American Nat. Bank v. Fidelity & Deposit Co.

Beck, J. (After stating the facts.) 1. In the absence of notice or knowledge, a bank can not question the right of'a customer to withdraw a fund, nor refuse the demands of the depositor by check; and it is also true that if money be deposited by one as trustee, the depositor as trustee has the right to withdraw it, and, in the absence of knowledge or notice to the contrary, the bank would have a right to presume that the trustee would appropriate the money, when drawn, to a proper use; but it is also true that if a bank has notice or knowledge that a "breach of trust, is being committed by the improper withdrawal of funds, it incurs liability, becomes responsible for the wrong done, and may be made to replace the funds which it has been instrumental in diverting. The Supreme Court of Maryland held that a bank, which credited a check to the individual account of a named person, when the check itself stated that it was for “deposit to the credit of” the person named, with the word “trustee” added to his name, was liable for participating in the breach of trust in case of loss ensuing to the trust estate by reason of his drawing out the fund by cheeks on his personal account. In the case referred to, the court said: “To deposit to the credit of Henry "W. Clagett, trustee, was an explicit notification to the bank that Clagett was not the actual owner of the money. It was an equally explicit instruction to the bank not to place the fund to the credit of Clagett’s personal account. . . Knowing that the money was not Clagett’s, but that it was payable to him, and to be deposited to [130] 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 check 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.” Duckett v. Nat. Bank, 86 Md. 403, 39 L. R. A. 89, citing Bundy v. Monticello, 84 Ind. 419. “If the bank participates with the trustee in a misappropriation of the fund, or knowingly permits such misappropriation to take place, it must answer to the beneficiary for loss thereby occasioned.” 3 A. & E. Enc. Law (2d ed.), 832. See also cases cited supporting the text. . Much stronger is the reason for holding, in the case at bar, that the bank participated in the breach of trust than in the case of Duckett v. Nat. Bank, supra. It was agreed in this latter case, in behalf of the bank, that if the bank had obeyed the direction given to it and had opened an account with Clagett (the depositor) as trustee, still Clagett could have withdrawn the funds on checks appropriately signed, and could then have misapplied the money without involving the bank. But in the case at bar, Tindall, the receiver, could not by checks, however appropriately signed by himself, unless thej>' were also countersigned bjr the judge, have withdrawn the funds. Such were the express terms of the order or decree. The defendants knew the provisions made in the decree as to the manner in which checks, ’except checks for expenses, should be signed. They knew that they were depositories of trust funds, for the safeguarding of which extraordinary care and caution was being exercised by the court. We do not know by the use of what terms 'of direction, in a decree or order for the deposit of funds in a designated bank, more emphatic notification could have been given this defendant that payment upon any check, not countersigned as prescribed in this order, would amount to an aiding of a trustee in the misapplication of the funds. By the improper withdrawal of the funds, Tindall was clearly guilty of a breach of trust. The bank had knowledge of this breach of trust, knowing as it did the express terms upon which Tindall might check out the money, — terms which, so far,, as affect the sum now sued for, were plainly violated. And having the knowledge that a breach of trust was -being committed, by payment of the checks improperly drawn and not counter [131] signed by the judge of the superior court it aided in that breach, and in the consequent misapplication of the funds; and having done so, it became liable to the beneficiaries of the trust, that is to the creditors of the Macon Hardware Co., to whom Tindall sustained a fiduciary relation. 2. That liability determined, we have to decide whether the suretj', having paid the judgment against its principal, the receiver, was subrogated to all the rights and remedies of the obligee in the bond and the creditors of the Macon Hardware Co. against the bank for having, participated, in' the breach of trust and enabled the receiver to misappropriate the fupds. “A surety who lias paid the debt of his principal is subrogated both at law and in equity to all of the rights of the creditor, and in a controversy with other creditors ranks, in dignity, the .same as the creditor whose claim he paid.” Civil Code, §2995. “He is entitled also to be substituted in place of the creditor as to all securities held by him for the payment of the debt.” Ib. §2996. That the surety was entitled, under the facts alleged in the petition, to the beneficial application of the doctrine of subrogation seems to admit of little doubt. We find a general statement of the doctrine as follows: “Sureties of a fiduciary, who are compelled to satisfy a liability'- occasioned by his default, devastavit, or breach of trust, will be subrogated to all rights and remedies of the cestui que trustent, the creditors, or other beneficiaries, against the fiduciary or those participating in the default, devastavit, or breach of trust. This rule is applicable to receivers.” 