McHenry County v. Northern Trust Co.

*650 Johnson, J. This is an action against a surety upon a depositary bond. The case was tried to the court and from the judgment in plaintiff’s favor and from an order denying a new trial this appeal is taken. On January J, 1919, McHenry' county accepted a. depositary bond in the sum of $30,000.00, furnished by defendant company in behalf of the First National Bank of Towner, North Dakota. The principal, hereinafter referred to as the Towner Bank, had been designated a depositary of county funds pursuant to the provisions of §§ 3315 to 3329, Comp. Laws, 1913. The condition of the bond is in the following language: “Whereas the said First National Bank of Towner has made application or proposal or is about to make application or proposal to. the board of county commissioners of said county to become one of its depositaries under the provisions of §§ 3315 — 3329 of the 1913 Compiled Laws of North Dakota, “Now, Therefore, if the said bank is designated one of the depositaries of' said county under the provisions of said §§ 3315-3329 of the 1913 Compiled Laws of North Dakota and shall safely keep and repay according to the letter and intent of said sections any and all funds deposited with it, subject to draft on demand, together with interest thereon at the rate specified in said application or proposal, then this obligation to be null and void, but otherwise to be and remain in full force and effect.” The statutes referred to in the bond prescribe the method of designating the depositaries of county funds. In general, they required a designation of depositaries upon competitive bids. An adequate bond was required before any; banking institution could be designated. All funds of the county were directed by these statutes to be deposited by the treasurer in banks designated as county depositaries; and if the treasurer deposited such funds otherwise he became liable to fine or imprisonment. On the other hand, if he complied with the law and deposited the public funds only in designated depositaries he was ex *651 pressly exempt from liability by reason of loss of such funds thru the failure or insolvency of the banks designated. On February 25, 1919, chapter 147, Session Laws, 1919 became effective. Section 7 of this act provided that “all state, county, township, municipal and school district funds . . . and all other public funds shall be, by the person having control of such funds, deposited in the Bank of North Dakota within three months from the passage and approval of this act, subject to disbursement for public purposes. . . . Any person who shall violate any of the provisions of this section shall be guilty of a misdemeanor and upon conviction thereof shall be punished by imprisonment in the county jail for not less than 90 days and by fine not less than $100.00. All deposits in the Bank of North Dakota are hereby guaranteed by the state.” In § 10 it is provided: “Whenever any of the public funds hereinbefore designated shall be deposited in the Bank of North Dakota as hereinbefore provided the official having control thereof and the sureties on the bond of every such official shall be exempt from all liability by reason of loss of any such deposited funds while so deposited.” On December 2, 1920, an initiated law (Sess. Laws, 1921, p. 255) went into effect amending section 7 by excluding county funds from the public funds therein enumerated and required to be deposited in the Bank of North Dakota. From the enactment of chapter 147, supra, in 1919, to December 2, 1920, save for certain exceptions not necessary to notice, the only legal depositary of county funds was the Bank of North Dakota. The portions from the act creating the Bank of North Dakota, quoted above, clearly disclose a legislative purpose to deprive all officers, having control of the fiscal affairs of public corporations, of the power to designate any depositary of public funds other than the Bank of North Dakota. It is a matter of public history, which this court will judicially notice (Comp. Laws, 1913, §§ 7928-7933) that the express purpose of this law was to bring into this institution all public funds. While it is true that the act did not deprive the county commissioners of the control over the fiscal affairs of the county, reposed in them by statute, as is said in State ex rel. Kopriva v. Larson, 48 N. D. 1144, 189 N. W. 626, yet.it is clear that whatever power the county commissioners had with respect to the designation of depositaries for public funds (§§ 3315-3329) was entirely wiped out *652 ■when chapter 1-LT, Session Laws, 1919 was enacted. It would seem that any attempt, directly or indirectly, to evade the letter and the express purpose of the statute in this respect would have been wholly without effect. It must, therefore, be conceded that when the arrangement, which will be more fully described, was made by the county treasurer with the cashier of the Towner bank, it would have been illegal for the officers of McHenry county to attempt to use any bank other than the Bank of North Dakota as a depositary of county funds. Had they done so they would, under § I of the act., supra, have become liable to criminal