Fidelity & Deposit Co. v. Queens County Trust Co.

The plaintiff brings the action to recover the amount it was compelled to pay as surety in the bond given by Robert J. Peebles as trustee in bankruptcy of William Trist Bailey, and which Peebles, as trustee, illegally withdrew from the defendant and appropriated to his personal use. At the trial the court directed a verdict in favor of the plaintiff in the sum of six thousand six hundred dollars and interest. The Appellate Division reversed the consequent judgment and dismissed the complaint. We have concluded there was error in dismissing the complaint.

The cardinal facts are: By order duly made in June, 1906, Robert J. Peebles, trustee in bankruptcy of William Trist Bailey, a bankrupt, was directed to furnish a surety company bond in a stated sum and to deposit in the defendant all moneys of the estate immediately upon the receipt of them. The bond of the trustee and of the plaintiff as surety, in the usual form, was responsively furnished. The evidence did not show that a copy of the order or bond was served upon the defendant. Between July 3, 1906, and June 27, 1907, the trustee made in the defendant twelve deposits of funds belonging to the bankrupt estate. The deposit slips stated the deposits were made by Robert J. Peebles, trustee, and the deposits were credited to the account of "Robert J. Peebles, Trustee." On the same day, July 3, 1906, that such account was opened by the deposit of a check, the individual account of Robert J. Peebles in the defendant was charged with a withdrawal of the amount of the check. Of the eleven checks of third persons deposited in the trustee account a part were payable to "Robert J. Peebles, Trustee," and a part to "Robert J. Peebles." They were apparently indorsed "Robert J. Peebles, Trustee." A check, deposited September 13, 1906, was drawn by John J. O'Grady payable to himself and was indorsed: "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."

The withdrawals from the trustee account were made between July 17, 1906, and September 17, 1908, by fifty checks, each signed, "Robert J. Peebles, Trustee." Of the fifty checks, thirty-two, drawn and paid prior to September 17, 1908, were issued upon the order of the United States district judge for the eastern district of New York, and each was countersigned across its face, "Percy G.B. Gilkes, Deputy Clerk, U.S. District Court, Eastern Dist. of New York," or "Richard F. Morle, Clerk U.S. District Court, Eastern District of New York," and each of twenty-five of the thirty-two had upon its face in writing, "In re Wm. Trist Bailey." Three of those checks were certified by the defendant on the day of their date. Eight checks drawn and paid prior to September 17, 1908, were in the ordinary form, that is, without the countersignature or the statement

The appropriations of the trust funds by the trustee to his personal use began on September 17, 1907, and were accomplished by nine checks drawn and paid within the ensuing year. Each check was in the ordinary form and, with the exception of two, was deposited in the individual account of Peebles in the defendant. During that period, one check was drawn on the account pursuant to the order of the court and was countersign "Richard F. Morle, Clerk U.S. District Court, East Dist. of New York." There is no evidence that Peebles was indebted to the defendant at any time or that any of the moneys of the bankrupt estate misappropriate by him were received by the defendant in payment any indebtedness to it.

General order twenty-nine of the United States Supreme Court general orders in bankruptcy, adopted and promulgated by that court, November 28, 1898, pursuant to the Bankruptcy Act (Section 30), is: "No moneys deposited as required by the Act shall be drawn from the depository unless by check or warrant, signed the Clerk of the Court, or by a Trustee, and countersign by the Judge of the Court, or by a Referee designated for that purpose, or by the Clerk or his assistants under an order made by the Judge, stating the date, the sum, and the account for which it is drawn; and an entry of the substance of such check or warrant, with the date thereof, the sum drawn for, and the account for which it is drawn, shall be forthwith made in a book kept that purpose by the trustee or his clerk, and all checks and drafts shall be entered in the order of time in which they are drawn and shall be numbered in the case each estate. A copy of this general order shall be furnished to the depository, and also the name of any referee or clerk authorized to countersign such checks." There is no evidence that the defendant was furnished a copy of this rule.

Robert J. Peebles died December 31, 1908. A substituted trustee compelled an accounting on the part of his administrator, which revealed the peculations we have stated. Under the order of the court the plaintiff paid (the estate of Robert J. Peebles being insolvent) their amount.

