Fidelity & Deposit Co. v. Hamilton Nat. Bank, 3.

• Citation: 126 S.W.2d 359
• Decision Date: 03 November 1938
• Docket Number: No. 3.,3.
• Parties: FIDELITY & DEPOSIT CO. OF MARYLAND v. HAMILTON NAT. BANK et al.
• Court: Supreme Court of Tennessee

126 S.W.2d 359

FIDELITY & DEPOSIT CO. OF MARYLAND v. HAMILTON NAT. BANK et al.

No. 3.

Court of Appeals of Tennessee, Eastern Section.

November 3, 1938.

Certiorari Denied by Supreme Court March 4, 1939.

Appeal from Chancery Court, Hamilton County; J. L. Foust, Chancellor.

Suit by the Fidelity & Deposit Company of Maryland against the Hamilton National Bank and another to recover money alleged to have been misappropriated by a treasurer of plaintiff's assignor and

paid by him to the named defendant as collecting agent for the unnamed defendant. From an adverse decree, defendants appeal.

Affirmed.

Cantrell, Meacham & Moon, of Chattanooga, for appellants.

Miller, Miller & Martin, of Chattanooga, for appellee.

McAMIS, Judge.

Hamilton National Bank and R. T. Wright have appealed from a decree rendered against them and in favor of the Fidelity and Deposit Company of Maryland, as assignee of the Volunteer State Life Insurance Company, representing the sum of $3,218.20 of the funds of Volunteer State Life Insurance Company misappropriated by its treasurer, Oscar Mather, and paid by said Mather to the Hamilton National Bank as collecting agent for Wright.

On January 27, 1930, the Hamilton National Bank held, as collecting agent for R. T. Wright, Mather's personal note amounting, with interest, to $3,218.20, secured by a series of collateral notes, forty-three in number, for $100 each, payable monthly, and secured by a second deed of trust upon real estate located in Hamilton County, Tennessee. Mather was Treasurer of the Volunteer State Life Insurance Company in which capacity he bought and sold securities for it.

In December 1929, Mather sold through the Hamilton Securities Corporation bonds belonging to the Volunteer State Life Insurance Company for $13,501.32, for which the Securities Corporation issued its check payable to Oscar Mather, Trustee. This check was endorsed by Mather first as Oscar Mather, Trustee, and then as O. Mather, Trustee, and deposited in the Hamilton National Bank to the account of O. Mather, Trustee. On January 27, 1930, this account had been reduced by checks regularly drawn to a balance of $558.05. Again, on January 27, 1930, the Hamilton Securities Corporation sold for Mather additional bonds for $4,082.66 and the check therefor was, in like manner, endorsed and deposited in the Hamilton National Bank to the credit of O. Mather, Trustee.

On the same date, Mather presented his check, drawn upon said account, to the bank for the balance due upon his personal notes to Wright. This check was drawn and signed by O. Mather, Trustee. The bank, without making any inquiry as to Mather's right to draw upon said account for the purpose of paying his personal obligations and without investigating the nature, purpose and true ownership of the funds deposited in the name Mather as Trustee, but without any actual knowledge that the funds so deposited were not, in fact, personal funds belonging to Mather, accepted the check and delivered the note, with collateral, to Mather.

Shortly thereafter it was discovered that Mather had defaulted in his accounts with the Volunteer State Life Insurance Company to the extent of more than $70,000 and that the securities sold to the Hamilton Securities Corporation to which we have referred, the proceeds from the sale of which were deposited in the O. Mather, Trustee, account belonged to the Volunteer State Life Insurance Company, their abstraction representing a part of Mather's defalcations.

The Chancellor was of opinion that the use of the word "Trustee" was sufficient to put the Bank upon inquiry as to the trust character and true ownership of the funds carried in Mather's name as trustee; that Wright, having acted through the Bank as his agent, is chargeable with the Bank's neglect to make such inquiry, and that Wright should be held primarily liable for the Bank's participation in Mather's unauthorized misappropriation of funds. Accordingly, primary liability was adjudged against Wright, with secondary liability against the Bank. From this decree, as already indicated, both have appealed to this court.

