Southern Trust & Commerce Bank v. San Diego Savings Bank

Appeals from stated parts of a judgment of the superior court of San Diego County in an action to -recover judgment for the amount of certain trust funds of an estate, which funds were deposited in defendant bank by one E. M. Barber, guardian of the estate.

The complaint is in twenty-one counts, but relates to only ten transactions. There are two counts for each transaction except one, which is set forth in three counts. The court gave judgment for the plaintiff on its first and second counts, and in favor of the defendant on all of the other counts. The plaintiff appeals from that part of the judgment which runs in favor of the defendant. There is also an appeal by the defendant, but counsel for defendant admit that the judgment against defendant should be affirmed, because it is conceded that the funds were, in that instance, paid to the defendant, at the time when they were embezzled by the guardian.

By its findings the court determined that on March 20, 1914, and for several years prior thereto, and until the month of May, 1916, E. M. Barber was cashier of the defendant bank; that as such cashier said Barber had exclusive charge of the tellers and clerks, and that all of said tellers and clerks took their orders from him as cashier; that as such cashier he had control and custody of the bank’s money and accounts, subject to the direction of the president of the bank and the bank’s board of directors, of which board the said Barber was a member; that from the seventh day of January, 1914, down to the month of May, 1916, said Barber was also the guardian of the person and estate of John Wood; that John Wood died on the second day of

Upon the third and fourth ca.uses of action the court found, and there is now no contention to the contrary, “That on or about the 29th day of June, 1914, the said E. M. Barber received a certificate of deposit from the Farmers National Bank of Corning, Iowa, for the sum of $8271.12 payable to E. M. Barber, Gdn. That the funds represented by said certificate of deposit were the funds of John Wood. That the said E. M. Barber indorsed said certificate of deposit and placed the same to his personal credit with the defendant San Diego Savings Bank, and that said E. M. Barber deposited the said $8271.12 in his personal account with said defendant bank for the purpose and with the intention of embezzling, misappropriating and converting the said sum and the whole thereof to his own use and that the said sum was by said E. M. Barber embezzled, misappropriated and converted to his own use. . . . That the said sum of $8271.12 so deposited to the personal account of said E. M. Barber with the said defendant and so embezzled and converted to the use of said E. M. Barber has never been paid to said John Wood or to any one authorized to receive the same for him.”

But the court further made the following findings, concerning wMeh, and each of them, appellant specified and now contends that the evidence is insufficient to justify the same: “That it is not true that the said defendant San Diego Savings Bank with knowledge of the reasons and purposes for wMch said sum was deposited in the personal account of said E. M. Barber and with knowledge that said E. M. Barber intended to withdraw the said sum from his personal account for Ms own use and benefit, permitted the said E. M. Barber to withdraw the said sum of $8271.12 from his personal account and allowed the said sum to be converted to the uses of said E. M. Barber. But on the contrary the court finds that the said certificate of deposit was received in the usual course of business and was deposited by said E. M. Barber in the usual course of business of said bank and without any knowledge whatever on the part of said defendant bank and without any notice at all

On the remaining causes of action the findings of fact are similar to those last above set forth, with the exception that in some instances the moneys of John Wood received by Barber were deposited to an account in the name of E. M. Barber, guardian of John Wood; whereas, in the remaining instances, the money, in the form of cheeks or drafts to the order of E. M. Barber, guardian, was deposited to the personal account of Barber. Appellant contends that in the case of the Iowa certificate of deposit, and in certain other instances, respondent bank received the benefit of these moneys in this, that the trust funds were used to make good overdrafts of Barber on his personal account. It was shown that from time to time checks issued by Barber against his personal áccount, when the balance to his credit was not sufficient to meet them, were carried as cash for a week at a time (a little more or less) and not charged to his account until the account showed credits sufficient to meet them. But appellant was unable to prove, and the evidence does not show, the definite fact that at any time the funds of John Wood were used to meet any such deficit in Barber’s bank account. The evidence, therefore, was sufficient to justify the court in its finding that the funds of John Wood were not used to pay any indebtedness of Barber to the defendant bank, other than in the one transaction wherein the court gave judgment in favor of the plaintiff.

[1] “ There are three ways in which a bank may incur liability and be compelled to make good deposits that have been misappropriated by the fiduciary: (1) By a violation on its part of the contract, express or implied, between it and the owner of the fund. The reason for the bank’s liability is based upon the general principle that the bank cannot discharge its obligation to a depositor except by payment in strict conformity to the contract of deposit. (2) By appropriating the fund, either with or without the fiduciary’s consent, to the payment of the latter’s debt to the bank. The reason for the bank’s liability is based upon the general theory that the owner of a fund may follow it into the hands of and recover it from any person who has not innocently given value therefor. The action for money had and received is an appropriate, form of action in this class of cases. (3) By assisting the fiduciary to accomplish the misappropriation, the bank having knowledge, actual or constructive, that the fraud is being or .about to be perpetrated by the fiduciary. The reason for the bank’s liability is that it knowingly makes itself a party to a fraud, and must make good the loss that results from the misappropriation.” (L. E. A. 1915C, note p. 519.)

