159 N.Y.S. 954 | N.Y. App. Div. | 1916
The action was brought by a surety company against the defendant trust company to recover the amount of certain checks which Robert J. Peebles, a trustee in bankruptcy, having the funds of the bankrupt estate on deposit with the
• Quite an amount of evidence was introduced by plaintiff, much of it documentary. That in behalf of the defendant was brief, consisting mainly of the testimony of its officers and employees, to show that it had no express notice that the fund was that, of a trust estate. The transactions of the account were hack in 1906, 1907 and 1908, and defendant’s witnesses had no specific memory other than what the entries showed. The learned trial court would not permit those witnesses to testify that they did not know that the account belonged to the bankrupt estate, and excluded all such quessions upon objection of plaintiff, defendant excepting. I am not quite sure that those rulings were correct; but, as doubtless the burden was on the plaintiff to show knowledge by the defendant of the true nature of the account, probably no harm can be imputed to those rulings if it should be concluded that the plaintiff did not sustain that burden.
The undisputed facts appear to be as follows:
On May 15,. 1903, the said Peebles was appointed trustee in bankruptcy of the estate of the bankrupt William Trist Bailey. On June 28, 1906, an order was made by the referee, approved by the judge, by which the trustee was required to give a bond in the sum of $25,000, and directed to deposit the funds with the defendant without any bond being required of the defendant. Apparently he had before given a bond in the amount of $10,000, which was superseded by the $25,000 bond. On September 10, 1908, an order was made designating the defendant as a general depository in bankruptcy estates and requiring it to give a bond for $10,000. There is no proof that any such bond was ever given. On June 27, 1906, the plaintiff gave its bond as surety for the trustee in the sum of $25,000. On July 3, 1906, the trustee opened an account with the defendant in the name of Robert J. Peebles, trustee. He died December 31, 1908, leaving a balance of $270.06 in such account, in which he had deposited an aggregate of $18,084.22, including a little interest
Frank L. Entwisle was, on February 5, 1909, substituted as trustee in bankruptcy of the estate, in place of Peebles, deceased; and thereafter, the administrator of that estate and the plaintiff, as his such surety, were called to account for his proceedings as such trustee, with the result that it was found that the decedent’s estate was indebted thereon to the bankrupt estate in the sum of $8,142.11, which had been misappropriated by the decedent; and an order was duly made requiring plaintiff and the administrator to pay that amount over to the substituted trustee, and, the Peebles estate apparently being insolvent, the plaintiff, as such surety, was compelled to pay over said amount to said substituted trustee. Thereafter the plaintiff brought this action against the defendant to recover $6,618.68, the amount of several checks drawn by Peebles upon such account with the defendant, and paid by defendant, which checks were not countersigned by the clerk of the court.
At the close of the trial, upon plaintiff’s motion, the court directed a verdict for the plaintiff for $6,600, the amount of nine such checks, which the evidence showed were used by decedent for his own personal purposes, with interest thereon, making in all the sum of $9,221.29; and the court denied defendant’s motion to submit to the jury various questions as well as the entire case.
The decedent made twelve separate deposits in such account, aggregating the sum of $17,621.42, all belonging to the bankrupt estate and being principally proceeds of sales of its real property. As to the form of those deposits, the following facts are to be noted:
The third deposit, being of $2,394.88, consisted of four
On September 13, 1906, he deposited two checks aggregating $2,849.17, one of which was Exhibit No. 20. That was a check drawn by John J. O’Grady to himself and indorsed thus: “Pay to the order of Robert J. Peebles, Trustee in Bankruptcy for William Trist Bailey, Bankrupt. John J. O’Grady.”
“Robert J. Peebles, Trustee in Bankruptcy for William Trist Bailey, Bankrupt, for deposit to the credit of Robert J. Peebles, Trustee.”
All of the deposit slips appear to. have been simply in the name of “Robert J. Peebles, Trustee.” It is" evident that the only thing significant about the deposits, as giving any notice to the defendant of the true character of the fund, is the O’Grady check above described. The deposit slips indicate that there were eleven checks deposited in 'the account.
