Washbon v. The Linscott State Bank

• Court: Kansas Supreme Court
• Writing for the Court: PORTER, J.:
• Citation: Washbon v. The Linscott State Bank, 125 P. 17, 87 Kan. 668 (Kan. 1912)
• Decision Date: 06 July 1912
• Docket Number: 17,765
• Parties: FRED WASHBON, as Grand Master, etc., et al., Appellees, v. THE LINSCOTT STATE BANK, Appellant

125 P. 17

87 Kan. 668

FRED WASHBON, as Grand Master, etc., et al., Appellees, v. THE LINSCOTT STATE BANK, Appellant

No. 17,765

Supreme Court of Kansas

July 6, 1912

Decided July, 1912. [Copyrighted Material Omitted]

Appeal from Jackson district court.

Judgment affirmed.

SYLLABUS

SYLLABUS BY THE COURT.

1. TRUST FUNDS -- Misappropriation -- Participation by Bank. Where a bank knowingly participates with a depositor in a misappropriation of trust funds and reaps the fruit of the breach of trust it becomes liable to the beneficiary for whatever loss the latter sustains.

2. LODGE FUNDS--Defaulting Treasurer--Overdraft--Liability of Bank. The treasurer of the grand lodge of Masons deposited the funds of the order in defendant bank. With knowledge that he was a defaulter the bank, for the purpose of aiding him in concealing his shortage, permitted him to overdraw his account and issued to him a certificate to be exhibited to the grand lodge showing that he had on deposit the amount of the certificate, the bank taking as collateral security for the overdraft notes representing loans made by him as treasurer to various individuals. After his reelection as treasurer he returned the certificate to the bank, it was credited to his account, the overdraft was taken up and the collateral returned to him. Upon his death the grand lodge for the first time learned that he was a defaulter and sued the bank for the amount of the overdraft. Held, that the overdraft was a loan to the treasurer individually, that it was paid when the account was credited with the proceeds thereof, and that the bank with knowledge of the trust character of the fund could not accept any part thereof in payment of the personal debt of the treasurer and is liable to the grand lodge for the amount of the overdraft.

3. ACTION--Implied Contract--Tort. An action by the grand lodge against the bank to recover the amount of such overdraft, wherein the petition states the facts in ordinary and concise language, is held to be an action upon an implied contract to refund the money and not in tort nor for relief on the ground of fraud.

4. ACTION--Statute of Limitations--Trust Funds. Upon the facts stated the statute of limitations would not begin to run in favor of the bank against an action to recover the money until the beneficiary discovered the breach of trust.

Charles Hayden, I. T. Price, E. D. Woodburn, F. T. Woodburn, and A. E. Crane, all of Holton, for the appellant.

M. A. Bender, of Holton, T. F. Garver, and R. D. Garver, both Topeka, for the appellees.

STATEMENT.

This suit was brought by the officers of the Most Worshipful Grand Lodge of Ancient, Free and Accepted Masons of Kansas, hereinafter referred to as the grand lodge, against The Linscott State Bank, as the successor of The National Bank of Holton, to recover funds deposited in the bank by Albert Sarbach, grand treasurer of the lodge. The controversy is one of several arising out of Sarbach's defalcation as grand treasurer. Some of the legal propositions are the same as those involved in the recent case of Washbon v. Hixon, ante, p. 310, 124 P. 366. The plaintiffs recovered in the court below and the bank appeals.

Albert Sarbach was first elected grand treasurer in 1903. He was annually reelected until 1909, and was serving in that capacity at the time of his death, September 11, 1909. He deposited the funds of the grand lodge in and kept his account as grand treasurer with The National Bank of Holton, until the bank was changed to a state bank in 1909, after which he kept the account with The State Bank of Holton. George S. Linscott was cashier of the national bank, and after the change was cashier of the state bank. The officers of the bank knew from a short time after he became treasurer that he was making a wrongful use of the lodge funds and that during a large portion of the time he was short in his accounts. In September, 1903, he loaned $ 4000 of the funds to Linscott, cashier of the bank, and in 1905 made another loan of $ 10,000. Linscott gave Sarbach his individual notes for these loans, which were afterwards repaid with interest. At each annual meeting of the grand lodge it was necessary, as the officers of the bank well knew, for Sarbach to make his annual report as treasurer and produce the funds or evidence that he had on hand the amount due from him as treasurer. In order to enable him to satisfy the officers of the grand lodge that the funds were intact the bank aided him in concealing the shortages by issuing to him for temporary purposes certificates of deposit or certified checks for the amount he should have had on hand, without regard to the actual balance in his bank account. The bank extended credit to him for the deficit in his account, taking from him collateral security therefor. After his reelection as grand treasurer and upon his return from the annual meeting the certificate of deposit or certified check would be indorsed by him officially and deposited in the bank, the collateral security would be returned to him, and the books of the bank would show no overdraft. In February, 1904, the certified checks issued to him amounted to $ 30,440, which was the sum he should have had on hand, but was for $ 7734.96 more than he had in the bank. In February, 1905, the certificate of deposit which he presented to the grand lodge was for $ 17,950.81 more than he actually had in the bank. In February, 1906, the bank gave him a certified check for the purpose of exhibiting to the grand lodge, which called for $ 9087.43 more than he actually had in the bank.

