Rodgers v. Bankers National Bank
| Decision Date | 17 January 1930 |
| Docket Number | 27,457,27,458 |
| Parties | WILLIAM C. RODGERS v. BANKERS NATIONAL BANK; MARSHALL BARTLETT v. SAME DEFENDANT |
| Court | Minnesota Supreme Court |
Two actions in the district court for Hennepin county consolidated for trial, by the trustees in bankruptcy of the Radio & Sporting Goods Supply Company and the Butterfly Confectionery Company, respectively, to recover of defendant the proceeds of five checks embezzled by one Henderson, the former trustee of both corporations, plaintiffs' contention being that defendant was charged with liability in assisting the fiduciary to collect the proceeds of the checks. There were findings for plaintiffs, and defendant appealed from an order in each case, Dickinson, J. denying its motion for a new trial. Reversed.
When bank is liable for loss of trust funds deposited in name of trustee.
1. A bank is liable for the loss of trust funds deposited with it in the name of the trustee when, having actual knowledge of the character thereof, it acts in bad faith by conniving with the fiduciary. It is also liable if it receives for itself such funds from the trustee under circumstances charging it with constructive knowledge of their trust character. It is also liable if it receives and retains such funds without notice or knowledge of their true character unless it has so changed its position that it has acquired equities equal or superior to the rights of the owner.
Four checks deposited constituted trust funds.
2. Five checks were deposited in a bank by Henderson to his personal account. They were trust funds. He checked the money out in embezzlement. Held, upon the record (1) that two of the checks showed upon their face that he was trustee of the funds, but the cestui que trust was not disclosed; (2) that as to two of the checks the chain of endorsements on the back thereof showed that he had the money as trustee of bankrupt estates; and (3) that one check, which carried only a memorandum "Bal. a/c to Trustee," was not characterized upon its face as trust funds.
Bank was not guilty of bad faith.
3. The bank had constructive notice that the proceeds of four of the checks were trust funds and that the proceeds of two of these involved judicial or official trusts. The bank never received any of the trust funds for its own benefit nor was it in any way guilty of bad faith.
Bank must honor checks unless it knows trustee intends to divert proceeds.
4. A bank is bound to honor the customer's checks, unless it has at the time actual or constructive knowledge that the customer is then and there and by means thereof intending wrongfully to divert the money.
Bankrupt statute applies only to designated depository.
5. The purposes of §§ 61 and 47a(3) of the bankrupt act and general order No. XXIX in bankruptcy are to give, as they do, adequate protection to the bankrupt estate. They are not intended to define the liabilities of banks generally having business relations with trustees in bankruptcy. Their commands are directed to the designated depository and the trustee. The law applicable generally to a bank receiving deposits of fiduciary funds, as here involved, controls even though the funds belong to a judicial or official trust and their deposit is in violation of a law defining the duties of the proper custodians.
Banks and Banking, 7 C.J. § 333 p. 644 n. 24; p. 645 n. 26 27.
Bill & Maslon, for appellant.
Cobb, Hoke, Benson, Krause & Faegre, Claude Krause and Glenn S. Stiles, for respondents.
Fowler, Carlson, Furber & Johnson and Ralph H. Comaford, amici curiae, filed a brief in behalf of the Minnesota Bankers Association.
The bank has appealed from an order in each of these two cases denying its motion for a new trial.
Raymond L. Henderson was the trustee in bankruptcy of the estate of the Butterfly Confectionery Company, a corporation, from June 17, 1924, until October 21, 1925, when he resigned and Marshall Bartlett is his successor. Raymond L. Henderson also was the trustee in bankruptcy of the estate of the Radio & Sporting Goods Supply Company, a corporation, from June 29, 1925, until October 21, 1925, when he resigned and was succeeded by William C. Rodgers.
From August, 1919, to September, 1925, inclusive, Henderson carried a personal checking account with defendant bank. He occasionally borrowed moderately from the bank. While so acting as such trustee in these two estates Henderson came into possession of five checks which he deposited in his checking account with the defendant and thereafter checked out the proceeds for unauthorized purposes under circumstances amounting to embezzlement. These checks as delivered to the bank by Henderson were in the form, excluding bank endorsements, and indorsed as follows:
Exhibit E.
