Eyrich v. Capital State Bank , 67 Miss. 60 ( 1889 )

Cooper, J.,

delivered the opinion of the court.

The Capital State Bank exhibited the bill in this cause in the chancery court of Hinds county, in which court administration of the estate of P. T. Baley was pending, against Eyrich, administrator of Baley, and one Rogers, to enforce the payment of a certain joint and several promissory note made by Rogers and Baley to the bank for the sum of one thousand five hundred dollars. The note contains a stipulation that if it is not paid at maturity the maker would pay a reasonable attorney’s fee. As between the makers of the note, Rogers was principal and Baley surety, and this fact was known to the bank.

Rogers made no defense and decree was rendered against him for the sum claimed. Eyrich, administrator, admitted the execution of the note and his liability to pay so much of the sum named therein as remains unpaid, subject to a set-off of five hundred dollars, but objected that suit could not be brought against him until after the lapse of twelve months from the grant of administration to him of said estate, which time had not elapsed when the bill was filed. The twelve months permitted to an administrator before distribution, refers not to distribution in payment of debts, but to the parcelling of the estate to the distributees.

The administrator claimed as a set-off the sum of five hundred dollars which his intestate had deposited in said bank to his individual credit, and which sum he contends has never been properly accounted for by the bank. The bank admits that such sum had been held by it to the credit of the intestate, but shows that before the maturity of the note here sued on, the firm of W. C. Rogers, composed of said intestate and W. C. Rogers, was indebted to the bank in the sum of five hundred dollars, evidenced by an overdue promissory note, executed by said firm for money loaned by the bank ; that this note was presented to Baley and payment demanded, which he refused to make, whereupon the bank (there being no credit on its books for said firm) applied the credit standing in the name of the intestate to the payment of said note. The bank contends in limine that since its bill is against the administrator of Baley and Rogers, a demand in favor of Baley alone cannot be set off, the demands not being mutual.

This position is not maintainable; this is not a suit at law, nor is it one which could be maintained in equity upon general principies, being for the enforcement of • a purely legal demand. But since the estate of Baley is being administered in the court in which the bill is exhibited, the court, as a mere matter of administration, has under our constitution and laws jurisdiction to examine into its validity and enforce its payment. Hunt v. Potter, 58 Miss. 96. But the complainant cannot by joining in the proceedings another defendant, jointly liable with the intestate at law, preclude the administrator from setting up in discharge of the liability of the estate a debt due by the creditor to the intestate. "Without regard to the character of the demand asserted against the estate, as one due by the intestate alone, or by him jointly with another, the rights of the parties will be settled just as though the obligation was that of the estate alone, even though it was made jointly with another and that other is without objection on his part, or by the administrator improperly joined as defendant in the proceeding. The jurisdiction of the court is auxiliary and incidental to the administration of the estate. The objection taken by the administrator to the allowance of an attorney’s fee is without merit. The intestate promised to pay not only the principal sum named in the note and interest, but also a reasonable attorney’s fee in event suit should be necessary to collect the debt. There is no more difficulty in fixing the quantum of such fee than exists as to all matters not liquidated by the terms of a contract.

The next question presented arises from the objection made by the administrator to the act of the bank in applying the individual deposit of Baley to the payment of the $500 note it held against the firm of W. C. Eogers, of which firm Baley was a partner. This note was due and unpaid, and months before the maturity of the note now sued on, the bank, against the objection of Baley, charged it up to his private account, thus absorbing his individual deposit.

Counsel for the administrator insist that the right of set-off by the bank exists only where the individual who is depositor and debtor, stands in both these characters in precisely the same relation and on precisely the same footing toward the bank. In support of this position they rely upon the text of Morse on Banks and Banking, vol. I, sect. 326, and the authorities there cited. The question was propounded from the bench during the argument, whether any different rule applied to a banker than to any other person, to which counsel replied in the affirmative, on the authority above noted.