As to the checks drawn by decedent upon the account, the following are to be especially noted, viz.:
(a) Four checks dated July 21, 1906, and charged as paid July twenty-fourth. Each of those checks bears, at the upper right-hand corner, the words “InreWm. Trist Bailey ” and had across the face thereof the words “Percy G. B. Gilkes ” (written), “ Deputy Clerk U. S. District Court, Eastern District of New York” (stamped), and is signed “Robert J.'Peebles, Trustee.”
(b) Twenty-nine like checks, with similar heading and stamp and writing across the face were drawn by Peebles, with the same signing, upon the account at various intervals from July 27, 1906, to July 18, 1908.
(c) At different times, beginning with the first check on July 17, 1906, to and inclusive of the last one on September 19, 1908, seventeen checks were drawn by decedent “Trustee ” upon the account, each of which seventeen checks was without any such heading or countersigning. Those seventeen checks included the nine upon which recovery was had. Of those nine checks the following six, viz.: (1) September 17,1907, $760; (2) February 11, 1908, $260; (3) March 13, 1908, $250; (4) April 24,
In addition to the fact of the conversion of the moneys by Peebles, it seems to be recognized by counsel that in order to sustain the recovery had the following propositions must here be affirmed, viz.: (a) That defendant had notice that the funds belonged to the bankrupt estate; (b) that it had notice that they were by the checks in question being converted by Peebles to his own use; (c) that the defendant would be liable to the bankrupt estate although it did not itself benefit by decedent’s misappropriation of the moneys, as by having them applied to pay any indebtedness by him to it, and (d) that, under the circumstances, plaintiff is subrogated to the right of the bankrupt estate to hold the defendant liable.
As to the proposition “ (a) ” above stated, it seems well settled that the mere use of the word “ trustee ” in such an account does not give even constructive notice that the account is really in trust and not individual. (Manhattan Savings Inst. v. N. Y. Nat. Exch. Bank, 170 N. Y. 58, 67; Beaver v. Beaver, 117 id. 421, 430; Swartwout v. Mechanics’ Bank of New York, 5 Den. 555.)
In the cases recited by respondent’s counsel relating to such an account, the fact that the depository actually knew the trust character of the account, not merely that it was deposited in the name of the customer “ trustee,” was clearly established. Thus in the case of American Nat. Bank v. Fidelity & Deposit Co. of Maryland, apparently the respondent here (129 Ga. 126; 58 S. E. Rep. 867), cited at length in respondent’s brief, the depository defendant had accepted its designation as such by an order of the court, which expressly provided that checks must be countersigned by the judge, except those for actual expenses, and that those must specify for what expenses drawn. In that case the checks in question were not of either such kind.
Again, in Walker v. State Trust Co. (40 App. Div. 55) it appeared that the deposit was originally made in the name of the infant, real owner. The expression used by Mr. Justice Cullen in the opinion on page 58, “for the words 'special guardian,’etc., were merely descriptiopersonae,” indicates that if the deposit had been in the name of “ Winchell, Special Guardian,” the trust company would have had thereby no notice that the fund was really in trust and belonged to another.
Moreover, in Niagara Woolen Co. v. Pacific Bank (141 App. Div. 265), which appears to be the main reliance of the respondent, at least among New York decisions, the fact that the money deposited by Philip Horowitz with the defendant, in the name of his firm, was really at least originally the property of the corporation, was evident upon the face of the deposited checks, they being drawn to the corporation and indorsed by Horowitz as its president.
The evidence, aside from the manner of opening the account, failed to show any actual direct notice to defendant that it was really the account of the bankrupt estate. Thus there was no proof that any copy or actual notice of either the first order by the referee in bankruptcy, approved by the judge June 28, 1906, or of the second order, made September 10, 1908, designating the defendant as a general depository, or of Bankruptcy Rule 29, which provides, in effect, that such funds can be drawn only by checks countersigned by the judge, clerk or other officer designated under an order made by the judge, or any copy of such an order, or even the name of any officer so designated, was ever served upon or in any way communicated to the defendant. It was not proven that the general designation of the defendant by the order of September 10, 1908, was ever accepted by defendant by furnishing the bond required by its terms or otherwise. There was no evidence that any of the
The account, upon the credit side, shows twelve separate deposits, including eleven checks, all made by the slips in the name of “Robert J. Peebles, Trustee.” Of the checks so deposited only one has any significance upon the question of notice, and that was the O’G-rady check hereinbefore described. That was for $2,125, drawn by 0’Grady to his own order and indorsed by him to Peebles as trustee of the bankrupt estate, and by Peebles in that name. It had been given by a purchaser upon a sale of some of the bankrupt real property. That check was deposited in the account with another check, by the usual slip, in the name of “ Robert J. Peebles, Trustee,” on September 13, 1906.