27 Am. & Eng. Enc. Law (2d ed.), 219. In the case of Orem v. Wrightson, 51 Md. 34, 34 Am. Rep. 286, it was held that the doctrine of subrogation “is not founded on contract, but has its origin in a sense of natural justice. So soon as a surety pays the debt of the principal debtor, equity subrogates him to the place of the creditor, and gives him every right, lien, and security to which the creditor could have resorted for the payment of his debt.” These general statements of the doctrine of subrogation receive a special application in an adjudicated case directly in point upon the question now before us. In the case referred to it was said that where a bank has participated in the clerk of the court’s breach of trust in receiving to his personal credit and converting to his own use interest allowed to him for the use of [132] the State’s money placed to his credit as clerk, a surety on the. clerk’s' official bond who has paid a judgment recovered by the State is subrogated to every right of the State in respect of the claim, including the right of the State against the bank. The court says: “The theory of the appellant’s case is that the bank so aided and participated in Yan Sant’s diversion to his own use of. the interest on the deposits as to'have been equally guilty with him of the breach of duty thereby made, which, in view of his relation to the deposits, amounted to a breach of trust; that under those circumstances the State could have recovered from the bank the amount of the diverted interest; and that the appellant, having as surety satisfied to the State the amount of its loss, is entitled to be subrogated to its rights against the bank in the premises.” And the court added, in upholding the contention of the appellant, “The facts of the present case, in our opinion, bring it within the class of cases last referred to (holding that the surety of a fiduciary is subrogated to the rights and remedies of both the trustee and the cestui que trust against the fiduciary and those participating in the wrongful act), and we think both upon principie and authority tire appellant should be subrogated to the right of the State to recover from the appellee as a participant in Yan Sant’s breach of trust in receiving to his personal credit and converting to his own use the sum of $3,77'4.70, allowed to him by the appellee in return for the use of the State’s money deposited to His credit as clerk of the court of common pleas.” American Bonding Co. v. National Mechanics Bank, 55 Atl. 395. 3. But while, as we'have seen, the plaintiff in this case, as the surety, became subrogated to the rights of the creditors to enforce the liability incurred by the banks on account of their participation in the breach of trust, relatively to the right to enforce that liability the plaintiff in this case stands in the place of the obligee in the bond or of the creditors, for whose benefit this bond was taken. The participation by the bank in the breach of trust, in paying out the money improperly upon checks drawn by the receiver without being countersigned as provided in the order, was a wrong or tort against the creditors, giving rise to a right of action against the wrong-doer, the bank, at the time of the commission of the wrongful act. And inasmuch as the tort on [133] the part of the bank was complete at the time of the wrongful payment of the checks, and it became immediately liable to suit for such wrongful act, the statute of limitations began to run immediately, and at the expiration of four years from that date the right of action was barred by the statute of limitations. This is clearly so had the obligee in the bond or the creditors sought to enforce the liability .incurred by the bank. And with reference to the enforcement of that liability, the surety, the plaintiff in this •case, stands in no better position than would the party to whose rights he is subrogated. “The plaintiff, being subrogated, as he was, to all the rights of A., can have and exercise no greater rights than he had. This is a cardinal principle in all cases of subrogation. Where one takes the place of another, he can take and exercise no greater rights than such other could have done.” Harris on Subrogation, 580, §841, citing Walker v. Vaudry, 4 Rob. (La.) 395. See also Rodman v. Sanders, 44 Ark. 504. In the present case, the first of the unauthorized payments by the bank upon the receiver’s checks was made on the 30th day of January, 1894, and the last was made on the 33rd day of January, 1899; and this action' was instituted on the 39th day of July, 1904. It is clear, therefore, that the creditors could not enforce this demand against the bank; and if they could not, the plaintiff, who was subrogated to their rights, could not. This being true, and these facts appearing on the face of the petition, the demurrer sotting up the bar of the statute of limitations should havd been sustained, and the court erred in overruling it. Judgment reversed. All the Justices concur.