Blumberg v. Taggart

*41 Julius J. Olson, Justice. Action to recover $1,200 from defendant Taggart on the basis of fraud practiced by him to plaintiff’s loss in that amount. Liability against defendant insurance company is predicated upon the theory that $1,000 of this amount has been traced into its hands, and that because of Taggart’s fraud this sum became “impressed with a trust in favor” of plaintiff. Taggart defaulted. A trial to the court between the insurance company and plaintiff resulted in findings for the company. Plaintiff’s motion for amended findings or a new trial was denied, judgment was entered, and he appeals. We shall refer to the insurance company as the defendant. There is no substantial dispute about the facts. They may be thus summarized: On July 8, 1939, one Minnie Mortensen applied to an agent of defendant for a policy of insurance, referred to as “a continuous premium deferred life annuity” policy. Her application and $1,000 in cash were turned over to the agent. By this payment all premiums for the full period of 21 years were fully paid. The agent with whom she dealt delivered the application and the money to Taggart, who was a general agent for defendant to the extent of being authorized to receive and receipt for money coming into his hands for his principal but not to withdraw any funds so received from the principal’s depository, the Northwestern National Bank & Trust Company of Minneapolis. Taggart sent the application to the home office at Galveston, Texas, but retained the $1,000, converting it to his own use and saying nothing to his principal about the cash payment. On July 28, defendant, its officers at Galveston having no actual knowledge of its agent’s perfidy, issued to Miss Mortensen a deferred annuity contract which provided for premium payments of $65.59 on the eighth day of July each year until premiums for 21 full years had been paid or until her prior death. There is no question that plaintiff was defrauded by Taggart. The court so found, and that finding is not challenged. The fraudulent transaction occurred on or shortly prior to October 7, 1939. In that deal plaintiff gave Taggart a cashier’s check for $1,200 *42 payable to him. This transaction was a private one between Tag-gart and plaintiff. It did not in any way concern Taggart’s principal and was entirely outside the scope of his employment. The check, which was made and delivered October 7, was promptly cashed by Taggart at the bank upon which it was drawn. He deposited to the credit of defendant, his principal, $1,000 of the currency received and sent to defendant at Galveston a duplicate deposit slip showing the credit of this “currency” deposit to defendant’s account on that day. It bears this identification: “Mor-tensen, Annuity # 679633.” The remaining $200 was pocketed by Taggart. Defendant, upon receipt of the deposit slip, on October 10 issued to MisS Mortensen its premium trust fund certificate, stating, in substance, that all the premiums provided for in her policy had been fully paid. The insurance policy and the trust certificate are in full force and effect. With regard to the $1,000 cash deposited to defendant’s credit, the court found its position to be that of “a bona fide purchaser for value,” and that it was not unjustly “enriched by said deposit.” Plaintiff made no demand upon defendant for this sum until after he and Taggart had entered into a covenant not to sue, dated December 7, 1939. That was an agreement whereby Taggart agreed to repay to plaintiff, in monthly installments, the $1,200 of which he had been defrauded. It was to be “operative only if said schedule of payments” was “adhered to.” Taggart paid only $200 and defaulted as to the remaining payments. The present suit was commenced in September 1940. . No doubt, as between the insured and defendant, the policy became operative as and when her money was delivered to and accepted by one authorized to receive it. Taggart was such an agent. Mason St. 1927, § 3757. As to her, his theft or embezzlement was a loss his principal should bear, since a principal is bound by the acts of his agent to the extent of the authority, expressed or implied, with which he has clothed him. But this case does not hinge upon the legal principles obtaining in such a case. Here, as we have seen, the deal between plaintiff and Tag- *43 gart is entirely outside defendant’s field of operations and wholly aside and beyond his employment. His fraud upon plaintiff had nothing to do with any duty owed to his employer, nor was