Upon the other side of the account it appears that decedent drew in all fifty checks, of which thirty-three had, across the face thereof, the words “Percy G. B. Gilkes” (written) and “ Deputy Clerk U. S. District Court, Eastern District of New York” (stamped); and that twenty-one of the thirty-three checks had, written in the upper left-hand comer, the words “In re Wm. Trist Bailey, Bankrupt,” and four of them had, written in the same place, the words “In re Wm. Trist Bailey.”
The contention of the plaintiff is that those stamps and writings upon the face of the thirty-three checks, and the indorsement upon the O’Grady check deposited in the account as above stated, gave to the defendant at least, constructive notice that the account was really that of the bankrupt estate.
As to the effect of the marginal memorandum upon the twenty-one checks, viz., “In re Wm. Trist Bailey, Bankrupt,” the cases cited by the counsel for the appellant seem to sustain his contention that such a memorandum constituted no notice to the defendant of the true character of the account. In State Bank v. Dodge (124 U. S. 333) the defendant bank, having by court been made a general depository of court funds, the practice was for the clerk, in the case of each
The appellant’s brief states that the case of State National Bank v. Reilly (124 Ill. 464) is a similar case to the Dodge Case (supra), brought by another like party against the same bank in the Illinois State court, and decided in the same way by the Supreme Court of that State at about the same time.
In the case of Duckett v. National Mechanics' Bank (86 Md. 400), also cited by appellant’s counsel, the bank received and deposited in the personal account of one Clagett a check which had written into it these words, ‘ ‘ being the balance of purchase money due him as trustee from John B. Coale.” After-wards Clagett withdrew the money and applied it to his own use. The Maryland Court of Appeals held that the bank was not liable.
In the Niagara Woolen Co. Case (supra), largely relied upon by the respondent’s counsel, it was perfectly evident upon the face of all the checks deposited that the funds belonged to the corporation and had been by Horowitz’ indorsement as president applied to the use and benefit of his firm or himself individually. I do not see that that case has any bearing upon the question of notice here, except as to the effect of the O’Grady check, which was indorsed to Peebles as trustee of the bankrupt. That check would seem to have been notice to the defendant that Peebles was then (September 13, 1906) trustee in bankruptcy of Bailey, and that the money represented by the check had belonged to Peebles as such trustee. Hone of the other ten checks, which form nearly all of the entire sum deposited, contained any such information; and I do not see how that one check gave to the defendant any constructive notice that the other deposits were of the same character. As to the amount of that check, $2,125, it is undisputed that defendant paid out far more than that amount in proper payments for the benefit of the bankrupt estate.
It would seem, from the authorities reviewed, that defendant was not bound to take note of any matter appearing upon the checks, except such as served to carry out the contract between itself as debtor and Peebles as creditor, viz., the direction for payment, the signature of the depositor and the indorsement.
As to the countersigning of the thirty-three checks by the clerk of the court, it is evident that, under .the provisions of rule 29 of the Bankruptcy Rules and clauses 3 and 4 of subdi
Respondent’s counsel makes much of the fact that three of those thirty-three checks were certified by defendant, but I do not see that that fact gave to the writings.upon their face any greater effect as notice to the defendant of the real nature of • the account. It means merely that the defendant had those three checks twice under observation before actually paying them.
I think, therefore, that the evidence did not warrant the conclusion that the defendant, when it paid out the nine checks, had notice that the account belonged to the bankrupt estate.