prosecution as misdemeanants. This is important as throwing light upon the real intent and purpose of the parties when the new arrangement was made. In this connection it should be noted, as further indicative of the legislative intent that all public funds be collected in the Bank of North Dakota, that one of the two penal provisions in the whole act relates to a disregard of the law in this particrdai\ At or about the time that the public funds of McHenry county were transferred to the Bank of North Dakota, the treasurer of the plaintiff entered into an arrangement with an officer of the Towner Bank substantially as follows: The county treasurer would receive checks and items in payment of taxes and other obligations due the county; these he would, from time to time, take over to the bank and receive cashier’s checks therefor in the same amount as the aggregate of the items, which cashier’s checks would bo by the treasurer forwarded to the Bank of North Dakota for the purpose of depositing therein the funds of the county. By this arrangement the treasurer avoided the trouble and annoyance of transmitting a large number of small items and personal checks directly to the new depositary. The transaction is described in the treasurer’s testimony as follows: “Q. IIow did you deposit the checks and other items that came into the county treasurer’s office ? A. I merely got a cashier’s check and sent the one item. Q. When you cleared you took the checks, money orders and other items in your office to one of your local banks in Towner, either the First National Bank or the Pioneer and endorsed them over to these banks and exchanged them for a cashier’s check, is that the fact, and took the cashier’s check and sent that in to the Bank of North Dakota for deposit? A. With a certain understanding, yes. Q. That is the way *653 these transactions were handled, is it not? A. Yes.” The treasurer testifies further describing the arrangement: “Myself or my deputy took these particular items to the First National Bank and placed them there practically the same as a deposit for the collection of these checks.” Court: “Tell what you did, not what you think it was.” A. “That is what I did, I loft them there and put them in there for collection, in other words, and they turned around and gave me cashier’s checks in place of them.” The arrangement was made with the ca.shier of the Towner Bank and the treasurer testifies as to the cashier’s statements as follows: “And what was that talk with respect to your leaving these items in the bank with Mr. Bergh? A. That he ■would talce them for collection to assist us with the operation of the work in the office, that is my idea — I took it up with the county com-' missioners and they approved.” The former county treasurer quotes Bergh as saying: “I will take these here items as collections and handle them and I will give you one item which you can send to the Bank of North Dakota instead of having numerous items to contend with.” This witness testified that the county commissioners told him to “go on and use the First National Bank and the Pioneer State Bank each month alternately for a clearing house as a collection agency for these checks and turn over one cashier’s cheek to the Bank of North Dakota.” No formal resolution authorizing the arrangement was adopted by the county board (See State ex rel. Kopriva v. Larson, supra). It further appears from the testimony of this witness that it was expressly agreed between him and the cashier of the Towner bank that if any item was not paid the county would refund that amount to the bank. The bank made no charge under this arrangement, but it seems that it received interest on daily balances with its correspondent bank at the rate of 2-J% and that the same were somewhat increased for a few days until the cashier’s check was presented and paid. It appears'probable that the county loqj; no interest on this account, that is, it took no longer time, in the ordinary course of business, to clear the cashier’s check than to clear the numerous small items had they been sent and deposited directly. It is likely, in some circumstances, that the cashier’s check would be cleared with less delay than the individual items, with the result that the funds'of the county would *654 begin to. draw interest at the Bank of North Dakota somewhat earlier than otherwise might have been the case. Between the second and fifteenth days of December, 1920, pursuant to the arrangement hereinbefore described, the county treasurer left with the Towner bank various items, checks, etc. and received from the bank cashier’s checks therefor amounting to a total sum of $14,796.79. These cashier’s checks were delivered to the treasurer of McHenry county simultaneously with delivery to the Towner Bank of the items and checks heretofore mentioned. The cashier’s checks were thereupon by the county treasurer forwarded to the Bank of North Dakota to be cleared and the proceeds deposited therein as the funds of McHenry county. The cashier’s checks were presented, but never paid and it is on this account that suit is brought against the surety on the theory that the transaction constituted a deposit within the terms