No. 92-551
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
ANDREA "ANDY" BENNETT, State Auditor
and Commissioner of Insurance of
the STATE OF MONTANA,
Plaintiff and Respondent on Claim Appeal,
GLACIER GENERAL ASSURANCE COMPANY,
Respondent and Respondent,
MISSOULA HOTEL DEVELOPMENT ASSOCIATES,
Claimant and Appellant.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Jeffrey M. Sherlock, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Ronald B. MacDonald; Datsopoulos, MacDonald &
Lind, Missoula, Montana
For Respondent:
J. Dennis Moreen and Patrick M. Driscoll:
Chronister, Driscoll & Moreen, Helena, Montana
Submitted on Briefs:
Justice Karla M Gray delivered the Opinion of the Court.
.
Missoula Hotel Development Associates appeals from an order of
the First Judicial District Court, Lewis and Clark County,
designating its claim against the liquidated Glacier General
Assurance Company for return of a $250,000 retained deposit as a
Class 4 priority claim. We affirm.
The sole issue on appeal is whether Missoula Hotel Development
Associates established a preferential right to $250,000 of the
remaining assets of Glacier General Assurance Company.
In 1983, Missoula Hotel Development Associates (MHDA), a
limited partnership, was created to develop a Sheraton Hotel in
Missoula, Montana. To partially finance the project, MHDA
negotiated a $9,350,000 loan with First National Bank of
Minneapolis (First Bank). As a condition of the ten-year loan,
First Bank required MHDA to secure the obligation with a financial
guarantee bond issued by an insurance company. First Bank
suggested Glacier General Assurance Company (Glacier) as a
potential provider of the bond.
On December 29, 1983, MHDA and Glacier executed a financial
guarantee bond that provided security for the $9,350,000 loan with
First Bank. John Hayden, the president of Glacier, insisted that
MHDA pay the premium of the bond, approximately $778,950, in
advance and also provide a "retained depositl1 of $250,000. The
deposit, a standard practice in the industry, was intended to
provide Glacier with a sufficient cushion to meet three months of
payments on the underlying loan should MHDA default. Glacier would
receive all accumulated interest on the retained deposit duringthe
length of the loan and, if no default occurred, the $250,000 would
be returned to MHDA when it satisfied its obligation to First Bank.
On December 30, 1983, Glacier deposited MHDA's check of
$1,028,950, representing the retained deposit and the prepaid bond
premium, in its general operating account with First National
Montana Bank of Missoula. For accounting purposes, the $250,000
was shown as an asset under "cash on hand" and as a liability under
"amounts withheld or retained by the company for the account of
others." Douglas Hartz, assistant deputy liquidator with the State
Auditor's office, testified that, from his review of Glacier's
books, virtually every type of transaction took place through the
general operating account. Glacier deposited all income from
premiums and deposits, paid expenses and purchased investments
through this general checking account.
On March 12, 1985, upon petition by the State Auditor and
Commissioner of Insurance (Liquidator), the District Court ordered
Glacier into rehabilitation pursuant to 5 33-2-1332, MCA, of the
Insurers Supervision, Rehabilitation, and Liquidation Act. On
November 12, 1985, the District Court declared Glacier insolvent
and ordered it into liquidation. MHDA petitioned the District
Court to order the Liquidator to return its funds on deposit with
Glacier. The court concluded that it lacked jurisdiction and
dismissed the petition. We affirmed the dismissal in Bennett v.
Glacier General Assurance Co. (1987), 229 Mont. 538, 748 P.2d 464.
MHDA timely filed claims with the Liquidator for the unearned
portion of the $778,950 prepaid premium and the entire $250,000
retained deposit, asserting preference over claims by other Glacier
creditors. The Liquidator accepted both claims in their entirety
but recommended Class 4 priority treatment. MHDA objected to the
Liquidator's priority classification and the disputed claims
process provided in § 33-2-1368, MCA, was initiated.
Pursuant to § 33-2-1368(2), MCA, the District Court appointed
a referee to hear MHDA's claims. MHDA alleged that the retained
deposit was held in trust for MHDA and, thus, was not available for
distribution by the Liquidator. As to the prepaid premium, MHDA
alleged that it had been fraudulently obtained by Glacier.
