Independent Consolidated School District of Dow City v. Crawford County Trust & Savings Bank

Action in equity by Independent Consolidated School District of Dow City, Iowa, hereinafter referred to as school district, against its depository bank, Crawford County Trust and Savings Bank of Denison, Iowa, hereinafter referred to as bank, to recover on account of school funds misappropriated by Glenn Leslie, who was treasurer of said school district from 1934 till his death in July 1937. Leslie, as such treasurer, maintained two accounts in said bank, a general fund and a schoolhouse fund. During the period between July 1935, and March 1937, Leslie wrongfully withdrew and misappropriated a total of more than $13,000 by means of about 110 checks drawn by him on the general fund of the school district in said bank. Five of these checks were made payable to the order of Leslie himself and were endorsed and cashed by him. One was payable to the order of the bank and was apparently cashed there by Leslie. Leslie also made 26 checks payable to fictitious payees, which he cashed after endorsing thereon the names of such payees. Seventy-eight checks were made to the order of various persons and corporations in payment of Leslie's private obligations, principally for merchandise purchased in connection with his furniture and electrical-appliance business. All of said checks except the afore-mentioned one payable to the bank were cashed by other banks and by them forwarded to the depository bank for payment. As a result of these withdrawals, the general fund in the bank was reduced accordingly. At times it was *Page 509 overdrawn and was replenished by transfers from the schoolhouse fund. Count 1 of the petition is based upon transfers aggregating $3,572.49 allegedly wrongfully made from the schoolhouse fund to the general fund in 1937. The amendment to count 1 is founded upon a similar $2,000 transfer made March 23, 1936. Counts 2, 3, 4, 5, and 6 seek recovery from the bank for the various amounts misappropriated by means of the 110 checks. The bank cross-petitioned against certain payees of checks and various other banks, praying that in the event of recovery against it on counts 2 to 6 it have judgment against said defendants in cross-petition for the amounts of the checks received by or guaranteed by them respectively. Trial to the court resulted in decree and judgment against the bank for the $3,572.49 transferred from the schoolhouse fund to the general fund in 1937, as claimed in count 1 of the petition. No recovery was allowed upon the amendment to count 1 or upon the other counts of the petition. The holding upon counts 2 to 6 rendered unnecessary the consideration of the bank's cross-petition and the decree dismissed the same. [1] I. We will first consider the appeal of the school district from that part of the decree denying the recovery sought under counts 2 to 6 on account of the payment of the 110 (misappropriation) checks on the general fund. Defendant bank was the approved depository in which Leslie was required to deposit all school funds in his hands. Section 7420-d1, Code of Iowa, 1935. Code section 4316 required him, as school treasurer, to receive school funds and pay the same out only upon orders (warrants) signed by the president and secretary. The statutes contemplate the presentation of warrants to the treasurer and his payment thereof out of funds in the depository bank. As heretofore noted, two school funds were maintained in said bank, a general fund and a schoolhouse fund. Questions involving the schoolhouse fund will be later considered. This division deals with the general fund only. About 450 warrants, aggregating about $30,000, signed by the secretary and president, were issued each year. Prior to *Page 510 July 1935, Leslie executed no checks. During that period all warrants were presented to the bank, which paid the same and charged the general fund of the district therewith. There is no controversy concerning charges against the account for warrants cashed by the bank at any time. After July 1, 1935, there was some change in the practice, in that, although the bank continued to cash warrants, Leslie also checked against the account. Counsel for the school district assert that the only checks made by Leslie during the ensuing two years were the 110 misappropriation checks, but, as we understand the record, he also issued a few checks on the depository account direct to the holders of warrants in payment therefor. One contention of the school district is that Leslie had no authority to issue checks because the change in the method of making disbursements had not been authorized by the school board. As hereinbefore noted, the statute required the treasurer to receive, deposit, and pay out school funds. The disbursement of funds by check or order on the depository was necessarily incident to the performance of such statutory duties, and the power to make the same was, therefore, implied. Hence, no further authorization was required. [2] It is also contended that the checks were defective in form. They were signed "Glenn Leslie, Treas.," without any indication in the signature or upon the checks that they were drawn upon the account of the school district. The practice of paying out public moneys upon checks which do not upon their face indicate the public character of the fund upon which they are drawn indicates laxity and is not to be commended. However, we do not think this affected the validity or negotiability of the checks. Nor was the signature insufficient. It was in the form agreed upon between Leslie and the bank. 7 Am. Jur. 360. [3] In count 2 of the petition the school district asserts the bank had no right to honor the 26 checks made to the order of fictitious payees. It is contended the endorsements of the names of said payees on the backs of the checks, made by Leslie, were forgeries, and that under Code section 9483 no rights could be acquired thereunder. However, the real question at this point concerns the *Page 511 applicability of Code section 9469, which provides, with reference to negotiable instruments: "The instrument is payable to bearer: * * * When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; * * *." Under this statute, as well as under prior decisions, the rule appears to be well settled that where such a check is presented the bank is authorized to pay it to the bearer regardless of whether prior endorsements were genuine. 9 C.J.S. 683; 7 Am. Jur. 436, 839, 840, 844; Ann. Cas. 1918A, 669; American Express Co. v. Peoples Savings Bank, 200 Iowa 408, 412, 205 N.W. 1, 2. In this case it is clear Leslie made the checks payable to the order of fictitious and nonexisting persons, knowing them to be such, and that the checks were handled and honored as he intended. Therefore, under Code section 9469 these would be bearer checks, and the rights of the bank to honor the same would not be affected by the provisions of Code section 9483. [4] Counsel for the school district practically concede this proposition but contend Code section 9469 is not applicable, because, say they, checks of a school treasurer upon a depository bank, though negotiable in form, are not negotiable instruments. The authorities cited as sustaining this view involve warrants, orders, or certificates of indebtedness of public corporations. See Clark v. Des Moines, 19 Iowa 199, 87 Am. Dec. 423; Annotations in 36 A.L.R. 949; 56 C.J. 565. These have generally been regarded as acknowledgments of indebtedness or promises to pay and not as negotiable instruments in the sense of the law merchant. But the rule of nonnegotiability is not applicable to checks of a school treasurer drawn upon a depository bank. Such holding would impede the flow of such checks through regular commercial channels. It would, in effect, render the depository responsible for the acts of the treasurer, the same as a surety. This is not the measure of the bank's liability. See Andrew v. Farmers' Trust Savings Bank, Iowa, 226 N.W. 714, and cases therein cited; 7 Am. Jur. 296, 374; 9 C.J.S. 715. The rights of holders of such checks, made within the *Page 512 general powers of such officers, are the same as those accorded by commercial rules and practice to the checks of individuals. See United States v. Guaranty Trust Co., 293 U.S. 340, 350, 55 S. Ct. 221, 79 L. Ed. 415, 95 A.L.R. 651. We hold these checks were negotiable and that the bank was not liable thereon upon the theory presented. [5] Other counts of the petition seek recovery from the bank for the entire amount misappropriated by Leslie by means of checks to himself, checks to fictitious payees and checks to others for his personal obligations. That Leslie wrongfully withdrew from the bank and misappropriated said funds is not disputed. But the establishment of these wrongful withdrawals by the treasurer is not sufficient to render the bank liable therefor in the absence of proof of its participation, knowledge, or notice. 9 C.J.S. 715. In Andrew v. Farmers' Tr. Sav. Bk., Iowa, 226 N.W. 714, this court said: "Was the bank bound to know at its peril that all withdrawals made by the treasurer of the school corporation were supported by warrants legally issued by president and secretary? Though the treasurer held the funds of the school district in trust, yet their deposit in the bank was rightful and under the express authority of the school board. The deposit was general, and not special. In a legal sense the bank was not chargeable therefor as a trustee. Its relation to this deposit was the same as it was to any other general deposit — that of creditor. This is fully settled in our cases. Officer v. Officer, 120 Iowa, 389, 94 N.W. 947, 98 Am. St. Rep. 365; Hunt v. Hopley, 120 Iowa, 695, 95 N.W. 205; Incorporated Town of Conway v. Conway, 190 Iowa, 563, 180 N.W. 677; School Tp. v. Stevens, 158 Iowa, 119, 138 N.W. 927; Brown v. Sheldon State Bank, 139 Iowa, 83, 117 N.W. 289. "No statute is brought to our attention which charges the bank with any special duty toward this deposit, as distinguished from other deposits made by trustees. In the absence of bad faith on the part of the bank, we think it must be held that it had no such control over the deposit as would charge it with the *Page 513 duty to challenge the authority of the treasurer as its depositor to make such withdrawals as he saw fit." The general rule is that if a bank has notice or knowledge that a fiduciary is misappropriating or intends to misappropriate trust funds which he seeks to withdraw, good faith requires that the bank prevent such accomplishment. By failing so to do the bank makes itself a privy and instrumentality to the commission of the fraud and, therefore, liable for the amount misappropriated. 7 Am. Jur. 375. Adequate notice to the bank may come directly or from circumstances which reasonably support the sole inference that a misappropriation is intended. That question must be determined upon the particular facts and circumstances of each case. 7 Am. Jur. 376. In this case there is no evidence tending to show the bank had actual knowledge of Leslie's defalcations. The school district relies upon the few checks payable to Leslie, which it contends put the bank on notice. But Leslie did occasionally receive payments upon bills which had been allowed by the district, and the checks here in question were not in such numbers or amounts as to indicate misappropriation. The trial court found the bank paid the checks in good faith. It is our conclusion this finding was correct and that recovery upon counts 2 to 6 of the petition was properly denied the school district. This holding results in an affirmance of the appeal of the bank as to the parties who were defendants in cross-petition. The several motions to dismiss the appeal of the bank are overruled. — Modified and affirmed. HALE, C.J., and SAGER, STIGER, BLISS, GARFIELD, MILLER, and WENNERSTRUM, JJ., concur in the foregoing opinion. [Reporter's Note: Division II of this opinion having been superseded, it is printed, by order of court, as a dissent.] *Page 514 Supplemental Opinion April 7, 1942. Rehearing Denied October 20, 1942.