he, as to plaintiff, a representative of defendant. The problem is whether the money so wrongfully obtained by Taggart and directly traced to defendant is impressed with a resulting trust so that defendant, who had nothing to do with the original transaction and as a matter of actual fact knew nothing of it, should bear the loss, or, on the other hand, whether it is for the plaintiff to bear. In Penn Anthracite Min. Co. v. Clarkson Sec. Co. 205 Minn. 517, 522, 287 N. W. 15, 18, we held: “It is law that ‘where the owner of property transfers it, being induced by fraud, duress or undue influence of the transferee, the transferee holds the property upon a constructive trust for the transferor.’ Restatement, Restitution, § 166. That trust includes the proceeds of the property.” Cf. 25 Minn. L. Rev. 667, 710; 3 Scott, Trusts, § 469, pp. 2336, 2337; 26 R. C. L. 1236, and cases under note 1. In American Ry. Exp. Co. v. Houle, 169 Minn. 209, 213, 210 N. W. 889, 890, 48 A. L. R. 1266, we held: “The rule is well established that, where a constructive trust of embezzled funds comes into being for the protection of an injured party, it is not cut off by any transfer of the property or of other property substituted therefor until such property reaches the hands of a tona fide purchaser for value.” As to Taggart, there can be no question that he received plaintiff’s property under a constructive trust and is liable to him as a trustee. Our statute recognizes the stated rule, Mason St. 1927, § 8089: “No implied or resulting trust shall be alleged or established to defeat or prejudice the title of a purchaser for a valuable consideration, and without notice of such trust.” The following cases, amongst others, uphold the rule: Cochran v. Stewart, 21 Minn. 435, 438; MacLaren v. Cochran, 44 Minn. 255, 257, 46 N. W. 408; Newton v. Newton, 46 Minn. 33, 37, 48 N. W. 450; 18 Minn. *44 L. Rev. 366; 25 Minn. L. Rev. 674, 689; United States v. Dunn, 268 U. S. 121, 132, 45 S. Ct. 451, 69 L. ed. 876; 4 Bogert, Trusts & Trustees, § 881. The court found that defendant “stands in the position of a bomt fide purchaser for value” and “was not unjustly enriched” by the deposit made by Taggart to its credit in the designated bank. That defendant had no actual knowledge of Taggart’s wrongdoing is abundantly shown by the record. In this situation it becomes important to determine whether Taggart’s fraud, he having, of course, full knowledge of his own wrong, thereby created a situation whereby his knowledge also became that of his principal. We think it is well settled law that an agent’s knowledge will not be imputed to his principal when he is engaged in an independent fraud. In such circumstances it cannot be supposed that he will inform his principal of. it. In Rudd Lbr. Co. v. Anderson, 161 Minn. 353, 357, 201 N. W. 548, 550, we held that “when an agent commits an independent fraud, it cannot be supposed that he will inform his principal of it. Moreover, when he is engaged in perpetrating such a fraud, he is not acting within the scope of his employment. These are valid reasons for refusing to charge the principal with notice of the facts constituting the fraud.” (Citing cases.) 3 C. J. S., Agency, § 269, notes 53, 54, and § 270, note 61; 2 Am. Jur., Agency, § 374; Restatement, Agency, § 282. On this phase it is deemed important to consider the cases which form the bases upon which the authors of 2 Am. Jur., Agency, § 380, 3 C. J. S., Agency, § 269, and Restatement, Agency, § 274, rely in their formulation of the exceptions to or limitations on the rule we have discussed. The folloiving are considered the leading cases: Curtis, Collins & Holbrook Co. v. United States, 262 U. S. 215, 43 S. Ct. 570, 67 L. ed. 956, was a suit brought by the United States to cancel certain patents to lands acquired under the Stone and Timber Act. One Holbrook, general manager and vice president of the company, actively took in hand the acquisition from the government of title to certain valuable timber lands. When the required proofs had been furnished and final approval of the entry *45 made, the individual entrymen conveyed their respective properties (215 U. S. 221, 222, 224, 43 S. Ct. p. 572, 67 L. ed. 956) “through a naked trustee * * * to the Company. * * * . The Company was in being and under the active. management of Holbrook when these entries were being made and final proof submitted. Holbrook knew of the fraud practiced on the government in making the entries * * * and the circumstances as to the payment of money for