Washbon v. Linscott State Bank

The opinion of the court was delivered by Porter, J.: The appellant makes the claim that the suit is for the conversion of personal property'and is barred by the two-year statute of limitations; and further, that if it be held to be an action for relief on the ground of fraud it is not assignable and therefore can not be maintained by the surety company. But this is not an action in trover to recover the identical moneys converted by appellant to its own use. On the contrary, it is a suit upon an implied contract, waiving the tort. When property of another has been converted there -is always an implication of an indebtedness, and the injured party.may waive the tort and sue for the value of the property. (Douglass v. Loftus, Adm’x, 85 Kan. 720, 725, 119 Pac. 74.) The petition states the facts which, it is claimed, show the appellant’s liability, and it is well settled that if any doubt exists as to the nature of the action the courts incline toward holding it an action in contract (Delaney v. Implement Co., 79 Kan. 126, 129, 98 Pac. 781, and cases cited), and will sometimes do this for the declared purpose of avoiding the statute of limitations (St. Louis, I. M. & S. R. Co. v. Sweet, 63 Ark. 563, 40 S. W. 463, cited in the opinion in Douglass v. Loftus, Adm’x, supra, p. 727; McCombs v. Guild, Church & Co., 77 Tenn. 81; John H. Alsbrook v. M. Hathaway, Ex’r, 35 Tenn. 454). In the last case it was held that debt would lie for the • value of the chattels converted, “let the consé — 705 — quences as to the statute of limitations be what they may.” (p. 457.) Of course, the participant in a breach of trust can not, any more than can the unfaithful trustee himself, invoke the defense of the statute of limitations. (Duckett v. Mechanics’ Bank, 86 Md. 400, 411, 38 Atl. 983, 63 Am. St. Rep. 513, 522, and cases cited in note on page 523.) The case of Guernsey v. Davis, 67 Kan. 378, 73 Pac. 101, fully answers both of the foregoing contentions of appellant. It was there ruled in the syllabus: “If an agent of a loan company violate his instructions and misappropriate money sent him for the purpose of closing a loan, the money may be recovered in an action as for money had and received. “The statute of limitations does not begin to run against such an action until the principal has knowledge of the agent’s wrong. “One who actively participates in an agent’s breach of trust, with full knowledge of the agent’s duty, and thereby obtains possession of the principal’s money, which he misappropriates, incurs the same liability to the principal as does the agent.” (Syl. ¶¶ 1-3.) It was said in the opinion that “it was not necessary that the action be regarded as for relief on the ground of fraud” (p. 380) because the petition stated facts sufficient to constitute an action for money had and-received. So in the present case the petition contains a statement in ordinary and concise language which would entitle the appellees to recover for money had and received. The statute of limitations applicable to •actions for the conversion of personal property therefore furnished no defense. Until Sarbach’s death the officers of the grand lodge had no knowledge of his embezzlement or of the fact that the bank had wrong-, fully appropriated its funds. The statute of limitations against a suit such as this is would not begin to run until the principal had knowledge of the agent’s Wrong. (Guernsey v. Davis, supra.) And as held in — 706 — the case last cited it is not necessary to regard the. suit as an action for relief on the ground of fraud. The surety company, having paid the debt owing by the bank to the grand lodge, is in equity subrogated to all the rights of the original plaintiff regardless of any formal assignment. We see no reason, however, why the cause of action, being for money had and received, was not assignable. (Stewart v. Balderston, 10 Kan. 131.) Upon the facts as stated the learned judge of the court below rightly held that the bank loaned to Sarbach the amount of the overdraft and that the certificate of deposit when issued by the bank became the property of the grand lodge. If some other person had been elected treasurer and the certificate turned over to him by Sarbach there could be no doubt as to the bank’s liability to pay to Sarbach’s successor or to the. grand lodge the full amount of the certificate and that it would be obliged to look to Sarbach individually for payment of the overdraft. The fact that Sarbach was chosen to succeed himself did not alter the situation, nor did his reélection change the ownership of the certificate or affect the bank’s indebtedness to the grand lodge. When Sarbach deposited the certificate in the bank and endorsed it as grand treasurer the officers of the bank knew that the funds belonged to the grand lodge and that he had no personal interest in any part of it. (Washbon v. Hixon, ante, p. 310, 124 Pac. 366.) As a matter of fact the officers had full knowledge of the situation without reference to the character of the endorsement upon the certificate. With knowledge of the trust character of the deposit the bank could not lawfully receive the proceeds of the certificate or any part thereof and apply it in payment of the individual debt which Sarbach owed to it for the overdraft. In Washbon v. Hixon, supra, Sarbach gave Mrs. Hixon a check on the bank signed by himself as grand treas-. urer in payment of an individual note he was owing — 707 — her. It was held that the official signature of the check was notice to her of the trust character of the funds and the grand lodge was permitted to recover from her the amount of the check. (See, also, Guernsey v. Davis, 67 Kan. 378, 73 Pac. 101; Bank v. Myers, 65 Kan. 122, 69 Pac. 164; Loan Co. v. Essex, 66 Kan. 100, 71 Pac. 268; Hier v. Miller, 68 Kan. 258, 75 Pac. 77; Gerard et al. v. McCormick, 130 N. Y. 261, 29 N. E. 115; 21 A. & E. Encycl. of L. 584.) Upon the same principle it is held by an unbroken line of authorities that a purchaser from a trustee with notice takes the property impressed with the trust and his position is no better than that of his vendor. (2 Perry on Trusts and Trustees, 6th ed., § 828.) In