United States Fidelity & Guaranty Co. v. Union Bank & Trust Co. , 228 F. 448 ( 1915 )

DENISON, Circuit Judge

(after stating -the facts as above). [1] 1. The official funds on deposit were not, as between the clerk and the bank, a trust fund; but as between the clerk and the beneficiaries, the fund was largely or wholly made up of trust moneys; and this case must be approached by way of the proposition that if the bank, out of this fund, either satisfied its debt against the clerk personally, or affirmatively and intentionally aided him in wrongfully appropriating it to his own use, a liability therefor accrued in equity against the bank in favor of the beneficiaries. We think this proposition follows from the decision in Bank v. Insurance Co., 104 U. S. 54, 26 L. Ed. 693. True, in that case, Mr. Justice Matthews called attention to the fact that tlie court was not dealing with a voluntary application of the fund by the check of the depositor, but with an attempt to enforce a banker’s lien; but we do not see a controlling distinction between the two situations, as the former has developed in this case. Once admitting that the fund belongs in equity to the beneficiary and that the bank knows this, it seems clear that the bank can get no better right against the real owner from the fact that the depositor, trustee, colludes with the bank in the wrongful application.

[2] 2. From such a liability, on account of a bank debt paid, the bank could find no protection in the fact that it acted on the mistaken supposition that mingled in the deposit was enough money belonging to the depositor to satisfy his check. When such a joint fund is drawn upon for a payment to the bank to discharge a mere personal debt to it, the bank takes the money at its peril of having to refund, if in fact the trust deposit is thereby depleted. This is the teaching, though not the holding, of the case in 104 U. S. The refund works no injury to the bank; it has no equity equal to that of the real owner.

[3] 3. Where there is a single beneficiary of such a fund, the matter is simple; it becomes more complex when there are many beneficiaries. In such case, while their respective, mutual rights are several, yet the liability in chief must be to them as a class. There may be instances where the money of one person can be traced through the deposit into the diversion, but that must be unusual. The typical case is where, as here, money belonging to numerous persons is mingled in one deposit, which is added to from many sources and drawn against for many purposes until the identity of each owner’s part is hopelessly lost; and as between beneficiaries whose rights are of equal rank, this confusion cannot be cleared by any presumption that withdrawals must be charged against one rather than another. This ldss of specific identity ought not to be a protection for the wrongful appropriator. It is enough for the bank to know that the deposit, as a mass, is charged with a trust in favor of beneficiaries, as a class. The bank cannot be concerned with their equities as between themselves, as long as it will not be charged twice. An amount wrongfully taken by the bank from such a fund must stand to the beneficiaries in the same relation as the remainder does; and we cannot doubt that those whose money bad come into the clerk’s office would share pro rata in whatever official fund in cash or in bank might remain, in the absence of any right to preference or clear proof that the specific and identifiable money of one claimant remained.

[4] 4. If the beneficiaries in such fund, instead of pursuing the right.of action we have been discussing, recover their loss from the surety upon the official bond, the right to bring the action against the bank passes to the surety under the general principles of subrogation and by what amounts to an equitable assignment. Travelers’ Co. v. Gt. Lakes Co. (C. C. A. 6) 184 Fed. 426, 107 C. C. A. 20, 36 L. R. A. (N. S.) 60, and cases cited; American Co. v. National Bank, 97 Md. 598, 55 Atl. 395, 99 Am. St. Rep. 466.

[5] No matter what the form of the assignment, legal or equitable, the assignee cannot take a better right than the assignor had; and so we come to the defense of the statute of limitations. This defense may be of varying effect as against the beneficiaries of the fund, as between: (1) Individuals; (2) the state; and (3) the city and county. It would be strongest as against the' individuals. It is urged that this is, in effect, a suit to recover a deposit, and that such an action does not accrue, and therefore the statute does not begin to run, until the depositor has demanded payment from the bank and the bank has refused. Morse on Banks (4th Ed.) § 322, pp. 587-591. Mr. Morse, however, states that certain acts by the bank will dispense with the necessity of demand and refusal, among which acts are: (1) Notification to the depositor that his claim will not be paid, and (2) rendering by the bank to the depositor an account in which it claims the money as its own. It would seem that the second exception is included within the first, but either the first or the second is fairly satisfied by the facts of this case. As early as January, 1901, by an official report to the chancery court by a committee theretofore appointed, it was made a matter of public record that the clerk had less tiran $25 in his official bank account in place of the $25,000 which he should have •had. This was, in effect, a statement that Rainey had withdrawn from the bank all the sums now in question. In the natural course of- events, the substance of this report must have soon become known to all beneficiaries of the fund. It fairly put them on notice that the bank would not pay over the sums the second time and on inquiry whether those who had received the money were liable to pay it bade The statute began to run against all individual beneficiaries, at the latest, on the expiration of reasonable time for this notice to taire effect. This suit was not begun until 1909. The Tennessee statute is six years. The federal courts of equity generally enforce the state statutes (Kentucky Co. v. Kentucky Co. [C. C. A. 6] 187 Fed. 945, 948, 110 C. C. A. 93); and we are satisfied that the individual beneficiaries are barred.