expenses and bonuses out of moneys furnished” by him. He “was the sole agent acting for the Company in securing titles to land for it.” The company and he were engaged “in a common adventure.” He “was to procure the land for his principals at a stipulated profit for himself, they to furnish the money with which he could make the purchases for them.” Naturally and properly, the court concluded: “Under these circumstances, we do not think the Company can be treated as a bona fide purchaser. It is charged with Holbrook’s knowledge because he was the sole actor for the Company in procuring the fraudulent patents.” (Italics supplied.) The court carefully distinguished that case from American Nat. Bank v. Miller, 229 U. S. 517, 33 S. Ct. 883, 57 L. ed. 1310, upon which the company strongly relied, saying: “We do not think the case applicable here. The president of the Macon bank was engaged in something in which his interest was plainly independent of any agency of his on behalf of his bank.” And that is just as plainly the situation in our case. Taggart’s fraud practiced upon the plaintiff was wholly foreign to any duty owed by him to defendant. The deal between plaintiff and Taggart was their own private affair, wholly unconnected with Taggart’s employment. The Miller case directly supports our case of Rudd Lbr. Co. v. Anderson, 161 Minn. 353, 201 N. W. 548, supra. In Atlantic Cotton Mills v. Indian Orchard Mills, 147 Mass. 268, 17 N. E. 496, 9 A. S. R. 698, one Gray was the common treasurer of the two corporations involved in the suit. To make good and cover up his individual default, he drew checks upon one corporation payable to the other. He and he alone knew of the fraudulent origin of the checks and was the only officer of either corporation *46 having such knowledge. In this situation the court held (147 Mass. 273, 281, 17 N. E. 501, 9 A. S. R. 698): “There is no doubt that a thief may use stolen money, or stolen negotiable securities before their maturity, to pay his debts; and in such case an innocent creditor may retain the payment. But this doctrine is inapplicable to the present case, for two reasons: in the first place, under the circumstances disclosed in the auditor’s report, the plaintiff cannot be considered as an innocent creditor, that is, a creditor without notice; and moreover, the transaction did not amount to payment. » tt tt tt “The fact that Gray, upon a private memorandum, charged himself with the sums fraudulently withdrawn by him is immaterial. This act was unauthorized, and the defendant is not bound by it. Entering it in this manner did not make the transaction a loan from the defendant to Gray.” In Mays v. First State Bank (Tex. Com. App.) 247 S. W. 845, 846, one Adams was the cashier of the bank, and as such “did all the loaning and directing the work in the bank; * * * he assumed all of the responsibility and made all the loans, since the president was not active.” It was shown in that case “without contradiction, that — ‘No director or any one interested in the bank had anything to do with taking the notes into the bank, except Adams.’ ” There Adams was a defaulter. The court, after stating the general rule as we have heretofore stated it, said (247 S. W. 846): “But a different status is created where the officer deals both with and for the corporation; where he as an individual deals with himself as agent for the corporation and as agent deals for the corporation, with himself as an individual, in one and the same transaction. In such a case we cannot conceive otherwise thán that he as agent knows everything that he as an individual knows.” So that “where he is the sole representative , of the corporation in the transaction, under such circumstances, the corporation is as *47 wise as the customer or client. He is the corporation and he is the customer or client.” The cases of National Turners Bldg. & Loan Assn. v. Schreit-mueller, 288 Mich. 580, 285 N. W. 497; Higgins v. Daniel, 5 Wash. (2d) 134, 105 P. (2d) 24, and Knobley Mountain Orchard Co. v. Peoples Bank, 99 W. Va. 438, 129 S. E. 474, 48 A. L. R. 459, are in accord with those here discussed but do not go beyond them. The Michigan case is interesting because the court there distinguishes but does not destroy prior cases dealing with this subject. Summarizing the cases, the net result to be arrived at is this: Where the guilty knowledge of the agent comes to him as the sole representative of his principal for whom he is acting and is the only one having such knowledge, the principal must take the