Union Stock Yards Bank v. Gillespie, 137 U. S. 411, 34 L. Ed. 724, the bank received on deposit from a factor funds which it must have known were the proceeds of property of the factor’s principal, and it was held that the bank could not appropriate the deposit to the payment of a general balance due the bank from the factor and if it attempted to do so the principal had his remedy in equity. It can not be doubted that the credit given to Sarbach as grand treasurer for the amount of the certificate by the bank which issued it was a payment of the certificate. “A credit given for the amount of a check by the bank upon which it is drawn is equivalent to, and will be treated as, a payment of the check. It is the same as if the money had been paid over the counter on the check, and then immediately paid back again to the account or for the use for which the credit is given.” (2 Morse on Banks and Banking, 4th ed., § 451.) (See, also, Bartley v. State, 53 Neb. 310, 338, 73 N. W. 744; Oddie v. The Nat. City Bank of New York, 45 N. Y. 735.) A case cited by appellees which is in point is Town of East Hartford v. The American National Bank, 49 — 708 — Conn. 539. There a town treasurer made notes as treasurer without authority of the town, which were discounted by the bank and the proceeds placed to his credit as treasurer. The bank afterwards received his checks as treasurer in payment of the notes. He became a defaulter for the amount drawn by him to pay the notes. Although in that case the bank acted in good faith, supposing that he had authority to make the notes, and the proceeds were used for the town’s benefit, it was held that the bank was charged as a matter of' law with notice that he had ño power to execute the notes or to pay them, that they were to be treated as his individual notes, and that the bank had no right to retain the money against the demand of the town. Whatever the arrangement was by which the bank surrendered to Sarbach the notes left with it as collateral security for the loan of the overdraft, it can not be said that the grand lodge seeks by this suit to rescind an agreement made in its behalf by its agent and at the same time retain the fruits thereof. The bank loaned the overdraft not for the benefit of Sarbach’s principal but for the purpose of enabling Sarbach to conceal from his principal the defalcation. It said to the grand lodge, “We have on deposit to your credit the full amount of this certificate.” The grand lodge, believing the representation, continued the unfaithful steward in office. The bank’s participation in the fraud did not stop there; it entered into a secret arrangement with the defaulter by which the bank’s liability for the shortage would not be shown upon its books and it surrendered the collateral which it held as security for the loan. When it attempted to repay to itself the individual debt which Sarbach owed, out of funds which it is forever estopped to deny belonged to the grand lodge, it became liable to refund the money upon the same principle which obliged Mrs. Hixon to restore to the grand lodge the proceeds of the check — 709 — she received in payment of Sarbach’s individual debt. The. bank knew that the money it received was a trust fund which Sarbach could not divert to his own use. The bank’s liability in the transaction respecting the overdraft of $934.09 is governed by the same principles of law. If there were no other facts in evidence save that Sarbach overdrew his account in January, 1908; and afterwards deposited collections which balanced the overdraft, and the bank thereafter cashed other checks drawn by him which left his account again overdrawn, there would be left the single question whether the grand lodge could recover from the bank the amount of an ordinary overdraft by an agent which on its face had been paid out for the benefit of the principal. But in view of all the evidence as to the course of dealing between the bank and Sarbach we must hold that the bank is liable for the overdraft of January, 1908, which, it seems, was paid with the bank’s knowledge out of the moneys received directly from the grand secretary. There is nothing substantial in the claim that the grand lodge is estopped. No estoppel was pleaded in the answer. It is argued, however, that the grand lodge claims the proceeds of the bank’s loan to Sarbach of the overdrafts and ought not to be permitted at the same time to repudiate that part of the agreement between Sarbach and the bank by. which the collateral notes deposited by him to secure the overdraft were returned to him when the overdraft was wiped out. This argument is based upon the assumption that the' grand lodge in some way received the benefit of the collateral notes. The court, in finding number fourteen, states that the evidence fails to show what disposition was made of the notes after they were returned to Sarbach. There is a further finding, number fifteen, that Sarbach never accounted to the grand lodge for interest received on any such loans and that this use of the funds was unauthorized by and without — 710 — notice to the grand lodge or its officers, and further, that the bank from time to time bought several notes of this character from Sarbach. The bank must have known that Sarbach had no authority to loan these trust funds to any person or for any purpose. It participated in the fraudulent use of the moneys for its own profit, and we are at a loss to discover how the bank can urge that the grand lodge must return notes which it never received and which were given for. unauthorized loans from its funds with the full knowledge and participation .of the bank. The loan of the overdrafts was not made for the benefit of the grand lodge, but solely for Sarbach’s benefit. The grand lodge, as the bank well knew, was not in need of any loans, and the bank also knew that the purpose of the loan was to enable Sarbach to perpetrate a fraud upon the grand lodge. Where a bank knowingly participates with a depositor in a misappropriation of trust funds and reaps the fruit of the breach of trust it becomes liable to the beneficiary for whatever wrong is done him. The judgment is affirmed. Mason, J., not sitting.