Court Opinion

ID: 7900358
Source: CourtListenerOpinion
Date Created: 2022-09-08 21:55:02.934968+00
Date Added: 2024-06-11T16:21:04.976663
License: Public Domain

Pearce, J.,
delivered the opinion of the Court.
John D. Bowling of Prince George’s County by his will bequeathed to three trustees named therein certain funds to be held in trust for the purpose of securing to his wife Elizabeth Bowling, the annual sum of $5,000 during her life, and in further trust after her death to distribute the same among the testator’s children and *17grandchildren, as directed by the will. The appellants were by proper proceedings in the Circuit Court for Prince George’s County appointed trustees in the place and stead of Henry W. Clagett (the survivor of the three testamentary trustees), who was removed for breach of his trust, and these proceedings were instituted by the appellants in the Circuit Court No. 2 of Baltimore City, for the purpose of recovering from the National Bank of Baltimore, the sum of $12,568.55, which they allege constitutes part of the above trust fund, and to have been knowingly and wrongfully diverted therefrom by the defendant and applied by it to the payment of a debt due to the bank by Clagett in his individual capacity. It will be necessary to state the principal facts upon which this controversy arises, in order to a satisfactory discussion of the legal principles upon which it must be determined.
In June 1891, while Clagett was sole trustee for Elizabeth Bowling he held among the assets of that fund certain certificates of indebtedness of Prince George’s County, amounting at that time, with interest, to about $12,000, which was originally due to Clagett individually, but which some time prior to 1891, had been by him assigned on the books of the county, to the three testamentary trustees of Mrs. Bowling. By the Act of 1890, ch. 121, the Commissioners of Prince George’s County were authorized to issue coupon bonds to the amount of $80,000, of which $50,000 was to be applied to the payment of debts due by the county, among which was this debt due the trust fund of Elizabeth Bowling. By the terms of that Act the bonds could only be disposed of to the highest bidder “ at a public letting,” and by reason of a provision that the interest coupons could only be paid on presentation, in connection with the bond, it was found no sale could be effected. The Act of 1892, ch. 535, repealed and reenacted ch. 121 of 1890, omitting the provision as to the coupons which had defeated the sale, and required that all the bonds provided for by the Act of 1890, should be counted and destroyed by the County Com*18missioners, before the bonds provided for by the Act of 1892 should be put 011 the market. Clagett was President of the County Commissioners on June 10th, 1891, and on that date, the following order was passed by the Board: “June 10th, 1891. Ordered that H. W. Clagett, trustee, be allowed 1890 bonds for his Co. paper on file, for the years 1874, 1875, 1876 and 1877, and that these bonds be exchanged for other bonds, when issued, with 6% int. from date.” He signed as President and caused the clerk to sign and issue $12,-500 of these bonds. ' In August 1891, Clagett borrowed from the Bank of Baltimore $11,000, upon his individual note, and delivered these $12,500 bonds to the bank as collateral security for this loan. Shortly after this, a new board of Commissioners was elected, and after the passage of the Act of 1892, on counting the bonds provided for by the Act of 1890, it was found that $12,500 of them were missing and the new bonds could not be issued until all the old were called in and destroyed. After some delay, it was ascertained that the missing bonds were in the possession of the Bank of Baltimore, as collateral to the loan to Clagett, and when demand was made for them, the bank refused to surrender them until the loan was paid. Finally, the bank delivered the bonds to James T. Perkins (then treasurer of Prince George’s County, and through whom Clagett had negotiated the loan) with the understanding that he should surrender them to the Commissioners upon payment of Clagett’s note. The testimony of Thomas E. AYilliams, Clerk to the County Commissioners in 1892, shows that Perkins delivered these bonds to him upon receipt of a check for $12,-568.55 and a statement of the amount due by the county to Clagett as trustee. This check read as follows :
Upper Marlboro, Md., Aug. 1st, 1892.
The Citizens’ National Bank of Laurel, pay to the order of J. Thomas Smith, Cashier Nat. Bank of Baltimore $12,568.55, twelve thousand five hundred and sixty-eight dollars and fifty-five cents, in full for amount *19due as assignee of Henry W. Clagett, sole trustee of Mrs. E. Bowling, from 1874 to 1881, inclusive.
