Opinion
36086.
DECIDED APRIL 5, 1956. REHEARING DENIED MAY 9, 1956.
Misappropriation of funds. Before Judge Pharr. Fulton Superior Court. December 12, 1955.
Smith, Kilpatrick, Cody, Rogers McClatchey, A. G. Cleveland, Jr., for plaintiff in error.
Alston, Sibley, Miller, Spann Shackelford, Henry J. Miller, contra.
This was an action by a corporation, which sought to recover from the defendant bank moneys derived from checks of the corporation, signed by one of its officers, and payable to a trade name used exclusively by the officer drawing the checks, and deposited in the bank in the officer's trade name, said moneys sought to be recovered being amounts paid to the bank by the check of the officer (depositor) in payment of the individual obligations of the officer to the bank and amounts paid to others by checks on the individual account drawn by the officer. The allegations of the petition were not sufficient to put the bank on inquiry whether the moneys so derived and so deposited were trust funds being misappropriated by the officer of the plaintiff corporation as a trustee ex maleficio.
DECIDED APRIL 5, 1956 — REHEARING DENIED MAY 9, 1956.
National NuGrape Company sued Citizens Southern National Bank to recover the sum of $179,728.65 by reason of the facts shown in the petition. The petition alleged: "2. For many years petitioner has been in the business of manufacturing and selling flavor concentrates. The principal place of business of petitioner is in Fulton County, Georgia, at No. 794 Forrest Road, N.E., where its principal offices are located and where the principal business of the corporation is transacted. 3. The defendant herein is the Citizens Southern National Bank, a national banking association organized under the Federal banking laws with an office, agent and place of doing business in Fulton County, Georgia, and is subject to the jurisdiction of this court. 4. Defendant is liable to petitioner in the sum of $179,728.65 by reason of the facts hereinafter set out. 5. From 1934 until August 24, 1953, petitioner had in its employ one R. O. Williams. From the time of his employment until April 28, 1942, the said R. O. Williams served in the capacity of cashier of petitioner, and from April 28, 1942, until August 24, 1953, he served as assistant secretary of petitioner. In such capacities he acted for the first ten years of his employment as assistant to the head bookkeeper and auditor, and for the balance of said time he acted as head bookkeeper, his duties during all of such time being performed at the office of petitioner in Atlanta, Georgia. 6. Beginning on May 22, 1940, and continuing for the balance of the time he served as cashier and assistant secretary of petitioner, the said R. O. Williams was authorized to sign checks for petitioner when countersigned by another officer. During such time, the principal accounts of petitioner were maintained at the First National Bank of Atlanta and the Fulton National Bank of Atlanta. 7. From approximately 1944 until August 24, 1953, the said R. O. Williams had complete charge of the accounting records of petitioner, including the preparation of periodic operating statements and balance sheets, preparation of income tax returns, and the sole responsibility for checking monthly bank statements of petitioner against cancelled checks. 8. During such period all invoices rendered to petitioner, after approval and clearance through the particular department concerned, were routed to the desk of R. O. Williams, who had the responsibility of preparing the company's checks in payment of the invoices. The practice followed was for Williams to prepare the check; sign the same, attaching it to the invoice, order and other supporting papers; place the check and supporting documents, including the invoice, on the desk of one of the officers authorized to countersign petitioner's check; and after such signing, Williams had the responsibility for transmitting such checks to the proper parties. 9. In August of 1953, petitioner learned that said R. O. Williams, over a period of years beginning at approximately 1940, had misappropriated large amounts of petitioner's funds which petitioner alleges exceeded the sum of $500,000, and later learned that the defendant herein had participated in a large portion of such misappropriations, as hereinafter set out. 10. As petitioner learned in August, 1953, the general method followed by said R. O. Williams in the misappropriation of funds was as follows: `In the year 1940 the said R. O. Williams opened a personal checking account in the Mitchell Street Office of the defendant in the name of North-South Transportation Company, the same being a fictitious name adopted by the said Williams. In making the misappropriations from petitioner, the said Williams would cause checks of petitioner to be prepared for payment of what is believed by petitioner to have been bona fide accounts payable of petitioner, would then sign such checks, attach to the copy of such checks the invoices for such accounts payable, together with other supporting documents, take the original and such attachments to another officer of petitioner and have the original of the checks countersigned, as hereinabove alleged in Paragraph 8. The said Williams would then change the name of the payee from the name of the creditor on the invoice to