It results that if there are beneficiaries not barred, but who may be treated as surviving the statute, the survivors may receive a larger dividend than otherwise would happen. Manifestly this could not be so if the money of each beneficiary could be identified, or if otherwise his right was wholly several; but we see no reason why distribution of such a fund as we are now considering should not be made to the claimants whose claims exist at the time of distribution and be continued until their claims are satisfied. The wrongful possessor of. the fund is not prejudiced by being compelled to yield what he does not own to those who have a good title, and if it appears that there are no other claimants entitled to share., True, a decree for such payment does not bind those who are not parties to the record; but it frequently happens that rights of the parties must be determined as between themselves without an adjudication which will bind others, and in such situations, the question whether all substantial rights involved are held by parties to the record must be determined by the evidence in the case, and not by surmises as to what might be made to appear in some other case.

[6] 5. It is clear enough that, if the state of Tennessee had brought the action to recover’ on account of the $3,000 of state taxes in the clerk's hands, the statute of limitations would have been no defense; but does this exemption from the statute of limitations, existing for the benefit of the state, inure to the benefit of one who has become subrogated to the state’s right of action? We must think that it does; though counsel have not found, nor have we, any decisions directly upon that subject, excepting American Co. v. National Bank, supra, in which, on page 607 of 97 Md., 55 Atl. 395, 99 Am. St. Rep. 466, the Supreme Court of Maryland expressly decided that the assignee by subrogation took the benefit of the state’s exemption. The principle is the same as in the leading case of Lambert v. Taylor, 4 B. & C. 138. Here it was held that when the title to a chose in action vested in the sovereign by law upon the owner’s suicide and where after a time it was transferred by the Crown to the representative of the deceased, the statute did not run during the Crown’s ownership. This case was cited with apparent approval in United States v. Nashville Co., 118 U. S. 120, 126, 6 Sup, Ct. 1006, 30 L. Ed. 81. See, also, Hunter v. United States, 5 Pet. 173, 182, 8 L. Ed. 26, holding that the same right of priority which belongs to the state attaches to the claim in the hands of a surety who has paid the debt to the state; the analogy between a right of priority and a right of exemption seems complete.

We think the conclusion of exemption is required by considerations both of fairness and of public policy. The primary security held by the state, in the form of a right of action or some other form, may be ample to protect, through subrogation, a secondary surety, and the latter may assume the liability relying upon his own right to resort to the primary security, if he is himself compelled to pay, but he can do nothing by way of such resort until he is himself damnified; and it is manifestly unjust that this secondary surety should find the statute of limitations no defense in his favor when he is required to pay, but a successful defense against him when he exercises his right of subrogation. So, too, it must be true that if a surety under such circumstances is unable to take anything effectively through subrogation, he would make payment to the state only when compelled, and the public interests would suffer.

The case of United States v. Beebe, 127 U. S. 338, 8 Sup. Ct. 1083, 32 L. Ed. 121, is not persuasive to the contrary. The holding was that the exemption from the statute of limitations will not be allowed when the state, although plaintiff on the record, is only a nominal party having no actual interest. The real purport of this decision is that the form of the. record will not determine whether exemption may be claimed, but that the court will look back to the substantial basis of exemption; and it carries more or less implication that if a suit was brought by an individual for the use and benefit of the state, the exemption could be claimed. The instant case is only one step further away in this direction. Instead of suing, for the use and benefit of the state, the plaintiff takes over and pays for the state’s claim and then sues. In the Beebe Case, there never had been any real claim by the United States or any right of action in which it had a real interest.

We conclude, therefore, that to the extent of the $3,000 of the tax money and- interest thereon which it had paid over for the benefit of the state, the guaranty company was not barred by the statute of limitations'and (unless for the matters hereafter mentioned) was entitled to recover from the bank on account of the bank’s appropriation of this official fund to the’ bank’s debt.

[7] 6. Considering, now, the character of the demand or right of action in favor of the state, and which constitutes part of the guaranty company’s present demand, we must find the basis on which it rests. Does it depend upon the theory that the taxpayer’s money deposited with the clerk for transmission to the state is a trust fund which is-now to be recovered from the bank by tracing into its hands and by identification in specie or through substitution? If this is the true theory, then we must decide the issue upon which the court below acted. We think the trio,re satisfactory basis is found in the preferential right in the state, as declared by the Supreme Court of Tennessee in the early stages of this controversy. It was decreed that out of the total amount paid by the guaranty company, the state was entitled to preference, and must be paid in full, but that the county and the city had no such right, and must take equal rank with individual claimants. The opinion of that court is reported in Fidelity Co. v. Rainey, 120 Tenn. 357, and on pages 399-405, 113 S. W. 397, it is shown that the priority under the bonds was rested on the sovereign’s common-law right of preference against a debtor’s assets. The fund recovered from the guaranty company was only a substitute for the fund which should have been in the clerk’s office, and, interpreting the Supreme Court opinion as we do, its necessary effect is to say that for this tax money the state had d. preference or a first lien upon the fund in the clerk’s office. The present action against the bank operates in substance and in effect only to restore to, the fund in the clerk’s office an amount which should not have been taken away, and the restored fund must be subject to the same priority as the original. It follows that a wrongful diversion of the fund would take full effect as an injury to the rights of the state before it would take effect at all as an injury to the rights of any other beneficiary in the fund — and quite regardless of whether -or not the specific state money had come into the fund— assuming, as was true in this case, that there was no proof to show the money in the fund to have been the identifiable property of any one except the state. Accordingly, we conclude that, even though it should be conceded that the proof fails to trace the state money to the bank, that failure would not defeat the state’s right to recover.

