Goodwin v. American National Bank , 48 Conn. 550 ( 1881 )

Pardee, J.

(After stating the principal facts). The petitioner insists that, inasmuch as the acts of the executor in depositing on his private account the amount of the $10,000 loan made upon his note as executor and in drawing the checks which he did upon that account, were known to the teller of the respondent bank and were recorded upon its books, the directors are to be charged with having thereby acquired actual knowledge of a fraudulent use of the money by the executor after the loan and before the first renewal thereof; if not actual knowledge such good reason for suspicion as to put them on inquiry; that the ignorance was voluntary or the result of inexcusable negligence; and that the renewal under such circumstances released the pledged asset in behalf of the legatees.

"When the executor applied to the respondent for a loan, saying that, it would be for the benefit of those interested in the residue of the estate, of whom he was one, to pay the legacies at once by borrowing, pledging the shares in question as security, and holding them for a more favorable condition of the market, the declared purpose was within the power vested in him by the will, was one which the strictest law of trusts would sanction, and one for which the respondent, acting in good faith, could safely make and renew a loan upon the security of the shares. In doing this it came under no obligation to see to the proper application of the money; did not become the insurer of the estate against a devastavit. Eor the executor had power to borrow money for purposes connected with the discharge of his duties, and pledge the assets of the estate as security ; and the title of the pledgee will be perfect even if the executor intended a fraud, if the loan was made for a purpose apparently proper, without knowledge actual or implied of such intention.

The petitioner has called our attention to Bodenham v. Hoskyns, 2 DeG., M. & G., 903, in which a trustee deposited money with the defendants in the name of the cestui que trust; they loaned money to him for his private uses, and induced him to repay them from the trust money ; to Colt v. Lanier, 9 Cowen, 342, in which an executor with the knowledge and consent of his partner, Colt, used the funds of the estate in payment of partnership debts ; to Duncan v. Jaudon, 15 Wall., 176, in which Duncan, to oblige Jaudon, loaned him money knowing it to be for his individual use and took in pledge shares which he knew belonged to an estate; to Smith v. Ayer, 101 U. States Reps. 327, in which the defendant took in pledge from an executor assets which he knew belonged to the estate for a loan which he had made to the executor, knowing it to be for his private use; and to McLeod v. Drummond, 17 Vesey, 170, in which bankers took from an executor assets which they knew belonged to the estate as security for a loan which they made to him, knowing it to be for his private use.

In each of these cases the person compelled to surrender money paid, or assets pledged to or purchased by him, acquired from one known to him to be an executor or trustee, that which he knew to he an asset of the estate or of the trust, with actual knowledge derived from the executor or trustee himself that he intended to use the proceeds of the sale or pledge for the relief of his private necessities; and, as a rule, in cases where the pledgee or purchaser had not knowledge from the declaration of the executor or trustee, we think that courts have not decreed a forfeiture of title unless he had actual knowledge of facts which of themselves afford as convincing evidence of the fraudulent intent as if the executor or trustee had made such declaration to him; as when a trustee, confessedly borrowing for his own use, offers in pledge a certificate of stock in his name as trustee, with a power to transfer executed by him as trustee, without any accompanying oral declaration that he had only the title of trustee to the shares; as was presumably the case of Shaw v. Spencer, 100 Mass., 382. The court compelled the pledgee in such a case to accept the declaration of the certificate as the equivalent of a declaration by the person. , And,, inasmuch as the act of loaning to an individual for his private use and knowingly requiring of him the delivery of trust shares by way of security, is regarded as fraudulent, in the sense that it is assistance intentionally given for profit to one who is perpetrating a fraud, courts are unwilling to decree a forfeiture for fraud upon knowledge imputed to the pledgee, unless the facts in which it is found force the imputed, in degree, close up to the actual; unless indeed, to borrow a rule of evidence, they exclude all reasonable doubt as to the existence of knowledge.

But in the case before us the respondent had not at the last renewal actual knowledge that the executor had not carried into effect his expressed purpose to apply the borrowed money to the payment of legatees.