the name of the North-South Transportation Company (Williams' fictitious name), after which he would take the checks and deposit them in his personal account maintained in the fictitious name of North-South Transportation Company at the Mitchell Street Office of the defendant, as hereinabove referred to.' 11. Said R. O. Williams, having complete charge of the accounting records of petitioner, concealed from the other officers of petitioner the cancelled checks payable to North-South Transportation Company, and during all the course of his misappropriations, he made false financial statements showing a smaller profit on petitioner's operations than was actually made. 12. Petitioner alleges that prior to January 1, 1949, the said R. O. Williams misappropriated from petitioner in the manner aforesaid a sum in excess of $300,000, said misappropriations being affected by several hundred individual transactions as outlined in Paragraph 10 above. Petitioner further shows that the said R. O. Williams has destroyed all of the petitioner's checks used in such misappropriations prior to January 1, 1949, and therefore, due to the fact that petitioner does not have the actual checks involved, petitioner makes no claim in this suit for recovery with respect to any money misappropriated prior to said date. 13. Petitioner further shows that between January 1, 1949, and August 24, 1953, said R. O. Williams deposited in his personal account maintained in the fictitious name of North-South Transportation Company at the Mitchell Street office of the defendant at least 254 such checks, constituting misappropriations from petitioner by the said Williams in the manner set forth in Paragraph 10 of the sum of $233,018.20, said deposits averaging over $4,000 per month. Petitioner has in its possession 239 of such checks and will produce the same on the trial of this case. 15 of such checks have been destroyed by R. O. Williams and cannot be produced by petitioner. There are attached hereto as Exhibits "A" and "B" two checks typical of all of the checks involved, and there is attached hereto as Exhibit "C" a list of the dates and amounts of the 239 checks referred to above. 14. Petitioner further shows that at all times after June 5, 1940, there was on file with the defendant a signature card for the North-South Transportation Company account showing that such account was actually a personal account of the said R. O. Williams and that the said R. O. Williams was the sole person who was authorized to sign checks on such fictitious account. Petitioner further shows that by reason thereof all employees of defendant who had any dealings with said R. O. Williams during such time, either in accepting deposits in said North-South Transportation Company account or in making payments of checks drawn by the said Williams on said account, were charged with constructive notice of the facts shown by said signature card referred to above and with constructive notice that all of the checks deposited in said account in the manner set forth in Paragraph 10 above were corporate checks of petitioner signed by R. O. Williams as an officer of petitioner and payable personally to the said R. O. Williams. 15. Petitioner shows further that Cecil Hester, who at all times since June 5, 1940, has been a vice president of defendant and in charge of its Mitchell Street Office, opened the North-South Transportation Company account for R. O. Williams, and by reason thereof has at all times since June 5, 1940, had actual knowledge that the North-South Transportation Company account at defendant's Mitchell Street office was nothing but a personal account of the said R. O. Williams and that the said R. O. Williams was the only person authorized to draw checks thereon. 16. Petitioner further shows that from time to time prior to and subsequent to January 1, 1949, said R. O. Williams made personal loans from defendant through the said Cecil Hester and other officers of defendant, the names of whom are unknown to petitioner but are well known to defendant; that in connection with such loans the said R. O. Williams, beginning in November, 1948 and from time to time thereafter, gave personal financial statements to defendant; that none of such financial statements showed any alleged assets of any alleged company in the name of North-South Transportation Company; that the financial statement furnished to defendant as aforesaid by the said Williams in November, 1948, showed that his total income was $20,000 per year and a financial statement furnished on April 1, 1953, as aforesaid showed that his annual income from all sources was $25,000. Petitioner further shows that the aforesaid facts, when considered in light of the fact that R. O. Williams was depositing in the North-South Transportation Company account approximately $50,000 each year, should have caused the said Cecil Hester and other officers of the defendant to make inquiry with respect to the checks of petitioner being deposited by Williams in his personal account maintained in the fictitious name of North-South Transportation Company in the manner alleged in Paragraphs 10, 12 and 13 above, and such inquiry, if made, would have disclosed that all of such checks were fraudulent. 