author: NORDBYE, District Judge.

text:
    MARTIN v. FIRST NAT. BANK OF RUSH CITY.
    No. 2045.
    District Court, D. Minnesota, Third Division.
    Aug. 10, 1931.

      R. C. Andrews, of Minneapolis, Minn., for plaintiff.
    S. B. Wennerberg, of Center City, Minn., and George H. Sullivan, of Stillwater, Minn., for defendant.
   NORDBYE, District Judge.

The above-entitled matter came on -for trial before the undersigned, one of the judges of the above-named court, without a jury, at Duluth, Minn., on the 7th day of May, 1931; R. C. Andrews of Lindstrom, Minn., appearing in behalf of the plaintiff, and S. B. Wennerberg, Center City, Minn., and George H. Sullivan, Stillwater, Minn., appearing in behalf of the defendant. The court having heard the evidence adduced at said trial, and upon all the files and records herein and the arguments and briefs submitted to said court, makes the following findings of fact and conclusions of law.

Findings of Fact.

I. That Peter J. Engberg, above named, is the duly appointed, qualified, and acting guardian of the estate of Ernest L. Martin, incompetent, and that letters of guardianship upon said estate were duly issued to him on January 25,1928, by the probate court in and for the county of Chisago and state of Minnesota.

II. That defendant, the First National Bank of Rush City, a corporation (hereinafter called the Bank), is a national banking association under the laws of the United States of America.

III. That plaintiff, Ernest L. Martin, was duly adjudged incompetent by said probate court of Chisago county on December 9,1919, and was duly committed to the State Hospital for the Insane at Rochester in said state, and was later transferred to the United States Hospital for Disabled Veterans at St. Cloud, Minn., where he is now in confinement.

IV. That thereafter, and on the 7th day of April, 1920, one G. M. Erieson was appointed special guardian of the estate of said Ernest L. Martin, incompetent, by the probate court aforesaid, and during all the times hereinafter mentioned, and until January 4, 1928, said G. M. Erieson having qualified as such guardian continued to act as such, and to have custody and possession of the estate, property, and money of said incompetent, and at the time of his appointment as special guardian of plaintiff’s estate, said G. M. Erie-son was a stockholder and director, and the cashier of said defendant Bank, and was later made a vice president of said Bank, and during all of the time that said G. M. Erieson was acting as special guardian of plaintiff’s estate, and in possession of the same and plaintiff’s property and money, said G. M. Erieson was the principal managing officer of defendant Bank, and was directly and solely in charge of the affairs and daily business of said Bank.

V. That subsequent to his appointment as such special guardian, the said Erieson opened an account with said Bank for the deposit therein of plaintiff’s money and credits, his account being known and designated on the records of said Bank as an account with “Estate of Ernest L. Martin, Incompetent.” That of the money and credits coming into the hands of Erieson in his capacity as special guardian of plaintiff’s estate, being the property of plaintiff, the sum of $7,843.64 was paid by the government of the United States to plaintiff on account of a compensa-ble injury suffered by him while in the army and service of the United States, and the sum of $4,600 was paid by the government of the United States to plaintiff on account of his policy of insurance with said government. That all of the payments made to plaintiff by the government- of the United States and coming into the hands of said Erieson as special guardian were made by check dravm on the Treasurer of the United States and deposited by the said Erieson in said Bank and credited to said trust account hereinbefore mentioned.

VI. That said Bank had actual knowledge that all of the funds coming into the hands of Erieson as special guardian of plaintiff’s estate, and the deposits to the credit of plaintiff’s said account, were held in trust for plaintiff and that the said Erieson as special guardian had no authority to withdraw any part of the deposit to plaintiff’s credit except in the .ordinary and usual manner of withdrawing funds from accounts in a depository bank and only for such purposes as were au-> thorized by law and the purposes of said guardianship.

VII. That the St. Croix Valley Land & Loan Company (hereinafter referred to as the Land Company) is a corporation organized and existing under the laws of the state of Minnesota, and that during all the times herein mentioned, the said G. M. Ericson was stockholder and director'of said Land Company and its principal manager and executive officer. That the said Land Company was also a depositor of said Bank and carried a cheeking account therein to which deposits were credited from time to time in favor of said Land Company.

VIII. That said G. M. Ericson was also a depositor in said Bank in his individual capacity and carried a cheeking account therein during all the times herein mentioned.

IX. That both Ericson and the Land Company during the times herein mentioned were in financial straits, and during this period Ericson habitually made overdrafts on his checking account. Such overdrafts were customarily permitted by said Bank, and the Bank customarily and regularly made loans by way of overdrafts to said Ericson without objection by the other officers or directors of said Bank.

X. That on May 10,1921, less than a year after said Ericson became custodian of the fund belonging to plaintiff, he drew out of said fund the sum of $1,200 by way of a debit slip on said account, and credited $400 thereof to his own personal account and $800 to the account of the Land Company. That on February 4, 1922, Ericson’s personal account was overdrawn in the sum of $597.66, and on said date the said Ericson drew by debit slip from plaintiff’s account the sum of $700 and by credit slip credited to his personal account the sum so drawn in order to cover the overdraft that existed there. That on March 24, 1923, an overdraft of $1,005.24 existed in Ericson’s personal account, and on said date he drew by debit slip on plaintiff’s account the sum of $500, and of the sum so withdrawn, the sum of $388.34 was credited to Ericson’s personal account to apply on the overdraft that existed there. On August 11, 1923, $500 was withdrawn from the plaintiff’s account; $381.71 of the amount so withdrawn was applied on an overdraft that existed in Ericson’s account in the sum of $381.-71. On August 16, 1923, there was an overdraft in the account of the Land Company in the sum of $54.63, and said Ericson caused a debit slip to be drawn on plaintiff’s account in the sum of $1,500 and by credit slip credited the Land Company’s account in the amount so drawn. Thereafter a large number of withdrawals were made by Ericson from the plaintiff’s account and deposited in his personal account to cover his overdrafts or to increase the funds in his own personal account. A considerable number of withdrawals and deposits were made by debit and credit slips, but the use of debit slips in connection with withdrawals from plaintiff’s account was not limited to misappropriation of the funds in the estate. Many legitimate claims against this estate were paid by this method; that is, Ericson would draw a debit slip against the estate funds and pay a legitimate bill with cash of the Bank and thereafter credit the cash account with the amount debited against plaintiff’s account.

-XI. That in the latter part of 1925, the Land Company was in dire financial circumstances and had no funds with which to pay checks drawn on its account in the defendant Bank. That for some period of time in the years 1925 and 1926, cheeks of the Land Company aggregating $418 drawn on the defendant Bank were carried as cash items by the bookkeeper at the suggestion of said Ericson, and then on March 2,1926, with the intent on his part and on the part of the Land Company to misappropriate the same, Ericson ordered the bookkeeper to charge these cheeks to the account of the plaintiff herein and thereafter such charge was accordingly made.

XII. That between May 10, 1921, and May 29, 1926, with the intent to misappropriate the same for his use and for the purpose of paying indebtedness due the Bank by way of overdrafts, the said Ericson withdrew the sum of $7,775 from plaintiff’s account. That $5,475 of said sum was credited to Ericson’s personal account and $2,300 was credited to the account of the Land Company. That $2,928.28 of said sum - so withdrawn was applied in payment of overdrafts due the defendant Bank from Ericson and the Land Company, and of the said sum of $7,-775 so withdrawn, the sum of $6,575 was deposited to the credit of Ericson’s personal account and to the credit of the Land Company subsequent to and including February 4, 1922, when the first application of trust funds was made to the payment of overdrafts.

That attached to and made a part of these findings of fact, with the same force and effect as if set forth in full herein, is a statement referred to during the trial as “Plaintiff’s Exhibit G,” which sets forth the dates and amounts and the application of the various withdrawals made by the said Ericson between May 10,1921, and May 29, 1926.

XXII. That the said Ericson had no authority as guardian to withdraw any sum from plaintiff’s said account except for purposes permitted by law and for the ordinary and usual purposes of his trust. That all of said withdrawals were made by said Ericson while acting as the sole and exclusive officer in charge of defendant Bank and the sole and only officer or agent of the defendant having any knowledge thereof. That all of the said withdrawals arid unauthorized debits were wrongful and unlawful diversions and misappropriations of trust funds belonging to plaintiff, and in repaying to the Bank the overdrafts hereinbefore mentioned, Ericson acted as the agent for the defendant Bank and within the scope and course of his employment with said Bank, and the knowledge of said Ericson as said agent is imputed to the said Bank.

XIV. That the defendant Bank knew that the money deposited to plaintiff’s credit constituted a trust fund for plaintiff, and defendant Bank knew on February 4, 1922, by and through its agent, Ericson, that the funds of plaintiff were being diverted for the purpose of satisfying indebtedness to tbe Bank by way of overdrafts, and tbe Bank knowingly received trust funds on that date for unlawful purposes. That notwithstanding tbe breach of trust committed by its agent and the knowledge thereof by the Bank on said date, the said Bank permitted said Ericson to remain in full charge of said Bank and to remain as custodian of said trust funds, and thereafter received from the said trust funds the sum of $2,330.62 to apply on indebtedness due it from the said Ericson and the said Land Company.

XV. That during all the times herein mentioned, the said Ericson was financially embarrassed and frequently overdrew his account with the Bank, all of which was known to the Bank, and on several occasions during this period, the bank examiners in the course of their duty criticized the frequent overdrafts of said Ericson and admonished the Bank to remedy this situation.

