United States Fidelity & Guaranty Co. v. Hood

• Decision Date: 12 March 1940
• Docket Number: 9013.
• Citation: 7 S.E.2d 872,122 W.Va. 157
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. HOOD et al.
• Court: West Virginia Supreme Court

7 S.E.2d 872

122 W.Va. 157

UNITED STATES FIDELITY & GUARANTY CO. v. HOOD et al.

No. 9013.

Supreme Court of Appeals of West Virginia.

March 12, 1940

Dissenting Opinion April 9, 1940.

Syllabus by the Court.

Steptoe & Johnson and W. E. Miller, all of Charleston, for appellant.

Robinson & Stump, of Clarksburg, and G. C. Belknap, of Sutton, for appellees.

MAXWELL Judge.

Herein the surety on a guardian's bond, having paid to the ward the amount of a judgment obtained by him against the guardian and surety, seeks, under the doctrine of subrogation, to recover from the receiver of the bank where the guardianship funds were on deposit the sum of $3,000.00, with interest representative of an amount of such funds received by the bank from the guardian as a credit on his personal indebtedness to the bank, and so applied.

The plaintiff appeals from a decree of the circuit court dismissing its bill.

On March 19, 1929, United States Fidelity and Guaranty Company with approval of the county court of Braxton County, became surety on a bond of $6,000.00 for E. L. Juergens, guardian for John Willis Mollohan, an infant.

Juergens guardian, received for his ward from the estate of a prior guardian who had died the sum of $4,210.84 which he promptly deposited in the Bank of Sutton, March 25, 1929, in a separate account which on that date he opened as guardian. The following day, by check, he transferred $4,000.00 from the guardianship account to his personal account which disclosed an overdraft immediately prior to this transfer. The same day he gave the cashier of the bank his check, drawn on his personal account, for $3,000.00 which amount was at once credited on the indebtedness of approximately $7,000.00 owing by Juergens to the bank.

From a statement of the guardianship account made by a commissioner of accounts in February, 1935, there appeared a balance of $3,737.44 owing by the guardian to the ward, who then had attained his majority. Later that year, Mollohan obtained a judgment against Juergens and his surety for $3,584.24. The surety paid the judgment.

The bank having been in receivership since 1931 the surety instituted this suit against the receiver and the bank early in 1937.

There is no challenge of the plaintiff's right to subrogation, if the bank would have been liable to the beneficiary of the trust funds for the amount thereof paid to the bank by the guardian on his personal debt.

For the plaintiff the case was excessively pleaded in that the bill contains an unwarranted and wholly unsupported averment, on information and belief, that at the

time Juergens became guardian, or shortly prior thereto, there was an understanding between him and the bank that his indebtedness to the bank, or a large part thereof, would be paid out of fiduciary funds coming into his hands as such guardian. This was denied in the answer, and though the plaintiff offered no testimony in support of the allegation, the bank officials testified positively and unequivocally that there had been no such understanding or pre-arrangement. The record indicates no justification for this drastic charge in the bill. The case for the plaintiff is grounded on a different basis.

With the accusation of pre-arrangement eliminated from the equation, the question remains whether, under the circumstances disclosed by the record, the bank was entitled to accept the payment of $3,000.00 in the manner employed by Juergens.

A bank is not ordinarily liable to the beneficiaries of trust funds, on deposit in the bank, diverted by the trustee or other fiduciary thereof for his personal benefit. United States Fidelity & Guaranty Co. v. Home Bank for Savings, 77 W.Va. 665, 88 S.E. 109. But a bank does incur a liability where known trust funds thus on deposit are used by the fiduciary in payment, pro tanto, of his individual indebtedness to the bank. This proposition has been dealt with in many cases wherein, of course, the facts have been variant, but, throughout, there extends the underlying principle that the bank has been unjustifiably benefited at the expense of the beneficiaries of the trust fund, and the bank having parted with nothing in the transaction should account for the diverted funds paid to it. As between the bank and the cestui que trust, the latter has the stronger equity. "Where a bank has notice that funds deposited are trust funds, it cannot acquire an interest in or a benefit therefrom. If the bank accepts such funds in payment of a debt due it by the depositor it becomes liable therefor; for it has at once not only abundant proof of the breach of trust, but participates therein for its own benefit." 5 Michie on Banks and Banking, p. 135. Of the numerous cases in point, consult: Conqueror Trust Co. v. Fidelity & Deposit Co., 8 Cir., 63 F.2d 833; Hale v. Windsor Savings Bank, 90 Vt. 487, 98 A. 993; Allen v. Puritan Trust Co., 211 Mass. 409, 97 N.E. 916, L.R.A. 1915C, 518; Fidelity & Deposit Co. of Maryland v. Rankin, 33 Okl. 7, 124 P. 71; Fidelity & Deposit Co. v. Hamilton Nat. Bank, Tenn.App., 126 S.W.2d 359.

The cashier acted for the bank in making the transfer of $4,000.00 from the account of Juergens, guardian, to his personal account, and in then receiving the Juergens check of $3,000.00, and crediting that amount on his indebtedness. It should be resolved that the cashier in good faith considered that the bank had a right to accept the benefit of this credit, and that he had no intention of participating in a transaction which was unfair to the beneficiary of the trust fund and unjustly enriched the bank. But the fact of his good intentions does not relieve the bank from its liability in the premises. Brovan v. Kyle, 166 Wis. 347, 165 N.W. 382. The information which the cashier possessed was, of course, chargeable to the bank. He knew that the Juergens personal account would not sustain a withdrawal of $3,000.00, or of any other amount in fact, except for the augmentation from the trust funds. To the suggestion that it did not appear to the cashier but that there was actually due from the guardianship fund to Juergens personally the sum of $4,000.00 which he transferred from the former account to the latter, the answer is that the situation was such as, at the very least, to have put the bank on inquiry concerning the guardian's right to use $3,000.00 of this m oney as a payment on his personal indebtedness to the bank. Union Stock Yards Nat. Bank v. Gillespie, 137 U.S. 411, 11 S.Ct. 118, 34 L.Ed. 724. Respecting the closely analogous situation where a bank permits an official of a corporation to use its funds in payment of his personal debt to the bank, the Circuit Court of Appeals for the Second Circuit stated: "If it [bank] fail to use due care it may be required to pay again. Consequently while in case of a corporate check signed by an officer with express or implied authority, the mere fact that it is drawn to his own order and therefore may be improperly used will not require the bank to question it. But if the bank have knowledge that the officer is using the check for his personal benefit, e. g. to pay his debt to the bank or to deposit it to his personal credit, then the bank is put upon inquiry and if it fail to make it, pays at its peril." Havana Central R. Co. v. Central Trust Co. New York, 2 Cir., 204 F. 546, 551, L.R.A. 1915B, 715.

In the case of United States Fidelity & Guaranty Company v. Home Bank for Savings, supra [77 W.Va. 665, 88 S.E. 111], the court stated: "To render a bank of deposit liable for the default or misappropriation by a fiduciary of a trust fund deposited it must have actually participated therein, or with knowledge reaped some benefit therefrom, as by itself appropriating the money...