Winslow v. Harriman Iron Co.

• Decision Date: 11 September 1897
• Citation: 42 S.W. 698
• Parties: WINSLOW et al. v. HARRIMAN IRON CO. (FIRST NAT. BANK OF CHATTANOOGA, Intervener).
• Court: Tennessee Supreme Court

42 S.W. 698

WINSLOW et al. v. HARRIMAN IRON CO. (FIRST NAT. BANK OF CHATTANOOGA, Intervener).

Court of Chancery Appeals of Tennessee.

September 11, 1897.

Appeal from chancery court, Roane county; H. B. Lindsay, Chancellor.

Bill by H. M. Winslow and others against the Harriman Iron Company. The First National Bank of Chattanooga intervened. From a decree overruling all exceptions and confirming the report of the master on the debts and assets of defendant, complainants H. M. Winslow, the Manufacturers' National Bank, the intervener, and others appeal. Reversed as to one credit allowed to the Manufacturers' National Bank and as to one credit allowed to intervener.

McKinzie & Carr and G. L. Burke, for appellants H. M. Winslow and Manufacturers' Nat. Bank. Geo. W. Easley, for appellee.

NEIL, J.

This is a general creditors' bill filed against the Harriman Iron Company to wind it up as an insolvent corporation. It was duly adjudicated to be insolvent, and a reference was had to the master upon debts and assets, and he made his report, and that report was confirmed, the chancellor overruling all exceptions. The case is now here upon the appeal of the Manufacturers' National Bank of Harriman, a creditor, and the First National Bank of Chattanooga, also a creditor, and upon the appeal of the complainants, likewise creditors. The appeal of the Manufacturers' National Bank is based upon the refusal of the master to allow that corporation to retain a credit of $1,445.96, which it had entered on its note April 24, 1896. On that date there appeared upon the books of the Manufacturers' National Bank $1,445.96 in favor of the Harriman Iron Company as a deposit. On the morning of the day just mentioned, the bank appropriated the $1,445.96 as a credit on its note, which was then overdue. In the afternoon of the same day the bill in this case was filed, the Manufacturers' National Bank being one of the complainants in the bill. The $1,445.96 was made up of two items, one for $27.60 and the other $1,418.36. The first-mentioned amount — $27.60 — was a bona fide deposit, balance due to the Harriman Iron Company at the date above mentioned. That company being insolvent, and the debt being overdue, the bank had the right to appropriate that sum upon the indebtedness due to it from the iron company (Trust Co. v. Bank, 91 Tenn. 336, 18 S. W. 822); and it seems that the same right would have existed if the debt had not been due (Id.). The chancellor was in error, therefore, in so far as he disallowed the $27.60. But the item of $1,418.36 stands upon a different basis. That money was deposited in the bank under the following circumstances: The Harriman Iron Company owned $3,000 of stock in the Manufacturers' National Bank of Harriman. This stock was in the custody of Mr. H. S. Chamberlain, the president of the Harriman Iron Company. He, desiring to raise money upon this stock, sent it to Mr. Durrell, with authority to negotiate. Mr. Durrell was cashier of the Manufacturers' National Bank. He procured a loan upon the stock from his sister, in New Jersey, Mrs. Leming, in the name of the Harriman Iron Company, and as a result of that loan received from her $1,418.36. He was directed by Mr. Chamberlain to remit the proceeds of the loan to him at Chattanooga. He was given no authority to deposit the proceeds in the Manufacturers' National Bank. On the very day that the present bill was filed, Mr. Durrell deposited the $1,418.36, contrary to instructions, in the Manufacturers' National Bank. There is no direct proof upon the subject, but we cannot resist the impression that Mr. Durrell made this deposit with the express purpose of having it subjected to the claim of the Manufacturers' National Bank in the manner that it was attempted to be appropriated. The circumstances indicate that such was the fact, though we are hardly warranted in finding it as a fact; but certainly there is a very strong suspicion of the truth of it. At all events, it is certain that Mr. Durrell made this deposit without authority. It is stated that he was a director of the Harriman Iron Company, and for this reason he had a right to make the deposit. It is true, he was such director, but the stock was not in his hands in that capacity. It had been placed by the Harriman Iron Company in the hands of Mr. Chamberlain, who had control of it. From him Mr. Durrell received such authority as he had, and in making that deposit he went beyond his authority, and violated his instructions. The question is, can the bank take advantage of this fraud perpetrated by Mr. Durrell? We think not. Mr. Durrell was the cashier of the bank at the time he made this deposit without authority, and the bank was chargeable with notice of the fraud. Tagg v. Bank, 9 Heisk. 479; Franklin v. Ezell, 1 Sneed, 497; Barnard v. Iron Co., 85 Tenn. 139, syll. 3, 2 S. W. 21; Duncan v. Jaudon, 15 Wall. 165, 177. The same result must follow from another standpoint. The making of a deposit creates the relation of debtor and creditor as between the bank and the depositor. It is a contract whereby the bank undertakes to receive the money, and pay it out on the depositor's check, and it also involves an implication that, if the depositor should become indebted to the bank, the bank would have the right to apply the deposit to the indebtedness. Morse, Banks (2d Ed.) pp. 28-32. No one can create this relation between the depositor and the bank without authority from the depositor. In such case the person who holds the depositor's money, and so deposits it without authority, is guilty of a conversion of the fund, and the bank receiving it is likewise guilty of conversion, at all events, if it is so related to the payee making the deposit as to affect it with notice, as in the present case. The legal relation then existing between the bank and the person whose money is put into the bank without authority is not that of a technical depositor, but merely the relation that exists between persons when one gets possession of the property of the other without authority of law, or wrongfully asserts dominion over it, falling distinctly within the definition of a conversion. Roach v. Turk, 9 Heisk. 708. The bank, having knowledge in the manner stated, would be equally guilty of the conversion as the agent. Id. A bank is liable for the just responsibility of its acts in the same degree as an individual. Insurance Co. v. Cross, 9 Heisk. 283. And see Branner v. Branner, 1 Lea, 101; Bank v. Trenholm, 12 Heisk. 520. The latter is a stronger case, even, then Roach v. Turk. In this case Trenholm was allowed to recover against the bank. A factor without authority had pledged Trenholm's cotton to the bank, and the bank, without knowledge of the factor's want of authority, had sold the cotton. Certainly, a bank receiving property under the circumstances disclosed in the present case would stand in a poor position to insist upon an equitable set-off; nor is it entitled to a legal set-off, because the bank liability arises ex delicto and the liability of the Harriman Iron Company arises ex contractu. Brady v. Wasson, 6 Heisk. 131-134. Therefore we are of the opinion that there was no error in the chancellor refusing to allow the bank to retain a credit of $1,418.36.