17. Petitioner shows that by reason of the facts set forth in Paragraphs 14 through 16 above, defendant at all times subsequent to January 1, 1949, was charged as a matter of law with constructive notice that R. O. Williams was a trustee ex maleficio with respect to the funds deposited by him in his said personal account maintained in the fictitious name of North-South Transportation Company at the Mitchell Street Office of the defendant, and that the amounts on deposit with defendant in such account were actually funds belonging to petitioner. 18. Petitioner shows that defendant itself participated in such misappropriations of R. O. Williams by receiving in payment of personal obligations of the said R. O. Williams to defendant the following amounts belonging to petitioner, which, under the circumstances related above, had been deposited by the said R. O. Williams in his personal account maintained in the fictitious name of North-South Transportation Company at the Mitchell Street office of the defendant, said payments to defendant being made at a time when defendant was charged as a matter of law with constructive knowledge that the amounts on deposit in said fictitious name account were actually funds of petitioner. There follows a list of 29 checks dating from February 28, 1949, through July 29, 1953, totaling $25,301.72 with the statement in said paragraph "total appropriated defendant subsequent to January 1, 1953, $25,301.72." The list of checks above referred to drawn since January 1, 1953, totaled $4,000 principal, approximately $60 interest. 19. Petitioner shows that in August, 1953, when it learned of the said misappropriations, all amounts so misappropriated and deposited in the North-South Transportation Company account as aforesaid had been paid out either on personal indebtedness of the said R. O. Williams to the defendant as aforesaid or for other personal uses by said R. O. Williams, except a balance of $792.53 in said fictitious account. 20. Petitioner further shows that it has never at any time had any business dealings with any company by the name of North-South Transportation Company or with R. O. Williams doing business as North-South Transportation Company, and that it has received no benefit whatsoever from any of the amounts misappropriated from it by the said Williams as aforesaid. 21. Petitioner shows that by letter of March 23, 1954, through its attorneys herein, it made demand upon defendant through its attorney, Henry J. Miller, in the sum of $235,393.88, which is the amount of defendant's liability arising on and after February 28, 1949. Petitioner further shows that the defendant has acknowledged that the funds in the R. O. Williams' personal account maintained in the fictitious name of North-South Transportation Company were funds of petitioner by paying to petitioner since said demand the sum of $792.53 representing the balance in the said account in August, 1953, when petitioner learned of the aforesaid defalcations of Williams, but that defendant on July 6, 1954, denied the balance of the demand made as aforesaid. 22. Petitioner shows that defendant is liable to it in the amount of $25,301.72, which is the amount of its money actually appropriated by the said defendant in payment of R. O. Williams' personal obligations to defendant as set forth in Paragraph 12 above, and in addition is liable to petitioner in the further sum of $205,767.65, which is the balance (after allowance for the said $792.53 payment as set out above) of funds misappropriated by the said Williams from petitioner as hereinabove alleged after February 28, 1949, the date on which the defendant itself first participated in the fraudulent misappropriations by receiving the sum of $2,659.73 from the North-South Transportation Company account as alleged in Paragraph 17 in payment of a personal obligation of Williams to it. Petitioner shows that defendant is further liable to it for interest at the rate of 7% per annum from July 6, 1954. 23. Petitioner shows that promptly after learning of the aforesaid defalcations of Williams, petitioner sought and obtained a receivership for the said R. O. Williams in Carroll Superior Court, and through its diligent efforts in said proceedings it realized the sum of $51,340.72. 24. Petitioner shows that during the period of the misappropriations herein complained of, a fiduciary relationship existed between it and R. O. Williams; that during such time petitioner was deterred from discovering such misappropriations and from the bringing of this suit by the fraudulent acts of R. O. Williams as hereinabove alleged; that the defendant herein participated with the said R. O. Williams in such fraudulent acts and received the fruits of such misappropriations as hereinabove set forth; that because of such participation by defendant, the defendant is chargeable with the fraud of Williams in deterring petitioner from the bringing of this action; and that by reason of the foregoing, if any statute of limitations is applicable to any portion of the claim herein asserted, the same has been tolled under the provisions of Section 3-807 of the 1933 Georgia Code until on or about August 24, 1953, when petitioner first learned of the fraudulent misappropriations and acts of the said Williams. 25. Petitioner further shows that it acted with promptness after learning of the facts complained of in this petition in presenting its claim to the defendant and filing this suit."
