United States Fidelity & Guaranty Co. v. Hood

The United States Fidelity and Guaranty Company executed as surety the guardian fiduciary bond in a penalty of six thousand dollars on March 19, 1929. On March 25 the guardian deposited forty-two hundred, ten dollars and eighty-four cents in the Bank of Sutton, and on March 26 the guardian's check for four thousand dollars was deposited to Juergens' personal account and the Bank accepted Juergens' individual check for three thousand dollars. The check was credited upon his indebtedness to the Bank. Proof of claim filed with the Receiver, as well as the bill of complaint in this proceeding, contains allegations charging a criminal conspiracy between the guardian and the Bank of Sutton, the Bank, according to the accusation, having loaned Juergens individually five thousand dollars shortly before his appointment and qualification with the understanding that the indebtedness would be repaid out of fiduciary funds coming into his hands as guardian. At the time the alleged loan was made, Juergens was indebted to the Bank to the extent of approximately two thousand dollars, the five thousand dollar note representing a new loan of that amount. This transaction was negotiated in February, 1928, and it was not until the latter part of March, 1929, that Juergens was appointed and qualified. It is to be supposed that at the time the loan was made the fiduciary post was filled by Juergens' predecessor, so that the proof of claim and the bill of complaint, both of which were verified, although based upon information and belief, could only have been conscientiously executed in utter ignorance of easily ascertainable information.

If a fiduciary execute a check payable to himself individually and deposit it in the drawee bank to his individual account, his doing so does not put the bank upon inquiry as to the legitimacy of the transaction. Havana Cent.R. Co. v. Knickerbocker Trust Co., 198 N.Y. 422, 92 N.E. 12, L.R.A. 1915B, 720; New Amsterdam Casualty Co. v. Robertson,129 Or. 663, 278 P. 693, 64 A.L.R. 1396.

According to the overwhelming weight of authority, the bank may assume that the fiduciary estate is legally obligated to the fiduciary as an individual, and hence that the payment of the check by the bank as the fiduciary's debtor is required, the bank, without further cause, not being at liberty to suspect the motive of its depositor. If that be so, excepting instances where the bank is chargeable with knowledge imputing fraud, I do not understand why a bank cannot thereafter accept the individual check on the individual account of its depositor in payment to the bank of an individual indebtedness of the maker of the check. If the indebtedness was due to some third person, there is no doubt that the bank would be freed from all responsibility. Havana Cent. R. Co. v. Knickerbocker Trust Co.,198 N.Y. 422, 92 N.E. 12, L.R.A. 1915B, 720; 3 Scott on Trusts 1744. See also United States Fidelity Guaranty Co. v.Bank, 77 W. Va. 665, 88 S.E. 109. I realize that the bank receiving checks of its depositors in payment of an indebtedness due it occupies a dual position where its conduct should be very closely scrutinized, and anything approaching coercion impelling a fiduciary to discharge his individual indebtedness to the bank from fiduciary funds should not be tolerated. In this case, however, there is not one scintilla of such proof, nor any indication that the form of the transaction involving the payment of two checks, instead of one, was to any degree a setup or makeshift with the hope by that means of legitimatizing the payment to the Bank.

I realize that there is a twilight or border zone in the reasoning of the cited cases. However, there is authority for the statement that a bank by accepting money known to be trust funds to be credited to the personal account of the trustee is not put upon inquiry, and is liable only if it becomes an actual participator in a resultant breach of trust. 4 Bogert on Trusts, paragraph 908.

This Court in United States Fidelity Guaranty Co. v. Bank,77 W. Va. 665, 88 S.E. 109, 111, cited in the majority opinion, used the following language quoted in the appellees' brief:

"In the other cases cited defendants were rendered liable on principles of equity and justice, for having of their own motion or by collusion with their depositor, appropriated the trust funds to the payment of some individual liability or indebtedness of the depositor to them. We are cited to no authority for holding a bank liable for a breach of trust by its depositor under any other circumstances. For aught a bank would know a check though payable to its depositor in some representative or fiduciary character, the money would belong absolutely to him, and represent money already paid out by him in discharge of his fiduciary liability; the bank cannot assume that money paid out on checks of a fiduciary is being misappropriated, and it has the right to assume that it is being properly appropriated, at least until it has actual notice to the contrary. To place the burden of supervising all such accounts upon a bank of deposit would be unreasonable, and one which few institutions, if any, would be willing to assume; indeed it would be unbearable, and to do so would in many cases deprive all fiduciaries of banking privileges, and work a detriment to estates and fiduciaries generally. So upon principles of equity and justice we cannot see that the bill presents a case for the relief of subrogation or substitution sought thereby, and our conclusion is that the decree should be affirmed."

The statement of the learned author of "Scott on Trusts" classifies West Virginia as being among the jurisdictions not adhering to the rule sustained by what is referred to as the weight of authority to the effect that a bank is liable to the extent of trust funds deposited in a trustee's personal account in paying the depositor's liability to the bank. (See Scott on Trusts, Vol 3, 1748, paragraph 324.4.) An examination of the cases cited to sustain the text will disclose that none of them involves two accounts and two checks, as in this case.

The quoted utterance of this Court was in 1916. I have no doubt that both the proof of claim and the bill before us were drafted on the theory of conforming to the rule laid down inUnited States Fidelity Guaranty Co. v. Bank, 77 W. Va. 665,88 S.E. 109. A careful reading of that case and the two papers referred to I believe justifies that conclusion. It having totally failed to prove any mala fides on the part of the Bank, the complainant's case failed under the doctrine dealt with in the Fidelity case, and I do not believe that it should be permitted to shift its complaint so that, having done so, it is now entitled to recover on the theory that the Bank was put upon inquiry. The bank, although the debtor of its depositors, unquestionably occupies a confidential relationship toward them, and an unjustifiable inquisitiveness exercised by a bank is well known to be an unbearable liability. Neither do I believe a bank should be required to sift the information which reaches it according to the rules of evidence, distinguishing hearsay from factual information, and I fear that the majority opinion simply shifts the burden of proof and requires that a bank assume the initiative and eliminate all possibility of a fraudulent purpose rather than being obliged to wait until the known circumstances indicate its existence. I do not believe the Bank of Sutton was put upon inquiry so I would affirm the trial chancellor's decree.