Community Sav. Bank v. Gaughen

Decision Date16 January 1940
Docket Number44790.
Citation289 N.W. 727,228 Iowa 18
PartiesCOMMUNITY SAV. BANK v. GAUGHEN et al.
CourtIowa Supreme Court

Appeal from District Court, Clayton County; H. E. Taylor, Judge.

Suit in equity based on an alleged conspiracy by defendants to use assets and credit of plaintiff for private purposes through the use of sight drafts upon plaintiff's account with defendant bank as collateral security for private obligations of defendant Gaughen, and praying that a constructive trust in favor of plaintiff be impressed upon assets of defendant bank in the sum of $25,000 and for an accounting in regard thereto. The defense was a general denial and special pleas of fraud and estoppel against plaintiff. The court heard the matter for the purpose of determining whether an accounting should be had, found that Gaughen borrowed $25,000 from defendant bank, paid the same by an illegal and unauthorized draft upon plaintiff's account, that defendant holds $25,000 in trust for the plaintiff, denied the plea of estoppel, and undertook to set the matter for hearing on the accounting and for final judgment. Defendant bank appeals.

Reversed.

Miller & Claussen and P. B. Holleran, all of Clinton, for appellants.

Smith & O'Connor, of Dubuque, and D. D. Murphy & Son, of Elkader, for appellee.

MILLER, Justice.

The pleadings herein are quite voluminous and the facts are unusual. Before undertaking to set forth the issues, it would seem advisable to first state certain facts shown by the record without dispute.

Plaintiff is a state bank at Edgewood, Iowa, and the defendant bank is a national bank at Clinton. Defendant Gaughen was, during 1936, cashier for plaintiff. Defendant Anderson was, during 1936, until the latter part of November, president for defendant bank.

While Gaughen was acting as cashier for plaintiff, he was also engaged in an automobile loan business known as the Automobile Finance Company. He made default at the trial and his whereabouts were then unknown. The evidence does not show his version of the transactions involved. From the evidence introduced, it would appear that he was, without question guilty of unlawful conduct while acting as plaintiff's cashier and defaulted for a large sum of money. The difficulties presented by this litigation arise through the fact that Gaughen undertook to combine his relations as cashier for plaintiff with his private finance business. In August, 1936, Gaughen opened an account for the plaintiff with the defendant bank. His manipulation of that account has resulted in this litigation.

On September 14, 1936, Gaughen entered on plaintiff's books a debit of $25,000 to defendant bank and credited plaintiff's bond account with $25,000. On September 19th he wrote Anderson asking for a temporary showing of credit of $25,000 for not to exceed ten days, that the permanent financing was all arranged, if the deal went through, that he did not have the required collateral and was enclosing 70 shares of stock in plaintiff's bank owned by himself, his wife, his father and his mother-in-law, and, in order that the loan would not go sour, he was enclosing an undated draft to cover the principal. He enclosed with the letter said stock, his note for $25,000 and an undated sight draft for $25,000 on plaintiff's account with defendant bank. September 22nd the note was entered on defendant's books. The draft and stock were deposited as collateral for plaintiff's account and a deposit slip showing the deposit of $25,000 in plaintiff's account was sent to Gaughen.

On October 5, 1936, Anderson wrote Gaughen that the note had matured October 3rd, and suggested that it would be well to clean up the deal. On October 16th, Gaughen wrote Anderson to charge up the deal and enclosed his personal signed check in blank to be filled out for the amount of interest, asking that Anderson make it as reasonable as possible. On the same day, defendant bank charged the draft to plaintiff's account, filled in the interest check for $25, cancelled the note on its books and returned the note to Gaughen. However Gaughen made no entry on plaintiff's books of the $25,000 draft or the interest

On November 7, 1936, Gaughen executed another demand note for $25,000 and sent the same to defendant bank with an undated $25,000 draft on plaintiff's account with defendant. These two instruments are recorded on defendant's books on November 13th but do not show on plaintiff's books. On November 27th, the second sight draft was charged by defendant bank to plaintiff's account and the note was returned as paid.

The correspondence by Gaughen and the deposit slips did not appear in plaintiff's files, but were found by bank examiners. Some of the monthly statements of the defendant bank to the plaintiff were not in the files, but were produced later by Gaughen.

