Fifth National Bank v. Village of Hyde Park

Mr. Justice Diokey delivered the opinion of the Court: It is conceded that no one had the slightest suspicion that Waldron was a defaulter, until some time in 1878, and about the first of May of that year. There is nothing in the proofs tending to show that any of the officers of the bank had any suspicion that Waldron was, or had at any time been, applying the moneys of the village to the payment of any claim or demand which (as between him and the village) he was in duty bound to pay from his own personal funds. It is insisted by counsel for the village of Hyde Park, that the several loans made of this bank by Waldron in his own name, and upon his own notes or the notes of other private persons, were mere private debts, and not debts for which the village was liable, and inasmuch as the bank officers knew that the payment of these loans was made from funds known by them to be the funds of the village, they insist that such payment was known to them to be a misappropriation of the trust funds. The learned judge of the circuit court took this view of the matter, in so far as concerns payments made after the account was kept in the name of “A. D. Waldron, Treasurer.” He held otherwise, however, so far as regards payments made out of the account kept in the name of “A. D. Waldron.” In Morse on Banks and Banking, 37, it is said, in general terms: “If a depositor seeks to pay Ms own debt to the banker by an appropriation of the funds to his credit in a. fiduciary capacity, then the banker is affected with knowledge of the unlawful character of the appropriation, and will be compelled to refund. ” It seems plain, however, that unless the debt to which the funds are thus applied ■ be such that the officers of the bank are aware that the same is really and in truth “his. own debt, ” knowledge of the unlawful character of the appropriation can not be imputed to the bank. To charge a stranger to a trust fund as a trustee, by reason of participation in a misapplication of the fund, upon the ground that the fund was used in payment of a private debt of the original trustee, it is necessary to show not only that the party sought to be charged was aware that the fund was a trust fund, but also that he was aware that the debt to the payment of which it was applied, was, at the time of such application, in fact a private debt,—a debt of such character that the fund in question could not lawfully be applied in payment thereof. In Keame et al. v. Robarts et al. 4 Maddox Ch. 357, it is well stated, as the result of the authorities at that time (1819), that “every person who acquires personal assets by a breach of trust * * * is responsible to those who are entitled to the fund, if he is a party to the breach of trust.” And again: “Generally speaking, he does become a party to the breach of trust by buying or receiving in pledge any part of the personal assets, not for money advanced at the time, but in satisfaction of his private debt, because this sale or pledge is prima facie inconsistent with the duty of an executor.” This implies that the debt in satisfaction of which the property is taken, is of such character that it is known to be a private debt, for it is elsewhere declared that the party so receiving the trust fund must, to become chargeable, have been guilty of “fraud, collusion, or gross negligence. ” In the same case the vice-chancellor says: “If a party dealing with an executor for the personal assets, pays his money to the executor so that it may be applied to the purposes of the will, he is not responsible for the executor’s misapplication of it; but if, in dealing with the executor, he does in truth pay his money for the private purposes of the executor, he is equally a party to the breach of trust whether he applies his money to the private debt of the executor, or to the private trade of the executor, and this because he knows that the object to which the money is applied is not an object to which it may be lawfully applied. ” In Field v. Schiefelin, 7 Johns. Ch. 150, Chancellor Kent says, in substance, that to charge a third party with participation in the misapplication of trust funds by a trustee, the proof must “justify the conclusion of a breach of trust, in which the party to be charged knowingly partook. ” That was the case of a guardian, and Kent, after a review of all the then cases, says they all agree that a party dealing with an executor is safe if he is no party to his fraud, and has no knowledge or proof that he intended to misapply the proceeds, and was not in fact by the very transaction applying them to the extinguishment of his own private debt. This necessarily refers to a debt known to be his own debt, to which the fund could not be properly applied. We have examined with care all the cases referred to by counsel for appellee, and many others, where a party receiving trust funds in payment of a private debt to himself has been held chargeable as a trustee, and we find no case among them where the party so charged was not aware, at the time of receiving such trust funds, that the debt to which it was applied was a debt to the payment of which the trustee could not lawfully apply the trust fund. The receipt of such money, under such circumstances, is a plain fraud. Let us consider a moment the character of these debts, which in this case are called private debts. The debt for the loan of $52,000, made on June 11, 1877, may be taken as an example. Waldron called at the bank, saying he wished to borrow a given sum of money for the use of the village of which he was treasurer, to pay warrants in anticipation of the collection of taxes. The money was, upon that statement, lent to him upon his own personal note, secured by collaterals. There was no fraud in believing this statement to be true, nor is there any proof that it was not true. The money thus lent was placed to his credit as treasurer, and paid out by him on checks drawn by him as treasurer, a large portion of which is proven to have been paid upon proper warrants upon the treasury, and no part of which is shown to have been paid out for other purposes. The bank assumed, and had a right to assume, that this money was intended to be applied to the proper payment of valid warrants, in anticipation of the