Farmers' & Traders' Bank v. Kimball Milling Co.

• Decision Date: 18 December 1890
• Citation: 47 N.W. 402,1 S.D. 388
• Parties: Farmers' & Traders' Bank v. Kimball Milling Co.
• Court: South Dakota Supreme Court

47 N.W. 402

1 S.D. 388

Farmers' & Traders' Bank v. Kimball Milling Co.

Supreme Court of South Dakota

December 18, 1890

Syllabus by the Court.

1. Where the president and cashier of a bank fraudulently divert the funds and assets of the bank, and invest them in mill machinery, fixtures, real estate, and appurtenances of a corporation of which they were at the time the president and secretary, such corporation holds such property impressed with a trust in favor of the bank to the extent of the bank funds and assets that can be traced into such corporate property, unless such corporation can show that it acquired such funds and assets in good faith, and for a valuable consideration.

2. The fact that such bank officers were the general officers of the milling company from its organization, and during the time the bank funds, property, and assets were being diverted and invested in the milling company's property by them, as well as officers of the bank, constitutes presumptive knowledge on the part of the milling company of the fraudulent acts of such bank officers.

3. It is not necessary, in cases of constructive or involuntary trust, as defined by section 3920, Comp. Laws, that the bank should show that its funds had paid for any definite or aliquot part of the milling company's property; but the bank is entitled to have impressed and charged upon the milling company's property a trust to the extent of its funds and assets, with the profits thereof, which it can trace into said milling company's property, with notice.

4. Where the officers of the bank have received stock of a corporation in payment for the funds and property fraudulently obtained from the bank, and invested in the corporate property, the bank is not compelled to follow the stock in the hands of the officers of the bank so receiving it, but may, at its option, follow the property so purchased or created with such fraudulently misappropriated bank funds and assets, with the profits thereof, or their proper proportion, where it is alleged, as in the present case, that substantially all the property of the corporation has been acquired or created with the misappropriated bank funds and assets, and the profits thereof, under circumstances showing the corporation received such property with notice of all the facts, and where it is alleged that all the stock is held by such bank officers, or by parties having full notice of all the facts.

5. It is not indispensable, under section 3920 of our statute, that a trust or any fiduciary relation exist between the wrong-doer and beneficiary in order to raise a trust in the property, except for the violation of a trust. If the funds or assets have been obtained by fraud or any other wrongful act, a trust arises in favor of the beneficiary in the property, or to the property into which such funds have been converted or transmuted.

6. A corporation receiving the misappropriated funds and assets of a bank through its president and cashier, who were also the officers of the corporation, with notice, can properly be required to account for such funds and assets, and the profits thereof.

7. An allegation in the complaint that about $10,000 of the bank funds and assets were diverted, and converted by its president and cashier into the property of a milling corporation, of which such bank officers were also the principal officers, with the further allegation that the property of such milling corporation was substantially created with and that it commenced its business on the funds and assets of the bank, is sufficient, on general demurrer to impress a trust on such corporate property in favor of the bank, when such funds and assets had been acquired by the milling corporation, with notice.

Appeal from circuit court, Brule county.

W. A Porter, for appellant. G. L. McKay and W. S. Farmer, for respondent.

CORSON P. J.

This is an action brought by plaintiff to enforce a trust against the defendant for an accounting, and for an injunction. A general demurrer was interposed to the complaint on the ground that it does not state facts sufficient to constitute a cause of action. The demurrer was overruled, and defendant appeals from the order. The complaint alleges, in substance, that plaintiff and defendant are corporations; that on the incorporation and organization of the plaintiff, in August 1884, one Gates was made its president, and one Foote its cashier, and that said Gates and Foote were intrusted with the custody and control of plaintiff's business; that upon the incorporation and organization of the defendant, in November, 1886, said Gates was elected president, and the said Foote secretary; that, immediately upon his entry upon his employment as cashier of the plaintiff's bank, said Foote began to and did misappropriate and convert the money assets, and funds of the bank to his own use and benefit, and that with the money, assets, and funds of the said bank, so misappropriated and converted, he purchased certain mill machinery and fixtures, which, upon the organization of the said milling company, he subscribed and contributed to and merged into the property and assets of the said milling company as representing and in payment of a part of its capital stock; that the citizens of the city of Kimball raised and paid over to said Foote about $1,250 in money, notes, and assets, as a bonus to assist in the construction of a mill, and that said Foote obtained and received said bonus by reason of his possession of said mill machinery and fixtures so purchased with the money and assets so diverted and fraudulently obtained by him from plaintiff's said bank; that, upon the incorporation and organization of the said milling company, said Gates and Foote, still being officers of said bank and of said milling company, began and continued to divert and misappropriate the funds, assets, and credit of said bank to the use and benefit of said milling company in the construction of its mill, the purchase of mill machinery, fixtures, real estate, and appurtenances, and that the amount so wrongfully obtained from said bank and diverted to the use and benefit of said milling company was about $10,000; that while such officers of said bank and said milling company they used and traded upon the credit and responsibility of said bank to aid the said milling company in carrying on its milling business, and in obtaining its mill machinery, fixtures, real estate, and appurtenances, etc., and that they neglected the business of said bank, and gave their time and attention to the business of said milling company; that said milling company began its business without other capital than that so fraudulently obtained from said bank by said Gates and Foote, except about $2,500 contributed by one Hayden, and that the value of the milling company's property is about $15,000, all of which was purchased and created by the money, funds, and assets of said bank, so fraudulently misappropriated and diverted by said Gates and Foote; that said Gates and Foote hold the stock of said milling company, except that held by parties to whom it has been transferred, with full knowledge of all the facts, and that said milling company has been a profitable and successful institution, and has done a large and lucrative business since its organization.

Before proceeding to examine the complaint and the objections made to it by counsel for appellant, it may be proper to consider the different classes of trusts, and the provisions of our statutes relating to them, as well as the general principles of equity governing cases of this character. Trusts, under section 3911, Comp. Laws, are divided into voluntary and involuntary, and by section 3913 an involuntary trust is declared to be created by operation of law. It is further defined in sections 3919 and 3920, which are as follows: "3919. One who wrongfully detains a thing is an involuntary trustee thereof for the benefit of the owner. 3920. One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act is, unless he has some other and better right thereto, an involuntary trustee of the thing gained for the benefit of the person who would otherwise have had it." And by section 3933 it is provided: "Every one to whom property is transferred in violation of a trust holds the same as an involuntary trustee under such trust, unless he purchased it in good faith, and for a valuable consideration." These sections are evidently intended to include that class of trusts known, in equity jurisprudence, as "constructive trusts," as a resulting trust is defined in section 2796, and the effect of a transfer of the trust property under that section is provided for in section 2797. These sections are as follows: "2796 When a transfer of real property is made to one person, and the consideration therefor is paid by or for another, a trust is presumed to result in favor of the person by or for whom such payment is made. 2797. No implied or resulting trust can prejudice the rights of a purchaser or incumbrancer of real property for value, and without notice of the trust."

In a resulting trust intention is an essential element, although that intention is never expressed by words of direct creation. The law, however, presumes the intent from the facts and circumstances accompanying the transaction, and the payment of the consideration for the whole or a definite or aliquot part of the property sought to be impressed with the trust. There is usually no element of fraud in a resulting or implied trust, but the conveyance is made or taken with the knowledge and consent, express or implied, of the person who has paid the consideration. When one, therefore, takes a conveyance secretly,...