We have examined the text of Morse and the authorities cited by him (except Ex parte McKenna, 30 L. J. Bank. 20, to which we have not access), and do not think either the text or the authorities cited support the view advanced by counsel. Section 334 of the same volume deals with the right of set-off by the bank, but there is no suggestion that a bank may not avail itself of the right in any case in which another might do so. We have found no case in which a different rule has been applied to banks, and we are aware of no principle upon which it could rest. Morse but asserts as applicable to bankers the rule which is of general application, that to warrant set-off there, must be mutuality in the character of the demands. The cases cited by him are Watts v. Christie, 11 Beav. 546; Ex parte McKenna, 30 L. J. Bank. 20; Dawson v. Bank, 5 Pike (Ark.), 283 ; Liggett Spring Axle Co.’s Appeal, 111 Pa. St. 291, and International Bank v. Jones, 119 Ill. 407.

In Watts v. Christie, after insolvency of the'bank, an individual depositor directed the bank to apply his deposit to the credit of his firm which was indebted to the bank. This the bank refused to do, and the firm sought to obtain the benefit of the individual deposit. Other arrangements of similar character had been acquiesced in by the bank, and the master of rolls very strongly intimated that an unfair preference had been thus given to those securing transfers, which could be set aside by creditors of the bank. The authority seems to proceed to the extent that even by the consent of the depositor and the bank, the transfer could not have been made. In Dawson v. Bank, 5 Pike, 283, it was held that a bank could not apply the deposit of an individual to the payment of a debt due by a firm of which he was a member. This was put upon two grounds, one that the charter of the bank prohibited such set-off, the other because the debts were not mutual. On the latter ground this decision followed and was based upon Trammell v. Harrell, 4 Pike, 602, in which it had been held that under the statute of that state controlling set-off, a defendant could not set off the joint and several obligation of the plaintiff to himself. This decision was afterwards overruled in Leach v. Lambeth, 14 Ark. 668.

In International Bank v. Jones, 119 Ill. 409 ; Coates v. Preston, 105 Ib. 473; Gregg v. James, Breese, 143; Burgwyn v. Babcock, 11 Ill. 28 ; and Hilliard v. Walker, Ib. 64, it is settled that partnership contracts are not joint and several under the statutes of Illinois so as to permit a defendant sued by a single partner on his own demand to set off the debt due him by the firm. Liggett Spring Axle Co.’s Appeal, 111 Pa. 291, does not touch the question involved. In none of these cases is there anything said indicating that a bank if sued would be controlled by any other rule than would apply to other defendants. But it is settled in this state that a demand in favor of the defendant against the plaintiff and another, jointly and severally bound, may be set off against the plaintiff suing alone. Moody v. Willis, 41 Miss. 347. If the bank had been sued by Baley it might have set off any demand it had against the firm of which Baley was a member, and might, because it could, apply his credit to the debt due by said firm.

The next objection taken by the administrator to the appropriation of the sum due to the intestate to the $500 note of the firm is that Rogers had drawn checks on the firm account in favor of third persons and in satisfaction of his individual debts, and that the bank had with knowledge of such misappropriation, or with sufficient notice to put it on inquiry, paid out the firm deposit on such checks and thus participated in the misapplication, by reason of which it should be made to replace such sums and apply them to the satisfaction of the said note.

It appears from the evidence that Rogers, who was the son-in-law of Baley, was introduced by him to the bank, and information given that Baley was a member of the firm of ~W. C. Rogers, and that he wanted Rogers to keep his account with said bank. It is not positively shown that Baley knew the account was after-wards so kept, but on one occasion he received a check from Rogers on the bank in payment of a private debt due by Rogers to himself, which check was paid by the bank.

Some of the checks drawn by Rogers on the firm account contained on their faces memoranda from which it is argued that the bank should have inferred that he was applying the firm assets to the payment of his private accounts, and should have declined to honor the checks so drawn.

There is no suggestion that the bank derived any benefit from any of these payments, or had any sort of interest in them, or procured them to be made. The broad proposition is announced that it was the duty of the bauk to protect the interest of Baley by scrutinizing cheeks drawn by Rogers, and by declining to pay such as it suspected were drawn in favor of his individual creditors.