collection of taxes, and on the 1st of December, 1877, one day after a large amount of money had come into the treasury from the collection of taxes by the county treasurer, when Waldron proposed to use so much of that fund in paying off the unpaid balance of that loan, the officers of the bank were authorized to assume, and in good faith did assume, that the money was by such payment being applied in refunding money paid out on such warrants on the treasury from the proceeds of the original loan. If this were true in fact, it was not a misapplication of the trust fund, but was a proper and just application of the fund. Had Waldron had'abundant means of his own, and had he, when there was no money in the treasury, paid with his own money warrants properly drawn upon the treasury to the amount of $50,000, he would have thereby in equity become entitled (by subrogation to the rights of the holders of such warrants) to apply to his own use so much of the public moneys afterwards coming to his hands as needed to refund to him the amounts so advanced. It follows that, under the circumstances, at the time when the officers of this bank received payment of this loan, they were not aware that, as between the village of Hyde Park and Waldron, he had not lawfully and equitably the right to apply the public funds to the payment of this debt. They must be assumed to have known the law in relation to the transaction, but the law does not impute to them omniscience as to the facts. Taking the facts as these officers believed they were, and as they had good cause to believe, the payment would not have been a misappropriation of the funds. They are not chargeable with fraud, collusion, or gross negligence. The case In re Gross, 6 L. B. 632, C. App., is cited as against this position, but it is not in point. There, as here, the funds were known to be trust funds. There, as here, the funds may be said to have-arisen from moneys advanced" by the bank upon the personal credit of the officer and trustee, but at the time when it was proposed by the bank to apply the trust fund to the private account of the officer, it was known that the officer was in default, and had the officer been present and offered to so apply the trust fund, called the “police fund, ” the bank could not at that time have accepted the same without being knowingly a party to the misapplication. The court said: “If a banker receives from a customer holding a trust account, a check drawn on that account, he is not in general bound to inquire whether that check is properly drawn. Here the customer has drawn no check, and the bankers seek to set off the balance of his private account against his credit on what they knew to be a trust account. ” It was very properly held that the set-off could not be allowed. The court would otherwise have permitted the bank to make a known misapplication of a trust fund. So, in Bodenham v. Hoskyns, 13 E. L. & E. 222, Parks was the agent of Bodenham, and kept the moneys of his principal in the bank of Hoskyns, in a deposit account headed “Botherwas account, ” and at the same time kept his own moneys in the same bank in a deposit account in his own name. After Parks was known to the banker to be insolvent, and when his private account was largely overdrawn, the bank, with the consent of Parks, transferred all the moneys standing to his credit on the “Botherwas account” to his credit on his private account, which still left that account over-drawn. The bank was very properly held to be a party to that breach of trust. The officers of the bank knew, at the time of the appropriation of the trust funds, that they were the funds of another entrusted to the care of their debtor, and that the debt to which they were applied was a strictly private debt, to which the trust funds could not properly be applied. The court says: “They were aware of the circumstances, which made it a fraud in Parks to make the transfer, * * * and they concur in the transaction. ” In the case at bar the officers had no knowledge or suspicion of the circumstances which made it a fraud in Waldron to pay these notes from the village funds. In Jandon v. City Bank et al. 8 Blatch. 430, the trustee borrowed money from the bank for his oion use, and pledged certificates of stock issued to him, as trustee for complainant, by name; and it was ruled that the bank held them for the complainant, the court saying: “The transaction of the loan indicated * * * that he was borrowing money for his private use. ” In the case at bar the transaction of the loan did not indicate that he was borrowing the money for his own use. He professed to be borrowing for the use of Hyde Park, to pay warrants in anticipation of the collection of taxes. It does not seem necessary to review other cases in detail. The teaching of all the authorities is consonant with the proposition that to charge a stranger as a party to the misappropriation of a trust fund, such stranger must knowingly partake in the breach of trust,—that he must know or have proof of facts which in law characterise the transaction as a breach ok trust. It is no doubt true that where a stranger receives moneys of a trust fund from the trustee as a gift, or without a valuable consideration, though in ignorance of the character of the moneys received, he may be held as a trustee; but where such stranger to the trust has in good faith paid a valuable consideration, or has materially changed his condition, so that he can not be restored to his original advantages, that doctrine does not apply. In the case at bar the money was in good faith received by the bank from a man in good credit, and with assets in his hands of his own to the value of over $30,000, and his note and valuable collaterals were surrendered to him. It is now proposed, after that man has become insolvent, and has been stripped by complainant of all his assets, and has died, to rescind the payment to the bank, without restoring that for which it was paid. This, it seems to us, would be grossly unjust. The judgment of the Appellate Court is therefore reversed, that the Appellate Court may reverse the decree and remand the cause to the circuit court, for proceedings not incompatible with the views of the law herein expressed. Judgment reversed. Scott and Sheldon, JJ., dissenting.