The referee tried MHDA's claims and subsequently issued his
opinion, findings of fact and recommendation that both the retained
deposit and the unearned premium be given Class 4 priority
treatment under § 33-2-1371, MCA. With regard to the retained
deposit, he concluded that MHDA and Glacier had established a trust
and that MHDA had traced the trust funds to Glacier's general
operating account. However, he also determined that the general
operating account dropped to a negative balance between the time
the trust funds were deposited and Glacier's insolvency.
Therefore, MHDA's trust property was extinguished, the trust ceased
to exist, and MHDA's right to preferential treatment from the
account was eliminated.
The District Court adopted the referee's recommendations.
MHDA appeals, contesting only the Class 4 priority designation of
the retained deposit.
Did MHDA establish a preferential right to $250,000 of the
remaining assets of Glacier?
The parties do not dispute the referee's findings of fact.
Instead, MHDA contends that the referee misapplied the law in
concluding that the trust property had been extinguished. Our
review of legal conclusions is plenary. Steer, Inc. v. Deplt of
Revenue (1990), 245 Mont. 470, 475, 803 P.2d 601, 603.
In the present case, the parties agree that MHDA traced the
trust property to the general operating account and that Glacier
commingled the trust property with its own money in that account.
It is well-established that when trust funds are commingled with
private funds, the entire mixed fund will be impressed with the
trust to the extent of the trust funds, except to the extent that
the trustee may be able to distinguish and separate his own from
the trust funds. Yellowstone County v First Trust
. & Sav. Bank
(1912), 46 Mont. 439, 442-3, 128 P. 596, 599; Hawaiian Pineapple
CO. V. Brown (1923), 69 Mont. 140, 148, 220 P. 1114, 1116. The
trust property need not remain in its original form if the trust
property is held by the trustee and the beneficiary can trace the
trust property to its substituted form. State v. Banking Corp. of
Montana (1926), 77 Mont. 134, 150, 251 P. 151, 153: Yellowstone
County, 128 P.2d at 599; Restatement (Second) of Trusts 5 202 (1)
(1959). Thus, it is clear that MHDA may impress a trust upon
Glacier's general operating account.
However, MHDA is entitled to a $250,000 preferential claim to
the trust property in the general operating account only if the
trust property continues to exist. Restatement, 5 74. Unless MHDA
can trace the $250,000 to another asset, MHDA's preference to the
funds in the general operating account cannot exceed the amount of
the lowest balance on hand between the time of deposit of the trust
funds and the time of liquidation. See Hawaiian Pinea~~le, P
220 .
at 1116 and Bankina CorD., 251 P. at 153-4. The low balance is
often referred to as the "lowest intermediate balance."
The theory behind this principle is that, if the amount of
cash in the account reached a figure lower than the amount of the
trust funds and later reached a higher figure, it is conclusive
that some of the trust funds were dissipated, and other funds
deposited. Because the deposits made after the account reached the
lowest intermediate balance were made by persons other than the
beneficiary, the beneficiary has no preference to the remaining
220 P. at 1116. Comment
funds in the account. Hawaiian Pineaw~le,
j to § 202 of the Restatement further explains that:
[wlhere a trustee deposits in a single account in a bank
trust funds and his individual funds, and makes
withdrawals from the deposit and dissipates the money so
withdrawn, and subsequently makes additional deposits of
his individual funds in the account, the beneficiary
cannot ordinarily enforce an equitable lien upon the
deposit for a sum greater than the lowest intermediate
balance of the deposit. ... If after the deposit of the
trust funds in the account the deposit was wholly
exhausted by withdrawals before subsequent deposits of
the trustee's individual funds were made, the
beneficiary's lien upon the deposit is extinguished, and
if he is unable to trace the money withdrawn, he is
relegated to a mere personal claim against the trustee,
and is entitled to no priority over other creditors of
the trustee.
Here, testimony and exhibits of record establish that Glacier
deposited the $250,000 in the general operating account on
December 30, 1983. Sometime between October 19 and 22, 1984,
Glacier's general operating account reachedthe negative balance of
-$328,777.72. Glacier was ordered into liquidation on November 12,
1985. Thus, when the account reached the lowest intermediate
balance in 1984, MHDA's trust funds in the account were dissipated
and its right to a preferential claim against Glacier was
extinguished as well. Any subsequent deposits into the general
operating account were made with funds which MHDA has no right to
claim.