[8] 7. The nature of the state’s claim must also be determined, as between a claim, which is independent and severable and one which is only a fraction of a general and indivisible right of action belonging to beneficiaries as a class. If it is of the former character, it may stand alone and be independently transferred by subrogation or by any other kind of assignment: but if it be only a portion of the unitary action muring to all beneficiaries, any attempt to transfer it separately must fail, since a cause of action cannot be split.' Travelers’ Co. v. Great Lakes Co., supra. And see Turk v. R. R. Co. (C. C. A. 6) 218 Ted. 315, 134 C. C. A. 111. Here, again, we must think that the adjudged priority is sufficient to give the stajte’s claim a separate identity. Giving full force to the idea that each beneficiary claims, not independently, but as a member of a class, it is yet true that the claim of the state stands apart. The general fund is at all times charged with a first lien in favor of the state, and an injury to the fund is an injury to that lien. It is true that the injury to the lien comes through the injury to the fund; but the right of the lienholder to redress is so far independent that we cannot think an action brought by him could be defeated because subordinate lienholders or beneficiaries were not joined. A court of equity might well direct them to be joined, but they would not be indispensable parties. It follows that the guaranty company is entitled to recover against the bank the amount which it paid on account of the state tax money.

[9] 8. The claims of the county and city present another question, not made below, but apparent on the record; and, at our request, counsel have filed briefs thereon. The right of a surety on a bond to be subrogated for the obligee in a right of action against one wrongfully causing the liability is founded on payment by the surety to the obligee, and it does not come into existence except upon full payment of the loss indemnified against. This is because subrogation is of an equitable character, and the surety cannot be permitted to take away from the obligee, to the latter’s prejudice, securities or rights in which he is still beneficially interested. Sheldon on Subrogation, § 127; Musgrave v. Dickson, 172 Pa. 629, 632, 33 Atl. 705, 51 Am. St. Rep. 765. In this case, the loss of the state was $3,000, and the guaranty company paid it in full, but the loss of the city was $8,700, and the guaranty company has paid on account of it only $5,700 (as above estimated). This leaves the city with an unpaid claim of $3,000 against the clerk and the clerk’s fund, and the right of action which the city originally had against the bank it was entitled to enforce and collect and to apply the full sum collected upon its claim. The city thus had, in a very-proper sense, two securities to which it might resort and upon both of which it might realize in full until its whole claim was satisfied; these securities being its right of action against the bank and its claim against the guaranty company on the bond. Between these two securities, there was no such relative rank as could permit the guaranty company to pay the part of the claim for which it was liable and then indemnify itself by demanding the security which the city held for the remainder of the city’s claim. The same situation existed as to. the county ; and, when it is thus stated, it seems to us quite evident that the interests of the city and county in this right of action against the bank did not pass by subrogation to the guaranty company, but that the interest of the state therein did so pass.

It is said that only that creditor a portion of whose debt remains unpaid after the surety has paid all he is bound for can raise the objection that the surety may not be subrogated to the creditor’s securities and remedies until the creditor has been paid in full, and case's are cited supposed to be to this effect. These are probably all distinguishable from the general principle above stated, because the creditor had agreed to the substitution (Motley v. Harris, 1 Tea [Tenn.] 577), or because there was a security common to several distinct debts, and the surety, having paid one of these debts, claimed corresponding rights in the security (Nettleton v. Ramsey, 54 Minn. 395, 56 N. W. 128, 40 Am. St. Rep. 342), or because of some other analogous reason. That the city and county have not objected. to> the subrogation claim of the guaranty company is perhaps explained by the fact that tire record shows no notice to them of any such claim. At any rate, the cause of action existing in favor of the city or of the county was a single, indivisible cause of action, even if it existed separately from the rights of individual beneficiaries, and it could not be split up into two actions, with or without the consent of the city or county.

By the foregoing conclusions, it becomes immaterial whether the rights of the city and county were barred by the statute of limitations, or whether any liability originally accrued on account of the $2,000 payment, or whether the amount wrongfully diverted by the bank was somewhat more than $5,000. The guaranty company can recover only the amount of the state tax claim and interest, and to. cover such a claim the amount which the bank concedes that it applied to its own debt is large enough.

The decree below is reversed, with costs, and the case is remanded for further proceedings consistent herewith.