Opinion ID: 1481538
Heading Depth: 1
Heading Rank: 1

Heading: The Appeal of the Defendant Bank.

Text: In considering this appeal we shall proceed on the assumption that the bank received proceeds from the sale of cattle which were mortgaged to the loan company. The master has so found; the trial court has approved the finding; there is substantial evidence in its favor; the finding will, therefore, not be disturbed. See citations, supra. We shall also assume that the payments made by Gottlieb to the bank by his several checks were in some amount, at least, from moneys derived from the sale of the mortgaged cattle, though to what extent this was the case is somewhat doubtful in view of the master's findings. The principal question raised by defendant's appeal is this: Conceding that the bank had no actual or constructive knowledge or notice that among the moneys which it received from Gottlieb were proceeds of the sale of cattle which were mortgaged to plaintiff, was the bank nevertheless liable to plaintiff for the amount of such proceeds which Gottlieb transferred to the bank in payment of his preexisting debt to the bank? The plaintiff loan company contends that this question should be answered in the affirmative; the defendant bank, in the negative. In order to answer this question properly, it is necessary to consider, not only the facts already stated, found by the master, but also certain other facts relating to the accounts between Gottlieb and the bank, which were found by the master or which appear from the uncontradicted evidence. Deposits were made by Gottlieb in the bank of moneys derived from the sale of the mortgaged cattle as follows: From July 5 to August 13, 1918 .... $23,113.68 From August 13, 1918, to September 24, 1919 ........................ 21,376.54 From September 24 to October 9, 1919 ............................ 16,899.27 From October 10 to October 25, 1919 2,743.39 From October 25, 1919, to January 20, 1920 ........................ 1,024.84 Payments were made by Gottlieb to the bank from the proceeds derived from the sale of the mortgaged cattle as follows: August 13, 1918 .................. $16,923.23 September 24, 1919 ............... 10,352.00 October 10, 1919 ................. 10,486.00 October 25, 1919 ................. 2,743.39 On August 13, 1918, Gottlieb had on deposit with the bank $40,096.52, of which $23,113.68 had come from the sale of mortgaged cattle, leaving $16,982.84 derived from other sources. On that date Gottlieb paid the bank $16,923.23, leaving $59.61 over and above the trust fund, $23,113.68, which had been derived from the sales of the mortgaged cattle. The presumption is that Gottlieb paid out his own funds and kept the trust funds intact. This is in accordance with the doctrine that, where an agent or trustee deposits trust funds to his own personal credit, and mingles them with his personal funds, and thereafter draws checks on the deposit in payment of his personal debts, he will be presumed to have drawn out his own money and to have left that belonging to the trust fund. 7 C. J. 646; Merchants' Nat. Bank v. School District No. 8 (C. C. A.) 94 F. 705; Bank of British N. A. v. Freights, etc. (C. C. A.) 137 F. 534, 538; Board of Com'rs v. Strawn (C. C. A.) 157 F. 49, 15 L. R. A. (N. S.) 1100; Brennan v. Tillinghast (C. C. A.) 201 F. 609; Drovers', etc., Bank v. Roller, 85 Md. 495, 37 A. 30, 36 L. R. A. 767, 60 Am. St. Rep. 344. After making the payment of $16,923.23 on August 13, 1918, Gottlieb owed the bank nothing. His new loans from the bank from this date on to January, 1920, ran at times as high as $50,000. No security was required by the bank on these loans. During this period his deposits of moneys derived from sales of cattle, including those mortgaged to plaintiff, aggregated more than $170,000. There were other large deposits from different sources. His daily balance sometimes ran as high as $40,000. On the other hand, overdrafts were not of infrequent occurrence. They ran from a few dollars to upwards of $11,000. Between August 13, 1918, and the date of the next credit item, checks were drawn amounting to more than $15,000. By December 7, 1918, all of the balance had been checked out, and there was an overdraft of $1,927. The trust fund had completely disappeared. We may assume that the balance in the bank, amounting to $12,319.05 on September 24, 1919, the date of the next payment, was wholly trust funds. Gottlieb had deposited between August 13, 1918, and September 24, 1919, $21,376.54 out of proceeds of cattle mortgaged to plaintiff. He had therefore checked out from these trust funds the difference, amounting to $9,057.49. On September 24, 1919, he made a payment to the bank of $10,352, and he then had a balance of $1,967.05. By October 1, 1919, this balance was checked down to $793.50. By October 9, 1919, he had deposited $16,899.27, proceeds of cattle mortgaged to plaintiff, and his balance of that date was $17,565.63. From this he paid the bank $10,486. He continued to check against the