First National Bank v. Consolidated School District No. 28

¹ Reported in 238 N.W. 634, 240 N.W. 662. On August 28, 1928, the First National Bank of Windom in good faith and for value bought from the Farmers State Bank of Wilder warrants issued by defendant district, herein referred to as the defendant, in April, May, and June, 1928, aggregating $1,285.

On January 16, 1929, the First National Bank of Heron Lake in good faith and for value bought from the Farmers State Bank of Wilder warrants issued by defendant from March to December, 1928, aggregating $3,476.36.

There being no dates of maturity on such warrants, each of said national banks sued defendant to restrain it from paying subsequent warrants before their warrants were paid. Defendant's answers alleged set-off and estoppel, which replies denied.

The actions were tried together, and the court found for defendant on the theory of set-off. They are here upon one record, each plaintiff having separately appealed from an order denying its motion for a new trial.

1. One Malchow was the treasurer of defendant since its organization, and from 1902 to March 12, 1930, he was also the cashier of the Wilder bank, wherein he carried the defendant's checking account. He was the sole managing officer of the Wilder bank and exclusively in charge of its business. He proved faithless to his trust, and the bank was closed as insolvent on March 12, 1930.

Prior to the purchase of the warrants by either plaintiff, Malchow, as treasurer of defendant, received from the treasurer of Jackson county, wherein defendant is situated, checks aggregating $12,918.51, the same being taxes collected by the county. Ordinarily he would have deposited these checks to defendant's account. He did so deposit $5,000 thereof and no more. The balance of $7,918.51 he converted to the use of the Wilder bank. Details are not important. It is sufficient to say that he stamped the checks paid and returned them to the county without charging the amounts to the county's checking account on the books of the bank and against which account the checks were drawn. The amounts were used to replace in the county's checking account items which Malchow had previously wrongfully taken therefrom to offset bad notes or other items of charge-off. The argument is advanced that the transaction was wholly a matter of book entries and that there was no conversion, for the simple reason that no money was involved since the checks were drawn on the Wilder bank.

We think that argument is fallacious. The checks were good, represented money, and were valuable. They evidenced defendant's right to receive the face value thereof, and had the cashier performed his duty as a banker the defendant would have realized $7,918.51 from the checks, the evidence of this ready credit. Malchow, as treasurer, turned these checks into the hands of the bank, and then as the banker he stamped them paid and returned them to the drawer. The transaction constituted a payment by the county to the defendant. Whether the checks were charged to the account of the county, Malchow by his acts and conduct furnished the county with the evidence that the money had been paid to the defendant and then instead of depositing the money in the bank to the credit of the defendant he handled the checks as stated. By the wrongful manipulation of Malchow as the cashier of the Wilder bank the money readily realizable from the checks was lost to the defendant. It was a misappropriation of the property by Malchow for the benefit of the bank. It was embezzlement. State v. Peterson, 167 Minn. 216, 208 N.W. 761. This misappropriation of these checks before they were deposited to defendant's account was a clear case of larceny, for which the bank's liability followed. The Wilder bank owned these warrants, but when plaintiffs purchased them the indebtedness arising out of the conversion remained unpaid and was a legal set-off available to the defendant as a defense to the collection of the warrants.

2. Perhaps the case should have a broader consideration. From September 1, 1922, to March 12, 1930, Malchow wrongfully withdrew from defendant's checking account in the Wilder bank $28,332.64, the major portion of which was withdrawn prior to August 28, 1928. There was credited back to this account $8,960.23, the source of which does not appear, leaving a net wrongful withdrawal in this item of $19,372.41. He also withdrew for the purported purpose of paying warrants, but which was wrongfully used for other purposes, the sum of $23,804.14. This was also mostly incurred prior to August 28, 1928. The total wrongful misapplication of defendant's funds amounts to $43,176.55. Substantially all of this arises out of the misuse of fiduciary or trust funds. Through Malchow and from the records of the Wilder bank, it was charged with knowledge that such funds were trust funds; that they were wrongfully used and that substantially all thereof were in fact used for and in its behalf; and that it in fact received the benefit of substantially all thereof. The Wilder bank with such knowledge participated in Malchow's breach of fiduciary obligation, which results in liability. Rodgers v. Bankers Nat. Bank, 179 Minn. 197, 229 N.W. 90; Solway State Bank v. School Dist. No. 26, 179 Minn. 423, 229 N.W. 568; Berg v. Union State Bank, 179 Minn. 191, 229 N.W. 102; Agard v. Peoples Nat. Bank,169 Minn. 438, 211 N.W. 825, 50 A.L.R. 629.

The character and purpose of Malchow's manipulation cannot be obliterated by the argument that the whole thing was merely a matter of book entries and that such wrongful book entries could not affect the relation of debtor and creditor existing between the Wilder bank and defendant. Of course a depositor's money, when deposited, becomes the money of the bank. But one cannot escape the consequences of his transactions by the mere use of credits in modern business and banking transactions instead of handling currency or cash. The effect is the same. Defendant's money disappeared, and the Wilder bank through Malchow got it. The bank participated in Malchow's misconduct. Under the circumstances, on this theory of the case, an equitable set-off was available to the defendant at the time when plaintiffs purchased their warrants. Solway State Bank v. School Dist. No. 26, 179 Minn. 423, 229 N.W. 568, and cases cited above.

This case is distinguished from Independent School Dist. No. 21 v. Integrity Mut. Cas. Co. 171 Minn. 376, 214 N.W. 258, by the fact that in that case there was no embezzlement, while here there was. This case is also distinguished from First Nat. Bank v. School Dist. No. 272, 177 Minn. 30, 224 N.W. 251, in that the court in that case found the facts against the claim of equitable set-off; but in the instant case the court found the facts in support of the claim of equitable set-off. This came is also distinguishable from the case of Solway State Bank v. School Dist. No. 26, 170 Minn. 83, 212 N.W. 25, in that it did not there appear that the unfaithful official was acting for the bank in a temporary theft of certain warrants. In the instant case the Wilder bank with knowledge received the fruits of the larceny. But when the Solway case was here the second time, 179 Minn. 423, 229 N.W. 568, upon an amended answer as suggested in the first appeal, it was made to appear that the wrongdoer checked the money to the bank to pay his personal debts, and, the bank being charged with his knowledge, the court sustained the claim of equitable set-off. We are unable now to see why this case is not controlled by the doctrine of the second Solway case.

3. The warrants being non-negotiable (Kalman v. County of Grant, 167 Minn. 458, 209 N.W. 638; First Nat. Bank v. School Dist. No. 15, 173 Minn. 383, 217 N.W. 366, 56 A.L.R. 1369) the defense of set-off, which was available against plaintiffs' assignor at the time they purchased their warrants, is still available against the plaintiffs though they bought the warrants for value and in good faith. This results from a rule of law which we cannot change but which we obey. If it would be better that such warrants be negotiable, thereby making them readily salable in the market to the advantage of the drawer and at the same time attractive to investors, that is a legislative matter.

Both orders are affirmed.

AFTER REARGUMENT. On January 29, 1932, the following opinion was filed: