Hartford Acc. & Indem. Co. v. Farmers Nat. Bank

• Decision Date: 21 December 1940
• Citation: 149 S.W.2d 473,24 Tenn.App. 699
• Parties: HARTFORD ACCIDENT & INDEMNITY CO. v. FARMERS NAT. BANK et al.
• Court: Tennessee Court of Appeals

149 S.W.2d 473

24 Tenn.App. 699

HARTFORD ACCIDENT & INDEMNITY CO. v. FARMERS NAT. BANK et al.

Court of Appeals of Tennessee, Middle Section.

December 21, 1940

Certiorari Denied by Supreme Court April 5, 1941.

Appeal from Chancery Court, Davidson County; James B. Newman Chancellor.

Suit by the Hartford Accident & Indemnity Company against the Farmers National Bank and another, to recover the amount of checks wrongfully drawn upon a trust account, wherein defendant New York Life Insurance Company filed a cross-bill. From a decree for plaintiff, defendants appeal.

Affirmed and decree entered in Court of Appeals for plaintiff.

Seay Stockell & Edwards, of Nashville, for appellee New York Life Ins. Co.

FELTS Judge.

Dick Taylor, Clerk and Master of the Chancery Court of Franklin County, Tennessee, died April 14, 1932. He was short in his account of back tax collections. The Chancery Court of Franklin County adjudged that he had wrongfully appropriated to his own use $7,843.14 of this fund; that his executrix and the Hartford Accident & Indemnity Company, surety on his official bonds, should pay the State and County this amount plus 12 1/2 penalty and 15% attorney's fee, totaling $10,000; and that the surety upon paying this should be subrogated to all the rights of the State and County.

From 1924 until his death he had carried his account of back tax collections in the Farmers National Bank at Winchester, this account being labeled "Dick Taylor, Back Tax." A part of his misappropriations was effected by means of a large number of checks drawn for his own use and paid by the bank on this account. The surety, after paying the amount of the decree, filed the bill herein to recover of the bank the amount of such checks upon the ground that it participated in the breach of trust by paying the checks, knowing the account was a trust fund and the checks were for Taylor's own use. Recovery was also sought against the New York Life Insurance Company because one of these checks in the sum of $209.75 was given that company by Taylor in payment of a premium on his life insurance, the check showing it was drawn on the trust account.

Upon the hearing the Chancellor filed his opinion and findings that the account of "Dick Taylor, Back Tax" was "a trust account and not a mixed account"; and he referred the cause to the Master to report what checks were drawn for Taylor's own use and benefit and paid by the bank on this account, and whether the bank had actual or constructive notice that such checks were for Taylor's own use and benefit. The bank's petition for a rehearing upon the finding that the account was a trust account was denied.

The Master listed 198 checks, giving the date, amount, and payee of each, totaling $7,302.41, which he reported were drawn on this account and paid by the bank for Taylor's own personal use; and he reported that the bank had actual or constructive notice that all these checks were for Taylor's own benefit. The surety and the bank both excepted to the report. The surety's exceptions were overruled, and the bank's exceptions were overruled except as to two checks, both payable to Dick Taylor, one for $350 showing on its face it was for "Transfer fees and costs Back Tax," and the other for $200 showing it was for "Costs." These two items were eliminated, and the Master's report was in all other respects confirmed by the Chancellor; and he rendered a decree in favor of the surety against the bank for $6,752.41, with interest from the filing of the bill, $2,143.88, making $8,896.29, and against the insurance company for $209.75, with $66.55 interest, totaling $276.30, the decree providing that payment of the $8,896.29 by the bank would discharge the insurance company and payment of the $276.30 by the company would operate as a credit on the amount for which the bank was liable. The Chancellor dismissed the crossbill of the insurance company by which it sought, if it should be adjudged liable, a recovery over against the bank upon the ground that by accepting and paying the check the bank admitted Taylor's authority to draw the check. Code, § 7386.

The bank appealed. It contends it had no actual knowledge, and upon the facts shown cannot be charged with constructive notice, that Taylor was misappropriating official funds, and it is not liable for any of the checks it paid on the account of "Dick Taylor, Back Tax."

As stated, this account ran from early in 1924 to April 14, 1932. During part of this period Taylor had three accounts in the bank, his individual account, his official account as Clerk and Master, and this back tax account. Sometime (date not appearing) after opening the back tax account he discontinued his personal account, but continued to carry his Clerk and Master account until his death. The evidence in this case relates alone to the back tax account, nothing being shown as to the other two accounts. M. E. Chattin, the auditor, testified that Taylor's total collections of back taxes amounted to $22,538.21, his deposits in the account "Dick Taylor, Back Tax" aggregated $21,988.69, and Taylor's shortage was $11,279.08. Chattin testified that after allowing Taylor credit for all proper disbursements, including officers' costs, fees to back tax attorneys, taxes paid to the State and County, and Taylor's own costs, fees and commissions, Taylor's shortage was $11,279.08. Some 294 checks drawn by Taylor and paid by the bank on the back tax account were produced in evidence. Some 98 of these checks showed on their face they were given for official purposes, such as payment of taxes to the County Trustee and to the State Comptroller, refunds on taxes, advertising, stamps, fees to back tax attorneys, and officers' costs. These 98 checks given for official purposes aggregated $12,656.85. Three of these checks appear to have been payments by Taylor to himself of his own costs, fees and commissions. One of these checks was payable to "Dick Taylor, C. & M." in the sum of $1,820.34 and shows on its face it was for "Transfer Back Tax." Two of them were payable to Dick Taylor, one in the sum of $350 showing it was for "Transfer fees and costs Back Tax," and one for $200 showing it was for "Costs." These three checks to Taylor himself aggregated $2,370.84. Some 196 checks drawn on the back tax account which do not show they were drawn for official purposes were put in evidence. The total amount of these checks was $6,752.51. About 40 of these 196 checks show on their face that they were given for personal purposes of Dick Taylor, such as "corn," "lamps," "shoes," "pasturing cattle," "hay," "acct.," "Dis. on 900 N.," premium on Dick Taylor's life insurance, etc. Many of these 196 checks, not showing the purpose for which they were drawn, were payable to merchants and tradesmen in Winchester who were known to the bank's officers. For instance, one of these checks was for $500 payable to the Wenger Auto Company for an automobile. Dick Taylor owed the bank two notes, one for $900 and one for $2,000. Nine of these 196 checks were payable to the bank itself, the first being January 2, 1929, and the last September 28, 1931. Three of these nine checks to the bank were for $30 each and were for interest on the $2,000 note, and three were for $18 each and were for interest on the $900 note. Taylor was well known to the bank's officers, and was himself a stockholder and director of the bank. It is undisputed that these checks given to the bank were known to be for Taylor's own personal obligations and that a great many of the other checks were also known to be for Taylor's own personal use because they so showed on their face. We think also the bank's officers knew that the great number of checks given to merchants and tradesmen by Dick Taylor were for his own individual use. Thus it appears that of the $21,988.69 deposited by Taylor in the back tax account he withdrew, by checks on this account, $9,123.25, $2,370.84 of which appeared to be for his own costs, fees and commissions, and $6,752.41, amount for which the bank was held, appeared to be for his own personal use.

The bank's officers knew that the monies in the account "Dick Taylor, Back Tax" were...