(Signed) William Berry, President,
D. T. Sherriff,
John L. Rawlins,
County Corns.”
Countersigned, Thomas E. Williams, Clerk.
The statement mentioned as delivered with the check, was headed as follows:
“ Statement showing the amount of paper of Prince George’s Co. held and owned by Jno. Bowling, H. W. Clagett and J. K. Roberts, for Mrs. E. Bowling for the years 1874, 1875, 1876, and 1877, now held by Henry W. Clagett, sole trustee.”
Then follows each item of the account, with interest added to July 1st, 1892, aggregating $12,568.55. Perkins having surrendered the bonds when the above check and statement were delivered to him, then delivered the check and statement to J. Thomas Smith, Cashier of the National Bank of Baltimore, who then signed the receipt at the foot of the statement which read as follows:
“ Balto., Aug. 2, 1892.
Received from Jas. T. Perkins, check on Citizens’ Nat. Bank, Laurel, drawn by Prince George’s County Commissioners for $12,568.55.
J. Thomas Smith, Cashier.”
This statement, so receipted, was then returned to the Commissioners; the check was endorsed for collection by the cashier, and was collected by the bank. Out of the proceeds, Clagett’s note was paid, and the balance, $1,563.35, was carried to the credit of Clagett upon the books of the bank, and was subsequently paid out upon his individual checks.
A decree pro confesso was entered against Clagett. The bank demurred to the whole bill on the ground: 1st, That the bill did not state a case entitling the plaintiff to any relief in equity. 2nd, That there was an ade*20quate remedy at law, and: 3rd, That plaintiffs had not shown themselves entitled to the discovery prayed. This demurrer was overruled by Judge Wicices. The bank then answered, admitting substantially most of the matters of fact alleged in the bill, but denying all liability, and alleging that it took the bonds in the usual course of business, without knowledge or suspicion that Clagett’s title thereto could be questioned, and alleging also that the proceeds of the loan were largely applied by Clagett to the legitimate uses of the trust, upon his checks drawn on said proceeds.
The bank also alleged, in answer to certain paragraphs of the bill, that if Clagett had no right to pledge said bonds, or to assign said claim against the county, as the plaintiffs contended he had not, then the plaintiffs had been in no wise injured, and that in any event there was an adequate remedy at law, and prayed the benefit of these defences as fully as if presented by demurrer. Testimony was taken, and after argument the bill was dismissed by Judge Stocicbridge and this appeal was taken. No opinion having been filed, we are unfortunately without the ádvantage of knowing the reasons which led to the decision rendered by the learned Judge. We have no doubt that the case is one of equitable cognizance, and that the demurrer to the jurisdiction of the Circuit Court was properly overruled. The authorities will be found amply cited in Swift v. Williams, 68 Md. 237; in Central Nat. Bank v. Connecticut Mutual Ins. Co., 104 U. S. 54, and in Union Stock Yards Nat. Bank v. Gillespie, 137 U. S. 411.
The main question for determination is, whether upon the facts of the case, the bank can be held liable to the appellants for the amount of the check wrongfully made and delivered by the County Commissioners to the cashier of the bank and appropriated by it to its own use, and to the personal use of Clagett. The fundamental principles upon which the solution of this question must depend have received the careful consideration of this Court in the recent case of Duckett and others, trustees, against the Nat. Mechanics’ Bank of *21Baltimore, decided December ist, 1897 (86 Md. 400), and their application was very accurately discriminated in reference to the two checks then in question. In that case it was said, “ There can be no dispute that, as a general principle, all persons who knowingly participate, or aid, in committing a breach of trust are responsible for the wrong, and may be compelled to replace the fund which they have been instrumental in diverting, and there is in such instances, no primary or secondary liability as respects the parties guilty of participating in the breach of trust, because all are equally amenable.” We do not reproduce this passage here as enunciating a new principle, for it had been expressly so held both in England and in this country, as in Wilson v. Moore, 1 Mylne & Keene 146; Knatchbull v. Hallet, L. R. 13 Ch. Div. 696, and in Swift v. Williams, 68 Md. 249; but we repeat it, because its language shows that not only all those who originate and perform the act which is designed to work the breach of trust are compelled to see it righted, but those also who have been in any manner “ instrumental ” in the resulting diversion of the fund. Under these authorities therefore, and equally we think upon principle, if it appears that the bank knowingly participated in the primary act which led to the breach of trust, or was instrumental through its own subsequent act in perfecting the breach, the way to which was opened by Clagett’s act, it should be required