Duckett v. National Mechanics' Bank

McSherry, C. J., delivered the opinion of the Court. These proceedings had their origin in a bill filed by the appellants against the appellees in the Circuit Court of Bal ⁴⁰² timore City. The appellants are trustees who were appointed by an order of the Circuit Court for Prince George’s County in the place and stead of Henry W. Clagett, the .survivor of three trustees named in the will of John D. Bowling. To these latter—the testamentary trustees—certain funds were bequeathed by Mr. Bowling, to be held in trust for the purposes designated in the will; but as those purposes have no relation whatever to the questions pre.sented in the record they need not be alluded to here.

It is only necessary to state that the funds now in controversy formed part of the corpus of that trust estate. Upon the death of his associates Clagett became, under a decree of the Circuit Court for Prince George’s County, sole trustee .and thereafter, having made default to the trust estate, was in due course removed and the appellants were immediately appointed to discharge the trusts created by the will of Mr. Bowling. Amongst the investments belonging to the trust •estate in the hands of Clagett were two mortgages, each for two thousand dollars, one due by Thomas S. Duckett and the other by Washington J. Beall. The mortgage given by Beall was foreclosed by Clagett after he became sole trustee, .and the money realized from the sale was paid to him through Mr. Charles H. Stanley.

The payment was made by Mr. Stanley’s check, which reads as follows : “ Laurel, Md., February 13, 1892. Citizens’ National Bank. Pay to the order of James Scott, cashier, $2,000.00, two thousand dollars, for deposit to credit of Henry W. Clagett, being the balance of purchase money due him as trustee from John R. Coale. C. H. Stanley.” When the Duckett mortgage matured the amount secured by it was paid to Clagett through Mr. Stanley by a check in these words : “ State of Maryland, Citizens’ National Bank of Laurel, Laurel, Maryland, Sept. 17, 1892.

Pay to the order of James Scott, cashier, $2,024.30, two thousand and twenty-four 30-100 dollars, to deposit to the credit of Henry W. Clagett, trustee. C. H. Stanley.” Both of these checks were deposited in the National Mechanics’ Bank of Baltimore, where Clagett ⁴⁰³ kept an individual or personal account and the proceeds of each were carried to his credit in that account. Clagett in his capacity as trustee had no account with the bank. The individual account of Clagett, including the proceeds of the two checks just transcribed, was drawn on from time to time by him, and after his removal as trustee it was discovered that these funds had been dissipated and spent.

Clagett was and still is insolvent. The new trustees—the present appellants—made demand upon the National Mechanics’ Bank for a restitution of the amount of the two checks, claiming that the bank was accountable therefor because it had wrongfully placed the proceeds thereof to Clagett’s individual account instead of to his account as trustee and had thereby aided and participated in his breach of trust; and to enforce that demand they filed the pending bill against the bank and Clagett. Upon final hearing the Circuit Court of Baltimore City decreed that the bank was not liable and dismissed the bill, whereupon this appeal was taken. The ultimate inquiry is, whether under the circumstances stated the bank is liable to make good to the new trustees the amounts of these two checks.

In addition there are subordinate questions arising by way of defence that will be disposed of after the main one has been dealt with. There can be no dispute that as a general principle all persons who knowingly participate or aid in committing a breach of trust are responsible for the money and may be compelled to replace the fund which they have been instrumental in diverting. Every violation by a trustee of a duty which equity lays upon him, whether wilful and fraudulent or done through negligence, or arising through mere oversight or forgetfulness, is a breach of trust. 2 Pom Eq. sec. 1079. There is in such instances no primary or secondary liability as respects the parties guilty of, or participating in the breach of trust; because all are equally amenable.

That a breach of trust was committed by Clagett does not admit of a doubt. The defaulting trustee was removed because he was a defaulter. He unquestionably received the ⁴⁰⁴ proceeds of these two checks and those proceeds formed part of the corpus of the trust estate which it was his imperative duty to [preserve intact. Instead of performing that duty he spent the funds—they have disappeared and he has not explained what he did with them—and it can make no possible difference for what purpose he did spend them, if by spending them he impaired the corpus of the trust estate; and that he did impair the corpus of the trust estate no one pretends to deny.

Whoever knowingly aided him, or knowingly participated with him in missapplying that fund, became by reason of so aiding and so participating, equally liable with him to make the fund good by restoring it to the trust estate. 2 Pom. Eq., sec. 1079. If the bank knowingly aided and participated in Clagett’s breach of trust, then the bank is, beyond dispute, as responsible to the new trustees as is the defaulting trustee himself. This liability of the bank depends, however, altogether upon the contingency that it knowingly aided the trustee, Clagett, to commit the default of which he was undeniably guilty.