Exhibit H.
Radio and Sporting Goods Supply Co.
A. O. Gieri (Receiver)
Exhibit J.
D. E. Baker Special Agent
By D. E. Baker
Exhibit L.
(Indorsed on back)
D. E. Baker Special Agent
Exhibit N.
Henderson Stiles & Gates
Elsie Wenvermiller, Auditor
W. B. Henderson
The cashier's check, exhibit E, belonged to the Butterfly estate, and the other four checks belonged to the Radio estate. These two actions are prosecuted by the present trustees of the respective bankrupt estates to charge the bank with liability for the proceeds of these checks.
1. There is much authority for and against liability of a bank for the proceeds of deposits of a fiduciary of his trust funds to his personal account and the dissipation thereof. The authorities which impose liability do so upon the theory that the bank, being charged with constructive notice from the form of the checks deposited plus the deposit thereof to the personal account, assists by affording to the fiduciary the machinery by which he misappropriates the proceeds and without securing adequate assurance of the propriety of the conduct of the fiduciary.
It seems illogical and inexpedient to say that there is a distinction between such a deposit when made by a trustee and one made by an agent. One of the recent cases supporting plaintiffs' theory, in which many cases are cited, is McIntosh v. Detroit Sav. Bank, 247 Mich. 10, 225 N.W. 628. See also Oklahoma State Bank v. Galion I.W. & Mfg. Co. (C.C.A.) 4 F.2d 337. The numerical weight of authority favors nonliability. 40 Harv. L. Rev. 1077, 1080, and cases there cited; 34 Harv. L. Rev. 469; Empire Tr. Co. v. Cahan, 274 U.S. 473, 47 S.Ct. 661, 71 L.Ed. 1158, 57 A.L.R. 921. To this proposition appellant cites:
6 Cal L. Rev. 171, 173; 10 Minn. L. Rev. 611; 32 Yale L.J. 377; 35 Yale L.J. 854; Gray v. Johnston (1868) L.R. 3 H.L. 1; Shields v. Bank of Ireland (1901) 1 Ir. R. 222; Coleman v. Bucks and Oxon Union Bank (1897) 2 Ch. 243; Corporation Agencies, Ltd. v. Home Bank of Canada (1927) A.C. 318; Bischoff v. Yorkville Bank, 218 N.Y. 106, 112 N.E. 759, L.R.A. 1916F, 1059; Taylor v. Astor Nat. Bank, 105 Misc. 386, 174 N.Y.S. 279; Wickenheiser v. Colonial Bank. 168 A.D. 329, 153 N.Y.S. 1035, affirmed, Wickenheiser v. Herring, 224 N.Y. 651, 121 N.E. 898; Corn Exchange Bank v. Manhattan Sav. Inst. 105 Misc. 615, 173 N.Y.S. 799; Mills v. Nassau Bank, 52 Misc. 243, 102 N.Y.S. 1119; Whiting v. Hudson Tr. Co. 234 N.Y. 394, 138 N.E. 33, 25 A.L.R. 1470; Fidelity & D. Co. v. Queens County Tr. Co. 226 N.Y. 225, 123 N.E. 370; Batchelder v. Central Nat. Bank, 188 Mass. 25, 73 N.E. 1024; City of Newburyport v. Spear, 204 Mass. 146, 90 N.E. 522, 134 A.S.R. 652; City of Newburyport v. First Nat. Bank, 216 Mass. 304, 103 N.E. 782; Allen v. Puritan Tr. Co. 211 Mass. 409, 97 N.E. 916, L.R.A. 1915C, 518; Allen v. Fourth Nat. Bank, 224 Mass. 239, 112 N.E. 650; Kendall v. Fidelity Tr. Co. 230 Mass. 238, 119 N.E. 861; Eastern Mut. Ins. Co. v. Atlantic Nat. Bank, 260 Mass. 485, 157 N.E. 520; U.S.F. & G. Co. v. First Nat. Bank, 18 Cal.App. 437, 123 P. 352; Goodwin v. American Nat. Bank, 48...
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