Rensselaer Valve Co. v. National Bank of Commerce of Seattle

Bridges, J. The appellant, Rensselaer Yalve Company, is a corporation engaged in the manufacture of valves and hydrants, having its factory and its principal place of business at Troy, in the state of New York. It maintains a branch place of business in the city of Seattle for the sale of its products. This branch, during the times which gave rise to the present controversy, was under the management of one Fred H. Hayner, who conducted it under the title of “Rens-selaer Yalve Company. Fred H. Hayner, Mgr.” The appellant’s trade in Seattle was principally with contractors on public works, who paid for the articles purchased largely with checks drawn on banks operating in the city of Seattle. Prior to the year 1917, all these checks were forwarded to the appellant at Troy, and were by it collected in the usual manner through banking houses. The appellant and Hayner soon discovered that contractors often desired to purchase from one person, not only the hydrants and valves they needed, but also other supplies, such as pipe and jute. They agreed that Hayner might, on his own account, become the agent for products other than hydrants and valves. It was realized that, in doing business in this way, certain checks might be made payable to appellant a part of the proceeds of which might belong to Hayner. For — 255 — this reason, and for the further reason that, under the former method of collection, checks were sometimes lost for want of timely presentation, a change in the method of collecting a part of the checks was desirable. To this end, the president of the appellant and Hayner approached the respondent, a national bank doing business at Seattle, when an understanding was reached satisfactory to all parties. The substance and effect of the agreement was that all checks received by Hayner payable to the appellant should be deposited by him in the respondent bank in the name and to the account of the appellant. In order that Hayner might pay himself such sums as belonged to him and remit the balance to the appellant, he was given authority to sign checks in the .name of appellant drawn on its account. After appellant had given these oral instructions to the bank, it wrote respondent the following letter embodying the substance of the agreement: “Seattle, April 5,1917. “National Bank of Commerce, “Seattle, Wash. “Gentlemen: Confirming conversation with your Mr. Brownell, the account now opened of Rensselaer Valve Company, in your bank is of moneys belonging to said Rensselaer Valve Company, but subject to check signed Rensselaer Valve Company by Fred H. Hayner, Mgr., but otherwise subject in all respects to the order of proper officers of said Rensselaer Valve Company (a corporation) of Troy, N. Y. duly accredited as such in the usual manner. Yours respectfully, “Rensselaer Valve Company, “By Ellis L. Rowe, Prest.” The business was conducted through Hayner until the fall of 1920, when an investigation of his affairs which the appellant then made disclosed that he was in default to it in a large sum of money. This action was then brought to recover from the bank the amount — 256 — of certain checks made payable to it which were either paid by the bank to Hayner in cash or deposited to his private account without first being deposited to the account of the appellant. The testimony tended to show that the respondent had not followed the instructions which we have mentioned. Instead of requiring the checks made payable to the appellant to be deposited in its name, it permitted Hayner, on the presentation thereof, to direct the disposition of their proceeds without so depositing them. In certain instances it paid him cash over the counter for them, and in other instances permitted him to deposit the amount of the checks directly to his individual account. While the appellant’s testimony concerning its loss is not very satisfactory, yet it is sufficient, without any contradiction, to show that it had never been repaid the amount of moneys represented by the checks so cashed by Hayner and deposited to his credit. At the close of the appellant’s testimony, the trial court granted respondent’s motion for nonsuit and thereupon entered a judgment dismissing the action. Let us state the matter more concretely. According to instructions given to the bank, the checks involved should have been placed in the account and to the credit of the appellant. These instructions were not followed by respondent. It permitted Hayner either to cash the checks or to place them to his individual account. Under further instructions given the bank, Hayner had a right to draw checks in the name of the appellant against the account into which this money should have been placed. Had the checks been deposited to appellant’s credit as per instructions, Hayner might, by virtue of his authority, have withdrawn the money and put it in his own private account and there would have been no liability on the part of the bank, assuming that — 257 — it would have been innocent of any wrongdoing on Hayner’s part. The only proof of loss to the appellant was that it has never been paid any portion of the sums represented by these checks. The main question is, is the appellant entitled'to recover of the respondent on these facts. There are what we consider one or two less important questions we will first dispose of. Respondent contends that there is no testimony to show that the appellant had not received from Havner, or otherwise, the amount of money here sued for. But we think the testimony, while somewhat unsatisfactory, is sufficient in this respect. The president of the appellant was asked: “Do you know whether or not the Rensselaer Valve Company has received the proceeds of these checks (meaning those involved in this suit) ? A: Tes, I know that they did not.” Practically the same question was asked of the general manager, who answered: “I know absolutely that the Rensselaer Valve Company did not receive the proceeds from those checks.” There being practically nothing to dispute