Atlantic Cotton-mills v. Indian Orchard Mills

• Decision Date: 20 June 1888
• Citation: 17 N.E. 496,147 Mass. 268
• Parties: ATLANTIC COTTON-MILLS v. INDIAN ORCHARD MILLS.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

147 Mass. 268

17 N.E. 496

ATLANTIC COTTON-MILLS v. INDIAN ORCHARD MILLS.

Supreme Judicial Court of Massachusetts, Suffolk.

June 20, 1888

COUNSEL

J.G. Abbott, R.M. Morse, Jr., and C.S. Hamlin, for plaintiff.

The defendant has the burden of proof to maintain this claim in set-off. If it could not maintain an independent action to recover, it cannot maintain its claim in set-off. The magnitude of the amounts involved has no legal significance. The sole inquiry is whether, upon legal principles, the defendant can recover this money of plaintiff. Bank v Bank, 10 Gray, 559. The plaintiff contends that this loss must remain where it has fallen, and that the Indian Orchard cannot recover on any part of its claim in set-off. The plaintiff, in denying the defendant's right to maintain its claim in set-off, relies on these propositions (1) That it was a creditor of Gray for the amount of each of his abstractions from its treasury; (2) that the checks or the proceeds of the checks of the Indian Orchard Mills transferred by Gray, without regard to his intention as to their use, have in fact been appropriated to the payment of his debts to the Atlantic Mills; (3) that Gray had the legal title to the checks and funds on which they were drawn, and did in fact transfer that title to the plaintiff; (4) that the Atlantic Mills had no actual knowledge of Gray's fraud; (5) that Gray's knowledge will not be imputed to the plaintiff; (6) that even if the defendant could maintain its claim where the frauds were perpetrated by two persons one of whom was the agent of plaintiff and the other of the defendant, it cannot do so where the frauds are those of a common fiduciary; (7) that the Indian Orchard Mills has been negligent in the management of the business, especially as regards its relation with Gray and with the plaintiff, and that by reason of that negligence it has caused, or has contributed to cause, the losses out of which this controversy has arisen, and that, therefore, it cannot maintain its claim in set-off; (8) that it is estopped to deny the correctness of the transactions as shown on its books. In examining the authorities, we consider first the very few cases upon which the defendant will probably base its claim. But they can readily be distinguished from the case at bar. Bank v. Bank, 10 Gray, 532; Skinner v. Bank, 4 Allen, 290; Bank v. U.S., 16 Ct.Cl 54; Bank v. U.S., 114 U.S. 401, 5 S.Ct. 888. See Bigelow, Fraud, 239, note; Distilled Spirits, 11 Wall. 356. We now proceed to examine the decisions of this court which bear upon any of the propositions involved in this case. Ingraham v. Bank, 13 Mass. 208; Bank v. Plimpton, 17 Pick. 159; School-Dist. v. Bank, 102 Mass. 174; Thacher v. Pray, 113 Mass. 291; Pope v. Lowitz, 14 Bradw. 96; Innerarity v. Bank, 139 Mass. 332, 1 N.E. 282. Here, as in the case at bar, one of two innocent parties must suffer by the fraud of their common agent or fiduciary, and it was determined that the loss must rest where it had fallen. See, also, Insurance Co. v. Abbott, 131 Mass. 397. But there are a series of decisions in harmony with the Massachusetts cases above cited, wherein the courts have dealt more closely with the precise question presented in this case, so far as it arises from the fraud of a common fiduciary, though in none of them, it is submitted, have the facts been so favorable to the plaintiff's contention. Ex parte Apsey, 3 Brown, Ch. 265; Jaques v. Marquand, 6 Cow. 497; Dunlap v. Limes, 49 Iowa, 177; Hollembaek v. More, 44 N.Y.Super.Ct. 107; Thorndike v. Hunt, 3 De Gex & J. 563; Case v. James, 29 Beav. 512; Taylor v. Blakelock, 32 Ch.Div. 560. But the defendant may claim that the Atlantic Mills is not an innocent holder, because Gray's knowledge of the fraud should be imputed to it. To this the plaintiff answers that, upon the well-settled law in this state, Gray's knowledge will not be imputed to the plaintiff. See statement, DEVENS, J., in Innerarity v. Bank, ubi supra; Bank v. Lewis, 22 Pick. 24; Barnes v. Gas-Light Co., 27 N.J.Eq. 33; Bank v. Christopher, 40 N.J.Law, 435; Dillaway v. Butler, 135 Mass. 479. This statement of the law is supported by numerous decisions, beginning with Kennedy v. Green, 3 Mylne & K. 699; Cave v. Cave, 15 Ch.Div. 639. See, also, Sankey v. Alexander, 9 Ir.Eq. 259; Waldy v. Gray, L.R. 20 Eq. 238; In re Southamptons' Estate, 16 Ch.Div. 178; In re Bank, L.R. 5 Ch. 358; In re Railway Co., L.R. 7 Ch. 161; Kettlewell v. Watson, 21 Ch.Div. 685; De Kay v. Water Co., 38 N.J.Eq. 158; Burton v. Burley, 13 F. 811; Wheel Co. v. Hagon Co., 20 F. 699; Rolland v. Hart, L.R. 6 Ch. 678. It may well be questioned whether the fact that Gray was the common treasurer of both mills--a common fiduciary--does not absolutely preclude any question of imputed notice from being raised. Neither can show a better right to be made whole than can the other. The one, therefore, upon whom the loss, because of the fraud of the agent, has fallen, must remain the sufferer. If it were necessary for the decision of the case, it might further be claimed, upon the doctrine of Dana v. Bank, 132 Mass. 156, that the defendant has failed to use such diligence as it was bound to use to entitle it to maintain the action in set-off. Further, the defendant is estopped to deny the correctness of the transactions as shown on its books. Bank v. Root, 2 Metc. 522; Whiting v. Wellington, 10 F. 810; Com. v. Bank, 137 Mass. 431.