XVI. That by the exercise of reasonable care and diligence the Bank knew or should have known on February 4, 1922, that the said Ericson intended to misappropriate plaintiff’s funds and convert the same to his own use and the use of the Land Company, but instead of taking reasonable measures to prevent further misuse of the trust funds intrusted to its care, tbe said Bank became a participant in tbe misappropriation and profited thereby, and aided and assisted said Ericson in carrying out his scheme for the use of trust funds for unlawful purposes.

XVII. That the said Erieson and the Land Company are now and for a long time have been insolvent, and no part of the funds so embezzled by the said Erieson, as hereinbe-fore stated, has been returned to or received by the plaintiff. That the defendant Bank became insolvent on June 4, 1927, and on said date the Comptroller of the Currency appointed a receiver of said Bank and ever since that time has been and now is in receivership.

XVIII. That plaintiff never filed any claim with the receiver before the commencement of this suit, but defendant at no time recognized the validity of plaintiff’s claim, and any demand or presentátion of a formal claim to the defendant or its receiver would have been an idle procedure.

XIX. That on account of the facts herein-before stated, the defendant is liable to the plaintiff for the sum of $6,575, which was misappropriated by the said Erieson on and after February 4, 1922, and is liable in the further sum of $418, which represents the amount of the Land Company eheqks which were wrongfully debited to plaintiff’s account by the said Erieson.

Conclusions of Law.

1. That the court has jurisdiction of the parties to the suit and the subject-matter thereof.

2. That plaintiff have judgment against defendant in the sum of $6,993, with interest on the sum of $418 from March 2, 1926, at the rate of 6 per cent, per annum, and on the sum of $6,575 at the rate of 6 per cent, per annum from the date of the misappropriation of the various withdrawals, as follows:

Interest on $700 from February 4, 1922.

Interest on $500 from March 24,1923.

Interest on $500 from August 11, 1923.

Interest on $1,500 from August 16, 1923.

Interest on $500 from September 29,1923.

Interest on $700 from December 8, 1923.

Interest on $100 from March 19, 1924.

Interest on $100 from April 14, 1924.

Interest on $150 from May 21, 1924.

Interest on $300 from September 23,1924.

Interest on $300 from November 19, 1924.

Interest on $200 from January 12, 1925.

Interest on $250 from May 4, 1925.

Interest on $200 from November 13, 1925.

Interest on $300 from January 4, 1926.

Interest on $275 from May 29,1926.

-together with his costs and disbursements herein.

Let judgment be entered accordingly.

Memorandum.

There can be' no serious contention that the Bank is not liable for the actual amounts it received from plaintiff’s account in the repaj-ment of the overdrafts in Ericson’s and the Land Company’s accounts. Erieson, its cashier, of course knew that trust funds were being used to pay an indebtedness due the Bank by way of overdrafts. The Bank, through its cashier, knowingly permitted trust funds to be diverted and used in paying debts occasioned by overdrafts. It must be required to restore to the trust fund the amounts that it received in this manner.

. It is my opinion, however, that not only is the Bank liable for the actual sums it received in repayment of these overdrafts, but in addition is responsible to plaintiff for all moneys diverted and misappropriated by Erieson on and after February 4,1922, which is the date that the first overdraft was paid with trust fun'ds. This date marks the time when the Bank became aware of the perfidy of its cashier and it became in possession of information as to his breach of trust which required it to protect its incompetent depositor from further loss.

The Bank knew that plaintiff’s account. consisted of trust funds. This account was carried as the “Estate of Ernest L. Martin” for nearly six years. The character of this account and the way in which it was carried gave to the Bank sufficient notice to indicate that these funds did not belong to Erieson. The Bank knew, or should have known, that the funds in the hands of a guardian are in his custody in trust and that such funds must be used in the ordinary and usual course of the administration of the estate and in furtherance of its object. Allen v. Puritan Trust Co., 211 Mass. 409, 97 N. E. 916, 919, L. R. A. 1915C, 518; Sternberg v. Blaine, 179 Ark. 448, 17 S.W.(2d) 286; Rodgers v. Bankers Nat. Bank (1930) 179 Minn. 197, 229 N. W. 90.

Volume 3 Minn. Dunnell’s Digest, 419, Guardian and Ward Section, 4107 F: “Interest of guardian in property of ward — A guardian lias no title or personal interest in the property of his ward, but only a naked authority not coupled with an interest. The legal as well as the beneficial title to both real and personal property remains in the ward. The guardian has a right to the possession of both forms of property, but only for the purpose of his trust and for the use and benefit of the ward. His possession is the possession of the ward. He holds the possession merely as the officer of the court appointing him and subject to its orders in relation thereto.”

It is well settled that a guardian has no authority to make a loan to himself. Sowers v. Pollock (1923) 112 Kan. 599, 212 P. 103, 30 A. L. R. 458 and note; In re Bates’ Guardianship (1918) 70 Okl. 321, 174 P. 743; Fidelity & Deposit Co. v. Freud (1911) 115 Md. 29, 80 A. 603.

Unquestionably' Erieson had a perfect right to maintain an account with the Bank as guardian even though he was sole manager and executive officer of the Bank. In disbursing the funds of the estate he would act as representative of himself and not of the Bank. When an officer of a bank deals with the bank on his own account, the knowledge of the officer is not generally imputed to the bank. .

The Bank had a right to rely on the presumption that as a fiduciary Erieson would act lawfully and within the scope of his authority. A banking institution should not be required to supervise and scrutinize the various withdrawals made by a depositor that has an account in a trust capacity. The exigencies of modem banking business would justify no other rule. But a bank is not without responsibility to its depositors. It cannot become a party to a breach of trust, nor countenance a diversion of trust funds by lending its facilities to the aid thereof. It cannot sit by supinely after it has received notice that its depositor is misappropriating the funds of the beneficiary, or permit or acquiesce in the embezzlement of funds that to its knowledge belong to a trust estate.

The defendant’s position is that Erieson was engaged in a personal scheme to defraud; that the other bank officials were innocent of any wrongdoing and had no personal knowledge of his breach of trust. Defendant earnestly contends that the knowledge of its cashier cannot be imputed to it and cites the generally recognized rule: “That knowledge of an agent, actually concealed from his principal, while the agent is dealing with the principal on his own account, is not to be imputed to the principal, even though the agent, assuming to act as such, did whatever was done on the part of the principal in the transaction with himself, if disclosure of the matter concealed would have had a tendency to-defeat his purposes.” Bank of Overton v. Thompson (C. C. A.) 118 F. 798, 801. The principle contended for by the defendant is not applicable to the facts of this ease. On February 4, 1922, Erieson, within the scope of his authority as the sole manager and executive officer and the only official representing the Bank in the transaction, accepted and retained trust funds to pay indebtedness due the Bank by the way of. an overdraft. Thereby the act of Erieson became the act of the Bank and the knowledge of Erieson became the knowledge of the Bank.

The Bank was apparently a one man institution. The directors left the entire management of the Bank to Erieson. They paid very little attention to its affairs and evidently permitted Erieson to carry on his scheme to defraud for a period of four years without any other official being personally cognizant of his duplicity. The use of debit and credit slips by Erieson in disbursing funds on this account is indicative of his control. The directors, however, had received direct information that Erieson was in financial straits, and that he was frequently overdrawn in his account. Erieson’s conduct in this regard must have been quite flagrant to cause the bank examiners in their several reports to refer to his habit of overdrawing his account. It would seem that any reasonable supervision on the part of the officials of the Bank would have disclosed the misuse of trust funds. The other employees of the Bank were evidently dominated by Erieson and knowingly assisted him in the diversion of trust funds. It was the bookkeeper on Ericson’s order that made the various bank entries regarding the transfer of trust funds and the charge of $418 of Land Company’s cheeks to plaintiff’s account.

The Bank was put on its guard when this account was opened. It knew that Ericson was not the owner of these funds. A guardian does not have title to his ward’s funds. He is merely the custodian thereof. Notwithstanding this knowledge and its duty to its depositor, the plaintiff herein, the Bank placed Erieson in complete charge of the banking institution and permitted him to be the only bank official that was connected with the handling of this trust account for a period of four years.

Overdrafts as a practical matter are loans from a bank to a depositor. The loans of Erieson and the Land Company were repaid with trust funds. The Bank received and retained the benefits of Erieson’s acts in taking care of the various overdrafts and cannot no;w be heard to say that it accepts the acts of its cashier in part but not in their entirety. If it accepts the advantages of the acts, it also must accept the disadvantages. It was neither Erieson, the guardian, nor Erieson, the individual, that acted on February 4, 1922, when the overdraft of $597.65 was repaid to the Bank by the use of a debit slip of $700 on plaintiff’s account. It was neither Erieson, the individual, nor Ericson, the guardian, that provided for the payment of $418 of Land Company’s cheeks with the funds of the plaintiff. The act of Ericson in applying trust funds to the payment of overdrafts was the aet of Erieson, the cashier. It thereby became the act of the Bank, and the Bank thereby received actual knowledge and positive information of the breach of thp trust. Instead of taking steps to protect the funds intrusted to its care, it became a privy to the defalcation. It participated in the fruits of Ericson’s peculations and permitted him to remain in full charge of its banking institution. It will be presumed to have known that debit slips were being used by its cashier to divert trust funds through unauthorized channels. The aet of Erieson in proceeding to transfer'trust funds by way of debit and credit slips wa,s scarcely the aet of an ordinary depositor that had custody of trust funds. The Bank permitted Ericson to continue as cashier notwithstanding its attention had been called by the bank examiners to the frequent overdrafts and when it knew that such overdrafts were being paid with trust funds. It permitted Erieson to withdraw some $6,575 from plaintiff’s account over a period of four years, and of that sum nearly $3,000 was actually received and retained by the Bank to satisfy an indebtedness to the Bank brought about by the overdrafts of its cashier and the Land Company. Exemption from liability will not be granted to the Bank under such circumstances. Knobley Mountain, etc., Co. v. People’s Bank (1925) 99 W. Va. 438, 129 S. E. 474, 476, 48 A. L. R. 459; Holden v. New York, etc., Bank (1878) 72 N. Y. 286.

