Farmers' & Merchants' Bank v. Farwell, 312.

• Decision Date: 13 November 1893
• Docket Number: 312.
• Parties: FARMERS' & MERCHANTS' BANK OF CLAY CENTER v. FARWELL et al.
• Court: U.S. Court of Appeals — Eighth Circuit

58 F. 633

FARMERS' & MERCHANTS' BANK OF CLAY CENTER v. FARWELL et al.

No. 312.

United States Court of Appeals, Eighth Circuit.

November 13, 1893

Statement by SANBORN, Circuit Judge:

H. L Frishman, a merchant in Clay Center, in the state of Kansas sustained a loss by fire March 3, 1888. He held nine policies of insurance against this loss, issued by nine insurance companies. In the summer of 1888 he commenced actions against these companies upon these policies, and they remained pending until 1891. At the time of the fire he owed the appellant, the Farmers' & Merchants' Bank of Clay Center, Kan., $3,000, but before November 23, 1888, he had reduced this indebtedness to $2,200. At the time of the fire he owed the appellees, John V. Farwell & Co., $4,000, and on November 23, 1888, he owed them $11,000. On that day he made a written assignment of his interest in the insurance policies, and in the moneys to be derived from them, to the appellees, to secure his indebtedness to them. This assignment was not filed in any court, but was delivered to one of the attorneys of Farwell & Co. Subsequent to this assignment, Frishman testified, in the trial of the actions against the insurance companies, which were prosecuted in his name, that he was the owner of the policies, and that no one else was interested in them, and this fact was known to the officers of the bank. Frishman informed some of these officers after the assignment that he could pay his debt to the bank when he collected the money on these insurance policies, that this money would be deposited with their bank and that they could then pay the bank out of it. In reliance upon these statements, they permitted Frishman to renew his notes to the bank repeatedly; allowed him on one occasion to take up an indorsed note with his own note, without indorsement, and loaned him some more money; so that he owed the bank $3,500 on March 19, 1891, all of which was past due. The bank officers knew that Frishman was indebted to Farwell & Co., but did not know that he had assigned the policies to them. They had demanded an assignment of the policies to the bank, but he had refused to make it. Farwell & Co. did not know that Frishman was indebted to the bank, nor that he had testified that he alone was interested in the policies, nor that he had made the representations recited to the bank. The attorneys who prosecuted the actions against the insurance companies were employed by Frishman, and were not advised of the assignment to the appellees. One of these attorneys, on March 19, 1891, settled certain of these actions, and collected $3,480.19, which, without the authority or knowledge of Frishman, he deposited to the credit of Frishman in this bank. On the same day the bank charged the indebtedness of Frishman to it against this credit. Frishman and Farwell & Co. immediately notified the bank that the money so deposited was the property of the latter, under the assignment, and Farwell & Co. brought this suit in the court below, and obtained a decree for its recovery. This decree is challenged by this appeal.

F. B Dawes, (Dawes & Durrin, on the brief,) for appellant.

Charles Blood Smith, (W. H. Rossington and Clifford Histed, on the brief,) for appellees.

Before CALDWELL and SANBORN, Circuit Judges.

SANBORN Circuit Judge, after stating the facts as above, .