The defendant demurred to the petition generally and specially. The court sustained the general demurrer, dismissed the action, and the plaintiff excepts.
1. At the outset it should be stated that it is not the contention of the plaintiff that the forged alterations changing the names of the payees of the checks to North-South Transportation Company were discoverable by the exercise of ordinary care. We understand it to be conceded by the plaintiff that the checks were prepared by R. O. Williams and presented to the countersigning officer of National NuGrape Company before he changed the name of the payees and ran them through a protectograph machine which stenciled "NuGrape" and the amount in dollars and cents on the line made for the placing of the amount of the check. We understand that it is also conceded that R. O. Williams changed the names of the payees before running the checks through the protectograph, and that the perforations made by the machine over the payees' names prevented the detection of the alteration of the payees' names. Either these facts are true or the countersigning officer countersigned the checks after the alteration was made. In either event, one to whom the checks were negotiated, without more, had a right to regard the checks as authoritatively made payable to North-South Transportation Company, and the defendant bank, after Williams opened his personal account with the defendant in the name of the transportation company, without more, had a right to assume that the checks were authoritatively made payable to R. O. Williams, individually.
It should also be noted at the outset that the petition does not allege that the plaintiff's countersigning officer conspired with R. O. Williams, and that the defendant was charged with that knowledge, nor that Williams opened his account with a check from the plaintiff.
It should be noted also that the defendant is charged with constructive knowledge that R. O. Williams was a trustee ex maleficio because of the following facts: (1) that the defendant knew that the funds in the North-South Transportation Company account were the individual funds of R. O. Williams; (2) that the defendant was charged with constructive notice since June 5, 1940, when Williams opened the account with Cecil Hester, Vice President of defendant bank, that the checks deposited by Williams in the North-South Transportation Company account were corporate checks of petitioner, signed by R. O. Williams as an officer of petitioner and payable personally to R. O. Williams; that from time to time R. O. Williams made personal loans from defendant through Cecil Hester and other officers of defendant, and that, beginning in November, 1948, and from time to time thereafter, gave personal financial statements to defendant none of which showed any assets of any alleged company in the name of North-South Transportation Company, and that the financial statement in November, 1948, showed that his total income was $20,000 per year, and the one furnished on April 1, 1953, showed that his annual income from all sources was $25,000; (3) the fact that R. O. Williams was depositing in his North-South Transportation Company account approximately $50,000 per year should have caused Cecil Hester and other officers of the defendant to make inquiry with respect to the checks of petitioner being deposited by Williams.
2. The plaintiff bases its rights to recover on Code § 108-423 and American Nat. Bank v. Fidelity Deposit Co., 129 Ga. 126 (1) ( 58 S.E. 867). The Code section provides: "All persons aiding and assisting trustees of any character, with a knowledge of their misconduct, in misapplying assets, are directly accountable to the person injured." In the American National Bank case the court said: "If a bank has notice or knowledge that a breach of trust is being committed by the improper withdrawal of funds, it incurs liability, becomes responsible for the wrong done, and may be made to replace the funds which it has been instrumental in diverting; . . ."
Code § 13-2042 provides: "Whenever any agent, administrator, executor, guardian, trustee, either express or implied, or other fiduciary whether bona fide or mala fide shall deposit any money in any bank to his credit as an individual, or as such agent, trustee, or other fiduciary, whether the name of the person or corporation for whom he is acting or purporting to act be given or not, such bank shall be authorized to pay the amount of such deposit or any part thereof, upon the check of such agent, administrator, executor, guardian, trustee, or other fiduciary, signed with the name in which such deposit was entered, without being accountable in any way to the principal, cestui que trust, or other person or corporation who may be entitled to or interested in the amount so deposited.
Nothing herein contained shall prevent the person or corporation claiming the beneficial interest in or to any deposit in any bank from resorting to the courts to subject such deposit, provided such action is brought and served before such deposit is paid out, and to any action brought for this purpose both the bank and the depositor shall be necessary parties defendant."
