Bank of Marin v. England , 87 S. Ct. 274 ( 1966 )

Mr. Justice Douglas

delivered the opinion of the Court.

The question presented by this case is whether a bank which honored checks of a depositor drawn before its bankruptcy but presented for payment after it had filed -a voluntary petition in bankruptcy, is liable to the trustee for the amount of the checks paid where the bank had no knowledge or notice of the proceeding. The trustee applied to the referee for a turnover order requiring petitioner bank to pay to the trustee the amount of the checks and in the alternative asking the same relief against the payee. The referee determined that petitioner and the payee were jointly liable to the trustee. The District Court affirmed. Only petitioner appealed and the Court of Appeals affirmed the District Court. 352 F. 2d 186. We granted certiorari because of the importance of the question presented. Cf. Rosenthal v. Guaranty Bank & Trust Co., 139 F. Supp. 730; Mullane v. Central Hanover Bank & Trust Co., 339 U. S. 306.

I.

We were advised on oral argument that the joint judgment rendered against petitioner, the bank, and the payee of the checks was paid in full by the payee and that at present respondent’s sole financial interest in this litigation is protection against imposition of costs under our Rule 57. It is therefore suggested that the case is moot. We do not agree. Whatever might be the result if costs alone were involved (cf. Heitmuller v. Stokes, 256 U. S. 359, 362) this case should not be dismissed. We are advised that the payee has paid the joint judgment and has filed with the bankruptcy court and served on petitioner a demand for contribution from it respecting sums paid in satisfaction of the judgment. Thus petitioner is still subject to a suit because of the original judgment as to its liability. We would, therefore, strain the concepts of mootness if we required petitioner to start all over again when the payee sues it for contribution.

rH hH

Section 70a of the Bankruptcy Act, 52 Stat. 879, 11 IT. S. C. § 110 (a), provides that a trustee in bankruptcy is vested “by operation of law” with the title of the bankrupt as of the date of the filing of the petition to described kinds of property “including rights of action.” § 70a (5). But we do not agree with the Court of Appeals that the bankrupt’s checking accounts are instantly frozen in the absence of knowledge or notice of the bankruptcy on the part of the drawee. The trustee succeeds only to such rights as the bankrupt possessed; and the trustee is subject to all claims and defenses which might have been asserted against the bankrupt but for the fifing of the petition. See Zartman v. First National Bank, 216 U. S. 134, 138. The relationship of bank and depositor is that of debtor and creditor, founded upon contract. The bank has the right and duty under that contract to honor checks of its depositor properly drawn and presented (Allen v. Bank of America, 58 Cal. App. 2d 124, 127, 136 P. 2d 345, 347; Weaver v. Bank of America, 59 Cal. 2d 428, 431, 380 P. 2d 644, 647; and see Anderson National Bank v. Luckett, 321 U. S. 233), absent a revocation that gives the bank notice prior to the time the checks are accepted or paid by the bank. See Hiroshima v. Bank of Italy, 78 Cal. App. 362, 369, 248 P. 947, 950. The Court of Appeals held that the bankruptcy of a drawer operates without more as a revocation of the drawee’s authority. 352 F. 2d, at 191. But that doctrine is a harsh one that runs against the grain of our decisions requiring notice before a person is deprived of property (Mullane v. Central Hanover Bank & Trust Co., supra, at 314-318; Walker v. City of Hutchinson, 352 U. S. 112; Schroeder v. City of New York, 371 U. S. 208), a principle that has been recognized and applied in proceedings under the Bankruptcy Act. New York v. New York, N. H. & H. R. Co., 344 U. S. 293, 296-297. The kind of notice required is one “reasonably calculated, under all the circumstances, to apprise the interested parties of the pendency of the action.” Mullane v. Central Hanover Bank & Trust Co., supra, at 314. We cannot say that the act of filing a voluntary petition in bankruptcy per se is reasonably calculated to put the bank on notice. Absent revocation by the drawer or his trustee or absent knowledge or notice of the bankruptcy by the bank, the contract between the bank and the drawer remains unaffected by the bankruptcy and the right and duty of the bank to pay duly presented checks remain as before. In such circumstances the trustee acquires no rights in the checking account greater than the bankrupt himself.

Section 70d (5), 52 Stat. 882, 11 U. S. C. § 110 (d)(5), provides, with exceptions not relevant here, that “no transfer by or in behalf of the bankrupt after the date of bankruptcy shall be valid against the trustee.” And in case of a voluntary petition (with exceptions not material here) the filing operates as an adjudication. § 18f, 73 Stat. 109, 11 U. S. C. § 41 (f). It is therefore argued with force that payment by the drawee of a drawer bankrupt’s checks after the date of that filing is a “transfer” within the meaning of § 70d (5). Yet we do not read these statutory words with the ease of a computer. There is an overriding consideration that equitable principles govern the exercise of bankruptcy jurisdiction. Section 2a, 52 Stat. 842, 11 U. S. C. § 11 (a); Pepper v. Litton, 308 U. S. 295, 304-305; Securities & Exchange Commission v. U. S. Realty & Imp. Co., 310 U. S. 434, 455. We have said enough to indicate why it would be inequitable to hold liable a drawee who pays checks of the bankrupt duly drawn but presented after bankruptcy, where no actual revocation of its authority has been made and it has no notice or knowledge of the bankruptcy. The force of §§ 70d (5) and 18f can be maintained by imposing liability on the payee of the checks where he has received a voidable preference or other voidable transfer. The payee is a creditor of the bankrupt, and to make him reimburse the trustee is only to deprive him of preferential treatment and to restore him to the category of a general creditor. To permit the trustee under these circumstances to obtain recovery only against the party that benefited from the transaction is to do equity.

Reversed.