Drainage District No. 7 of Poinsett County v. Citizens Bank of Jonesboro

• Decision Date: 08 February 1943
• Docket Number: 4-6966
• Citation: 170 S.W.2d 60,205 Ark. 435
• Parties: DRAINAGE DISTRICT NO. 7 OF POINSETT COUNTY v. CITIZENS BANK OF JONESBORO
• Court: Arkansas Supreme Court

170 S.W.2d 60

205 Ark. 435

DRAINAGE DISTRICT NO. 7 OF POINSETT COUNTY v. CITIZENS BANK OF JONESBORO

4-6966

Supreme Court of Arkansas

February 8, 1943

Appeal from Craighead Chancery Court; J. F. Gautney, Chancellor reversed.

Decree reversed.

House Moses & Holmes, for appellant.

Lamb & Barrett, for appellee.

OPINION

MCFADDIN, J.

Appellant district and the commissioners thereof filed suit in Craighead chancery court against appellee bank seeking judgment for $ 5,692.48. From an adverse decision, there is this appeal.

On December 10, 1941, and for several years prior thereto, and for sometime thereafter, James A. Smith was the clerk of the circuit court and the chancery court of Poinsett county, Arkansas; and as said clerk he was the collector of delinquent taxes of Drainage District No. 7 of Poinsett county. On December 11, 1941, Smith received from Landers' Gin a check dated December 10, 1941, drawn on the Bank of Marked Tree, Arkansas, payable to the order of "Jas. A. Smith, clerk" for the sum of $ 5,692.48, and bearing the notation "for 1939 D. D. No. 7 tax." This check was delivered to Smith in his official capacity as collector of the delinquent drainage tax, and he issued therefor, on the regular form, the certificate of redemption of Drainage District No. 7 of Poinsett county to Landers Bros. for the redemption of certain lands for the delinquent drainage taxes of the said district for the year 1939. James A. Smith did not pay the said $ 5,692.48 or any part thereof to the Drainage District No. 7 or to any bank designated as its depository, and the district never received the said amount or any part thereof.

On December 11, 1941, James A. Smith took the said check in person to the appellee bank and indorsed it "Jas. A. Smith, clerk." The Citizens Bank of Jonesboro was not a bank designated as a depository by the County Depository Board of Poinsett county (as provided by § 4327 of Pope's Digest), neither was the Citizens Bank of Jonesboro a bank designated as a depository for the funds of the appellant drainage district (as provided by § 4328 of Pope's Digest). The teller of the bank received the check as a collection item and issued to James A. Smith, clerk (under date of December 11, 1941) a regular form of deposit slip, placing on the slip opposite the amount, the words, "For Collection" and also placing on the deposit slip the words "Marked Tree, Landers' Gin." The bank opened up a ledger page in the name of "James A. Smith, clerk," and showed the item on the ledger page as a deposit under date of December 11, 1941. The ledger page carried the typewritten notation "For Collection."

Mr. Gerald McGhee, the assistant cashier of the bank, overheard Smith inform the teller that he (Smith) wanted the money in thousand dollar bills, so Mr. McGhee called Smith back into the bank and told him that the bank did not at that time have bills in that denomination. Smith told the said bank cashier to send the check down to Marked Tree and get the money; and Smith asked how many days it would take before he could get the money, and was advised that it would be about three days. In the same conversation, Smith cautioned the bank cashier that he wanted it strictly understood that no one was to know about this check and that no checks were to be drawn against it and that he wanted the check sent down to Marked Tree and that he wanted the money, and he asked the cashier to secure thousand dollar bills in which to pay him in currency the proceeds of the check. The appellee bank sent the check direct to the Marked Tree bank for collection and remittance showing that the item was indorsed by "Jas. A. Smith" omitting the word "clerk." The Bank of Marked Tree remitted to the Citizens Bank of Jonesboro in the form of an exchange and charged the Citizens Bank $ 8.55 as exchange. The Citizens Bank ordered from a Memphis bank five one-thousand-dollar bills; and on December 15, 1941, Smith went to the Citizens Bank of Jonesboro and signed a check for $ 5,683.92 (representing the full amount less the Marked Tree exchange). This check was signed "Jas. A. Smith, clerk," and he received therefor five one-thousand-dollar bills and the balance in other denominations of currency. Mr. McGhee personally handled this final payment to Smith; and Mr. McGhee, called as a witness by the bank, testified in part as follows: "Q. Would your bank have accepted that check or its proceeds as a deposit from Smith? A. No, sir. Q. Why? A. Well, in the first place--you mean personally? Q. Either way. A. Personally we would not accept a deposit from Jimmy Smith on account of his reputation for bad checks and in the second place I did not know that we was the designated depository. Q. You saw the original check at the time it was deposited in the bank? A. Yes, sir. Q. You noticed that it was made out to Jimmy Smith, clerk? A. Yes, sir. Q. You noticed that it was marked '1939 taxes, Drainage District No. 7'? A. I don't recall that. Q. You noticed that it was drawn by Landers Gin? A. Yes, sir. Q. You paid the money out directly to Mr. Smith? A. Yes, sir. Q. Some three or four days after it was deposited? A. Yes, sir. Q. You heard Mr. Smith. He said to you, 'I want no one to know about this.' You heard him say that? A. Yes, sir."

