Bank of Hartford v. McDonald

Smith, J., (after stating the facts). Pretermitting a decision upon the competency of the evidence herein detailed and to which there were a number of objections, we are of opinion that the evidence is not sufficient to charge the bank with liability for the misappropriation of these funds. Except the correspondence, above set out, there is no proof that any officer of the bank, except the president, knew anything about the interest of appellees in the property and the rents and proceeds of the sale thereof and this correspondence is insufficient to charge it with such notice as would make it liable for any misappropriation. It does not advise the bank of their interest in the land and does not request that it hold the funds for their protection. The bank under these circumstances can not be charged with Spradling’s knowledge nor be required to perform his agreements. In these transactions, Spradling was a stranger to the bank, although its president, for the law does not allow the president of the bank to make contracts with himself, against the interest of the bank, so as to bind the bank, because the weakness of human nature and the probability of the agent giving himself the advantage of the bargain is recognized. In the case of City Electric Street Ry. Co. v. First National Bank, 65 Ark. 543, where a question similar to the one here considered was involved, the court said: “The contention of counsel on this point is plausible, but underlying it, there is the fallacy that in negotiating the notes in question the action of Allis was the action of the bank. Allis was the president of the bank, it is true, but he was also payee of the notes, and he was personally interested in their negotiation. This of itself made him a stranger to the bank, so far as the handling of these notes was concerned. An agent can not prostitute the name of his principal to the service of his own personal ends, and this rule applies with full force to the official of a. corporation in making use of the corporate name.” It is not contended here that the bank was a trustee nor is it said that it derived any benefit from the misappropriation of the funds. Spradling had the title in trust for the- benefit of himself and his copartners, and his control of the property and his right to dispose of it was without limitation, except the duty of finally accounting to appellees for his stewardship, and his knowledge of the rights of his copartners can not be imputed to the bank for the rule is that where an officer is individually interested in a note or other matter his knowledge is not to be imputed to his bank, since his interest is best served by concealing it. 5 Cyc. 461, and note 22; City Street Ry. v. First National Bank, supra; Home Ins. Co. v. North Little Rock Ice & Electric Co., 86 Ark. 538; Klein v. German Nat. Bank, 69 Ark. 140; City Street Ry. v. First Nat. Bank, 62 Ark. 33. There was no relation of trust between Spradling and .the bank, there was no obligation to deposit the funds in this particular bank, and Spradling could without question have deposited them in any other bank. The appellant bank had no interest whatever in the property and derived no benefit from the venture and was in no way responsible for its success or failure, and it has been held that where a trustee has full control over the funds deposited in a bank, he may draw them out of the bank ad libitum, and the bank incurs no liability in permitting this to be done, so long as it does not participate in the breach of trust, resulting in a misapplication of the funds. First State Bank of Bonham v. Hill, 141 S. W. 300; Interstate Bank v. Claxton, 80 S. W. 604, 65 L. R. A. 820. Appellee insists that if it were conceded that the president of the baiik alone knew of the agreement this knowledge would be imputed to the bank and would bind it and make it liable for any misappropriations of the funds, and cites in support of that proposition the case of Skillern v. Arkansas Woolen Mills, reported in 77 Ark. at page 172. The facts in that case were that the Woolen Mills Company owned a mill and leased its entire plant to one D. P. Terry, who was the cashier and managing officer of a bank, and two others, and these lessees took possession of the mill and operated it in the name of the lessor, bnt for their own personal benefit. They kept an account with the bank in the name of the lessor and transacted their business in its name. They overdrew the amount of their credit and at the instance of Terry, one of the lessees, and the cashier of the bank, and without authority of the mills company executed the note sued on by Skillern, the receiver of the bank, and it was there held that the bank, through its cashier and managing officer, had notice of the foregoing facts as they occurred, and was not misled, and that the mills company was not estopped from taking advantage of them. This is a full statement of the effect of that decision and, in our opinion, there is nothing there decided that gives support to appellees’ contention under the facts here shown to exist. Appellees cite cases to the effect that if a bank learns that a trustee is committing a breach of trust by an improper withdrawal of funds, or participates in the fraud, it is liable and that where a deposit of trust funds is made by a trustee in his own name with the knowledge of the depositing bank that such deposit is wrongful, the bank is liable to the cestui qui trust upon the trustee’s withdrawing and converting the funds and among other cases cited are Carroll County Bank v. Rhodes, 69 Ark. 43; and Boone County Bank v. Byrum, 68 Ark. 71. In the Byrum case the facts were that the bank knew the funds deposited with it had been derived from the collection of taxes and that the money belonged to the State, yet it appropriated it to the payment of an individual indebtedness of the collector due it, and it was there held that the sureties on the collector’s bond, who paid the State the amount misappropriated by the collector were entitled as against the bank to be subrogated to the State’s right to the deposit. In the Rhodes case, supra, a county collector deposited in the bank money collected for the State, and drew a check to pay a debt due by him to the bank, and the bank knew that the money belonged to the State, and it was held that the bank will be liable to the State for the money so appropriated; and in that ease Judge Battle, speaking for the court, said: “When money is placed as a géneral deposit in a bank, it is no longer the property of the depositor, but immediately becomes the money of the bank. The depositor becomes the creditor of the bank, and the bank his debtor; and the bank is bound by an implied contract to honor the checks of the depositor to the extent of his deposit. When his checks are drawn in proper form, the bank is bound to honor them. It can not excuse a refusal to pay them by showing that it had reason to believe that the checks were given for an unlawful purpose, or that other persons had liens or claims on the money deposited. But there is an exception to this rule. If the banker has notice that the fund does not belong- to the depositor and the check is drawn to pay a debt due the bank, then the banker would be affected with a knowledge of the unlawful intent, and would be in duty bound to dishonor the check, and, if he did not do so, would be a participant in the profits of the fraud, and liable to the owner of the fund for all moneys appropriated to its payment.” But we have shown that the bank had no knowledge that this was a trust fund, and, moreover, it would not come within the exception above mentioned for the reason that it did not participate in and was not a beneficiary in any misappropriation. Accordingly the decree of the chancellor is reversed and the cause remanded with directions to enter up a judgment against all the defendants in this cause for the amount of the note and interest.