responsibility of the agent’s acts as its own. He is, in such circumstances, the alter ego of his principal, since he only is the agency through whom the principal himself acted. In short, the exception or limitation to the rule which we think is applicable here rests upon the principle of the legal identity of the principal and agent. The facts here presented and as found by the court clearly eliminate Taggart’s misconduct in dealing with plaintiff from any connection with defendant. Its officers had no knowledge of any wrongdoing on his part. The affair with plaintiff was wholly his own. In that situation, fraud cannot be imputed to defendant. Taggart’s payment of his debt to defendant did not transform him into something else than what he was when he received the money from plaintiff. Restatement, Restitution, § 173(2), provides: “Except in the case of a transfer by an express trustee, a transfer of property other than an interest in land in satisfaction of or as security for a preexisting debt or other obligation is a transfer for value.” This principle has been adopted and followed by this court in the following cases, amongst others: Stevenson v. Hyland, 11 Minn. *48 128, 131 (198); Horton v. Williams, 21 Minn. 187, 193; Faulken-burg v. Windorf, 194 Minn. 154, 158, 259 N. W. 802. As pointed out in 3 Scott, Trusts, § 475, p. 2348: “The distinction between what constitutes value for the purpose of cutting off an express trust and what constitutes value for the purpose of cutting off a constructive trust seems to be clearly made in states in which the Uniform Sales Act is in force. In § 24 of the Act [Mason St. 1927, § 8399] it is provided that ‘Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller’s defect of title.’ In § 76 [Mason St. 1927, § 8450] of the Act it is provided that ‘ “Value” is any consideration sufficient to support a simple contract. An antecedent or preexisting claim, whether for money or not, constitutes value where goods or documents of title are taken either in satisfaction thereof or as security therefor.’ It is clear that by the terms of the Act the constructive trust which arises from the obtaining of title to chattels by fraud is cut off by a transfer of the chattels by the fraudulent person in satisfaction of or as security for an antecedent debt if the transferee has no notice of the fraud.” That Taggart was indebted to defendant by virtue of his failure to account for Miss Mortensen’s payment is clear, for he withheld money belonging to his principal which he had no right to retain. The following cases are helpful: Rhode Island Mut. L. Ins. Co. v. Pierce (R. I.) 171 A. 243; American & Foreign Ins. Co. v. Bacon (La. App.) 157 So. 305; Salem Traction Co. v. Anson, 41 Or. 562, 567, 67 P. 1015, 69 P. 675; Floyd v. Patterson, 72 Tex. 202, 10 S. W. 526, 527, 13 A. S. R. 787. “Where the claimant’s money is wrongfully used in discharging a debt of the wrongdoer, the claimant is not entitled to recover his money from the creditor if the creditor had no notice of the wrong, since he is then in the position of a tona fide purchaser.” 3 Scott, Trusts, p. 2455, § 513. *49 In support thereof are cited Babcock v. Standish, 53 N. J. Eq. 376, 33 A. 385, 30 L. R. A. 604, 51 A. S. R. 633; Ordway B. & L. Assn. v. Moeck, 106 N. J. Eq. 425, 151 A. 126. An interesting and instructive case on this phase, since it is one of first impression, is London & County Banking Co. Ltd. v. London & River Plate Bank, Ltd. [1888] 21 L. R. Q. B. D. 535, where the headnote states the essential facts and the law as applied thereto, thus: “Certain negotiable securities were stolen from the defendants by their manager, and came into the possession of the plaintiffs for value, and without notice of any fraud. Subsequently the manager obtained the securities from the plaintiffs by fraud, and restored them to the defendants, who did not know that the securities had been out of their possession. A portion of the restored securities were not the bonds actually stolen, but bonds of a like kind and value:— “jHeld, that, in the absence of evidence to the contrary, it should be presumed that the defendants accepted the securities in discharge of their manager’s obligation to restore them, and were therefore bona fide holders for value, and entitled to retain them.” Other cases are Nassau Bank v. Nat. Bank of Newburgh, 159 N. Y. 456, 54 N. E. 66; Bank of Charleston v. Bank of State, 13 Rich. (S. C.) 291. See 4 Bogert, Trusts & Trustees, § 889, p. 2585, and cases under note 57. Judgment affirmed.