Under the facts in this case, we reach the conclusion that the bank is liable, whether the case be viewed from the rules of trusts, or from the bank's defense that it did not accept the check as a general deposit. On either theory the bank is liable.

1. The Rules of Trusts.

In the case of Fidelity & Deposit Company v. Cowan, 184 Ark. 75, 41 S.W.2d 748, this court held that public moneys in the hands of a clerk were under a trust, and that the clerk, in receiving the money, was a trustee. This case answers the appellee's argument that the money in Smith's hands was not public money. It is clear that Smith as clerk committed a breach of trust.

In Scott on Trusts, § 324, the rule is stated: "Where a trustee deposits trust funds in a bank and commits a breach of trust either in making the deposit or in withdrawing the funds, or in misappropriating the funds after withdrawal, the question arises whether and under what circumstances the bank incurs a liability for participation in the breach of trust. . . . If the bank has notice that the making of the deposit, even though it is made in the name of the trustee as such, is a breach of trust, it is liable for participation in the breach of trust and is chargeable as a constructive trustee of the money so deposited. . . . Where a trustee deposits trust funds in a bank, and the bank permits him to withdraw the funds with notice that he is committing a breach of trust, it is liable for participation in the breach of trust."

Many cases are cited in the text to sustain the statements. We list a few of these: Farmers' Bank of Alamo v. U. S. F. & G. Co., 28 F.2d 676; Martin v. First National Bank, 51 F.2d 840; American Surety Co. v. Waggoner National Bank, 83 F.2d 99; Lowndes v. City National Bank, 82 Conn. 8, 72 A. 150, 22 L. R. A., N. S., 408; Miami County Bank v. State, 61 Ind.App. 360, 112 N.E. 40. See American Nat. Bank v. Fidelity & Deposit Co., 129 Ga. 126, 58 S.E. 867, 12 Ann. Cas. 669; Ann. Cas. 1914B, 677.

Similarly if the bank receives securities from a depositor and returns them to him knowing that he holds them as a fiduciary and intends to misappropriate them, the bank is liable. Manhattan Bank of Memphis v. Walker, 130 U.S. 267, 9 S.Ct. 519, 32 L.Ed. 959.

The general rule was recognized in the case of Helena v. First National Bank, 173 Ark. 197, 292 S.W. 140, where Chief Justice HART, speaking for the court said: "The general principle governing the bank's liability is that the officers of the bank, who know that a fund on deposit is a trust fund, cannot appropriate that fund to the private benefit of the bank, or, where charged with notice of the conversion of the trustee, participate with him in appropriating it to his own use, without being liable to refund the money, if the appropriation is a breach of the trust. Allen v. Puritan Trust Co., 211 Mass. 409, 97 N.E. 916, L. R. A. 1915C, 518, and Blanton v. First National Bank of Forrest City, 136 Ark. 441, 206 S.W. 745. "

In the Helena case, the facts showed that the bank had no notice of the conversion by the trustee, and, therefore, was not liable. But in the case at bar,...