this testimony, it is sufficient in that respect to carry the case beyond a nonsuit. It is true that on cross-examination of these witnesses the court refused to permit them to further testify on this point because they had obtained their information from the books of the company. But the testimony which we have quoted was based on assertions of the witnesses that they spoke from personal knowledge. That testimony still stands and was properly received. We cannot say, therefore, that there was no testimony that the appellant had not been paid the amount of the checks in question. Nor did the trial court grant the nonsuit on this ground, but because, having deposited the checks — 258 — to the account of appellant, Hayner had authority to check on that account. Respondent further contends that the judgment should be affirmed because of appellant’s conduct with reference to this account, in that it failed to use reasonable diligence in checking it up. It may be doubted whether such a defense is at all material or would tend to excuse respondent from complying with instructions. Wagner Trading Co. v. Battery Park Nat. Bank, 228 N. Y. 37. But it is unnecessary for us to pursue this discussion. The same question was involved to exactly the same extent in the case of Rensselaer Valve Co. v. Union Nat. Bank, 122 Wash. 494, 210 Pac. 947, 213 Pac. 490, and was there resolved against the respondent. That case arose out of the fact that, subsequent to the transactions here involved, the appellant’s account was transferred from the respondent to the Union National Bank of Seattle and the same general course of business was followed. We consider that that case is entirely controlling of this question. It is further contended that there was not any proof that the money represented by those checks belonged to the appellant. We do not so read the testimony. Besides, the checks were all made payable to the appellant and the presumption would be that they represented money belonging to it. Let us now discuss what we consider the 'main and fundamental questions. These were also fully involved in the Union National Bank case, supra, and were there decided against the respondent. Inasmuch, however, as they have been especially stressed here, we are not averse to elaborating somewhat upon what we there said. It is unquestionably the duty of a bank to faithfully carry out any instructions given it by a depositor concerning his business. In this case the bank had explicit — 259 — instructions that checks such as those involved here should be deposited by Hayner to the appellant's account. When Hayner failed to make such deposit, but cashed the checks for his own use, he was at once guilty of an unlawful conversion, and since the bank assisted him in obtaining the money, in direct violation of the instructions given it, though, of course, without intent to do wrong, it would be liable to the appellant. The moment the bank cashed the cheeks and gave the money directly to Hayner, in violation of instructions, the wrong had been done and the unlawful conversion accomplished, and the bank’s liability established. It is a well settled rule of law that, if a bank has notice that a breach of trust is being committed by the improper withdrawing of funds, it incurs liability, becomes responsible for the wrong done, and may be compelled to replace the funds that it has been instrumental in diverting. Where a bank has knowledge that a fund deposited with it is impressed with a trust, it is liable for permitting its application to the personal account of the depositor, or if the bank pay funds in its possession to one who it knows is not entitled thereto, it has committed a wrong, for which it will be held liable to the true owner, if he has sustained a loss. The following are a few of the leading cases in support of the foregoing proposition: Duckett v. National Mechanics’ Bank of Baltimore, 86 Md. 400, 38 Atl. 983, 39 L. R. A. 84; American Exchange Nat. Bank v. Loretta Gold & Silver Min. Co., 165 Ill. 103, 46 N. E. 202; Commercial & Agricultural Bank v. Jones, 18 Tex. 811; Niagara Woolen Co. v. Pacific Bank, 141 App. Div. 265, 126 N. Y. Supp. 890; Robinson v. Chemical Nat. Bank, 86 N. Y. 404; Hope Vacuum Cleaner Co. v. Commercial Nat. Bank, 101 Kan. 726, 168 Pac. 870; Allen v. Puritan Trust Co., 211 Mass. 409, 97 N. E. 916, L. R. A. 1915C 518, and note; United States Fi — 260 — delity & Guaranty Co. v. Adoue, 104 Tex. 379, 137 S. W. 648, 138 S. W. 383; Wagner Trading Co. v. Battery Park Nat. Bank, supra. The general rule laid down by the foregoing and other authorities is that where a bank has on deposit moneys which it knows, or by the exercise of reasonable care should know, are trust funds, and it knowingly permits the trustee to use the moneys for his private purposes, or in any manner adverse to the interest of the trust, it is liable to the trust estate. The case of Duckett v. National Mechanics’ Bank of Baltimore, supra, is a leading authority. There the facts were that one Clagett was a trustee for an estate and a check was made payable to his order as trustee. The bank permitted him to endorse the check payable to himself individually and to place the money to his individual account. Later he appropriated the money to his own use and the trust estate instituted suit against the bank. The court, speaking with reference to the check being made to Clagett as trustee, said: “This was an explicit notification to the bank that Clagett was not the actual owner of the money. Knowing that the money was not Clagett’s, but that it was payable to him, and to be deposited to his credit as trustee, the bank had no authority to place it to his individual credit . . . and if loss ensued by reason of Clagett drawing the fund out by checks on his personal account, the bank is liable to make restitution to the trust estate. The bank in the eye of the law participated in the breach of trust of which Clagett was guilty. In fact, the bank took the first step that ended in the spoliation of the trust. Its act in placing distinctly