balance until on October 15, 1919, he had a balance remaining of only $453.82. The balance was again built up until, on October 24, 1919, it amounted to $37,638; but included in this balance was only $2,743.39 derived from sale of cattle mortgaged to plaintiff. Payment was made to the bank on October 25, 1919, of $13,500, leaving a balance of $24,138. By November 18, 1919, this balance, as well as upwards of $22,000 intervening deposits, were all checked out, and there were overdrafts amounting to $11,475. In making the sales of the mortgaged cattle, and in making the deposits of the proceeds, Gottlieb must be held to have acted as agent or trustee for the loan company. He occupied a fiduciary relation to that company, so far as the transactions in question were concerned. We turn to the inquiry: What are the principles of law applicable to the foregoing facts? The authorities are far from harmonious upon the question when and how far a bank is liable to a beneficial owner of moneys deposited by his agent in the agent's personal account, and thereafter used in payment to the bank of a pre-existing debt of the agent. In the early case of Bank of Metropolis v. New England Bank, 1 How. 234, 11 L. Ed. 115, s. c. 6 How. 212, 12 L. Ed. 409, the facts were these: Certain negotiable paper, payable by parties in the District of Columbia, was held by the New England Bank in Boston. That bank indorsed the paper, without consideration, to the Commonwealth Bank in Boston for collection. The Commonwealth Bank sent the paper to the Bank of Metropolis in the District of Columbia. There had been mutual dealings between the Commonwealth Bank and the Bank of Metropolis, and an account current between them, in which they mutually credited each other with the proceeds of paper remitted for collection. On the face of the paper transmitted, the remitting bank appeared to be the owner. The balance sometimes was in favor of one bank; sometimes in favor of the other. Finally the Commonwealth Bank failed, and at that time it was debtor to the Bank of Metropolis. The question involved was whether the Bank of Metropolis could retain the proceeds of the notes belonging to the New England Bank to cover the balance owed by the Commonwealth Bank. The Bank of Metropolis had no notice or knowledge that the notes were not owned by the Commonwealth Bank. The trial in the lower court resulted in favor of plaintiff, New England Bank. Judgment was reversed in the Supreme Court for failure to give a certain requested instruction. In the course of its opinion the court said (1 How. 239, 240): There does not, indeed, appear to have been any express agreement that those balances should not be immediately drawn for; but it may be implied from the manner in which the business was conducted; and if the accounts show that it was their practice and understanding to allow them to stand and await the collection of the paper remitted, the rights of the parties are the same as if there had been a positive and express agreement; and such mutual indulgence on these balances would be a valid consideration; and, like the actual advance of money, give the plaintiff in error a right to retain the amount due on closing the account.    If, therefore, the jury find that the course of dealing between the Commonwealth Bank and the Bank of the Metropolis was such as is stated in the testimony; that they always appeared to be, and treated each other as the true owners of the paper mutually remitted, and had no notice to the contrary; and that balances were from time to time suffered to remain in the hands of each other to be met by the proceeds of negotiable paper deposited or expected to be transmitted in the usual course of the dealing between them, then the plaintiff in error is entitled to retain for the amount due on the settlement of the account. (Italics ours.) The case was tried a second time, and again came before the Supreme Court. At this time the Supreme Court for the guidance of the trial court laid down three instructions or rules as follows (6 How. 227): 1. If, upon the whole evidence before them, the jury should find that the Bank of the Metropolis, at the time of the mutual dealings between them, had notice that the Commonwealth Bank had no interest in the bills and notes in question, and that it transmitted them for collection merely as agent, then the Bank of the Metropolis was not entitled to retain against the New England Bank for the general balance of the account with the Commonwealth Bank. 2. And if the Bank of the Metropolis had not notice that the Commonwealth Bank was merely an agent, but regarded and treated it as the owner of the paper transmitted, yet the Bank of the Metropolis is not entitled to retain against the real owners, unless credit was given to the Commonwealth Bank, or balances suffered to remain in its hands to be met by the negotiable paper transmitted, or expected to be transmitted, in the usual course of the dealings between the two banks. 