The first and principal assignment is that the word "Trustee" after the name of the depositor was mere surplusage, and did not fix either actual or constructive notice or knowledge upon the Bank that the funds received in payment of Mather's note were not his own. The third assignment, that the word "Trustee" did not place upon defendants the duty of making inquiry into the status of the fund or require them to scrutinize the application thereof, is related to the question raised by the first assignment of error and will be considered and disposed of along with it.

Unless relaxed by the cases of New York Life Insurance Co. v. Bank of Commerce & Trust Co., 172 Tenn. 226 111 S.W.2d 371, 115 A.L.R. 643, and Moneypenny v. Third National Bank, 172 Tenn. 237, 111 S.W.2d 375, the rule in this State, at least, is that one who takes a paper from a trustee importing upon its face its fiduciary character is bound to inquire of the transferor the right to dispose of it. Alexander v. Alderson et al., 66 Tenn. 403, 7 Baxt. 403; Covington v. Anderson, 84 Tenn. 310, 16 Lea 310; Caulkins v. Gas-Light Co., 85 Tenn. 683, 684, 4 S.W. 287, 4 Am.St.Rep. 786; Ford v. H. C. Brown & Co., 114 Tenn. 467, 88 S.W. 1036, 1 L.R.A.,N.S., 188; United States Fidelity & Guaranty Co. v. People's Bank, 127 Tenn. 720, 157 S.W. 414; Central Bank & Trust Co. v. Cohn, 150 Tenn. 375, 264 S.W. 641; Freeman v. Citizens' Nat. Bank, 167 Tenn. 399, 70 S.W.2d 25; Barry v. Hensley, 170 Tenn. 598, 98 S.W. 2d 102. Of the cases enumerated, Alexander v. Alderson et al., Ford v. H. C. Brown & Co. and Central Bank & Trust Co. v. Cohn specifically deal with the notice conveyed by the use of the word "trustee". The cases of United States Fidelity & Guaranty Co. v. People's Bank, Freeman v. Citizens' Nat. Bank and Barry v. Hensley, supra, involve the liability of depository banks for conversion by the trustee of trust deposits.

However, independent of this rule, it is held that if the trustee in fact has power to negotiate the paper, a purchaser in good faith will be protected, although the trustee used the money for his private purposes. Bank v. Looney, 99 Tenn. 278, 292, 42 S.W. 149, 38 L.R.A. 837, 63 Am. St.Rep. 830.

All of these cases, without exception, adhere strictly to the rule of constructive notice with the result that it has developed into a settled rule of law in this State. The courts elsewhere are in practical agreement. See annotations, 61 A.L.R. 1389.

The case of New York Life Insurance Co. v. Bank of Commerce & Trust Co., supra, relied upon by defendants as marking a departure from the rule as expounded and applied in the cases cited, did not involve the character of trusts under consideration in any of them. Noting that Tennessee is committed to the rule of liability, it was pointed out that, in all our cases following the rule, the liability of the depositing bank was for guardian, administrator or other trust funds. The case which the court had under consideration did not involve funds of that character but involved "privately formed business agency relationships." A purpose to distinguish such a relationship from trusts of the classes previously under consideration is manifest from the following language [172 Tenn. 226, 111 S.W.2d 374]:

"Without relaxation of the rule heretofore enforced in this state for the protection of beneficiaries, frequently minors and others not in position to protect themselves, charging depository banks with notice carrying liability for misuse of trust funds whenever a note or check is accepted by the bank which shows on its face that the funds of guardians, administrators, or other trustees are involved, the depository bank will not be held to know of the terms, or limitations, if any, placed by voluntary agreements between parties on chosen `agents' or `attorneys'; a classification in which the instant case falls. The rule of notice and consequent liability of bank depositories will not be extended to these personally selected and privately formed business agency relationships, beyond requiring indorsement by the true party named, unless the bank has otherwise actual notice of a fraudulent purpose, or a want of authority on the part of the payee, or...