of the bond. : From and after the 25th of May, 1919, three months after chap. 147, Sess. Laws 1919, went into effect, the record shows that the plaintiff drew no checks on the Towner Bank; on that date there was a balance in the checking account of McHenry county with the Towner Bank of about $240.00. This amount was left in the bank, according to the testimony of the former treasurer, to cover checks that had been drawn prior to that date. The treasurer testifies, without contradiction in the record, that McHenry county opened its checking account with the Bank of North Dakota at the time the law required that county funds be transferred to that institution, and maintained the same exclusively therein until the Towner bank closed. On January 3, 1921, the county commissioners passed a resolution reciting, among other things, that the board authorized the county treasurer to use the Towner bank “as a clearing bank to handle such sundry checks and items that accumulate in the regular course of business.” The state’s attorney of McHenry county, J. H. Ulsrud, pursuant to direction from the county commissioners, made a demand upon the defendant Trust Company on January 13, 1921, for $12,682.-19. In the demand he stated the circumstances in which the funds of McHenry county came under the control of the Towner Bank to have been “that the county treasurer on different dates and in amounts as hereinbefore stated, in depositing funds with the Bank of North *655 Dakota, bought cashier’s checks from the First National Bank of Towner, payable to the order of Rufus Tree, county treasurer, and that he thereafter endorsed such cashier’s checks to the bank of North Dakota” and that the same were not paid. Each cashier’s cheek issued was marked “Not subject to check” and there was not at any time, subsequent to the taking effect of the law requiring’ the transfer of public funds to the Bank of North Dakota, an account in the Towner Bank in behalf of McIIenrv county subject to check. On January 8, 1920, the deposits of McHenry county in the Towner Bank, according to the ledger sheet, amounted to $142.58. Of this amount a tender was made. From that date until the bank closed there was no change, according to the ledger record. The former treasurer testified that he outlined the plan and purpose of the arrangement with the Towner Bank to the county commissioners; that he used the term “clearing,” and “that it would be more convenient for the office to clear thru one of these banks and send one item to Bismarck;” he says that the county commissioners agreed that that was proper. In other words, it appears from the testimony and from the resolution of the county board that the arrangement was understood and intended by all parties to be for the convenience of the county officers of McHenry county in dealing with small items and in depositing the public fuiids of McHenry county in the Bank of North Dakota as required by § 7, supra. After the taking effect of the chapter creating the Bank of North Dakota, on February 25, 1919, the surety, defendant herein, apparently took no steps to cancel the bond or in any manner indicate that, in its judgment, its liability thereunder had terminated. The premium was paid by the Towner bank and not by the county. There is no evidence that the surety had knowledge or was notified of the collection agency arrangement until the demand was made. The trial court found that the plaintiff deposited with the First National Bank of Towner between the second and fifteenth days of December, 1920, $14,796.79, pursuant to the terms of the bond; that the bank received the amount and agreed to repay it upon demand; that such deposit was made in reliance on the bond and would not have been made but for the bond; and that the defendant permitted the *656 bond to remain in force without cancelling the same during all tibe times when such moneys were deposited in the Towner Bank. I Stated generally the plaintiff’s contention is that the transaction between the officers of McHenry county and the Towner Bank, with respect to county funds, amounted to a deposit within the terms of the bond, and that inasmuch as the Towner Bank failed to repay the amount so deposited on demand the condition of the bond was broken and the surety liable to the full amount in which the Towner Bank defaulted in repaying such deposits to McHenry county. It is, on the other hand, contended by the surety that the transaction did not amount to a deposit within the terms of the bond; that it was merely a convenient arrangement entered into for the accommodation of the officers of McHenry county in assisting them to make deposits of public funds in the Bank of North Dakota. Stated somewhat differently, the position of the surety is that neither the Towner bank nor the officers of McHenry county intended, by the arrangement, to create or continue the relation of depositor and depositary, necessarily terminated by the new law. It is well to note what is not as well as what is involved in this proceeding. No serious claim is made against liability on the ground that statutory formalities were not complied with by the officers of the county when the depositary was designated