Anderson ceased to be president of defendant bank the latter part of November, 1936, but stayed with the bank for a week or ten days thereafter. When Gaughen's defalcations were discovered by plaintiff in January, 1937, Gaughen turned over to plaintiff certain property on his indebtedness and executed an order for the defendant bank to deliver to plaintiff the bank stock which had been given as collateral. This stock was surrendered by defendant bank to the plaintiff together with the auto finance paper also held by defendant as collateral upon plaintiff paying the defendant $18,000 to satisfy Gaughen's notes to defendant amounting to $18,430.

On January 27, 1937, plaintiff's books showed overdrafts amounting to $13,220.29, of which one was by the Auto Finance Company in the sum of $1,762.56, and one by Gaughen personally of $8,418.05. Plaintiff's books also showed a deposit with defendant bank amounting to $38,924.93, whereas defendant's books showed a deposit of $25,000 less than that sum.

In plaintiff's petition, plaintiff alleges that the defendants conspired together to use the assets and credits of plaintiff for personal and private purposes, conspiring and agreeing together that Gaughen, while purporting to act as plaintiff's cashier, would wrongfully appropriate to his own use and to the use of his co-defendants, assets of the plaintiff, would conceal such misappropriations by transferring to defendant bank for the apparent credit of plaintiff funds of plaintiff and notes of Gaughen, and also personal notes of Gaughen, would balance said credits on plaintiff's books by misappropriating equal amounts of plaintiff's assets, thereby enabling the defendants to take assets of the plaintiff in exchange for Gaughen's notes, keeping the accounts sufficiently large to protect obligations of Gaughen so discounted, that to accomplish this purpose, an undated sight draft drawn by Gaughen on said account of plaintiff, payable to the defendant bank, would be at all times held by defendant bank in an amount sufficient to cover Gaughen's obligations in the event of his default; that plaintiff had no knowledge of such conspiracy or the acts committed pursuant to it; that defendant collected upon collateral securities deposited by Gaughen pursuant to such conspiracy, and applied the proceeds upon obligations of Gaughen; that two sight drafts were deposited by Gaughen with the defendant, each for $25,000; the first one, on September 19, 1936, which was undated, was not entered on plaintiff's books and was wrongfully paid on October 16th by the defendant bank pursuant to such conspiracy and the proceeds thereof wrongfully applied to the payment of a personal note of Gaughen. The second draft was also undated, was delivered November 13, 1936, with a note of Gaughen, and was not entered on plaintiff's books. On November 27th, defendant bank charged and depleted plaintiff's account for the sum of $25,000 without plaintiff's knowledge, consent or authority, pursuant to such conspiracy and for the benefit of defendant bank, and, accordingly, defendant bank holds $25,000 as trustee for the plaintiff. The prayer of the petition was that a constructive trust in favor of the plaintiff in the sum of $25,000 be established and impressed upon the funds of the defendant bank and for an order that the defendant restore the same to the account of plaintiff, subject to plaintiff's order and direction; that defendant bank be held to an accounting and that judgment be entered for the amount found due the plaintiff.

The answer of defendant bank is in four divisions of which Division I is a general denial.

Division II of the answer asserts that Gaughen needed capital in his loan and finance business, borrowed money from defendants on his personal notes, secured by notes and conditional sales contracts of the automobile purchasers; the notes were discounted and at Gaughen's direction deposited in the account of plaintiff bank with defendant bank. The line of credit began with a loan of $7,500 on August 24, 1936 increased by new loans until ultimately retired. Interest was paid by checks of Gaughen on his personal account in plaintiff's bank. Gaughen agreed to and did keep collateral amounting to 20 per cent more than the amount of the loans. Gaughen was a defaulter to plaintiff. Such fact became known to plaintiff; plaintiff and defendant banks went over the loans, discount payments and all matters connected therewith. The accounting culminated on February 9, 1937, when there was found to be due defendant bank on Gaughen's notes the sum of $18,430, on which defendant held collateral amounting to $23,000. With Gaughen's consent, the plaintiff paid the defendant $18,000 and defendant delivered to plaintiff Gaughen's notes and the collateral. The plaintiff has collected on such collateral the sum of $22,000. When this settlement was made the plaintiff knew of the claims now asserted, said nothing of them,...

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