3. But if the jury found that, in the dealings mentioned in the testimony, the Bank of the Metropolis regarded and treated the Commonwealth Bank as the owner of the negotiable paper which it transmitted for collection, and had no notice to the contrary, and upon the credit of such remittances made or anticipated in the usual course of dealings between them balances were from time to time suffered to remain in the hands of the Commonwealth Bank, to be met by the proceeds of such negotiable paper, then the plaintiff in error is entitled to retain against the defendant in error for the balance of account due from the Commonwealth Bank. In Wilson v. Smith, 3 How. 763, 11 L. Ed. 820, the court reiterated the second rule and stated, obiter, that inasmuch as defendant had extended no new credit, and made no advances on the paper which he had received from plaintiff's agent, defendant, though he had no notice of plaintiff's rights in the paper, could not retain the proceeds of the paper as an offset to a debt owed by the agent to defendant. These cases have been followed in a number of instances. See Fulton National Bank v. Hosier (C. C. A.) 295 F. 611; Commercial Credit Co. v. Continental Trust Co. (C. C. A.) 295 F. 615; In re Steele-Smith Co. (D. C.) 298 F. 812, 815, 816; Bank v. Inglis (C. C. A.) 6 F.(2d) 841. See, also, Bank v. Bank (Tex. Civ. App.) 252 S. W. 1089. On the other hand, numerous authorities hold, where an agent has deposited in a bank to his own personal account moneys in which a third party has a beneficial interest, and the bank, having no knowledge of the character of the deposit and no knowledge of facts sufficient to put it upon inquiry, has applied the moneys in payment of a pre-existing debt of the agent to the bank, that the beneficial owner cannot recover from the bank; and this, too, whether or not the bank has changed its position by reason of the deposit. A fortiori, would this be the case where the agent paid the bank by check on the deposit. 7 C. J. pp. 658, 659; Pomeroy's Eq. Jur. § 1048; Thomson v. Clydesdale Bank [1893] A. C. (House of Lords) 282; In re Goll (D. C.) 8 F.(2d) 101; Arnold v. San Ramon Valley Bank, 184 Cal. 632, 194 P. 1012, 13 A. L. R. 320, and note; Cable v. Iowa State Sav. Bank, 197 Iowa, 393, 194 N. W. 957, 197 N. W. 434, 31 A. L. R. 748, and note; Kimmel v. Bean, 68 Kan. 598, 75 P. 1118, 64 L. R. A. 785, 104 Am. St. Rep. 415; Titcomb v. Richter, 89 Conn. 226, 93 A. 526; Smith v. Des Moines Nat. Bank, 107 Iowa, 620, 78 N. W. 238; Burnham v. Holt, 14 N. H. 367; Stephens v. Board, 79 N. Y. 183, 35 Am. Rep. 511; Hatch v. Bank, 147 N. Y. 184, 41 N. E. 403; Meyers v. N. Y. Bank, 36 App. Div. 482, 55 N. Y. S. 504. See, also, Holly v. Missionary Society, 180 U. S. 284, 21 S. Ct. 395, 45 L. Ed. 531. It has been suggested that the cases of Bank of Metropolis v. New England Bank, supra, and Wilson v. Smith, supra, have been overruled by the later cases of Central National Bank v. Insurance Co., 104 U. S. 54, 26 L. Ed. 693; Union Stockyards Bank v. Gillespie, 137 U. S. 411, 11 S. Ct. 118, 34 L. Ed. 724; United States v. Butterworth-Judson Corp., 267 U. S. 387, 45 S. Ct. 338, 69 L. Ed. 672; but a careful reading of these cases shows that each of them was decided on the ground of actual knowledge by the bank of the character of the deposit or knowledge of facts sufficient to put it on inquiry as to such character. The first rule therefore applied. We do not find it necessary to attempt to harmonize these seemingly conflicting authorities. Under the facts and circumstances of the case at bar as above outlined, we think the accounts between Gottlieb and the bank show a mutual indulgence of balances, in which the deposit of the proceeds of the cattle mortgaged to plaintiff played no inconsiderable part. In other words, we think it must be held that the bank did extend credit to Gottlieb by reason of the said deposits along with others, and did change its position by reason of the said deposits. The testimony and exhibits relative to the loans by the bank to Gottlieb, relative to the unrestricted checking out by Gottlieb of all his deposits, and relative to the allowance by the bank of the numerous overdrafts by Gottlieb, and the analysis above made of the accounts between Gottlieb and the bank, are all of them, when taken together, persuasive to that effect. Though the master did not specifically find this extension of credit and change of position on the part of the bank, yet he did find the primary facts from which such ultimate facts can and must be drawn. The case, therefore, comes within the third rule laid down in Bank of Metropolis v. New England Bank, supra, assuming, but without deciding, that that rule is still controlling in the federal courts. It follows that the plaintiff loan company cannot recover. No attorney's fee will be taxed in either appeal, but the bank will recover its costs, other than the statutory attorney's fee, in its own appeal. The decree must be reversed, with instructions to enter a decree in favor of the defendant bank. It is so ordered.