The conclusion that the facts permit and give support to the inference that the defendant knew or ought to have known that the funds deposited in the trustee account were trust funds belonging to Peebles as trustee in bankruptcy of William Trist Bailey, is too manifest and indisputable to require an analytical restatement of or discussion concerning them. The defendant did not, however, by paying moneys of those funds to Peebles or crediting them to his individual account, through the check of "Robert J. Peebles, Trustee," participate in the misappropriation of them by the trustee. A liability of the defendant did not arise from those facts. (Bischoff v. Yorkville Bank, 218 N.Y. 106. )

In case a copy of the general order twenty-nine had been furnished to the defendant, or the defendant had known or ought to have known of its existence, prior to the payment of the checks by which the misappropriation was effected, the payment of the nine checks would have made it liable for the diversion of the funds effected through them. The checks then would have been as to it, as they in fact were, incomplete and improperly drawn. (American National Bank v. Fidelity Deposit Co.,129 Ga. 126.)

We have concluded, with hesitation however, that the evidence permitted or gave support to a finding that the defendant was chargeable with knowledge of the existence of the general order. It was charged conclusively with notice or knowledge of the adjudication of William Trist Bailey's bankruptcy and with the provisions of the Bankruptcy Act, including those of section thirty. The adjudication was a judgment in rem, binding against all the world, so far as it determined Bailey to be bankrupt, and his property subject to administration in bankruptcy. (Manson v. Williams, 213 U.S. 453; Corbett v. Riddle, 209 Fed. Rep. 811.) The evidence permits the finding, as we have stated, that the defendant was chargeable with the knowledge that the moneys in the account of "Robert J. Peebles, Trustee" were trust funds arising from the bankrupt estate. The rule that a bank is not bound to take notice of or give heed to notations or memoranda upon checks, made for his personal convenience or advantage by the drawer, is not applicable to the countersignatures and the statement, "In re William Trist Bailey." The statement, considered with the knowledge of the bank that William Trist Bailey was an adjudicated bankrupt, may be found, in and of itself, to characterize the nature of the funds upon which the checks were drawn. It may indicate that the checks were given in the proceedings in the bankruptcy of Bailey, upon funds arising from the bankrupt's estate. (Hitchcock v. Buchanan,105 U.S. 416; Carpenter v. Farnsworth, 106 Mass. 561; Miller v.Roach, 150 Mass. 140.) The countersignatures were the formal official acts of a public officer of the bankruptcy court, to which must be imputed a cause and a purpose. The defendant could not assume or presume that they were made in sheer voluntariness or sport and without reason or effect. The acts of public officials do not spring from such causes. The countersignatures manifestly had a relation to the checks themselves. If unnecessary or meaningless, in relation to them, they would not have been there. Good and practical reason for them must in the nature of things exist. It is difficult, if not impossible, to conceive of a reason for them dissociated from the completeness or validity of the checks. The defendant, as a matter of natural necessity and mental operation, was bound to be in a condition of inquiring for the cause and purpose of them. One who has reasonable grounds for suspecting or inquiring ought to suspect, ought to inquire, and the law charges him with the knowledge which the proper inquiry would disclose. Actual notice may be proved by direct evidence or it may be inferred or implied. Actual knowledge is not required. Actual notice embraces all degrees and grades of evidence, from the most direct and positive proof to the slightest circumstance from which a jury would have been warranted in inferring notice. If a person has knowledge of such facts as would lead a fair and prudent man, using ordinary thoughtfulness and care, to make further accessible inquiries, and he avoids the inquiry, he is chargeable with the knowledge which by ordinary diligence he would have acquired. Knowledge of facts, which, to the mind of a man of ordinary prudence, beget inquiry, is actual notice, or, in other words, is the knowledge which a reasonable investigation would have revealed. (FirstNational Bank of Paterson v. National Broadway Bank, 156 N.Y. 459;Baker v. Bliss, 39 N.Y. 70; Williamson v. Brown,15 N.Y. 354; Anderson v. Blood, 152 N.Y. 285; Peck v. Bank ofAmerica, 16 R.I. 710.) In the case at bar a simple inquiry, by the bank of the trustee, for the reason of the countersignatures, would have revealed the existence of the general order and of its provisions.

The plaintiff, in virtue of the general principles of subrogation, has the rights of the obligee in the bond against the defendant. (Pittsburgh-Westmoreland Coal Co. v. Kerr,220 N.Y. 137; American National Bank v. Fidelity Deposit Co.,129 Ga. 126.)

The judgment of the Appellate Division should be reversed and a new trial granted, costs to abide the event.

HISCOCK, Ch. J., CUDDEBACK, CARDOZO, POUND, CRANE and ANDREWS, JJ., concur.

Judgment reversed, etc.