If without knowledge of Clagett’s misconduct, or if without sufficient notice to put it on inquiry that would have enabled it to ascertain that Clagett was mingling with his individual deposits and using as his own, money that the bank knew or had the means of knowing was trust money; or if the bank was merely the innocent agency through which, without fault or negligence on its part, Clagett depleted the trust estate, then it was not guilty of aiding him in misappropriating the trust fund and is not liable to restore it. In seeking, then, to solve the principal inquiry we must look to the record for the evidence which will fasten on the bank this knowledge or notice, if in fact it possessed such knowledge or notice. At the outset it ought to be noted that there is a marked difference between the phraseology and the legal effect of the two checks already set forth. The one is payable to Scott, cashier, for deposit to the credit of Clagett person ally—that is, not in his capacity as trustee—though there is ⁴⁰⁵ a memorandum added of which we will speak in a moment.

The other check is payable to Scott, cashier, “ to deposit to the credit of Henry W. Clagett, trustee.” Apart from these two checks and the information which they themselves by their terms imparted, there is no pretence that the bank had any notice or knowledge that the funds collected on them belonged to or formed part of any trust estate, or were other than Clagett’s own, individual property. As a consequence we are restricted to the checks alone in determining whether the bank is liable. It is true, undoubtedly, that a bank is bound to honor the checks of its customer so long as he has funds on deposit to his credit, unless such funds are intercepted by a garnishment or other like process, or are held under the bank’s right of set-off. It is equally true that whenever money is placed in bank on deposit and the bank’s officers are unaware that the fund does not belong to the person depositing it, the bank upon paying the fund out on the depositor’s check will be free from liability even though it should afterwards turn out that the fund in reality belonged to some one else than the individual who deposited it.

It is immaterial, so far as respects the duty of the bank to the depositor, in what capacity the depositor holds or possesses the fund which he places on deposit. The obligation of the bank is simply to keep the fund safely and to return it to the proper person or to pay it to his order. If it be deposited by one as trustee, the depositor as trustee has the right to withdraw it, and the bank, in the absence of knowledge t>r notice to the contrary, would be bound to assume that the trustee would appropriate the money, when drawn, to a proper use. Any other rule would throw upon a bank the duty of inquiring as to the appropriation made of every fund deposited by a trustee or other like fiduciary ; and the imposition of such a duty would practically put an end to the banking business, because no bank could possibly conduct business if, without fault on its part, it were held accountable for the misconduct or malversation of its depositors who ⁴⁰⁶ occupy some fiduciary relation to the fund placed by them with the bank.

In the absence of notice or knowledge a bank cannot question the right of its customer to withdraw funds, nor refuse (except in the instances already noted) to honor his demands by check ; and, therefore, even though the deposit be to the customer’s credit in trust, the bank is under no obligation to look after the appropriation of the trust funds when withdrawn, or to protect the trust by setting up a jus tertii against a demand. But if the bank has notice or knowledge that a breach of trust is being committed by an improper withdrawal of funds, or if it participates in the profits or fruits of the fraud, then it will be undoubtedly liable. In support of these general principles, if support they need at all, we may refer to Munnerlyn v. Augusta Sav. Bk., 88 Ga. 333 ; State Nat.

Bank v. Reilly, 124 Ill. 464 ; Chosen Freeholders v. Newark City Nat. Bk., 48 N. J. Eq. 51, all cited in 3 Am. & Eng. Ency. Law (2 ed.) 833, 834; Walker v. Manhattan Bk., 25 Fed. Rep. 255; 1 Morse on Banks and Banking, sec. 317; Swift v. Williams, 68 Md. 237 .

As the bank, then, would not be responsible for the use made of the trust funds by the trustee unless it knowingly participated in a breach of trust or profited by the fraud ; do the checks, which are, as we have said, the only evidence in the record on this branch of the case, show that the bank is liable ? As respects the first check representing the proceeds of the foreclosure of the Beall mortgage, we are of opinion that there is no liability on the part of the bank. It will be remembered that this particular check was not made payable to Clagett, as trustee, nor, being payable to Scott, cashier, were the proceeds directed to be placed to the credit of Clagett, trustee. In placing the proceeds to the individual credit of Clagett the bank did just precisely the thing it was directed on the face of the check to do.

In doing this it violated no duty to any one, unless the addition of the words “ being the balance of purchase money due him as trustee from John R. Coale,” controlled the explicit di ⁴⁰⁷ rection in the body of the check to deposit the fund to the credit of Clagett individually, and gave the bank notice that instead of doing what the check required should be done it must do something it was not instructed to do at all; viz.,, place the funds to the credit of Clagett as trustee. Mr. Stanley’s check was drawn, not on the National Mechanics’' Bank, but upon the Citizens’ National Bank of Laurel; and the memorandum descriptive of what the funds were or the source from whence they came, was neither an instruction to the Mechanics’ Bank through which the check passed as to the account in which these funds when collected from the Citizens’ Bank should be credited in the Mechanics’ Bank to Clagett ; nor was it a notification to the Mechanics’ Bank that the funds were impressed with a trust that would be invaded by their being carried to Clagett’s individual credit. On the contrary, the specific instruction on the face of the check was to credit Clagett individually with the proceeds, whatever the origin or ultimate use of those proceeds might be. This memorandum imposed no duty on the Mechanics’ Bank and operated only to subserve the convenience of the