marked trust funds to the personal credit of Clagett was obviously wrongful, and it must bear the resulting consequences. ’ ’ While the cases cited are not directly in point they are, in principle, controlling. It is true that, in the — 261 — case at bar, tbe bank may not have known that Hayner was obtaining the money on these checks for his own private nse, yet, if appellant’s testimony be true, it did know that he had no authority to obtain it in the manner he did, and that it had no authority to permit him to so obtain it. There was a safe and sure way in which the bank could have handled this business, and that was to deposit these moneys to appellant’s credit according to instructions. If thereafter Hayner drew on that account and used the money for his individual purposes, that was an affair between him and appellant, and in the absence of knowledge of the wrongdoing, the bank would not have been liable. Its error was in permitting Hayner to have the money in the first place. A loss being shown, its liability at once attached. But respondent very earnestly contends that, if it be admitted that it violated instructions in permitting Hayner to obtain the money on these checks, there is no testimony to show that the appellant suffered any loss because of such violation, and that one whose money has been wrongfully appropriated by another may still not recover unless he shows that the misappropriation or conversion resulted in his damage. Its argument is to the effect that its violation of instructions had nothing to do with appellant’s loss; that, had it followed instructions and caused the money to be deposited in appellant’s account in the bank, Hayner, by virtue of his authority to check on that account, could in another way have accomplished identically the thing he did accomplish, that is, embezzle the money; that because Hayner had power to do indirectly what he did directly, the violation of the instructions was not the cause of the loss. Since the argument we have asked for additional briefs on this point. We had hoped that counsel would be able to find some case or authority — 262 — directly in point, but, in onr opinion, none sncb has been cited. The fact that' Hayner had power to draw checks against the appellant’s-account and thus might, in that manner, have obtained the very moneys the respondent paid to him directly will not relieve the bank. It committed its error in violating its instructions. What might or might not have happened had it lived up to the instructions is immaterial. The bank having assisted Hayner to get the money, we will not speculate whether he might, would or could have obtained it in some other manner. Manifestly, one of the reasons the appellant had for insisting that checks made payable to it should be passed to its account was that it might, in that manner, know when payments had been made by contractors. For illustration, if a contractor who had bought some of appellant’s products paid therefor by giving Hayner a check payable to the appellant and that check had been passed to its account, then it could easily and readily know that the payment had been made, but if the check was permitted to be cashed by Hayner or placed to his own credit without passing it through the appellant’s account, it would have no way of knowing the payment had been made, and an excellent opportunity would be given Hayner to do the very thing he did — embezzle the appellant’s money. When appellant had proved its instructions to respondent concerning these checks and that the moneys represented by them had been paid to Hayner in cash or put to his credit, contrary to instructions, and that it had not received the money, or sums in equal amount, it had made a case which was sufficient to put the respondent upon proof. The mere fact that Hayner had authority to draw checks on appellant’s bank account and thereby indirectly obtain its money, does not nega — 263 — tive the idea that its loss resulted from the failure of respondent to follow instructions. The only case we have found touching this question is Duckett v. National Mechanics’ Bank of Baltimore, supra. There, as here, the bank claimed that its violation of duty was not the cause of the loss to the trust estate, because, had the money been placed to Clagett’s account as trustee, he, acting in that capacity, would have had the right to draw the money out and apply it to any use, and the bank would not be liable if it did not have notice. Answering this contention, the court said: “It is no answer to say that had the bank obeyed the direction given to it, and had it opened an account in the name of Clagett as trustee, and credited that account with these funds, still Clagett could have withdrawn them on checks appropriately signed, and could then have misapplied the money without involving the bank in any liability. This is no answer, simply because what might have been done was not done. Had the bank opened the account for this fund in the name of Clagett, trustee, instead of entering it to the credit of his personal account, it would have done what it was its plain duty to do, and it would not have been guilty of the error which it did commit,. Had it done its duty, and had Clagett afterwards withdrawn the money, as he might have done, and had he then misapplied it without the cooperation of the bank, there would have been no liability incurred by the bank at all. But this was not done, and the failure of the bank to do what it ought to have done cannot be treated as tantamount to the thing that it did do unless contraries are equivalent of each other. What it ought to have done is not what it did do, and it cannot escape liability upon the mere conjecture that what did happen to the funds might have also happened had the bank not been derelict in its dealings with those funds.” We are confident that the appellant’s testimony was sufficient to carry the case beyond a nonsuit. The — 264 — judgment is reversed and the cause remanded for trial. Main, C. J., Mackintosh, Holcomb, Tolman, Mitchell, and Pemberton, JJ., concur.