and the bond approved. This is not a case, therefore, where a bond has been acted on by public officer's and funds deposited in reliance thereon, without strictly complying with some initial or statutory formalities. It has been held that such a bond, acted on by all the parties, is binding as a common law obligation and that the surety cannot avoid liability on the ground of mere technical omissions with respect to certain preliminary requirements. The principles of such holdings have no application to the facts in the case at bar. The defendant, admitting the initial validity of the bond, contends that the default of the principal is not within the 'condition thereof. A further discussion of those cases would be useless and merely pedantic. The rights of the parties are measured by the terms of the contract between them; the statutory provisions, referred to in the bond, are as muJi a part of the contract as if the same had been fully set out therein. 18 C. J. 586; Equitable Surety Co. v. Board of Finance, *657 186 Ind. 650, 117 N. E. 860; Henry County v. Salmon, 201 Mo. 136, 162, 100 S. W. 20; Yeargain v. Delaware County, 90 Okla. 38, 215 Pac. 619. The surety, in the case at bar, undertakes and agrees that the principal will repay all funds deposited with it “subject to draft on demand,” as a depositary duly designated and acting under the provisions of §§ 3315-3329, supra. Such are the broad limits of the obligation of the surety. At the threshold of the case the question arises whether the officers of McHenry county could legally deposit the public funds of the county in the Towner bank after the law of 1919 became effective, establishing the Bank of North Dakota as the sole legal depositary of the public funds of the state and of its political subdivisions. Prior to the taking effect of chapter 147, Session Laws, 1919, it was the duty of the county commissioners to designate depositaries of county funds and of the treasurer to deposit such funds only in duly designated depositaries. Section 332-4, Comp. Laws, 1913, provides that if the treasurer should “deposit” or “loan” county funds in any manner except in accordance with the provisions of §§ 3315 — 3329 inclusive, he would become liable to a penalty of $500.00 for each such loan or deposit. The effect of the enactment of chapter 147, supra, upon the old statute relating to depositaries of county funds need not be determined in this action. This court, intimates, in State ex rel. Kopriva v. Larson, 48 N. D. 1144, 189 N. W. 626, that the provisions of §§ 3315-3329 were not wholly or for all purposes repealed. In any event, there can be no difference of legal opinion that after chapter 147, supra, became effective the county commissioners ceased to have power to designate any institution other than the Bank of North Dakota a depositary of the funds of McHenry county. When chapter 147, supra, became operative, the surety on the bond of the Towner bank had a right to assume that the latter institution would no longer be used as a depositary in violation of express statutory provisions. There was thereafter no need for vigilance on the part of the surety with respect to the solvency of the method of doing business of the principal in the bond. The surety could rightfully rely on the presumption that the county officers would obey the civil and criminal statutes and make no further deposits in the formerly designated depositaries. Thereafter the county and the surety had at *658 least constructive knowledge of the new situation which precluded McHenry county from continuing to use the Towner bank as a depositary of public funds, or from directly or indirectly consenting thereto. Had deposits been made in that bank notwithstanding the provisions of the new law, the act would have been unlawful. Slope County v. Douglas, 49 N. D. 1026, 194 N. W. 385, 386. Surely, on the facts in this record, no rule of law or principle of justice supports the proposition that there can be imposed on a surety in an under talcing in behalf of a depositary, in which a deposit has been or may lawfully bo made, a liability on account of a deposit made or attempted to be made therein after the time when the legislature has declared the making of such a deposit a criminal act. It is not perceived that the initiated law, which went into effect on December 2, 1920, has any bearing upon any issue involved in this case. It removed the mandatory requirement that all public funds be deposited in the Bank of North Dakota, but left that institution a legal depositary. Slope County v. Douglas, supra. McHenry county continued to deposit its funds in the Bank of North Dakota after the enactment of the initiated law. The arrangement made at the time the county transferred its public funds from the Towner bank as depositary to the Bank of North Dakota as the only legal depositary of public funds in the State, was continued unchanged. The intention of the officers of the county and of the managing agents of the Towner bank, remained precisely the same with respect to the deposit of county funds. Whether the arrangement for the clearing of checks was, when made, within or without the condition of the bond, the situation