In the case of Knobley Mountain, etc., Co. v. Peoples’ Bank, supra, the cashier of the bank, Leps, was also the treasurer of the plaintiff corporation with the authority to draw cheeks in the plaintiff’s name. He drew checks and placed them to the credit of his own and his brother’s account, which were at the time heavily overdrawn. In reversing the decision of the lower court, the court held that the bank could not disclaim knowledge of the fact that these sums paid on overdrafts did not belong to the debtors, and stated: “Cases may arise in which the knowledge of its sole executive should not be impressed upon the corporation, but the plain facts in this ease forbid the bank such immunity. The accounts of Leps and his brother had become heavily overdrawn. These overdrafts constituted debts due the bank. Admitting as true the contention of the bank that the bank paid the checks in question, and then plaintiff’s treasurer stole from the plaintiff the money obtained therewith — these facts do not exculpate the bank. In settlement of the overdrafts, the bank’s cashier accepted this so-called stolen money which he knew was not the money of Leps or his brother, but which he knew was money embezzled from the Orchard Company. It was to the interest of the bank to have these overdrafts adjusted; but the bank may not close its eyes to the fact that these payments were made with money which the debtors had no right to use and its cashier no right to receive. In attempting to avail itself of the acts of its cashier to its advantage, the bank becomes subject to those to its disadvantage. ' * * * ”

In Solway State Bank v. School District (1930) 179 Minn. 423, 229 N. W. 568, the court said:

“ * ' * * A corporation is chargeable with knowledge of facts known to its officers transacting its business. There is an exception to this rule when the particular officer representing the bank is himself adversely interested. The exception is without application, however, where the interested officer is the sole representative of the corporation in the transaction. In such case his knowledge is the knowledge of the corporation. * * ’ *
“As indicated in the previous opinion herein, Smith was the only bank official who gave any attention to the affairs of the bank. We need not discuss the evidence in detail. It is sufficient to say that Smith mixed defendant’s funds which were in his hands in trust, he being its treasurer, with his own, by depositing the same in his personal account. He thereafter cheeked out thousands of dollars and turned the same over to the bank to pay his debts to the bank. In turn he took defendant’s warrants which were carried in the bank’s note pouch as assets and exhibited them to the school officers as vouchers for his disbursements. There were many irregular transactions wherein he was the sole representative of the bank. Under the rule stated, the bank must be held chargeable with his knowledge — he knew all.
“The court found as a faet that when the bank closed, Smith’s account therein was overdrawn, and an amount therein, rightfully belonging to defendant and exceeding the sum of all the orders involved, had been knowingly misappropriated by Smith and the bank to the payment of his checks and other items so drawn for Ms individual purposes. The finding is that the hank had full knowledge, that it acquiesced, connived, and participated in the misappropriation and got the money. Such finding, which is supported by the evidence, spells liability.”

If I am correct in determining that on February 4, 1922, when the defendant accepted trust funds for its own purpose, that the Bank in law became aware of the diversion of trust funds and the breach of trust, it necessarily follows that thereafter the Bank is subject to the well-recognized principle of law that: “ * * * All persons knowingly participating in, or aiding in, committing a breach of trust, or in the misapplication of trust funds, are equally liable with the trustee to make good the fund by returning it to the 'trust estate.” 26 R. C. L. 1322, Trusts, § 183.

There are many decisions in both state and federal courts that sustain the views expressed herein. U. S. Fidelity, etc., Co. v. U. S. National Bank (1916) 80 Or. 361, 157 P. 155, L. R. A. 1916E, 610; Fidelity & Deposit Co. of Maryland v. Farmers’ Bank (C. C. A.) 44 F.(2d) 11, 16; Bischoff v. Yorkville Bank, 218 N. Y. 106, 112 N. E. 759, L. R. A. 1916F, 1059; Lowndes v. City National Bank (1909) 82 Conn. 8, 72 A. 150, 22 L. R. A. (N. S.) 408; Miami County Bank v. State (1916) 61 Ind. App. 360, 112 N. E. 40; United States Fidelity, etc., Co. v. People’s Bank (1913) 127 Tenn. 720, 157 S. W. 414, 415; Blanton v. First National Bank (1918) 136 Ark. 441, 206 S. W. 745; Brovan v. Kyle (1917) 166 Wis. 347,165 N. W. 382; United States Fidelity, etc., Co. v. Adoue & Lobit (1911) 104 Tex. 379, 137 S. W. 648, 138 S. W. 383, 37 L. R. A. (N. S.) 409, Ann. Cas. 1914B, 667, and note; Harris & Co. v. Chipman (C. C. A. 8, 1907) 156 F. 929; Oklahoma State Bank v. Galion, etc., Co. (C. C. A. 8, 1925) 4 F.(2d) 337; Farmers’ Loan & Trust Co. v. Fidelity Trust Co. (C. C. A. 9, 1898) 86 F. 541; Havana Central R. Co. v. Central Trust Co. (C. C. A. 2, 1913) 204 F. 546, 547, L. R. A. 1915B, 715.

In Allen v. Puritan Trust Co., supra, it is stated: “The principle governing the defendant’s liability is that a banker who knows that a fund on deposit with him is a trust fund cannot appropriate that fund for his private benefit, or where charged, with notice of the conversion join in' assisting others to appropriate it for their private benefit, without being liable to refund the money if the appropriation is a breach of the trust.”

In U. S. Fidelity, etc., Co. v. People’s Bank, supra, the court said: “ * * * We do not wish to be understood as holding that a bank is in general liable for the acts of trustees who deposit money with them. If the money is deposited to- the trustee’s credit as such, and Ms checks are drawn on tMs fund in his character of trustee, or guardian, as the case may be, the bank need look no further. It is not responsible for his administration of the fund, unless it knows, or in some special transaction has good reason to believe, that he is misappropriating the fund. It would be out of all reason to impose sueh responsibility on banks. The special ease we have before us, and to which we confine this opinion, is one wherein the bank knowingly united with the guardian or trustee in a misappropriation of the fund, by crediting it to the individual account of sueh trustee or guardian.”

In the case of Fidelity & Deposit Co. of Maryland v. Farmers’ Bank, supra, the court speaking through Judge Booth, approved the language used in the Bischoff v. Yorkville Bank, supra. The Bischoff Case concerned the peculations of one Poggenburg. He was an executor of an estate and deposited the funds of the estate to his individual account by checks drawn upon another bank. The cheeks that were deposited were signed by him in the name of the estate. Later on he paid from such deposits, which consisted wholly of trust funds, a personal indebtedness to the bank of deposit. The bank was held liable not only for the sum so paid but also for subsequent withdrawals. The statement in the Bischoff Case which was approved in the Fidelity & Deposit Co. of Maryland v. Farmers’ Bank, supra, reads as follows:

“A bank does not become privy to a misappropriation by merely paying or honoring the checks of a depositor drawn upon Ms individual account in which there are, in the knowledge of the bank, credits created by deposits of trust funds. The law does not require the bank, under such facts, to assume the hazard of correctly reading in each check the purpose of the drawer, or, being ignorant of the purpose, to dishonor the cheek. The presumption is, and after the deposits are made remains until annulled by adequate notice or knowledge, that the depositor would preserve or lawfully apply the trust funds. The contract, arising by implication of law, from a general deposit of moneys in a bank is, that the bank will, whenever required, pay the moneys in sueh sums and to sueh persons as the depositor shall direct and designate. Although the depositor is drawing checks which the bank may surmise or suspect are for his personal benefit, it is bound to presume, in the absence of adequate notice to the contrary, that they are properly and lawfully drawn. Adequate notice may come from circumstances which reasonably support the sole inference that a misappropriation is intended, as well as directly. * * *
“In the present ease Poggenburg paid to the defendant, as his creditor, on June 3, 1908, the sum of $765 from his account with the defendant. The finding of the trial court, supported by the evidence, is that the account at that time was constituted wholly from the trust funds. At that time and through the transaction the defendant knew that Poggen-burg had appropriated $765 of those funds for his private benefit. The presumption that he would not thus violate his duty and lawful right — that he would apply the moneys to their proper purposes under the will then ceased to exist. There was absolute proof in the possession of the defendant to the contrary. The defendant had 'no' longer the right to assume that in paying the cheeks of Poggenburg it was paying the executor’s moneys to the executor and not to Poggen-burg, the individual, or that Poggenburg would use the moneys lawfully. It had knowledge of such facts as would reasonably cause it to think and believe that Poggen-burg was using the moneys of the executor for his individual advantage and purposes. Those facts indicated that the payment to it was not an isolated incident; they indicated, rather, that it was within a method or system. Having such knowledge, it was under the duty to make reasonable inquiry and endeavor to prevent a diversion. Having such knowledge, it was charged by the law to take the reasonable steps or action essential to keep it from paying to Poggenburg as his own the moneys which were not his and were the executor’s, and was bound by the information which it could have obtained if an inquiry on its part had been pushed until the truth had been ascertained.”