To charge a bank with notice that a depositor is acting in violation of his trust so as to render it liable for the amount paid out on his check or order to one other than the bank itself, the circumstances must be such as to raise a presumption of knowledge that the depositor is acting dishonestly, or adequate notice to the bank may come from circumstances which reasonably support the sole inference that a breach of trust is intended. Michie, Banks Banking, Vol. 5A, p. 161; 7 Am. Jur. 376, § 522; Bischoff v. Yorkville Bank, 218 N.Y. 106 (112 N.E.. 759, L.R.A. 1916F, 1059). Judge Sibley speaking for the court in Atlanta St. A. B. Ry. Co. v. Barnes, 95 Fed. 2d 273, stated as to such cases: "The penalty thus visited ought to be supported by the mala fides of a fraudulent intent, or by a negligence so great as to show wilful ignorance. Simple neglect to enquire about circumstances which ought to have excited attention is not enough, just as it is not enough to prove a want of good faith in purchasing negotiable paper. . . Commercial transactions are not put within the strict fetters of constructive notice." It is too well known to require citation of authority that generally a creditor who receives from a corporate officer in payment of his personal debt a check drawn by such officer on the corporation's account to the creditor's order must make restitution to the corporation. In such a case the creditor is charged with notice that the transaction is invalid. That is not the case, however, where, as in this case, the corporation's checks are deposited to the trustee's individual account and where the checks on the corporation were countersigned by another officer of the corporation. In such a case a signature or counter signature by another officer changes the transaction from one with fraud on its face to one showing good faith on its face. Henderson Lumber Co. v. Chatham Bank Trust Co., 33 Ga. App. 196 ( 125 S.E. 867). In the Henderson case the ruling is based on the authority of a secretary to execute the instrument. The secretary was a disinterested party, and the holding that the seal of the corporation gave rise to the presumption that the secretary had authority to sign for the corporation does not mean that it gave rise to the same presumption as to the guilty president. It was expressly stated in that case that a corporate seal would not change the prima facie presumption that an officer of a corporation was without authority to use his company's credit for his own purposes. In this case there is no suggestion that the countersigning officer was without authority to countersign the checks, so this case, to the extent of showing authority in the signing by an officer other than the guilty one, stands on the same footing as the Henderson Lumber Company case. The only difference between the ruling in the Henderson Lumber Company case and this one is that in that case the presumption of the authority of an officer, other than the one charged with fraud, to sign the instrument arose because of the presence of the corporate seal, while in this case the presumption of the authority of the countersigning officer arises from the failure of the plaintiff to allege that such countersigning officer lacked the authority to countersign the instruments. The seal in the Henderson Lumber Company case is significant only in that it raised the presumption of the secretary's authority. If there had been no corporate seal in that case, the presumption of the secretary's authority could have appeared from the absence of allegation to to the contrary or the fact of it from definite proof of authority. The absence of corporate seals from checks is not significant, as they usually do not carry them, which fact is a matter of common knowledge. Since the bank was justified in believing that Williams was authorized by the corporation to draw the checks because they were countersigned by another disinterested official of the corporation, the question arises as to what kind of knowledge or notice was required to hold the bank guilty of aiding in the misappropriation. The bank did not have actual knowledge that Williams was a trustee. It is charged with constructive knowledge of the fact that Williams was a trustee because the deposits in the North-South Transportation Company account were not included in financial statements to the bank. Then, if such constructive knowledge is sufficient, the bank is further charged with constructive knowledge that the trust funds were being misappropriated. In cases such as this, where the creditor does not benefit, the corporation whose officer defaults is required to show facts leading to the sole inference of mala fides. In cases where the creditor receives the benefit of such a transaction, it would seem that the creditor should at least have actual knowledge of the fact of the trusteeship. Otherwise, instead of relieving a bank of the fetters of constructive notice the burden of constructive notice would be doubled and one fact of constructive notice would be superimposed on another. But however that may be, and assuming but not deciding that such a chain of constructive notices is sufficient, the petition in this case fails to allege facts which a jury could find were sufficient to put the bank on notice that the North-South Transportation Company account was a trust account. In deciding this question the facts on each side of the scales have been studiously examined. In 1940, R. O. Williams