in that regard was not altered by the taking effect of the initiated law.' An agreement which was not and could not be within the terms of the contract when made in May, 1919, cannot on December 2, 1920, by some mysterious and spontaneous metamorphosis, become converted into a situation within the condition of the bond. By contending for a species of suspended animation of the bond while § 7, supra, was in force, the plaintiff does not strengthen his position. It may be conceded, for the purpose of this discussion only, that the bond had not become inoperative and that by an appropriate resolution the commissioners of McHenry county could, on December 2, 1920, have re-designated the Towner bank a depositary of all public funds under *659 their control and that in such circumstances the surety would have been liable for a default of the principal during the term of the bond, unless sooner legally cancelled. Such a concession would in no manner aid the plaintiff because the county officers continued to use the Bank of North Dakota as the county depositary — which they could lawfully do — and the county officers and the officers of the Towner bank acted under the arrangement of May, 1919, without change in purpose or in fact. The county officers ceased to use the Towner bank as a county depositary in May, 1919, and never resumed, or intended to resume, the use thereof as a depositary of public funds. Had the commissioners re-designated the Towner bank a depositary of county funds on or after December 2, 1920, when all statutory bars to that course were lifted by the initiated law, it is possible that the surety might have sought to invoke legal principles to justify a refusal on its part to continue or re-assume the obligations of the bond. Presumably the condition of the Towner bank had become somewhat precarious on December 2, inasmuch as it was insolvent and closed less than three weeks later. This situation alone illustrates the injustice and unsoundness of the proposition that the plaintiff could rely on an agreement that legally could not and was not intended by any one to give rise to the relation of depositor and depositary, within the terms of the bond, without notice to the defendant surety or the slightest gesture indicative of a change of purpose in that regard. It has been held by this court that a deposit in a bank pursuant to the depositary laws is a loan of public funds to the bank. Board of Education v. Nelson, 33 N. D. 462, 476, 157 N. W. 664. See also Robertson v. Bank of Batesville, 116 Miss. 501, 77 So. 318; Equitable Surety Co. v. Board of Finance, 186 Ind. 650, 117 N. E. 860; Re Central Bank, 23 Ariz. 574, 205 Pac. 915. There is much authority for the proposition that title to public funds sought to be loaned to or deposited in a depositary expressly disqualified by statute to receive the same, does not pass to the depositary but remains in the public corporation. 18 C. J. 580. This in no manner conflicts with anything said in' Board of Education v. Nelson, supra, where mere irregularities were involved. A deposit or a loanj in violation-of statute, is expressly penalized by §§ 3324 to 3364 and- by § 3329 the officer who makes such deposit is guilty of a *660 misdemeanor. McHenry county never consented to anj- arrangement, subsequent to the taking effect of chapter 147, supra, whereby it would become the creditor of the Towner bank by reason of a deposit of public funds therein. A place where a general deposit of county funds could be made had been 'designated by the legislature; county officers could not designate another, nor could the board ratify any scheme in effect designating another depositary. Yellowstone County v. First Trust & Sav. Bank, 46 Mont. 439, 128 Pac. 596. See also State v. Thum, 6 Idaho, 323, 55 Pac. 858. A transaction cannot be at once lawful and unlawful; nor can it be lawful or unlawful according to the promptings of the interest of a party. The fact and the law are that no deposit, within the provisions of §§ 3315-3329, was intended or contemplated when the arrangement was made, or at any time thereafter prior to the closing of the Towner bank. The testimony of the county treasurer in behalf of the plaintiff is unequivocal that the items were delivered for collection only; and his testimony is open to no other construction than that the intention of the parties was that title to the items should not pass to the Towner bank except for that limited purpose. It was not intended that the Towner bank acquire the right to mingle with and use as its own the public funds of McHenry county. Moreover, the execution of such a purpose, had one existed, was wholly unauthorized and would have been a misdemeanor. McHenry county could at any time have reclaimed the items before the rights of other and innocent endorsees had intervened. Commercial Nat. Bank v. Armstrong, 148 U. S. 51, 37 L. ed. 363, 13 Sup. Ct. Rep. 533. “When an instrument is intrusted to a bank for collection,, the bank secures no title thereto, and no right to hold it in any other capacity than as agent.” National Bank v. Johnson, 6 N. D. 180, 69 N. W. 49. It seems that the error of the trial court consists in the conclusion that there