to restore the trust fund to its original condition. Now there can be no denial that the certificates of indebtedness, in the attempted discharge of which this check was drawn and paid, constituted part of the corpus of this trust. These certificates were assigned upon the books of the County Commissioners to the trustees and they were returned by them in their report to the Court as trust assets. When in June 1891, Clagett was allowed bonds for these certificates, these bonds — if they had any validity in his hands — were impressed with the same trust which characterized these certificates. The language of the order would indicate that the purpose was to substitute the bonds for the *22certificates, but from the fact that the certificates were not cancelled, and from the subsequent reference to them in the statement of the debt, it is apparent that the bonds were received merely as collateral, but in either event the trust equally attached so far as Clagett was concerned, and any disposition of the bonds by him for his personal benefit, was a clear devastavit by him, since “ as between cestui que trust, and trustee, and all persons claiming under the trustee, otherwise than by purchase for valuable consideration without notice, all property belonging to a trust, however much it may be changed or altered in its nature, or character, and all the. fruits of such property whether in its original, or in its altered state, continues to be subject to, or affected by the trust.” Pennell v. Deffell, 4 De Gex, McN. & G. 372; Englar v. Offutt, trustee, 70 Md. 78. But unless the bank, knowingly, or with means of knowledge, participated in a breach of trust or profited by the fruits of a fraud, it cannot be held responsible to the trust estate, and this liability must be determined from the evidence in the record.
By the terms of the Act of 1890, the bonds authorized by it were required to be sold to the highest bidder, “ at a public letting,” after a prescribed advertisement in the cities of Baltimore and Washington. It does not appear from the record whether such advertisement was, or was not, made, but it does appear that none of the bonds were sold. They have all been destroyed, and no evidence was offered of their form or contents, but as municipal obligations they must have shown upon their face, a reference to the Act of Assembly under which they were authorized, and we are of opinion, upon the peculiar facts of this case, as they appear in the record, that the bank must be charged with notice of the terms of that Act, and must be held to have dealt at its peril in taking these bonds as collateral security for the loan; since participation in a breach of trust may be the result of negligence, or mere oversight, as well as of wilful or deliberate fraud. It is true that municipal obligations such as these bonds are placed by numerous decisions *23upon the footing of negotiable paper, and when issued by competent authority, pass into the hands of a bona tide purchaser, for value, and before maturity, free from any infirmity in their origin, and that only bad faith on the part of the purchaser will impair his title. Murray v. Lardner, 69 U. S. 110; Cromwell v. Sac Co., 96 U. S. 51.
It is not necessary however, to inquire whether these bonds, under the circumstances of this case, could be held to have been issued by competent authority, because the doctrine above stated is applicable only to obligations actually issued, however wrongfully or improperly issued, and until actually issued, in apparent right though in actual wrong, they are not negotiable or valid securities; and the proof is incontestable that Mr. Devries, the president of the bank, knew when he took these bonds that they had never been sold and issued, and that they were not then negotiable securities. He states in his testimony that in July 1891, Jas. T. Perkins called at the bank and stated that the Commissioners of Prince George’s County owed Mr. Clagett quite a large sum of money which they were not in condition to pay and inquired if a loan of $11,000 would be made to Mr. Clagett upon $12,500 of 4 per cent coupon bonds of the county. He says Perkins then told him “ that the bonds were not negotiable, and that the Commissioners had not been able to dispose of them; that they had decided it was useless to attempt to sell them, and would apply to the next Legislature for permission to issue a new bond, one that would be negotiable; but that the Commissioners would give Mr. Clagett $12,500, of the bonds for the purpose of negotiating the loan, and when the new bonds were issued, the County would either give Mr. Clagett new bonds, which he could either substitute to the bank for the loan, or he would pay the loan off; and that Mr. Clagett was a gentleman of large means, and was perfectly responsible outside of the collateral; and that he was at that time President of the Board of County Commissioners of Prince George’s County.” Mr. Devries further testified that he told Perkins he thought the *24bank would make such a loan, but that he would have to consult the Board of Directors; that he did so, and they authorized the loan; that