The charge of $418 made upon the trust account by the deposit of the unpaid Land Company’s cheeks is eoneededly a liability of the Bank. U. S. Fidelity, etc., v. U. S. National Bank, supra; Lowndes v. City National Bank, supra.

In Cory, etc., Corp. v. Old (C. C. A. Va. 1928) 23 F.(2d) 803, 810, the court said: “Of course, a bank has no right to charge one man’s cheek to the account of another without the permission of the other; and it is clear that a bank should not charge the personal cheeks of an agent to the account of his principal without authorization of the principal.”

Plaintiff is entitled to interest on the various amounts misappropriated from the date of their diversion. Oklahoma State Bank v. Galion, etc., Co., supra; White v. Knox (1884) 111 U. S. 784, 4 S. Ct. 686, 28 L. Ed. 603; People’s National Bank v. Payne (C. C. A. 8, 1928) 26 F.(2d) 208.

Some contention was made at the trial that plaintiff’s action should be dismissed because he had never filed a claim with the receiver. There is no merit in this position. A presentation of a claim to a national bank receiver is not prerequisite to a suit thereon. Plaintiff as a judgment creditor will participate with the other general creditors in any dividends declared by the insolvent bank. Schulenberg v. Norton (C. C. A.) 49 F.(2d) 578.

The facts of the case before the court might justify a finding that the Bank is liable to plaintiff not only for the withdrawals from plaintiff’s account on and after February 4, 1922, but in addition for the first diversion of trust funds on May 10, 1921. Erieson was the sole executive officer connected with the transaction from its inception. There are authorities that apparently recognize a liability of a bank under such circumstances. However, it is the court’s opinion that the better rule to follow in the case at bar is to hold the Bank to strict accountability beginning February 4, 1922, when it accepted through its agent trust funds for. illegal purposes. It was to the interest of the Bank that the overdrafts be paid; naturally the Bank intrusted to its managing agent the collection of all indebtedness due the Bank, and it cannot be successfully maintained that Eriespn was acting in any personal capacity or as a guardian when he saw to it that debts due the Bank were taken care of.

Let this memorandum be made a part of the foregoing findings of fact and conclusions of law.

       Plaintiff’s Exhibit G


source: Caselaw Access Project

author: NIELDS, District Judge.

license: Public Domain

text:
    UNITED STATES v. BARNES et al.
    No. 823.
    District Court, D. Delaware.
    Aug. 7, 1931.
    Leonard E. Wales, U. S. Atty., of Wilmington, Del., for plaintiff.
    C. Edward Duffy (of Hastings, Stockly & Duffy), of Wilmington, Del., for defendants King and Hess.
   NIELDS, District Judge.

• The United States has filed its bill of complaint against Samuel Bames, as proprietor of a business carried on at certain premises, known as the Athens Hotel, at the southwest comer of Fifth and Shipley streets, city of Wilmington, in this district, and Francis X. King, Harry F. King, and Ella M. Hess, as owners of such premises. The owners have appeared and answered. Bames, though served with process, has neither appeared nor answered.

The bill charges, in substance, that intoxicating liquor was sold, kept, and bartered on the premises in question, that such premises were maintained as a common nuisance, as defined by the National Prohibition Act (27 USCA), and that such nuisance was a continuing one. It prays that the court abate the nuisance, first, by enjoining the respondents from manufacturing and selling intoxicating liquor on the premises, and, second, by closing the premises to occupancy and use for one year. Attached to the hill of complaint were affidavits showing the sale of intoxicating liquor upon the premises October 14, 1930, October 17, 1930, October 30, 1930, November 5, 1930, and a search of the premises under a search warrant November 7, 1930. The bill of complaint was filed November 13, 1930.

The owners consented that a temporary injunction issue. The matter is now before the court, after a full hearing in open court on bill, answer, and oral evidence. The owners resist the issuance of a permanent injunction and the incorporation therein of a closure provision depriving them of the use of the premises.

It would serve no useful purpose to review the evidence tending to establish the fact that the premises in question were a common nuisance within the meaning of the National Prohibition Act (27 USCA) at and immediately before the filing of the bill of complaint in this proceeding. The evidence inevitably establishes that fact. The sole question in the ease is whether the evidence furnishes reasonable ground for apprehension of a recurrence of such nuisance.

The premises in question, a three-story ^ hriek building with a saloon on the first floor, were received by the three owner defendants from their mother, Catherine F. King, at her death in February, 1922. Just before her death the property was leased by Francis X. Bong to Constantine Frank for ten years from March 25, 1922, at the rental of $2,-400, $3,000 and $3,600 per year, with a provision in the lease against subletting without the consent of the owner. In violation of the terms of the lease, Frank sublet the saloon portion of the premises to Samuel Barnes in 1926 or 1927, and Bames thereafter continued in possession. At the time the lease was executed certain alterations were made by Francis X. King, costing approximately $500, to better adapt the premises for use as a saloon and restaurant. None of the present owners have resided in Wilmington during the past eighteen years. Two of them have not been in Wilmington since the mother’s death, and the third, Francis X. King, not since about 1927. There is no evidence that any one of the owners had personal knowledge of the sale of intoxicating liquor on the premises.

A court of equity has power to abate a nuisance and decree a closure of the premises regardless of the owner’s ignoranee of the fact that the tenant was violating the law, and it is unnecessary that knowledge of the violation should be brought home to the owner. United States v. Boynton (D. C.) 297 F. 261; Farrell v. United States (C. C. A.) 21 F.(2d) 318; Engler v. United States (C. C. A.) 25 F.(2d) 37. Before the court can decree a permanent injunction, with or without a closure clause, there must be some evidence of the existence of a nuisance at the time or immediately before the institution of the proceedings, and there must be a reasonable apprehension on the part of the court that the premises will be used in the future for such unlawful purpose.

The evidence clearly establishes that intoxicating liquor was being sold on the premises. King testified that he was aware of the fact that there was a regular bar equipment, and that he made no personal investigation, but assumed “the place was being run as it should be run, according to law.” The upper half of the door leading into the saloon was glass. The door was kept locked, and the lock was released by an electric button operated underneath the bar. Had King visited the premises, he would have learned of the above facts and been put upon notice that the business being carried on was probably illicit. Had he investigated further, he would have learned that Barnes pleaded guilty in this court, on June 13, 1930, to a violation of the National Prohibition Act (27 USCA). Such conviction would normally charge an owner with notice of the existence of a nuisance on his premises and impose upon the owner the duty of abating the nuisance or abiding the consequence of failure so to do. A nonresident owner cannot plead his nonresidence to escape such responsibilities. On November 17, 1930, in answer to a telegram from Barnes advising him of the institution of these proceedings, Francis X. King came to Wilmington and visited the saloon premises. He made an inspection on December 3, 1930, and states that he “found no traces of liquors,” but “heard a customer refused” a drink of whisky. Hearing this request from a patron, placed King upon notice that liquor probably was being sold on the premises.

King took no steps to evict Barnes or to cancel the lease. On the contrary, he recognized the lease by collecting, while in Wilmington, a month’s rent for the premises. He took no step to abate the nuisance up to the time of the trial of this cause. Had King, upon learning of the facts, ousted Barnes and canceled the lease with his tenant, he would have placed himself in a more favorable position when it comes to the terms of the .decree to be entered. A nuisance once shown to exist will be presumed to continue, especially in the absence of change of environment, Engler v. United States (C. C. A.) 25 F.(2d) 37.

On the whole, I am satisfied a nuisance has been established, that there are reasonable grounds to believe the nuisance will recur, that an injunction with a closure clause should issue, and that the costs of this cause should be paid by the owners.


author: HOLMES, District Judge.

text:
    In re HEMMING. ROME MFG. CO. v. BAILEY.
    No. 1218.
    District Court, S. D. Mississippi, E. D.
    Aug. 17, 1931.

      E. B. Williams, of Meridian, Miss., for petitioner.
    Thomas L. Bailey, of Meridian, Miss., in pro. per.
   HOLMES, District Judge.

The Borne Manufacturing Company, feeling aggrieved at the action of the referee, has filed a petition for review of an order made by him in which he denied the petitioner’s claim for three large road-building machines in possession of the bankrupt at the time of adjudication, and subsequently taken charge of by the trustee, who is now claiming them for the benefit of the general creditors under what is known as our sign statute, section 3352 of the Mississippi Code of 1930. The reclamation petition asked for the return of the property or the payment in lieu thereof of the unpaid purchase money, amounting to $4,499.70. The referee held that the petitioner was entitled to no relief, except to be allowed to prove its claim as a general creditor which was granted.

A. E. Hemming was engaged in the business of a manufacturer of wagons and other things under the style and firm' name of Hemming Wagon Factory. He bought timber and other raw materials, manufactured them into wagons, and sold the finished products. When the wagon business fell off, he bought lumber, manufactured it into bleacher seats and ladders, and sold these also. The same individual, under the same name of Hemming Wagon Factory, was also engaged in the business of buying and selling road machines or graders, and parts for the same, which he bought from the petitioner under a written contract in which title was retained in the seller until the purchase price was fully paid. The instrument is in evidence, but has never been recorded in accordance with any registration laws.

Both vocations were pursued in the same buildings or places of business in the city ■of Meridian, Miss. There were two locations, separated by the distance of about a mile, in each of which a part of each business was transacted. At the factory plant, where wagons and other things were manufactured and sold, parts for the graders were also kept and sold, but not manufactured. At the of-fiee and warehouse, the other situs, the business of the manufacturer as well as of the dealer was transacted, and graders were kept and sold.

The graders in controversy were kept in the warehouse which is under the same roof with the offiee where both businesses were partially being conducted. That compartment of the building where they were found by the trustee was known as the warehouse, and was separated from the office by a partition, btít connected with it by doors in the partition. There was a toilet in the back end of the building used by the people who worked in the offiee. Stationery and other office supplies of the wagon factory were kept in that part of the building where the graders were stored. Over the door of the offiee, which was connected with the warehouse as stated, was a sign, reading: “Office, Hemming Wagon Factory,” which was the only sign about the premises.

The same individual may be engaged in two or more distinct business enterprises. He may be a farmer and a lawyer, a doctor and a druggist, a merchant and a farmer, or may engage separately in other different professions and vocations. The law regards each separately. A privilege license for one business does not ordinarily cover another carried on by the same individual. Smith v. Perkins, 112 Miss. 870, 73 So. 797. Even a municipality may perform governmental functions and carry on a private business for profit at the same time. Yazoo City v. Birchett, 89 Miss. 700, 42 So. 569.

Hemming, the bankrupt, was a manufacturer, but the property claimed by the trustee was not made by him or used or acquired in manufacturing. He was also engaged in the business of buying and selling road machines and parts for profit. The unrecorded contract between him and the petitioner designates him as a dealer in such merchandise. The agreed facts justify such a characterization. ' The words “dealer” and “trader” are synonyms. “A dealer is one whose business it is to buy and sell as a merchant, shopkeeper, or broker — a trader. Century Dictionary. A trader is one who makes it his business to buy merchandise, goods, or chattels to sell the same at a profit. Bouvier, Law Dietionary.” State v. Rosenbaum, 80 Conn. 327, 68 A. 250, 251, 15 L. R. A. (N. S.) 288, 125 Am. St. Rep. 121. “A dealer, in the popular, and therefore in the statutory, sense of the word, is not one who buys to keep, or makes to sell, but one who buys to sell again.” Norris Brothers v. Commonwealth, 27 Pa. 494. “Dealers are the middlemen between the manufacturer or producer and the consumer.” Commonwealth v. Campbell, 33 Pa. 380; Commonwealth v. Vetterlein, 214 Pa. 21, 63 A. 192, 193.

The Mississippi sign statute “applies only where the business transacted is that of a trader or one ejusdem generis.” Yale v. Taylor, 63 Miss. 598; Van Range Co. v. Allen (Miss.) 7 So. 499; Lyons v. Steele, 86 Miss. 261, 38 So. 371; Oliver v. Ferguson, 112 Miss. 521, 73 So. 569; Willis v. Memphis Grocery Co. (Miss.) 19 So. 101. This is true where there are separate and distinct lines of business carried on by the same corporation. The property of the nontrading one is not within the statute. Orr v. Jackson Jitney Car Co., 115 Miss. 140, 75 So. 945; Sayers & Scoville Co. v. Doak, 127 Miss. 216, 89 So. 917.

The personal property sought to be reclaimed by the seller in this case was acquired and used hy the bankrupt in his business as a dealer in graders and parts. As to this property he was a trader within the purview of section 3352 of the Mississippi Code of 1930, as construed by the Supreme Court of the state. Under this statute and the facts as stated, all property used or acquired by Hemming, the trader, in his business as such trader, is liable for his debts, and must be in all respects treated in favor of his creditors as his property. Gumbel v. Koon, 59 Miss. 264; Quin v. Myles, 59 Miss. 375; Shannon v. Blum, 60 Miss. 828; Paine v. Hall Safe & Lock Co., 64 Miss. 175, 1 So. 56; Howe v. Kerr, 69 Miss. 311, 13 So. 730; Bank v. Studebaker, 71 Miss. 544, 14 So. 733; Gillaspy v. Harvester Co., 109 Miss. 136, 67 So. 904; Payne Hardware Co. v. Harvester Co., 110 Miss. 783, 70 So. 892.

In Dodds v. Pratt, wherein Judge Campbell held that the sign statute did not derange the order of priority among creditors, the deed of trust was recorded. The official report of the ease, in 64 Miss. 123, 8 So. 167, does not so state, and the transcript of the record in the Supreme Court seems to be lost, but an examination of the original record in the office of the chancery clerk discloses this to be true. Under present decisions the case is authority only for the proposition that, where the instrument is recorded, the statute does not derange the order of priority among creditors. It is therefore not applicable here where the instrument reserving title in the seller was not recorded. In re Loeb’s, Incorporated (D. C.) 279 F. 269, 48 A. B. R. 126; In re Caver, Caver & Co. (D. C.) 42 F.(2d) 293; In re Shumaker (D. C.) 277 F. 521, 47 A. B. R. at bottom of page 505 and top of page 506.

Accordingly, the order of the referee is affirmed.


author: DAWKINS, District Judge.

text:
    BANK OF COMMERCE & TRUST CO. et al. v. WILLETTS WOOD PRODUCTS CO. et al.
    No. 335.
    District Court, W. D. Louisiana, Monroe Division.
    April 18, 1931.
    Theus, Grisham, Davis & Leigh, of Monroe, La., for receiver.
    Robinson, House & Moses, of Little Rock, Ark., for complainants.

      Cockrill & Armistead, of Little Rock, Ark., for M. & M. See. Co.
    Merrick, Schwarz, Guste, Barnett & Redmann, of New Orleans, La., for Canal Bank & Trust Co.
   DAWKINS, District Judge.

On November 3, 1928, the Bank of Commerce & Trust Company of Memphis, Tenn., and T. W. Vinton filed in this court, as trustees of a certain bond mortgage upon a large sawmill plant, timber lands, etc., a bill for foreclosure via ordinaria, and for the appointment of a receiver. Both the maker of the mortgage and bonds, Willetts Wood Products Company, a Delaware corporation, and the guarantor of the bonds, J. F. McIntyre & S’ons, Inc., a corporation under the laws of Arkansas, made defendants, appeared and consented to the appointment of a receiver. October 15, 1929, a final decree was entered for the sum of $924,000, with interest, costs, etc., against both defendants. The property was administered by the receiver, who finally sold it under order of court, and the same was bought in for the account of the bondholders.

At the time of the filing of the bill and appointment of a receiver there was on deposit with the Bank of Commerce & Trust Company (one of the above trustees), as" a banking institution, to the credit of the Wil-letts Wood Products Company, the sum of $19,466.56. Subsequently, by means of a cashier’s cheek, it passed this sum to the credit of J. F. McIntyre & Sons, Inc., for the purpose of applying the same to the satisfaction of its own claims. The Canal Bank & Trust Company et al. intervened in this proceeding, and by a cross-bill now seek to compel the Bank of Commerce & Trust Company to account for and pay over to the receiver the funds, on the ground that, having invoked the jurisdiction of this court in its said representative capacity, it should not be allowed individually to thus arbitrarily withhold or divert assets properly belonging to the receiver whose appointment it brought about. The properties of the Wil-letts Wood Products Company were sold by the receiver and bought in for the account of the bondholders in the name of certain. individuals as trustees, selected by the Bank of Commerce & Trust Company, or those affiliated with it. Pursuant to the order of this court, the receiver in said deed retained “a lien in such sum as the Bank of Commerce & Trust Company of Memphis, Tennessee, as trustee, may hereafter be ordered to pay over to said receiver on account of funds or property wrongfully .withheld from said trust estate,” and which was for the purpose of securing whatever judgment might be rendered on the claim now under consideration.

It is first contended by the Bank of Commerce & Trust Company that this court is without jurisdiction over it individually, because it has only appeared herein in its capacity as trustee of the bond mortgage. However, I do not conceive its rights in that respect to be any different to what would be the ease of a personal trustee if he were before the court under the same circumstances. It has subjected itself to the jurisdiction of this court for the purpose of asking that the properties and funds of the defendant corporation be subjected to the payment of claims which it represents as trustee, and as a means of bringing about that result procured the appointment of a receiver who was ordered to collect and administer its assets. Upon subsequent pleading of the intervener, the court ordered that the powers and duties of the receiver be made general in scope and for the benefit of all creditors. If the claim of the Bank of Commerce & Trust Company to the possession of the funds in question was substantial and not merely colorable, then the receiver would probably be compelled to sue it at its domicile, and could not in this proceeding compel it to hand over those funds as part of the estate of the insolvent corporation. However, I think it clear that, at the time the receiver was appointed, they stood in the name of the corporation and became a part of its assets, to be administered by him, and the bank could not change that status by a transfer through unauthorized entries upon its books. Being before the court for the purpose of having it administer the corpus of the receivership property, even though its appearance was as trustee, I think it may be compelled'to turn over that which lawfully belongs to the estate, as a condition to the surrender or release of property or funds to its nominee at the sale. It will not be allowed to take advantage of the fact that it was the depository of these funds as a banking institution to convert them to its own use and to decline to surrender them to the receiver. Cyc. vol. 39, p. 296, verbo “Trusts,” and authorities cited in footnote. Any claim of preference against such funds which it has can be asserted in this proceeding -wherein the court has jurisdiction and control of the whole estate. If it were an individual coming into this jurisdiction and had taken or withdrawn the funds in question from the estate over which the receiver had been appointed, it could be proceeded against either by complaint or rule for contempt. See Schmitt, Receiver, v. Lamb, 48 F.(2d) 533, and Cramer v. Lamb, 18 F.(2d) 537, on the docket of the Fifth Circuit Court of Appeals, recently decided.

My conclusion is that it is unnecessary to go into the merits of the claim of the bank for a preference as to these funds, since at the time of the appointment of the receiver they belonged to the corporation and all such claims must be litigated here after the money has been paid over to the receiver.

There should be judgment in favor of the receiver and intervener, for the benefit of the estate, and against the Bank of Commerce & Trust Company, ordering it to pay over to the receiver the said sum of $19,456.-66, with a lien upon the property conveyed by the receiver under the order of sale of the sawmill, lands, etc., as therein provided, to enforce its payment.

Proper decree may be presented.


text:
    OUACHITA VALLEY REFINING CO. v. CONWAY, Supervisor of Accounts for Louisiana, et al.
    No. 446.
    District Court, W. D. Louisiana, Shreveport Division.
    May 19, 1931.
    Powell, Smead & Knox, of El Dorado, Ark., for complainant.
    Percy Saint, Atty. Gen., of Louisiana, and Peyton R. Sandoz, Asst. Atty. Gen., of Louisiana, J. C. Daspit, of Baton Rouge, La., and R. J. O’Neal, of Shreveport, La., for respondents.
   DAWKINS, District Judge.

Plaintiff is an Arkansas corporation, engaged in the oil refining business at El Dorado, in said state, and sells some of its products to customers in Louisiana.. In this ease it charges that the respondents, whose duty it is to collect the highway tax on motor fuel, have seized a number of tank cars shipped into this state while the same were in the course of interstate commerce, in violation of the Federal Constitution, and that they will continue to do so to the disruption of its business and cause it to defend a multiplicity of suits, unless restrained. The relief sought is a permanent injunction.

* Respondents admit efforts to collect the tax, but deny that the complainant has any standing in court, for the reason the petition alleges the bills of lading had been attached to sight drafts and discounted at the Exchange Bank & Trust Company of El Dor-ado, thereby .disposing of its interest in the property. They further aver that the complainant is without right in equity or good conscience to seek this relief because it had been shipping into the state gasoline, falsely billed as tractor distillate, in violation of a federal statute, and for the purpose of avoiding payment of the tax; that the tank cars were billed to certain destinations and the bills of lading and drafts sent to other places, where they might be obtained by purchasers and surrendered to the railroads at points distant from the destination of the ears, in which eases the agents of the carrier would telephone authority for their release, thereby preventing and depriving respondents of an opportunity to collect the tax from those who should pay; that plaintiff would also make shipments to fictitious persons, with the view of diverting the same, if necessary, to avoid payment of the tax; and that on several occasions it sold its product to persons in Louisiana and collected the said tax on the basis of a delivered price, which tax funds it had held and converted to its own use until compelled to return them to said purchasers. Defendants, therefore, plead the maxims that “He who seeks equity must do equity,” and that “He who comes into equity must come with clean hands.” They pray that plaintiff’s demand b.e rejected and its suit dismissed.

No question has been raised as to the validity of the tax, or of the right of the state to collect the same through seizure after the ears have been delivered, but plaintiff insists defendants could not do so until the drafts had been paid and the bills of lading surrendered to the carrier. It sets up three specific instances in which such seizures were made. The first covered two shipments of “December, 12, 1930” (for which it alleges an order was received on “December 15, 1930”), and December 19, 1930, to Amite, La., the bills of lading in both cases being to the shipper’s own order, with instructions to notify the Amite Oil Company, to which drafts were attached, drawn upon said company and sent to a bank in that town for collection. The second seizure was of one car alleged to have been shipped in similar manner, December 24, 1930, to the Capital City Petroleum Company, at Baton Rouge, La., and the bill of lading with draft drawn on Wade Gar-niel', being sent to Independence, La., for collection. In the third ease, plaintiff alleges that shipment was made under similar circumstances to Shreveport, La., to fill an order from one C. L. Brown, with a shipper’s order bill of lading and draft drawn on Brown, sent to Texarkana, Tex. Plaintiff alleges that all three shipments, that is, to the Amite Oil Company, Amite, La., Capital City Petroleum Company, Baton Rouge, La., and C. L. Brown, Shreveport, La., were seized at these points by the state while the product was still in interstate commerce, and before any of the drafts had been paid or the bills of lading surrendered, under the pretext of collecting the tax.

I find the pertinent facts to be as follows:

Plaintiff is engaged in the refining business at El Dorado, Ark.,'and ships considerable quantities of its products into Louisiana, in car lots. The state has a highway tax’upon the sale of motor fuels, which it collects from dealers where the product has a flash point below 110° Fahrenheit.

In the latter part of 1929 -representatives of the defendant supervisor called on the president of the plaintiff company, explaining to him the difficulties which were being encountered in collecting the tax from those receiving such fuel in carload lots from without the state, and appealed to him to furnish the state reports of such shipments to aid it in preventing dealers from avoiding the tax. That gentleman promised to make such reports, but never did so.

On April 21, May 10, and October 27, 1930, respectively, shipments were made by the plaintiff to the Windsor Oil Company at Rayne, La., at a delivered price, which, at the request of the purchaser, included the state tax, and the full amount was paid, including a sufficient sum to cover the four cents per gallon highway tax. Later, during the fall of that year, the state demanded and collected the tax from the Windsor Oil Company. No report or remittance of the amount paid to plaintiff for the state was made, and it did not return the same to the purchaser until the middle of January, 1931, after the matter had been placed in the hands of attorneys at El Dorado. A similar sale was made to A. Willetts’ Sons Lumber & Shingle Company at Plaquemine, La., on November 26, 1930, that is, tax paid, which was not remitted to the state until December 20, .1930, after it had demanded the tax of the purchaser. In defense of its failure to remit the tax collected from the Windsor Oil Company, plaintiff’s president, as a witness, stated that it was being held to offset damages caused by the seizures herein complained of. However, the earliest of these seizures was not made until after the middle of December, 1930, some seven or eight months after the amount- paid by the customer for the tax had been received by it, and this explanation is therefore not very convincing, to say the least.

The shipments made to the Amite Oil Company were billed as tractor distillate, which the state claims is not included in the class bearing the tax, while in reality it was gasoline; the contention of defendants being that this was done to deceive the agents of the state and to aid the purchasers in avoiding the tax. The shipment to Baton Rouge was made with directions to notify the Capital City Petroleum Company, which had ceased doing business there, and the bill of lading with draft drawn on Wade Garnier was sent to Independence, La. This draft was evidently paid, for the bill of lading was surrendered to the railroad agent at Amite, La., who telephoned to Baton Rouge authority to release the car. After the seizures were made on December 27th and 30th, respectively, plaintiff attempted to divert the cars to other places, those at Amite to Osyka, Miss., and the one at Baton Rouge back to El Dorado.

After the seizure, of the shipment at Shreveport, which, as stated, was made under a shipper’s order bill of lading, with directions to notify C. L. Brown, plaintiff surrendered the original bill of lading, and obtained another with directions to notify the Seagull Gasolene Corporation at that point. In December, 1930, a car was shipped to Lake Charles, under a similar bill of lading, with instructions to notify the Coastal Oil Company, which was sent with draft drawn on one Hempley to Shreveport, La. The state sued out attachment process at Lake Charles, but the plaintiff induced the railroad company, notwithstanding, to permit it to divert the ear to Palmetto, La. The sheriff of Calcasieu parish made a return that he could not find any one representing the Coastal Oil Company. In diverting the ear, the plaintiff drew a draft on one A. Slyman of Palmetto, and sent it, with hill of lading attached, to a bank at Melville, La. This draft included a four-cent per gallon tax, but Slyman refused to honor it, and the ear was again seized by the state at that point.

The first seizure made of any of the cars was that at Amite, on December 24, 1930, and the others were on the 30th of that month.

Some fifty ears had been shipped by the plaintiff to Amite during the year 1930, twenty-eight of which were billed as tractor distillate, which the state contends was in reality gasoline. Samples taken from the two ears seized there and so billed I am convinced established that it was gasoline, and creates a very strong presumption that the others may have been of that character also.

No reasonable explanation has been offered by the plaintiff as to why it failed to furnish reports of its shipments as it had promised, or why these circuitous methods were used in handling its business. Neither do I think any satisfactory excuse has been given for attempting to divert the cars after they were seized, instead of either litigating the matter out at the point of seizure, or calling upon the purchaser to take the shipment and pay the tax) as would seem to have been the natural course, instead of incurring additional freight charges by reshipping and taking a chance of selling elsewhere. None of these supposed purchasers have been called to verify the bona fides of the transactions, as could have been done if they were genuine business dealings, without design to defeat the tax. Under the circumstances above detailed, were the officers of the state justified in believing that the plaintiff was acting in collusion with citizens of Louisiana, to avoid paying its taxes ?

Section 1 of the Act No. 8 of the Legislature of 1930, amending section 4 of the Act No. 6 of 1928 (Ex. Sess.), provides in part as follows: “That every person, firm, corporation or association of persons engaged as a dealer in the handling or distribution of gasoline or motor fuel for sale, use or consumption within the S'tate shall immediately upon the producing, refining, manufacturing, blending or compounding of any gasoline or motor fuel pay to the Supervis- or of Public Accounts the tax levied herein, which is hereby made due and payable immediately upon said producing, refining, manufacturing, blending or compounding; provided further that any dealer bringing gasoline or motor fuel into the State of Louisiana for sale, use or consumption therein shall immediately pay to the said Supervisor of Public Accounts the tax levied herein which is hereby made due and payable immediately upon same coming within the boundaries of this State. • Said payment shall be made by remitting or paying to the Supervisor of Public Accounts by bank draft, post office or express money order, certified check or- cash. Provided further that it shall be the duty of each dealer, within twenty days after the expiration of each monthly period (to be computed from the first day of each month to the last day of each month) to file with the Supervisor of Public Accounts a statement, under oath, on forms prescribed and furnished by him, of the business conducted by such person, firm, corporation or association of persons during the last preceding monthly period, whether the tax has been paid or not, which statement shall show the number of gallons of gasoline or motor fuel that was sold to persons, firms, corporations or associations of persons within the State, used or consumed by the dealer importing same. Pror vided further that any dealer preferring to pay any tax due hereunder at the time that the monthly reports provided for in this section are filed will be permitted to do so provided that the said dealer shall have previously furnished the Supervisor of Public Accounts a bond guaranteeing the payment of any tax, penalties or costs accrued or accruing under this Act.”

It is thus seen that the tax is imposed upon all who deal in motor fuel in this state, and the collecting department has ruled that it is not payable upon substances having a flash point above 110° Fahrenheit.

Of course, a refinery in Arkansas which, in good faith, ships its products to bona fide purchasers in Louisiana, does not have to pay the tax, nor can the state in such transactions, made in good faith, seize the ears until they have been delivered, that is, the drafts paid and the bills of lading surrendered, for to do so would be a clear interference with interstate commerce, in violation of the Federal Constitution. But, if the plaintiff, under the guise of honest dealing, ships its goods into Louisiana to fictitious persons or agents of its own, with the view of finding purchasers and selling to them, after the goods have come into the state, then it could hardly deny that it was a dealer within the meaning of the law, and bound to pay the tax. Again, if it were conspiring with citizens of this state to ship to them fuel upon which the tax should be paid, falsely billed as a product on which it is not collected, and handles its business with its customers in such manner as to knowingly aid and assist them in evading payment, it would hardly be in a position to ask the aid of a court of equity. It would certainly not attempt any such practices as have been indulged in in this case, with respect to its business in Arkansas, where its officers and property are subject to the powers of its own state. The very purpose of giving to Congress control over interstate commerce was to prevent the citizens of one state from indulging in petty and unjust dis-criminations against the other or its citizens, and a federal court is peculiarly constituted to enforce this common duty to mutually regard the rights of one another. This is one of the very wise and far-seeing concepts of the framers of the Federal Constitution, which has served to prevent strife like that between some of the states of Europe. I do not mean to say that there was any legal duty, whatever may be said about the moral obligation, on the part of plaintiff to make the requested reports to the defendants of its interstate shipments; at the same time, it was clearly without right to aid or connive with the citizens of Louisiana in the violation of the latter’s laws. This case does not involve any claim on the part of a bona fide holder of a bill of lading, requiring application of section 103 of title 49 of the United States Code (49 USCA § 103), under which refuge is sought by the plaintiff. It alone is complaining, and in doing so is confronted with its own conduct, which in my opinion, on the showing made here, does not warrant the interference of a court of equity. 1 Pomeroy, Eq. Jur. (2d) § 397; 21 C. J. 182, 183.

If, in the future, the state of Louisiana undertakes to seize the property of plaintiff while it is in interstate commerce, under bona fide sales made to its customers in Louisiana without questionable circumstances, then it will be time enough to listen to its complaint. For the present, I think the relief should be denied and plaintiff should be relegated to the remedies which the law affords for the determination of the issues raised in the suits filed in the state courts, where ample opportunity can be had to defend, with the right of review of the federal questions by the Supreme Court of the United States.

The suit will be dismissed, without prejudice to the right to renew the application for injunction, should circumstances warrant it in future.

Proper decree may be presented.


author: HAZEL, District Judge.

text:
    THE JAMAICA.
    District Court, W. D. New York.
    Dec. 6, 1926.
    See also (D. C.) 51 F.(2d) 858.
    Dorr E. Warner, of Cleveland, Ohio, for libelants.

      Stanley & Gidley, of Buffalo, N. Y., for respondent.
   HAZEL, District Judge.

In this libel in rem it is alleged that the steamship Jamaica was at fault, resulting in damage to the steamer George King for loss of use. The specific act of negligence is that the Jamaica, while at her dock, was allowed to fill with water and sink, blocking the exit from the slip where the George King lay, thus preventing her from departing and engaging in her regular transportation; and that the Jamaica left her sea cock open causing water to flow into her hull; and, further, that thereafter there was unreasonable delay in raising her.

The exceptions are that the facts alleged are insufficient to constitute an action in rem and no maritime lien eventuated.

The exceptions are not well taken, since the libel is in tort. The Jamaiea could not be permitted to wrongfully obstruct the channel and unreasonably delay vessels in using the channel. On the point of whether a maritime lien is created by the misconduct of the vessel arising from negligence or willful disregard of duty, see The John G. Stevens, 170 U. S. 113, 18 S. Ct. 544, 42 L. Ed. 969, which in principle appears to have a bearing. Respondent, in opposition, attaches importance to The Mary (D. C.) 123 F. 609, a suit to secure damages for the destruction of a raft of logs which had grounded and obstructed navigation. The learned court ruled that the raft, which had lodged against a bridge across the river and obstructed passage, had the same rights in navigable streams as other vessels; it appearing that'the grounding was purely accidental, and that other vessels were required to submit to reasonable delay until the owner has had time to remove the obstruction, before another vessel could be permitted to destroy the raft as a nuisance. The case was decided at final hearing. The obstructed steamer ran over the raft, breaking it up and scattering the logs, some of which were lost. She was held liable because of her failure to use ordinary care in preventing unnecessary injury, which she might have done, the court said, either by towing the raft out of the way or cutting it to prevent damaging the logs. The point here is also made that no maritime lien could arise by reason of the fact that the vessel having sunk was not in condition for navigation, but this may be reserved to the hearing. Whether these assertions constituted negligence, see also New York, N. H. & H. R. Co. v. Piscataqua Nav. Co. (C. C. A.) 108 F. 92.

The exceptions are overruled and the Jamaica is required to make answer.


author: ADLER, District Judge.

text:
    THE JAMAICA. NIAGARA FERRY & TRANSPORTATION CO., Inc., v. AMERICAN RADIATOR CO. et al. SALKELD et al. v. NIAGARA FERRY & TRANSPORTATION CO., Inc. AMERICAN RADIATOR CO. v. PERRY’S SAND YARD, Inc., et al.
    District Court, W. D. New York.
    July 10, 1931.
    On Rehearing Aug. 15, 1931.

      Dorr E. Warner, of Cleveland, Ohio, Forrest E. Single, of New York City, and Goul-der, White & Garry, of Cleveland, Ohio (Thomas H. Garry, of Cleveland, Ohio, of counsel), for Victor Salkeld and others.
    Stanley & Gidley, of Buffalo, N. Y. (Ray M. Stanley, of Buffalo, N. Y., of counsel), for the Jamaica and Niagara Ferry & Transportation Co., Inc.
    Dorr E. Warner, of Cleveland, Ohio (Harry J. Kelly, of Buffalo, N. Y., of counsel), for Perry’s Sand Yard, Inc.
    Wilcox & Van Allen and Brown Ely & Richards, all of Buffalo, N. Y. (John B. Richards and Selby G. Smith, both of Buffalo, N. Y., of counsel), for American Radiator Co.
    Love & Keating, of Buffalo, N. Y. (George P. Keating, of Buffalo, N. Y., of counsel), for Delbert 0. Lockhart.
   ADLER, District Judge.

These eases arose out of the sinking of the steamer Jamaica at the Hertel avenue dock of the American Radiator Company on April 16, 1926. Approximately three hundred feet of the face of the dock had been leased by the American Radiator Company to the Perry’s Sand Yard. There was a slip extending in from the dock which was not included in the lease to the sand company. In this slip the steamer George King was moored, and had been there for' some time prior to April, 1926. The steamer King was owned by Victor Salkeld and Dorr E. Warner, the libelants herein. Warner was also the principal owner of the Perry’s Sand Yard which had the lease to the dock. Neither he nor the Sand Yard had a lease to the slip in which the King was moored, and so far as the presence of the King in the slip is concerned, it may be said to have been there by sufferance, though apparently with the consent of the radiator company. Just prior to April 13, 1926, the Niagara Ferry & Transportation Company, Inc., the owner of the steamer Jamaica, applied to the American Radiator Company for dockage in the slip in question. The Owners of the King did not want to move their ship at this time, and after a conference with the owners of the Jamaica it was agreed that the radiator company should lease dock space for the Jamaica on the dock front and the King could then remain in the slip until it was ready to be moved. The Jamaica was brought up to the dock on April 13, and moored so that some part of it extended a distance in front of the slip. While in that position on April 16,1926, the Jamaica sank, and the entrance to the slip was then blocked so that the steamer King moored in the slip could not get out. The Niagara Ferry & Transportation Company, owner of the Jamaica, took steps to have her raised, but she was not actually raised and moved from her position in front of the slip until June Í6, 1926, two months after her sinking.

The libelants, Victor Salkeld and Dorr E. Warner, in the first libel brought an action in rem against the steamer Jamaica. They later filed a second libel against thé Niagara Ferry & Transportation Company, Inc., the owner of the Jamaica in personam. The Niagara Ferry & Transportation Company, Inc., appeared as claimants and filed an answer. It further filed petitions in both cases bringing in Delbert 0. Lockhart on the ground that he was an independent contractor for raising the Jamaica; the American Radiator Company on the ground that it had provided unsafe wharfage; the Perry’s Sand Yard, Inc., upon the ground that it had aided in the creation of a hidden obstruction along the dock; and the steamer George King on the same ground that the Perry’s Sand Yard was brought in.

Upon the trial no attempt was made to prove unsafe wharfage against the American Radiator Company or negligent creation of hidden obstructions along the face of the dock by the Perry’s Sand Yard or the steamer George King. The cross-libels are therefore dismissed. Further, the libel in the action in rem will be dismissed and the merits disposed of in the action in personam.

I will first pass upon the question of whether the owner of the Jamaica promptly commenced and diligently prosecuted the. raising and removal of the vessel. From a careful examination of the testimony, I conclude that the vessel’s owner did promptly enter into a contract with a presumably responsible salvor for the raising of the vessel. The testimony offered by the libelants has not convinced me that the work was not properly performed or diligently prosecuted. My conclusion is that the owner of the Jamaica was not in any particular at fault in the raising of the vessel.

The next question is: Did the Jamaica sink through the negligence of its owner? It was found on the morning of April 16, after the vessel had been moored to the dock for three days during which time the water and weather conditions were not unusual, that it was sinking rapidly.- Siphons promptly put into the ship had little effect and she sank to the bottom in a short time. There was no testimony introduced at the trial on the question of the unseaworthiness of the Jamaica, and there was no testimony introduced by the respondents to rebut the presumption of unseaworthiness. The unexplained • sinking of a vessel in her berth raises a presumption of unseaworthiness. Dupont de Nemours v. Vance, 19 How. (60 U. S.) 162, 15 L. Ed. 584. Unseaworthiness is a breach of warranty to those with whom the vessel’s owner enters into some contractual relation. In the case before us there was no contractual relation between the owner of the Jamaica and the libelants. If there is any liability or fault upon which the libelants can rely, it must be that the Jamaica sank by reason of the negligence of its owner. She sank unexpectedly from an unexplained cause, and following the reasoning of Judge Hough in The Kathryn B. Guinan which is set forth in the report of that ease in the Circuit Court of Appeals of this Circuit in 176 F. 301, 303, this raises a presumption of negligence. Judge Hough says: “I think it does, because the sinking of a vessel in calm weather, to the injury of third parties, is one of those unusual circumstances, from its nature unexplainable by third parties, to which the rule ‘res ipsa loquitur’ applies. The reasoning of Rose v. Stephens, etc., Co. (C. C.) 11 F. 438 (respecting the explosion of a boiler), seems to me wholly applicable. But the presumption so raised is rebuttable.”

In the Guinan Case the court found that the presumption was rebutted. In the instant ease no testimony was offered to rebut the presumption of unseaworthiness or the presumption of negligence. I must find therefore that the sinking of the Jamaica was due to the negligence of her owner, so far as injured third parties are concerned.

The Jamaica, moored at the face of the dock with a part of it blocking the opening into the slip sank so that libelants’ ship King moored in the slip, was unable to come out and go about its regular business for a period of weeks, or until the Jamaica was raised and moved. If the Jamaica sank through the negligence of its owner, the liability to third parties injured by reason of the sinking is a liability at common law. Dee Conservancy Board v. McConnell, [1928] 2 Kings Bench Division, 159; The Ella, Law Reports, (1915) 111.

The Ella through her negligent navigation came into collision and sank a barge within the port of Southampton. The wreck was abandoned by its owners, and the Harbor Authority who were the plaintiffs in this ease brought action against the owners of the Ella for the expense of removing her. The president of the court (Sir Samuel Evans) held that persons who by their negligence sank in the Harbor of Southampton another vessel which thereby became an obstruction to the harbor, and which the Harbor Authority therefore removed, were liable at common law for the cost of its removal. He states that: “The common law with reference to obstructions caused by wrecks of vessels sunk through misfortune without any fault of their owners is settled by the well-known cases of Brown v. Mallett, [1848] 5 C. B. 599; White v. Crisp [1854] 10 Ex. 312; and The Crystal, [1894] A. C. 508; but the question now before the Court is as to the law applicable in eases of obstructions or nuisances in navigable channels caused not through innocent misadventure but by negligence and improper acts.” In this connection he quotes the language of Mr. Justice Maule in the ease of Brown v. Mallett, 5 C. B. 599, in which he uses the following language: “It is the duty of a person using a navigable river with a vessel of which he is possessed and has the control and management, to use reasonable skill and care to prevent mischief to others.” (and he adds) “His liability is the same whether his vessel be in motion or stationary, floating or aground, under water or above it.”

This statement of duties and obligations of navigators of vessels was adopted by the Court of Exchequer in the case of White v. Crisp, 10 Ex. 312.

The principle enunciated in The Ella was followed in Dee Conservancy Board v. McConnell, supra, decided in the Court of Appeal, King’s Bench Division, as recently as 1928. In this case, two of the three Justices of the Court of Appeal who wrote opinions questioned and distinguished the ease of The Utopia, A. C. 492 (1893), which together with The Snark (1899) Probate, page 74, at page 80, are relied upon by respondents. The court says: “In The Utopia a vessel had sunk in the Straits of Gibraltar and without negligence, and the question was whether another vessel, which subsequently ran on to her where she lay could recover damages. No question was raised whether the owners of the sunken vessel would have been liable if she had sunk through negligence. Sir Francis Jeune states a general proposition, part of which was not necessary for the decision, because the facts did not raise it; he said, ‘The owner of a ship sunk whether by his default or not (wilful misconduct probably giving rise to different considerations) has not, if he abandoned the possession and control of her, any responsibility either to remove her or to protect other vessels from coming into collision with her.’ It will be observed that he did not say that the owner of a vessel sunk by his default is under no liability to those damaged by the sunken vessel; he says that the owner of a ship sunk, whether by his default or not, is under no liability to remove her or to protect other vessels from coming into collision with her. * * * If in the Utopia Sir Francis Jeune meant, in the passage I have quoted, to say that if the owner of a ship has abandoned her, he is under no liability for damage caused by his negligence, I respectfully disagree with his view, being as it is, against that expressed by Lord Her-schell in The Crystal (1894) A. C. 508. A common-law liability for negligence cannot be wiped out by abandoning that which has caused the damage. If Sir Francis Jeune was really thinking of this point — I do not think he was — his remark is obiter. * * * I therefore see no difficulty in the way of the present respondents, one of whom is the owner of the soil with the right to take tolls for navigation and the duty to keep the navigation open, and the other is the owner or licensee of, with an interest in, a wharf, the use of which has been obstructed by the appellants’ ketch having ground alongside and so stopping access to the wharf, recovering damages directly caused by the appellants negligence.”

The conclusion arrived at by all of the Justices who wrote in this case is that the ketch having sunk through the negligence of the defendants, they became liable at common law for the damage caused by the obstruction to the navigation of the river and the blocking of the approach to the second plaintiffs’ wharf.

I am led to the conclusion that libelants are entitled to such damages as they may be able to prove which were directly caused by the sinking of the Jamaica. I base this conclusion upon the common-law liability of the respondents for negligence. I have found negligence, as previously indicated in this opinion, through the unexplained sinking of the Jamaiea, and there being no testimony of any sort to rebut the presumption of unseaworthiness and negligence.

A decree may be entered in accordance with this opinion.

If this opinion be deemed an insufficient compliance with Admiralty Buie 46y2 (28 USGA § 723), findings and conclusions may be settled on notice.

On Petition for Behearing.

The libelants, Victor Salkeld and Dorr E. Warner, and the respondent, Niagara Ferry & Transportation Co., Inc., have each petitioned for a rehearing or for the modification of the opinion and decision of this court rendered herein on July 10,1931.

The petition of the libelants asks for a modification or reversal of that part of the opinion which states and decides that “the libel in the action in rem will be dismissed and the merits disposed of in the action in personam.” I have further considered this question, and have had my attention called to the opinion of Judge Hazel rendered December 6, 1926 (D. C.) 51 F.(2d) 857, in this same action. Exceptions to the libel herein were then presented to him on the ground that the facts alleged were insufficient to constitute an action in rem. I have concluded to follow Judge Hazel’s reasoning. I therefore change my decision with the effect of striking out from my opinion the above-quoted phrase dismissing the action in rem.

The entry of a decree in the in rem action will, however, be suspended until after the entry of a final decree in the suit in per-sonam. In ease libelants are unable to satisfy their claim for damages as finally determined in the suit in personam, they will be permitted to proceed in the suit in rem and have recourse against the security posted by the respondent in that suit.

Upon respondents’ petition for rehearing, I have studied the points and arguments set forth in the memorandum filed with the petition. I find no reason for modifying my opinion as previously filed.;

As to libelants’ petition, modification of the opinion is made as hereinbefore set forth. As to respondents’ petition, the petition for rehearing is denied.