was created the relation of depositor and depositary. Such was not the case. When the arrangement was made, the parties recognized in fact, as necessarily they must in law, that the existing relation of depositor and depositary must cease. Under the new arrangement the Towner Bank became a- mere collection agency or clearing house for the convenience and the accommodation of certain county officers. Suppose that, prior to the taking effect of chapter 147, supra, the *661 officers of McHenry county liad made no deposits of public funds in the Towner bank, but had put all such funds into the only other legal depositary in the county, the Pioneer State Bank. This would have been a violation of its contract, and particularly of § 3321, Comp. Laws, 1913, which requires the county treasurer to maintain substantially the same balance in both when two depositaries have been designated. In such circumstances the Towner bank would have had a cause of action, in some form. Suppose, further, what in fact happened, that the legislature changes the law, creates a new banking institution and expressly requires that all public funds, after a certain date, be deposited therein. Aside from any question of the impairment of the obligation of a contract, can it be seriously contended that the Towner bank would have had a cause of action, against any person or in any form, arising from the fact that McHenry county deposited all its public funds in the Bank of North Dakota and sent all its 'items directly to that Bank, or cleared them all thru another hank, instead of clearing them thru the Towner bank? The contract with the bank was to safely keep deposits of public funds, subject to draft or check on demand. To keep public funds therein after the new law became operative would have been a misdemeanor, and no breach of contract, of course, could have been predicated on the refusal of the county to use the Towner bank, directly or indirectly, as a depositary of public funds. In short, to create the relation of depositor and depositary between the county and the Towner bank was a legal impossibility at the time the arrangement was made. We are not concerned with legal niceties involved in any abstract definition of what transactions constitute a deposit. The transaction with the Towner bank, generally referred to in the testimony as a “collection agency” or a “clearing house” arrangement, was not intended by either party to result in a deposit and to give rise to the relation of depositor and depositary. The conduct of the parties and the practical construction put on the agreement by them, both before and after the bank closed, clearly demonstrate the absence of a purpose or intent to create that relation. See Widman v. Kellogg, 22 N. D. 396, 401, 39 L.R.A.(N.S.) 563, 133 N. W. 1020. Regardless, however, of what the intentions of the officers of the Towner bank and of McHenry county may have been when the arrangement was made, it *662 was entirely beyond tbeir power to create the relation of depositor and depositary by anything they might say or do. This political subdivision of the state could speak and act only in the manner and on the matters prescribed by the legislature in statutes enacted pursuant to constitutional authority. We are satisfied that the items delivered to the Towner Bank between the second and fifteenth days of December, 1920, were not delivered for deposit and safekeeping “subject to draft on demand” within the letter, spirit or purpose of §§ 3315 — 3329, Oomp. Laws 1913, and of the surety bond executed in behalf of the Towner bank by the defendant' and appellant herein. A service was rendered to certain county officers; it “was a convenience” as stated by one of the county commissioners. Dor this service no charge was made and whatever benefit accrued to the Towner Bank was not at the expense of McHenry county. The real and legal depositary at all times was the Bank of North Dakota. There is no pretense that the county had a right to, or that there ivas any expectation that the county would, write checks or drafts on a deposit in the bank after this arrangement was made. The defendant did not bond a “clearing house” or a “collection agency.” It bonded a depositary where county funds were to be deposited “subject to draft on demand.” That was the contract. The relation of depositor and depositary ceased to exist, by force of a statute, by the calculated and clearly expressed and understood purpose of all the parties an entirely new relation arose as a result of the deliberate agreement of the Towner bank and an officer of plaintiff, to which the defendant surety was not a party, of which apparently it had no knowledge, and which was not within the contemplation of any one when the bond was executed. Whether the Towner bank became, in any sense, a trustee is not decided and it is not intended to express any opinion on that subject. The judgment of the trial court must be reversed and the action dismissed. It is so ordered. Nuessle, and Birdzell, JJ., and Wolfe, District J., concur. Mr. Justice Christianson being disqualified did not participate; *663 Honorable Ohas. E. Wolfe, Judge of the Third Judicial District sitting in his stead.