he notified Mr. Perkins and that shortly after this Clagett came up with the bonds amounting to $12,500, and gave his note for $xi,ooo, and the bonds as collateral. The case thus presented is totally different from all those in which the doctrine above stated was applied. In the present case, entirely apart from any constructive or implied notice of the terms and requirements of the statute, the bank, through' its president, had actual and explicit notice that the statute required the bonds to be sold, and that they had not been sold but had been delivered to Clagett in direct violation of the authority of the statute. This being so, how then can it be contended that the bank occupied the position of an innocent purchaser of a negotiable security? Is it not indeed clear, in the light of this testimony of the president of the bank, that he and its directors fully understood the situation as candidly disclosed by Perkins (and as candidly repeated here by Mr. Devries) and were willing to make the loan and take whatever risk went with it, relying upon the personal responsibility of Mr. Clagett and the possession of these non-negotiable securities, coupled with the assurance that they would be exchanged for new bonds when they should be issued, unless the note were then paid off? With eyes opened wide by the information received from Perkins to the fact that Clagett was wrongfully in possession of these bonds, the bank in accepting them as security for the loan took the first step which resulted in the spoliation of the trust; and it was the desire of the Comsioners to regain possession of the bonds which had been issued in violation of duty, which induced them to give to the cashier of the bank the check by means of which it was enabled to consummate the spoliation. The possession of these bonds was acquired by the bank under circumstances which subject them in their hands to all the equities in favor of these appellants as successor’s to Clagett’s trust, and forbids that they be *25regarded as any consideration for any part of the check from the Commissioners to the cashier of the bank.
But if it be assumed for the purposes of argument, that the bank took title to the bonds in good faith, how does the case then stand?
Recurring to the testimony of Mr. Devries, he states that Clagett called on him in June 1892, and said “ the county was ready to pay him the money which it owed him, but would not do so unless he produced the bonds. I informed him we could not give up the collateral until the note was paid. After quite a discussion of the matter I told him I thought it could be arranged by the bank getting Mr. Perkins to act in the matter; that we might send him the bonds, and when he received the money, he could turn the bonds over to Mr. Clagett.” He also stated “ that Clagett assented to this arrangement, and Mr. Perkins agreed, and did act in the matter —that the bank delivered the bonds to Perkins under this arrangement; that he delivered them to the County Commissioners, and received a check in payment of the note, and forwarded the same to the bank, through which Clagett’s note was paid.” Strangely enough, it does not certainly appear either from the testimony of Mr. Devries, or Mr. Clagett, or in any other manner., whether it was known to Mr. Devries or to any other officer of the bank, at the time the bonds were delivered to Mr. Perkins, that Clagett held them as trustee; but if this was not known to the officers of the bank, Perkins, who became their agent at this stage of the transaction, did know it when Williams, the clerk of the Commissioners, delivered him the check and accompanying statement concurrently with the surrender of the bonds; and the cashier of the bank knew it when he received the check and statement and signed the receipt appended to the statement. What was the discussion between Mr. Devries and Mr. Clagett as to the return of the bonds to the Commissioners, does not appear, and it is not easy to understand why there should have been any difficulty whatever as to their return, if the bonds belonged to Mr. Clagett personally. *26If we were at liberty to draw inferences, we might perhaps infer that the capacity in which Mr. Clagett held the bonds, was the subject of that discussion, but we are not warranted in founding our conclusions in this matter upon inference, and we therefore assume the officers of the bank had no knowledge of the fiduciary character in which these bonds were held by Clagett until it was brought home to them by the presentation of the check and statement. It is urged by the appellee that the money in the Laurel bank was not a trust fund, and that the appropriation by the appellee °of the proceeds of the check, was not therefore an invasion of a trust fund, and that the words “ as assignee of H. W. Clagett, trustee, for Mrs. E. Bowling,” which are part of the check, was a mere memorandum to subserve the convenience of the drawer. But with this argument we cannot agree. In the case of Duckett v. The Mechanics’ Bank, decided at the last October term (86 Md. 400), one of the checks in question was as follows:
“ Laurel, Md., September 13th, 1892.