MHDA agrees that it has the burden of tracing the trust
property, but argues that it need only establish that the combined
values of Glacier's stocks, bonds and cash on hand did not fall
below the amount of the trust funds. MHDA asserts that Glacier
commingled the retained deposit with stocks and bonds and,
therefore, that it is entitled to impress a trust on the commingled
aggregate of those three liquid assets. Thus, according to MHDA,
the principles of Hawaiian Pineauule are satisfied because the
lowest intermediate aqqreqate values of the three assets did not
fall below the amount of the trust property. We disagree.
Although MHDA characterizes the stocks, bonds, and cash on
hand as a commingled mass of general funds, the stocks and bonds
were separate assets held by Glacier, not merely separate accounts
deposited at the same bank as the general operating account.
Glacier's financial statements show that it owned a variety of
classes and amounts of stocks and bonds. The evidence also
established that retained deposits were treated as a separate
liability and were debited only to the %ash on hand1* asset
account. MHDAfs assertion that the three assets were commingled
accounts that were continuously "in the bank, so to speak* is
incorrect.
Further, MHDA claims that Glacier's counsel testified that
Glacier commingled the cash, stock and bond accounts to limit
litigation, characterizing the stocks and bonds as "other general
funds." In fact, Glacier's counsel did not mention stocks or bonds
in the portion of his testimony relied on by MHDA; he testified
only that the trust monies were commingled with Glacier's other
general funds. We cannot agree that Glacier's counsel's reference
to "other general fundsw included Glacier's separate stock and bond
assets. We conclude that MHDA did not establish that Glacier
commingled the funds from the general operating account with the
stocks and bonds. Without a commingling of the three assets, MHDA
is not entitled to aggregate the values of the three assets and,
therefore, cannot overcome the result dictated by the principles of
Hawaiian Pineawwle.
As explained above, if MHDA could trace the $250,000 from the
general operating account to the purchase of another asset, it
would be entitled to impress a trust upon the substitute property.
See Yellowstone County, 128 P. at 599; Bankina Corw., 251 P. at
153; Restatement, § 202 (1). In this case, we conclude that MHDA
did not trace the $250,000 to the subsequent purchase of any other
asset.
Glacier's counsel testified that funds from the general
operating account were used to purchase stocks and bonds, but
testimony also established those funds were used for nearly all of
Glacier's business transactions. Glacier's counsel did not
identify any transaction in which MHDA's $250,000 retained deposit
was used to purchase either stocks or bonds. Doug Hartz testified
that, from his review of the books, he could not identify any
$250,000 investment from the operating account during the relevant
time period and that Glacier had no documentation identifying which
funds were used to purchase stocks and bonds. Although Glacier
previously had purchased such investments with funds in the general
operating account, this fact alone does not establish that MHDA's
$250,000 retained deposit was used to purchase stocks and bonds;
nor does it begin to identify the particular stocks and bonds upon
which MHDA would be entitled to impress a trust.
We faced a similar situation in Bankina Corn. There, a
banking customer presented a $3,210 claim against a failed bank.
The bank had $1,891.67 on hand when it closed its doors and
$19,270.45 deposited in other banks. Bankinq CorD., 251 P. at 153-
4. Without evidence that the customer's $3,210 was commingled with
the funds deposited in other banks, we concluded that the customer
had only traced the trust funds to the $1,891.67 on hand and,
therefore, was entitled to a preference only to that extent.
Bankinq CorD., 251 P. at 153-4.
Similarly, MHDA traced its retained deposit only to Glacier's
general operating account; it did not establish that its $250,000
was commingled with or used to purchase any other assets.
Therefore, MHDA did not establish a preferential right: to $250,000
of Glacier's remaining assets. We hold that the District Court did
not err in adopting the referee's recommendation and in concluding
that the retained deposit is a Class 4 priority claim.
~f f inned.
We concur:
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Ronald B. MacDonald
, /i
Datsopoulos, MacDonald & L i d
201 W. Main, Central Square Bldg.
Missoula, MT 59802
Robert A. Kudrna
Montana Guaranty Assn.
P.O. Box 2168
Great Falls, MT 59407
Dexter L. Delaney
P. Mars Scott
Mulroney, Delaney & Scott
P.O. Box 8228
Missoula. MT 59807-8228
Stacey Weldele-Wade
Worden, Thane & Haines
P.O. Box 4747
Missoula. MT 59807
Robert G. Mullendore
Attorney at Law
310 W. Spruce
Missoula. MT 59802
Steven Durkovich
Box 26781
Albuquerque, NM 87125
Carlos Solis
Kindel & Anderson
555 S. Flower St., 26th Floor
Los Angeles, CA 90071
Sharon Morrison, Esq.