As to the second proposition above stated as “(b),” I think that, even if the defendant had notice that the account was really that of the bankrupt estate, it is not chargeable by the nature of the nine checks with the fact that they constituted conversion by Peebles of the trust fund to that extent to his own personal use. The contrary seems to me to have been held in the Niagara Woolen Co. Case (supra), and that case is also decisive in favor of the plaintiff as to the third proposition above stated as “(c).” The majority of the court there distinctly held that such a bank is just as much liable where it permits such a depositor to apply the trust funds to his own personal uses, e. g., to the payment of his debt to a third party,
In the recent case of Bischoff v. Yorkville Bank (170 App. Div. 679) the Appellate Division in the First Department held that the bank was liable where it had permitted the executor to apply the funds to his own personal uses, and not merely for the portion thereof which he had used in paying his own indebtedness to the bank, Mr. Justice Scott alone dissenting and upon the same ground as in the Niagara Woolen Co. Case (supra).
Since the argument before this court of the case here at bar, the decision of the Court of Appeals in the Bischoff Case supra) has been announced (218 N. Y. 106). Therein that court affirmed, with some slight modification of amount, the order of the Appellate Division affirming a judgment in favor of the plaintiff in the case where an executor had, by means of checks drawn by him as such upon the account of the estate in another bank, to himself individually, and by him deposited in his own individual account with the defendant bank and then by checks to the defendant bank, applied a considerable part of the funds to the payment of his notes to such bank, and by other checks nearly all'of the rest of it to other personal uses, the action having been brought by the administratrix with the will annexed, who had succeeded the executor. The Court of Appeals, by Collin, J., writing, in that case held: (a) That the form of the checks deposited notified the defendant bank that the funds belonged to the estate; (b) that the checks upon the account with the defendant bank, to pay the executor’s individual debts to that bank, were constructive
It, therefore, appears that the law of this State now is that the depository bank is not bound, from the mere form of the check, viz., being payable to the depositor’s individual order, to take notice that the depositor, being a trustee of the funds, is thereby intending to divert the moneys to other than the trust purposes, but must have some other notice of such fact in order to be chargeable therewith. In the case here at bar no such other notice was proven, there having been "no application by the trustee of any of the funds to the payment of his own personal indebtedness to the defendant. Therefore, upon the authority of the Bischoff Case (supra) in the Court of Appeals, I conclude that the trial court was not warranted in finding the defendant liable for Peebles’ said convei’sion of the trust funds.
As to the fourth and last proposition above stated as “ (d),” it would seem that the American National Bank Case (supra) is an authority that such a surety as" the plaintiff may maintain such an action if the representative of the bankrupt estate could and the surety has paid to such representative the deficiency. Still, the contention of the counsel for the appellant, to the effect that this plaintiff should not be allowed such right of subrogation because it is plain that it has violated its own duty in the matter and would be liable' to this defendant upon the bond, seems to have some substantial force. In such bond it covenanted that Peebles should “in all respects faithfully
The only authority at all directly upon this question, cited in either brief, is the case of American Bonding Co. v. Welts (193 Fed. Rep. 978), decided by the United States Circuit Court of Appeals, Ninth Circuit, February, 1912. That case arose in the State of Washington, which had a statute (Rem. & Bal. Code, § 8326) similar to subdivision h of section 50 of the Bankruptcy Law (supra), providing that the bond might be sued upon by any person injured by any breach thereof. The plaintiff there, as surety upon the bond of a defaulting county auditor, had been compelled to pay to the county the loss, and in the action it sought to be subrogated to the county’s rights against the county treasurer (the depository of the county’s moneys) and the county commissioners, on the ground that the loss was occasioned by their negligence as well as the wrong of the county auditor. At the trial judgment was rendered in favor of the defendant. Upon the appeal the court affirmed the judgment, and the opin
This point does not appear to have been considered in the American National Bank Case (supra). Perhaps the bond in that case was not general, that is, in favor of any person injured by the default of the principal.
Upon the question whether or not the plaintiff here, tht surety, is upon the facts entitled to be subrogated to the right of the bankrupt estate to recover from this defendant, if such right of that estate were established, the American Bonding Company Case (supra) is directly in point and to the negative, and I recommend that we so hold.
Therefore, I advise that the judgment and orders he reversed, and the complaint dismissed, with costs.
Carr and Eigh, JJ., concurred; Thomas, J., concurred on second ground only; Jenks, P. J., not voting.
Judgment and orders reversed, and complaint dismissed - with costs.