It is manifest that the defendant in this action is not liable under either one of -the first two conditions last above stated. The bank paid the demands of the depositor on presentation of his checks, in strict conformity to the contract of deposit; and did not appropriate any of the trust money to the payment of Barber’s indebtedness to the bank, except in the one instance to which we have referred. It only remains to determine whether or not the defendant,

To put the matter concretely, let us take the item wherein it appears that Barber drew his check as guardian, payable to his own personal order, for five hundred dollars. He marked the check “Bard loan” (but there was no such loan) and drew out the money. Since it has not been accounted for in any other way, we may say at that very time he intended to and did embezzle that sum of five hundred dollars. As guardian he was not under obligation to keep the fund on deposit in the bank. In the ordinary course of business the bank was bound to honor his cheeks. If, on the stated facts, any liability exists, it must rest upon the theory that the bank itself was aware of the depositor’s wrongful intention, and was, therefore, bound to withhold the payment to which otherwise he" was entitled.

[2] To the general rule of law that a principal is presumed to have the same knowledge as his agent, counsel for appellant admits that there is an exception to the effect that where the agent has an interest adverse to that of his principal it will not be presumed that he has communicated his knowledge to his principal. No doubt that is the law. But counsel for appellant seek to apply to this case a limitation to that exception, which limitation is that where the principal is a corporation, the corporation is bound by the knowledge of its managing officer, even though such officer has an interest adverse to his principal, and that this is true where such managing officer is the only one acting for the corporation. In support of this contention they refer to McKenney v. Ellsworth, 165 Cal. 326 [ 132 Pac. 75 ]; Williams v. Hasshagan, 166 Cal. 386 [ 137 Pac. 9 ]; National Bank of San Mateo v. Whitney, 181 Cal. 202 [ 8 A. L. R. 298 , 183 Pac. 789 ]. These decisions must be read in the light of the fact that in each case the matter involved was a financial transaction wherein the bank was a directly interested party. Thus in the McKenney case the president of the bank, and who conducted its affairs, held a note made to him by the defendant for seven thousand five hundred dollars. The payee transferred this note to the bank, for

[3] In the case at bar the defendant did not occupy any fiduciary relation to the estate of Wood. Defendant was simply the debtor of Barber as guardian, or of Barber personally, on a contract to pay him so much money on demand. The depositor’s act of demanding and receiving the money from the bank might prepare him for committing the intended crime, but it was not a part of the act of embezzlement. When he applied to his own use the money so withdrawn, he ceased to act for the bank. The manner in which the guardian should keep his trust funds, or how he should dispose of them, were not matters in which the bank had any duty to investigate, or any interest to protect. Therefore, the knowledge which Barber had, of his own dis

In that one transaction in this ease wherein, as we have seen, the judgment is in favor of the plaintiff, the act of embezzlement consisted of the payment to defendant of funds of the- estate of Wood, in satisfaction of indebtedness of Barber to the defendant. There the defendant is chargeable with knowledge of the facts known to the cashier, because in the unlawful act itself he represented the defendant. It therefore became his duty to the defendant, his principal in that transaction, to inform it that the money offered in payment to the bank was stolen money, and it will be presumed, in such case, that this duty was performed. On the other hand, in a transaction to which the bank is not a party, the bank officer does not owe to the bank any duty of communication, and the presumption that such communication has been made does not arise. In the matter now under consideration, the misconduct of E. M. Barber was a violation of his duty to the trust estate. It was that alone, and in it he alone was guilty. We have examined the decisions rendered in other jurisdictions, to which counsel refer. In nearly all of them the bank was a party in interest, which received a benefit from the misappropriation of the trust funds. This was so in Lowndes v. City Nat. Bank, 82 Conn. 8 [ 22 L. R. A. (N. S.) 408 , 72 Atl. 151 ], from which counsel for appellant have quoted at great length. And even there the court was careful to point out that a bank does not undertake to supervise and safeguard a trust account, or to look after the appropriation of such funds when withdrawn. The liability there enforced was distinctly based upon the principle that “a bank may not actively and knowingly participate in a misappropriation of trust funds. It may not become an active co-operating agency to that end, and, by such co-operation, directly contribute to the consummation of the wrong.”

[4] Finally it is contended by appellant that the defendant bank had constructive knowledge of Barber’s misappropriations and is, therefore, liable. This point is based upon evidence proving that during the period of these defalcations, and for some time prior thereto, the said E. M. Barber had so conducted himself that he should have been an object of suspicion and investigation on the part of the

In view of the foregoing evidence, the court was not bound to decide that the board of directors of respondent bank were negligent in the performance of their duties and

The judgment is affirmed.

Shaw, J., and James, J., concurred.

A petition to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on February 19, 1923.

All the Justices concurred.