Citizens” National Bank pay to the order of James Scott, cashier, $2,000, two thousand dollars, for deposit to credit of Henry W. Clagett, being the balance of purchase money due him as trustee from John R. Coale,
C. H. Stanley.”
And the words “ being the balance of purchase money due him as trustee from John R. Coale,” were held not to be an instruction to the Mechanics’ Bank as to the account in which the funds should be credited, nor a notification that they were trust funds, and that the Mechanics’ Bank discharged its full duty, when it credited the funds as directed by the check, to Clagett’s personal account. The other check in question in that case, was at follows:
“ Laurel, Md., September 17th, 1892.
Citizens’ National Bank of Laurel, Maryland, pay to the order of James Scott, Cashier, $2,024.30, two thousand and twenty-four and thirty one-hundredths dollars, to deposit to the credit of Henry W. Clagett, trustee.
C. H. Stanley.”
*27And the bank was held liable to restore the amount of that check, because it credited the funds to Clagett personally in violation of the direction of the check to credit them to Clagett as trustee. The Court said: “ This was an explicit notification to the bank that Clag'ett was not the actual owner of the money. It was an equally explicit instruction to the bank, not to place the funds to the credit of Clagett’s personal account. It was consequently more than a mere memorandum made for the personal convenience of the drawer of the check.”
In the case at bar, the words which the appellee contends are a mere memorandum are not words merely descriptive of the source whence the funds came, as in the first check in the former case, but were used for the express purpose of controlling the destination of the proceeds, and constitute an explicit instruction to the bank that it could not accept and receive the proceeds, otherwise than in full discharge of the amount due by the County Commissioners to Clagett as trustee; an instruction quite a§ imperative in its terms as that of the last check in the former case, and absolutely necessary for the protection of the Commissioners in that transaction. It could not have been more imperative if the check had been made payable to “ J. Thos. Smith, Cashier-Trustee,” and in legal effect the moment the proceeds were collected, they were held by the bank in trust to be applied to the discharge of the debt due by the County Commissioners to Clagett as trustee. When the bank applied to Clagett’s personal debt, the amount due on his note, it committed as clear a breach of trust, as it did in passing the surplus to his personal account, and thus putting it in his power to dispose of it by his personal check. If there could be any doubt as to this conclusion, the receipt signed by the cashier at the foot of the statement would remove any such doubt. That statement set forth a debt due by the County Commissioners to Clagett, trustee. The receipt set forth the payment of that debt under no claim of right by the bank, and the signature of the *28cashier made the bank a trustee as effectually as if the cashier had signed as such. We cannot distinguish this case upon any sound principle from that presented upon the last check in the former case. Courts of Equity in guarding trust funds and compelling, their restoration by those who have invaded, or who have wrongfully or carelessly aided others in invading them, look to substance and not to form. When the bank learned, as it did upon presentation of the check and statement, if not earlier, that it could not secure the possession of the proceeds of that check otherwise than by receiving them as a trust fund, it was its plain duty to decline the check and stand upon such title to the bonds as it might be able to assert against the county. The surrender of bonds — to which it is perhaps possible it might have been able to assert title, though we think otherwise — cannot create a right to appropriate to its own use money which came into its hands as a trust fund and to which consequently it could have no title except as trustee. To permit the bank to escape liability under the facts of this case would be to renounce the exercise of the established and wholesome powers of equity, which we are forbidden to do. It results from what we have said, that the decree of the Circuit Court must be reversed. If upon proper proof, it can be shown that Clagett has paid out of the proceeds of this check any sums upon the order of Mrs. Bowling or to her, on' account of interest due her upon the whole trust fund, or for taxes or other proper charges upon such interest, for which sums he has not been elsewhere allowed in his accounting with her, the bank should have the benefit of all such payments. Our conclusion is that the bank is liable for the sum of $12,568.55, the amount of the check of August 2nd, 1892, with interest from the date of its receipt August 3d, 1892, less such credits as are indicated above when properly ascertained.
The decree dismissing the bill will accordingly be reversed, and the cause will be remanded with directions that a decree be passed in conformity with this opinion, making provision for reference to the auditor of the Court for the purposes stated.
*29(Decided June 28th, 1898.)
Judges Bryan and Briscoe did not sit in this case, but having examined the record and briefs authorize me to say that they concur in this opinion.

Decree reversed with costs above and below and cause remanded.