A bank has a lien on the moneys or funds of a depositor to secure his overdue indebtedness to it, and may at once apply these funds to the payment of such a debt. The foundation of this lien is the mutual relation of the parties. The depositor owes the bank for money he may have borrowed, and his debt is due. The bank owes the depositor for moneys he has deposited, and that debt is due. If the depositor brings an action for the amount of his deposit, the bank can, of course, set off the past-due debt he owes it, and the balance only can be recovered. The lien of the bank upon moneys deposited with it--the right of the bank to charge the overdue debt of its depositor against his deposit--is based upon this right of set-off, and is coextensive with it. It is essential to its existence that each of the parties should be a debtor to the other, and that each of the debts should be due. Not only this, but, as against third parties, the indebtedness of the bank that becomes subject to this right of lien must have arisen from the deposit of moneys or funds that belonged to the depositor himself. He cannot, by depositing moneys of others intrusted to his care, pay his own debt to the bank, or enable the bank to do so. In the absence of fraud or gross negligence on the part of third parties, the bank has no higher right or better title to their moneys intrusted to its depositor than the depositor has himself. It is met here by the rule that equity will follow moneys held in a fiduciary capacity as far as they can be identified, and restore them to the beneficial owner of them. If they are deposited in the bank by a trustee, agent, factor, or bailee, even if they are mingled with his own money, they do not become his property, and the bank stands in the shoes of its depositors. It must pay the money to the true owner. Pennell v. Deffell, 4 De Gex, M. & G. 372, 383; Knatchbull v. Hallett, (In re Hallett's Estate,) 13 Ch. Div. 696, 710, 719; Central Nat. Bank of Baltimore v. Connecticut Mut. Life Ins. Co., 104 U.S. 54, 67, 68; Bank v. King, 57 Pa. St. 202, 209; Van Alen v. Bank, 52 N.Y. 1; Manningford v. Toleman, 1 Colly. 670; Murray v. Pinkett, 12 Clark & F. 764, 785; Jordan v. Bank, 74 N.Y. 467, 472; Falkland v. Bank, 84 N.Y. 145, 149, 150. In Pennell v. Deffell, supra, Lord Justice Knight Bruce said:

'When a trustee pays trust money into a bank, the account being a simple account with himself, not marked or distinguished in any other manner, the debt thus constituted from the bank to him is one which, as long as it remains due, belongs specifically to the trust, as much and as effectually as the money so paid would have done, had it specifically been placed in a particular depository, and so remained.'

In Murray v. Pinkett, supra, the trustee of certain bank shares, which stood in his own name on the books of the bank, borrowed £4,000 of the latter upon his agreement to pledge the shares as security for the loan. In summing up the case the lord chancellor said:

'Then here are two equities; that is to say, here is a trustee of the property, which he held for the benefit of the cestuis que trustent, endeavoring to create an equity upon that property to secure his own debt. Which of these two equities is to prevail? Undoubtedly, the former.'

In Bank v. King, supra, a collector of rents deposited moneys of his principal in a bank in his own name. It was attached by a creditor of a depositor, and the principal immediately gave notice of his ownership. It was held that the attaching creditor stood in the shoes of the depositor, and could recover only what the depositor could.

The case before us is stronger than any we have cited, because these moneys were never deposited with the bank by the trustee, or with his consent. They were deposited by a mistake of his attorney, and without his knowledge or authority. The entire beneficial interest in the insurance policies, and in the moneys collected from them, as against Frishman, vested in Farwell & Co. by his assignment to them in 1888. They were intrusted to him to collect for their benefit. If, after he had collected their proceeds, he had deposited this money with the bank, with the intent to thus apply it to the payment of his own debt to the latter, he would have been guilty of a gross breach of trust, if not of a more serious offense. By mistake, and without his knowledge, these moneys of Farwell & Co. were deposited with this bank. It is the province of a court of equity to enforce trusts and to correct mistakes. The decree below corrected the mistake of the attorney who deposited this money, and enforced the trust under which it was collected. It directed that the money should be paid to the beneficial owners. To reverse it would be to enforce a mistake, and to compel the breach of a trust.

But it is said that Farwell & Co. are estopped to claim this money because they concealed the assignment, and permitted Frishman to appear as the owner of the policies, and he, by his testimony that he alone was interested in them, in the trial of the actions against the insurance companies, and by his representations to the bank, induced it to extend the time of payment of his debt, to surrender the security of an indorser, and to increase its loan. This position is untenable: First. It is the province of a court of equity to correct mistakes. Equity considers that as done which ought to have been done. The money in dispute must be treated as though the attorney of Frishman had never made the mistake of depositing it in...