The foregoing transactions are not involved in this suit and have been mentioned merely for the purpose of showing the course of dealing between the bank and Sarbach. The controversy arises over two transactions. On February 16, 1907, the bank issued to Sarbach a certificate of deposit for $ 29,185.97, which overdrew his account $ 4,465.76. To secure this overdraft he deposited with the bank as collateral security a number of notes payable to him as grand treasurer, executed by individuals to whom he had made loans. On February 23, after his settlement with the grand lodge and his reelection, he deposited the certificate for $ 29,185.97 in his account. The bank returned to him the collateral securities and paid to itself the overdraft out of the proceeds of the certificate. The trial court held that the $ 4465.76 overdraft was a loan made by the bank to Sarbach personally, that it constituted an individual debt, payment of which could not lawfully be made out of funds which the bank knew belonged to the grand lodge. There was another overdraft on January 2, 1908, of $ 934.09, which was afterwards paid out of collections made by Sarbach as grand treasurer, which he deposited in his account, and the trial court likewise ruled that the bank, with knowledge of the trust character of the deposit, could not apply it in payment of Sarbach's individual debt. The judgment in plaintiff's favor was for the sums involved in these two transactions. The trial court made very complete findings of fact, which are too lengthy to be reproduced here. Among them are the following:

"12. At the time of his death in September, 1909, Albert Sarbach was a defaulter in his account as Grand Treasurer to the amount of $ 16,358.99. His account as Grand Treasurer with the State Bank of Holton was at that time overdrawn in the sum of $ 2,707.48, and it had been overdrawn continuously from and after April 10, 1909. . . . On the evidence, I find that at the time of his death Albert Sarbach had misappropriated all of the funds of the Grand Lodge which he should have had on hands at that time, and that such misappropriation was made without the knowledge or consent of the plaintiffs or the other officers of said Lodge and they had no knowledge or notice thereof until after his death.

"13. At the time the checks of Albert Sarbach, as Grand Treasurer on the National Bank of Holton were certified, and when the certificate of deposit of February 16, 1907, was issued, the officers of said bank knew that Albert Sarbach was Grand Treasurer of the Grand Lodge of Masons of Kansas, and knew that he had to make annual reports to said Lodge as such Treasurer. When such checks were certified and certificates of deposit were issued, the officers of said bank also knew that such instruments were wanted by Sarbach for the purpose of showing that he had the amount of money, represented by each of said instruments, on deposit to his credit as Grand Treasurer at the time they were issued or certified, respectively.

"14. The overdraft resulting from the certifying of such checks and the issuing of such certificates of deposit for amounts greater than Sarbach had at the time, to his credit, as Grand Treasurer, in said bank, were allowed to him as loans, he at the time turning over to said bank notes of solvent parties, payable to him as Grand Treasurer, which he held for money of said Grand Lodge which he had loaned to different persons, such notes being in amount at least equal to the particular overdraft for which they were given as security. When the certified checks and certificates of deposit were returned and credit for the amount given to Sarbach, as heretofore found, the notes which had been put up as security therefor were returned to Sarbach. The evidence does not show what disposition was made of such notes after they were so returned to Sarbach.

"15. The officers of said, The National Bank of Holton, knew that Albert Sarbach checked out moneys at different times, from his said account as Grand Treasurer, for the purpose of making loans thereof to various outside parties. The first loan of that kind was to George S. Linscott, then cashier of the National Bank of Holton,...