Again, Pitkin became a debtor to the estate for the money which he as executor received from the respondent, and to the town for that which as treasurer he received from the tax-collectorall -this money thereby became to such a degree his own, and was to such an extent at his sole disposal, subject to his uncontrolled decision as to the place and manner of temporary keeping, tliat he could retain both in his personal possession without mark upon either, mingle them in one deposit, transfer the deposit from one account to the other for his convenience in keeping, investing or paying, without imposing upon the respondent an obligation because of these acts to know or suspect a fraud. Neither by such holding, or deposit, or transfer, is money lost to its own fund. It is not lost nor has a fraud been perpetrated so long as it remains in his possession or at his command, with an intent to answer all demands both of the estate and town; and so long as possession and ability to answer continue in him the intent will be presumed to be united with them. And a check drawn either individually or officially, payable to order or bearer, is so nearly the equal of currency in case of transfer, and performs so many offices of payment between individuals and executors, between the latter and trustees, and between these again and individuals, without giving any evidence when presented either of the number or character of the transactions of which it has been made a part or of the payments which it has effected, that the law will not charge the officers of a bank with knowledge that a depositor has committed a fraud, nor impose upon them the duty of inquiry, because he has drawn upon a treasurer’s account checks payable to himself or to bearer, or has transferred money from it to his own and from his own to it. They are not required to assume the hazard of correctly reading in each check the purpose of the drawer. The respondent directors might well suppose that the check for $8,745, drawn by Pitkin on October 1st, upon his individual account to order, effected in behalf of some of the legatees the reinvestment of their money in a form and manner known to and approved by them; and that his openly recorded act on October 8th, transferring the remaining proceeds of the loan from his individual to his treasurer’s account, accomplished in behalf of other legatees and in a form and manner known to and approved by them the sale of the stock and a re-investment of their money in the safer obligations of the town ; and, in short, that each of his checks as treasurer to bearer, or to himself, or from himself to the treasurer, completed an honest transaction.

In Central National Bank v. Connecticut Mutual Life Insurance Co. (104 U. S. Reps., not yet published), A. H. Dillon, Jr., had deposited with the bank in his name as “ General Agent ” money which as such agent he had collected for the insurance company. Notwithstanding it had actual knowledge as to the ownership of the money, the bank charged to this account his note given for money which it had loaned to him knowing it to be for his individual use, and refused to honor his check drawn upon that account as “agent” in favor of the insurance company, the owner. In the opinion denying the right of the bank to the money the court says :—“ A bank account, it is true, even when it is a trust fund and designated as such by being kept in the name of the depositor as trustee, differs from other trust funds which are permanently invested in the name of trustees for the purpose of being permanently held as such. For a bank account is made to be checked against, and represents a series of current transactions.' The contract between the depositor and the bank is that the former will pay according to the checks of the latter, and when drawn in proper form the bank is bound to presume that the trustee is in course of lawfully performing his duty, and to honor them accordingly.” And it is to be remembered that while we read the record of his deposits and checks in the clear light of fraud confessed by his flight, to the officers of the bank it was the record of the treasurer of his town; of a man whose integrity no one had then presumed to question. It might be a wholesome rule, if established and understood, that any omission by a trustee of the mark of the trust from either the securities or the money belonging to it, even with an honest purpose and for the briefest time, should be notice to all persons having knowledge of such act, that a fraud had been accomplished, if thereby the fidelity of trustees could be secured; but when a trustee has broken down all other barriers between himself and fraud, we fear that he will not allow a rule of law to restrain him ; those for whom he acts must ever find their protection in his integrity.

Nor will the law impute to the directors knowledge of fraud accomplished or intended from the fact that the executor desired to renew and continue the loan during the period of nearly four years. His reason for borrowing was that time would increase the value of the assets offered in pledge, and therefore it would be for the benefit of those to whom the residue was given, of whom he was one, to pledge and hold rather than sell. Thb reason embodied a promise to settle the estate at once by the payment of debts and legacies together, with a declaration that the loan would be projected into the future ; that the time taken for the settlement of the estate had nothing to do with the life of the loan; that that would depend solely upon the judgment of himself and others who, if debts and legacies were paid, were the owners of the pledged asset. And the reason referred to shares in a long-established and successful fire insurance company, which were not likely to increase in value suddenly because of unexpected profits. It is but reasonable to presume that the directors believed, as they had the right to do, that the only increase looked for was that which the general revival of the business and prosperity of the country would effect; that of necessity it was to be the result of the lapse of a considerable period of time. Therefore there was neither suggestion of danger nor ground for suspicion in the length of the loan ; and as from October, 1874, to October, 1878, the shares increased somewhat in value and paid large and regular dividends, the reason assigned by Pitkin continued to the last as complete a justification of the confidence of the directors in his truthfulness as at the first. They had the right to presume that debts and legacies had been paid, and that he was seeking to secure the profits of a rising market to himself and his associate remaindermen.

Moreover, we are unable to perceive that the granting of the loan was an added temptation to fraud. Eor to the executor determined to commit it, upon the same representation a sale was as easy for himself and as safe for the purchaser as would have been a pledge; having the money he need make no deposit; he could pay it away for his private use without speaking or written witness. So long as he should continue to pay the income to the legatees they were as little likely to suspect, inquire, or be informed, in one case as in the other.

Consequently, neither in law nor equity can the estate transfer the wrong and loss resulting from the betrayal of his trust by the executor from itself to the respondent.

The Superior Court is advised to dismiss the bill.

In this opinion the other judges concurred.