It is not suggested either by the argument or the evidence that the bank knew that Rogers was appropriating the firm’s money to the payment of his own debts, otherwise than from the fact that the checks sometimes bore private memoranda, presumably put there for his own information and not as directory to the bank. Neither our own researches nor the result of the labor of counsel has disclosed a case in which, under such circumstances, liability has been fixed upon the bank for checks so paid. True it is that a bank may not participate in the misapplication of the deposit left with it by a firm by accepting checks drawn on it in payment of the individual debt of the partner to the bank. But ordinarily the bank has no concern in the destination of a fund for which a proper check is presented at its counter. The confidence that Rogei’S would apply the funds of the firm only to firm purposes was one reposed in him, not by the bank but by Baley, his partner: It had a right to assume, in the absence of strong proof to the contrary, that this confidence was not being abused, and to act with reference to such presumption. Banks are not trustees of their depositors in that sense that they must see to the application of funds drawn by those entitled to check against them. In the multiplicity of business transactions innumerable instances must occur in which circumstances known to the bank, or- some of its officers, would suggest doubts as to the destination of funds cheeked against, which circumstances, if investigated, would disclose to what purposes the funds were being applied. But it has never been suggested that the bank may properly, much less- that it ought as a duty to the beneficiary of the fund, suspend its ordinary course of business that it may satisfy itself as to the right of him authorized to draw out the fund to so apply it. Where there is not a duty to act there can be no responsibility for failing to act, and it must be held that banks discharge their duty to depositors when, in good faith, they disburse the funds held by them in compliance with the direction of him who has the right to direct such disbursement. There ought to be either a fraudulent purpose on the part of the bank, or actual knowledge of a fraudulent design by another shown, before liability can be fixed on it for paying out funds on checks signed by him authorized to draw. In Gray v. Johnston, L. R. 3 Eng. & Irish App. Cases, an executrix gave a check in favor of a firm in which she was a partner for the whole fund of the estate of which she was the representative. On proceedings to charge the bank with the funds, which were lost to the estate, the lord chancellor said : “ On the one hand, it would be a most serious matter if bankers were to be allowed on light and trifling grounds — on mere suspicion or curiosity — to refuse to honor a check drawn by their customer, even though that customer might be an executor or administrator. On the other hand, it would be equally of serious moment if bankers were to be allowed to shelter themselves under that title, and to say that they were at liberty to become parties or privies to a breach of trust committed with regard to trust property, and, looking to their position as bankers merely, to insist that they were entitled to pay away money which constituted a part of the trust property at a time when they knew it was going to be misapplied, and for the purpose of its being so misapplied. I think, fortunately, the law on that point is clearly laid down, and may be derived without any hesitation from the authorities which have been cited at bar, and I apprehend that the result of these authorities is clearly this: In order to hold a banker justified in refusing to pay a demand of his customers, the customer being an executor, and drawing a check as an executor, there must, in the first place, be some misapplication, some breach of trust, intended by the executor, and there must, in the second place, be proof that the bankers are privy to the intent to make this misapplication of the trust estate.” See, also, Goodwin v. American National Bank, 48 Conn. 550.

There is no pretense of privity on the part of complainant in any misapplication of the funds of the firm of W. C. Rogers by the managing partner; the argument is, that if investigation had been made by the bank, the contemplated misappropriation would have been discovered, and that the bank had such notice as made it its duty to refuse payment of the checks drawn until investigation could be made.

The remaining objection taken by the administrator to the note of $500, paid by the application of the intestate’s private credit, is that it was not given for a partnership debt, nor for money loaned to the partner (Rogers) in the partnership affairs.

As to $400 of the sum represented by the note, it appears to have been borrowed by Rogers, and actually applied to the payment of commercial debts contracted by the firm in the due course of business. But as to the remaining $100, the objection is well taken. This sum was borrowed by Rogers from the bank to be applied to the payment of the interest then due on the $1500 note executed by himself and Baley, and payable to the bank. The bank knew this to be not a partnership debt, and as the money borrowed was to this extent at once applied to the payment of interest on this note, it was in legal contemplation a loan to Rogers for his own use, and being such the bank was chargeable with knowledge of his want of power to bind his partner. It knew all the facts, and the legal consequences which flowed from them it is conclusively presumed to have known.

The decree is erroneous, in so far as it allowed credit to the bank for this sum,

And for this reason must be reversed. A decree may be entered here for the proper sum. The costs of the appeal to be taxed against appellee; the costs of the court below against appellant.