opened the checking account with Cecil Hester, a vice-president of the bank. It is not alleged whether when the account was opened it was opened by a deposit of a check from the plaintiff to North-South Transportation Company. The checks to North-South Transportation Company were countersigned by another officer of the plaintiff with authority to do so. This fact was sufficient to entitle the bank to rely on the bona fides of transactions and the conclusion that the funds so deposited belonged to R. O. Williams individually, regardless of whether the bank could also be of the opinion that Williams might reasonably have a transportation company which did business with the corporation for which he worked. From May, 1939, to 1944, an officer other than Williams had the sole responsibility for checking monthly bank statements against canceled checks, and Williams' activities were not discovered. The defendant was justified in believing from this fact that the checks to North-South Transportation Company were made in good faith and were authorized. From 1944 to August 24, 1953, Williams had the sole responsibility of checking the bank statements against the plaintiff's canceled checks, and the defendant was justified during that period in believing that the drawing of the checks was regular and authorized, because neither the plaintiff nor any drawee bank ever complained. On the other side of the scales, is the fact that, when Williams gave financial statements to the bank, he did not include therein the assets in the North-South Transportation Company account. This fact alone is argued as the basis for the plaintiff's contention that the bank was charged with constructive notice that the account was a trust account. Under the allegations of the petition, no conclusion herein reached can be based on an allegation that the bank had actual knowledge of the trust account. It must be assumed that it did not. Then the pleaded facts must show that the mere omission of the account from the financial statements was enough to arouse the bank's suspicion. This they do not do. In the first place, it was not alleged that the account was first opened with a check from the plaintiff. If it was not, the officers of the bank would never have occasion to suspect the nature of the account from its omission from a financial statement, under the petition as drawn. In the second place, it is not alleged except by inference that, at the time of any financial statement, there was enough money on deposit in the account to merit its inclusion in a financial statement. In the third place, it is not alleged how or why the official of the bank who opened the account, even with one of the checks altered by Williams, should charge his memory with the facts of the deposit, and why he should have informed other officers, as there was nothing of a suspicious nature to call for such extraordinary memory or precaution. In the fourth place, the petition does not allege that the particular kind of financial statement called for the inclusion of the assets of the account, if any. In the fifth place, even if vice-president Cecil Hester had remembered the details of the opening of the account, there is no allegation as to why he should have known of the amount on deposit at the time of the first or any other financial statement, and the mere allegation that he should have been suspicious of the account under the circumstances of this case is not sufficient to have required the bank to investigate the legality of Williams' transactions. Since a lesser degree of care is required to bind a creditor bank than is required to bind one not a creditor, and since the petition does not allege facts which a jury could reasonably or intelligently find were suspicious enough to put the bank on notice that the account was a trust account as to moneys paid to it, it was under no duty to investigate the account in any event, and the court did not err in sustaining the general demurrer as to all of the checks and amounts sued for, since if the bank is not liable for the moneys it received from the account, it follows that it would not be liable for the amounts paid out of the account to others in the due course of business.
None of the authorities cited by plaintiff requires or authorizes a different conclusion. In American Nat. Bank v. Fidelity Deposit Co., supra, the receiver's checks were required by court order to be countersigned by the judge, which fact the bank knew. In American Trust c. Co. v. Boone, 102 Ga. 202 ( 29 S.E. 182, 40 L.R.A. 250, 66 Am. St. R. 167), the check was issued to J. H. Cooper as administrator, and he deposited the check to his individual account. The bank had actual knowledge that the check was made to an administrator, and was put on notice to see whether the representation of J. H. Cooper that he was sole heir of the estate was true, since the usual method of winding up estates required court action. In Georgia R. Bank c. Co. v. Liberty Nat. Bank c. Co., 180 Ga. 4 ( 177 S.E. 802), the checks involved showed on their faces that they were drawn upon funds of the ward and that they were payable to a person not entitled to them. As to the second count, a guardian is a special agent of the law and the law requires all persons dealing with him to examine his authority. See also Code § 37-113.
The court did not err in sustaining the general demurrer to the petition and in dismissing the action.
Judgment affirmed. Quillian and Nichols, JJ., concur.