What has been said above is without regard to the claims of the First National Bank of Chattanooga upon this subject. The claims of the Chattanooga Bank form the subject of the second exception to be considered. This bank insists that the stock in the Manufacturers' National Bank of Harriman had been pledged to it to secure an indebtedness of $1,500, and it claims the right to appropriate a sufficiency of that fund to pay the balance due upon its debt. This balance appears in the master's report as $749.29. Our attention has been especially called by the counsel to the pleadings upon this branch of the case. The original bill, speaking of the assets belonging to the Harriman Iron Company, says: "It holds some $3,000, par value, of the stock of the Manufacturers' National Bank of Harriman, but this stock, as complainant is informed and believes, is pledged as collateral security at this time to secure a loan of $1,500, the funds from which loan may, however, be held by defendant corporation, or for its credit, in said bank." The Harriman Iron Company says upon this subject, in its answer: "Defendant further alleges that among the bills payable, included in the above item of $1,816.39, were two notes, aggregating $1,500, to the First National Bank of Chattanooga, which was collaterally secured by $3,000 of the Manufacturers' National Bank stock." The First National Bank of Chattanooga was not made a defendant to the bill. It came in by intervening petition. In this petition it alleged that the Harriman Iron Company was indebted to it by two notes, — one for $1,000, dated December 28, 1895, and the other for $500, dated February 1, 1896, — each due 90 days from date; that there was pledged to it by the Harriman Iron Company stock to the amount of $3,000 in the Manufacturers' National Bank of Harriman, to secure the payment of the two notes; that afterwards, about the 9th of April, 1896, petitioner and the iron company agreed that the iron company might take the stock so pledged, and secure a loan thereon from some other person or bank, so as to raise funds for the payment of the two notes; that the sole purpose of turning the bank stock over to the iron company by petitioner was to realize funds to pay the notes; that it was distinctly understood and agreed that the funds derived from the new loan should be paid over to petitioner; that in pursuance of this agreement the defendant sent the Manufacturers' National Bank stock to George B. Durrell, then cashier of the Manufacturers' National Bank, for the purpose of being placed as collateral to secure the payment of new notes, aggregating $1,500; that at the time the bank stock was sent the iron company gave...