Michael Meloy, Esq.
P.O. Box 1241
Helena, MT 59624
Betty J. Nguy
Frank B. Hall & Co., Inc.
549 Pleasantville Rd.
Briarcliff Manor, NY 10610
Alan Bersin
Munger, Tollest, Rickershauser
355 S. Grand, Ste. 3500
Los Angeles, CA 90017
Martin J. Foley
911 Wilshire Blvd., Ste. 2100
Los Angeles, CA 90017
Robert Stephan, Jr.
371 East Monte Vista Way
Phoenix. AZ 85004
Wade J. Dahood, Esq.
Ray Dayton, Esq.
P.O. Box 727
Anaconda, MT 59711
Louis Forsell, Esq.
P.O. Box 184
Clancy, MT 59634-0184
David Littlefield
426 S. Fifth East
Salt Lake City, UT 84102
Donald C. Shiie
Nisen & Elliott
200 W. Adam St., Ste. 2500
Chicago, IL 60606
Hugh Alexander
Columbine Place #I30
216-16th St.
Denver, CO 80202
Robinson, Boese & Davidson
Box 1046
Tulsa. OK 74101
Estelle Depper
Wells Fargo Bank, NA
375 Sansome St, 10th floor, MAC 0102-103
San Francisco, CA 94163
Federal Deposit Ins. Corp.
P.O. Box 7549
Newport Beach, CA 92660
Charles Wehner, Esq.
Wehner & Perlman
11100 Santa Monica Blvd., Ste. 800
Los Angeles, CA 90025
William G. Walker
P.O. Box 8465
Albuquergue, NM 87198
Donald L. Ostrem
Attorney at Law
18 Sixth St. No.
Great Falls, MT 59401
George Link
Brobeck, Phleger & Harrison
550 S. Hope St.
Los Angeles, CA 90071-2604
Bill O'Leary, Administrator
Legal Services Div, Dept. of Labor
P.O. Box 1728
Helena, MT 59624-1728
Susan Witte, Chief Legal Counsel
State Auditor's Office
P.O. Box 4009
Helena, MT 59604
Doug Ham, Asst. Deputy Liquidator
Glacier General Assurance
P.O. Box 4026
Missoula, MT 59806-4026
John C. Fauvre
Office of General Counsel
Bank of America Tower
555 S. Flower St., Ste. 900
Los Angeles, CA 90071-2398
Arthur J. Shartsis
Shartsis, Friese & Gisburg
One Maritime Plaza, 18th Floor
San Francisco, CA 94111
John A. Donovan
Skadden, Aps, Slate, Meagher & Flom
34th Floor, 300 So. Grand Ave.
Los Angeles, CA 90071
Steve D. Holz
Musick, Peeler & Garrett
One Wilshire Blvd.
Los Angeles, CA 90017
Dan G. Cederberg
Attorney at Law
201 W. Main, Ste. 310
Missoula, MT 59802
Susan P. Roy
Garlington, Lohn & Robinson
B.O. Box '79W
Missoula, MT 59807
Charles E. Erdmann
Erdmann Law Office
P.O. Box 5418
Helena, MT 59604
Robert R. Throssell
Keller, Reynold, Drake, Stemhagen & Job.ron
38 So. Last Chance Gulch
Helena, MT 59601
J. Dennis Moreen and Patrick M. Driscoll ...
fhmni&.r, Driscoll & Mnreen
. ii
34 W. Sixth Ave., Ste. 2E !/
Helena, MT 59601
Robert Levinson
Grayson, Givner, Booke, Silver & Wolfe
16633 Ventura Blvd., Ste. 600
Encino, CA 91436
R.J. "Jim" Sewell, Jr.
Smith Law F i
P.O. Box 604
Helena, MT 59624
William H. Coldiron
Gough, Shanahan, Johnson & Waterman
P.O. Box 1715
Helena, MT 59624.1715
David B. Cotner
Boone, Karlberg & Haddon
P.O. Box 9199
Missoula, MT 59807
Mike Young
Jardine, Stephenson, Blewctt &c W m e r
P.O. Box 2269
G e t Falls, MT 59403
ra
Michael T. P e
is
5963 La Place Court; Ste. 309
Carlsbad, CA 92008
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA