It left the terms to the discretion
of the Secretary of War, subject to the duty to require adequate
security, but the act did not specify or limit the amount or kinds
of security to be taken. A lien upon and right over the balances in
the special accounts required to be kept is clearly within the
meaning of the word "security," as used in the act. The power of
the Secretary to exact such a lien or right in addition to the
collateral note and surety bond cannot be doubted.
The agreements made the balances in the special accounts
security for the obligations of the contractor and so created an
equitable lien in favor of the United States.
The established rule as to the creation of equitable liens is
stated in
Walker v. Brown, 165 U.
S. 654,
165 U. S.
664:
"The doctrine may be stated in its most general form that every
express executory agreement in writing, whereby the contracting
party sufficiently indicates an intention to make some particular
property, real or personal, or fund, therein described or
identified, a security for a debt or other obligation, or whereby
the party promises to convey or assign or transfer the property as
security, creates an equitable lien upon the property so indicated,
which is enforceable against the property in the hands not only of
the original contractor, but of his heirs, administrators,
executors, voluntary assignees and purchasers or incumbrancers with
notice."
See also Hauselt v. Harrison, 105 U.
S. 401,
105 U. S. 405;
Ingersoll v. Coram, 211 U. S. 335,
211 U. S. 368;
Pomeroy's Equity Jurisprudence (4th ed.) §§ 1233, 1234, 1235.
It may be assumed that the United States did not retain title to
the advance payment, and that, when it was made, it became the
property of the contractor, and also that the contract contemplated
that the relation of debtor and creditor might arise. The
contractor's obligation, subject to its right at any time to repay
the government in cash,
Page 267 U. S. 394
was to account for the amount of the advance with interest, by
deliveries of the picric acid at the agreed price, or to return
that amount to the United States, after making the authorized
deductions, if any. The contractor's note and the surety bond were
given to secure performance of the agreement. And the requirement
that the contractor deposit the money in special accounts in banks,
separate from its other funds, and collect and account for interest
on deposit balances, and draw on such accounts only for the
purposes specified and return the balance of the advances, was
additional security. It was to make more certain the performance of
the agreement. The purpose and effect of the special accounts was
to identify and keep separate the advance payment and
replenishments, to limit the use of the fund to the purposes
specified, and so to make it available as security to the United
States. Failure of the agreement expressly to grant a lien on or
declare these balances to be additional security is not
significant.
See Barnes v. Alexander, 232 U.
S. 117,
232 U. S. 121.
The Armistice came, and the United States terminated the agreement
before there was any production at the plant. The advance and
replenishments were not wholly expended, or accounted for by
deliveries of picric acid. The contractor was bound to "return,"
and the United States was entitled to demand and have, "any balance
of the said advance" remaining after the deductions authorized. The
agreements show that the parties contemplated that the need for
picric acid might cease before the advance payment was covered by
deliveries, and bound the contractor, in that event, to return the
balances in the special accounts to the United States. This case is
plainly within the rule.
Ordinarily, the relation existing between banks and their
depositors is that of debtor and creditor, out of which the right
of set-off arises. As a general rule, in the
Page 267 U. S. 395
absence of an agreement to the contrary, a deposit not made
specifically applicable to some other purpose may be applied by the
bank in payment of the indebtedness of the depositor.
See
Studley v. Boylston Bank, 229 U. S. 523,
229 U. S. 528;
New York County Bank v. Massey, 192 U.
S. 138,
192 U. S. 145;
National Mahaiwe Bank v. Peck, 127 Mass. 298, 300. But a
bank having notice that a deposit is held by one for the use of or
as security for another has only such right of set-off as is not
inconsistent with the rights of the latter. Here, the banks had
knowledge of the agreements under which these balances constituted
security for the advance made by the United States. By acceptance
of the moneys furnished in accordance with the agreement, their
right of set-off was made subject to the rights of the United
States and the obligations of the contractor.
See National Bank
v. Insurance Co., 104 U. S. 54,
104 U. S. 71;
Union Stockyards Bank v. Gillespie, 137 U.
S. 411,
137 U. S. 421;
Boyle v. Northwestern National Bank, 125 Wis. 498, 507.
The appropriation of these balances by the banks cannot be
sustained.
Decree reversed.