W.G. Russell and Geo. Putnam, for defendant.

This action is brought to recover the balance of an account between the two corporations. Plaintiff is entitled to recover or to have credit for the sums paid directly from its cash to plaintiff, entered on plaintiff's check-book, and received and used by plaintiff; and the secret memoranda of Gray, called his private accounts, cannot be used to change the character of such payments. We claim the right to have the record duly completed, and to treat the transactions as lawful. We deny the competency of any secret or private memoranda to control their legal effect. The secret memoranda or "private accounts" of Mr. Gray are not competent evidence against either company, (1) because neither company was a party to or had knowledge of the private accounts; (2) because it is not competent to show that the transactions which were perfectly lawful in themselves were entered into from an unlawful motive, for the purpose of giving them an unlawful character. The acts of the most dishonest trustee will be taken to be honest and lawful, so far as they can be so taken. In re Hallett's Estate, 13 Ch.Div 727, 747; Drake v. Curtis, 1 Cush. 416. Upon the same principle, Gray cannot be heard to say, nor can plaintiff use his statement, that defendant's money, which he had a right to pay over to them on defendant's account, was in fact wrongfully paid over to them on Gray's account. Even if Gray had no right to lend the money of the one mill to the other, so that the transaction could not be in any way viewed as a lawful one, the result would be that the party receiving the money would be bound to refund it to the party from whom it was taken, without regard to any unlawful or unauthorized contracts made by its agent without its knowledge. This proposition is illustrated and enforced by the case of Telegraph Co. v. Bank, L.R. 7 Exch. 119. See, also, Gray v. Lewis, L.R. 8 Ch. 1035. It is an argument of no little weight in support of defendant's position that the result of it will be to leave each corporation to lose the exact sum stolen from it by Gray. The only real transactions are the thefts, and the losses from these should rest where they originally fell. If Gray's private memoranda are taken into account, the most favorable result to the plaintiff would be that they would show that the unposted checks represent money stolen by him from one company and used by him to make good the deficiency in the cash of the other company. Bank v. Bank, 10 Gray, 532; Skinner v. Bank, 4 Allen, 290; U.S. v. Bank, 96 U.S. 30; Bank v. U.S., 16 Ct.Cl. 54; Telegraph Co. v. Bank, L.R. 7 Exch. 119. The present case differs from these only in the fact that the same person was the agent of both parties. Olmsted v. Hotailing, 1 Hill, 317; Bank v. U.S., 114 U.S. 401, 5 S.Ct. 888. The plaintiffs contend that they are not chargeable with notice of the fact that the money taken from the Indian Orchard Mills, and applied by Gray to the payment of his debt to the Atlantic Mills, was stolen, on the ground that the imputation of notice to the principal of facts known to his agent does not arise when the agent is engaged in a fraudulent transaction, so that it must be presumed that he would fail to communicate to his principal the facts of which notice is sought to be imputed. The true reason for the imputation of notice is that the agent represents the principal. Boursot v. Savage, L.R. 2 Eq. 134; Espin v. Pemberton, 3 De Gex & J. 547; Sankey v. Alexander, 9 Ir.R.Eq. 259, 269, note, 318; Cave v. Cave, 15 Ch.Div. 639; Bradley v. Riches, 9 Ch.Div. 189, 195, 196; Bank v. Bank, 10 Gray, 532; Skinner v. Bank, 4 Allen, 290; U.S. v. Bank, 96 U.S. 30; Telegraph Co. v. Bank, L.R. 7 Exch. 119; Bank v. U.S., 16 Ct.Cl. 54; Kennedy v. Green, 3 Mylne & K. 699; Rolland v. Hart, L.R. 6 Ch. 678; Sankey v. Alexander, 9 Ir.R.Eq. 259; DeKay v. Water Co., 38 N.J.Eq. 158; Dillaway v. Butler, 135 Mass. 479; In re Bank, L.R. 5 Ch. 358; Bradley v. Riches, 9 Ch.Div. 189; Thacher v. Pray, 113 Mass. 291; Bank v. Plimpton, 17 Pick. 159; School-Dist. v. Bank, 102 Mass. 174; Thompson v. Cartwright, 33 Beav. 178; Waldy v. Gray, L.R. 20 Eq. 238; Atterbury v. Wallis, 8 De Gex, M. & G. 454; In re Railway Co., L.R. 7 Ch. 161; Innerarity v. Bank, 139 Mass. 332, 1 N.E. 282; In re Southampton's Estate, L.R. 16 Ch.Div. 178; Insurance...