LAMSON et al. v. BEARD; C. B. CONGDON & CO. v. SAME; PHELPS et al. v. SAME, 94 F. 30

WOODS, Circuit Judge, after stating the facts, delivered the opinion of the court. . It is not important to inquire whether the court erred in admitting evidence of immaterial facts stated in the special findings.

The one question upon a special finding or verdict is “of the sufficiency of the facts found to support the judgment.” In determining that question, of course, every relevant and material fact found must he considered, and every irrelevant or immaterial fact rejected; and when the fact has been excluded from consideration there can remain no harm from the error of admitting the- evidence by which it was established- The special findings recite many facts and circumstances which, though not irrelevant, are of an evidentiary character only.

The ultimate facts on which the rights of the respective parties must be determined are few. They are comprehended in the statement that Cassatt, being president and practically in sole control of the bank, without authority, and without the knowledge of any other officer or stockholder, discharged his individual liabilities to the plaintiffs in error, respectively, by sending them drafts of the bank, payable to their order, and drawn upon the bank’s correspondent in Chicago, with which it had sufficient moneys out of which the drafts, after indorsement by the payees, were duly paid.

Much discussion has been expended upon the effect of the form of the drafts, in connection with the use to which they were put, as notice to the payees that they were drawn without authority; but, before entering upon that inquiry, it will be well to dispose of minor contentions. Assuming that the plaintiffs in error, when the drafts were tendered them, were put upon inquiry, it is asked, what would have been the subject of inquiry? and what facts would have been developed?

It is not accurate to say that the inquiry would have been, “Did Cassatt pay the bank for the drafts?” Payment for the drafts, doubtless, would have been important evidence, but not necessarily conclusive upon the true point of inquiry, which was, “Did Cassatt have authority to draw the drafts?” He might have had money in the bank, or have put it there at the time of drawing the drafts, and yet have been without authority to draw them; and without money on deposit, and without present payment, his authority to draw in the form and for the purpose proven might have been beyond dispute.

If, trusting to his integrity and individual responsibility, the directors authorized him to use the drafts of the bank for his individual purposes, whether paid for at the time or not, any loss resulting from a misuse of that authority ought, of course,' to fall upon the bank, rather than upon a third person, who in good faith had paid value for the paper; and the question of good faith would be determined by the ordinary rules applicable to the transfer of mercantile paper.

The fallacy or inapplicability of the supposed case of John Doe, living at Pella, and procuring of the bank a draft payable to the order of a distant creditor, and forwarding the draft to the creditor in discharge-of the debt, is evident. It is, doubtless, a not unusual practice for debtors to obtain and send 1o their creditors bank drafts, drawn payable to the creditors, and, of course, in every such case the creditor knows that the money of the bank is being used to pay to him the debt of another, — in the case supposed, the debt of John Doe.

But in such cases the creditor may accept the draft, without inquiry, not, as counsel have said, because of a presumption that tire debtor had paid for the draft, bpt because the draft had been drawn by the authorized officer of the bank in the usual course of business, acting without apparent or known personal interest in the transaction.

The receiver of such a draft, though named as payee, and on the face of the paper apparently a party to the original execution thereof, is not so in fact, but, as against the drawer, is in effect an indorsee, affected only by vices or infirmities of which he had notice before he accepted it. He might know that the draft had not been paid for, and yet take it on the assumption of regular and proper execution upon some other consideration than payment.

The inquiry, therefore, which these plaintiffs in error should have made, was whether Cassatt had authority to draw drafts of the bank upon funds of the bank in possession of its correspondents for use in his individual transactions. Such an inquiry involved no difficulty beyond communicating to the directors of the bank, other than Cassatt, the fact that such a draft or drafts had been tendered in discharge of liabilities incurred in dealings upon the Board of Trade in Chicago, and asking whether the execution of the paper had been authorized.

There can. be little doubt what would have been the result of such an inquiry, accompanied with a frank and full statement of the facts as they were known to the payees of any of the drafts in suit at the time of execution. It would not have needed a discovery of Cassatt’s fraudulent bookkeeping to enable the directors to say whether the execution of such paper had been theretofore authorized, or then had their approval.

As contended, it was clearly no duty of the plaintiffs in error to' undertake an examination of the books, which, once they commenced inquiry into the management of the bank, they would have learned had been wholly in the keeping of Cassatt, and of clerics who could not be expected to testify against him. Inquiry of Cassatt, too, it is to be presumed, would have been useless, and therefore, if made, would not have met the requirement of the law. The one thing necessary to be known was whether Cassatt had authority to make the proposed use of the bank’s paper.

The authority could have come only from the directors, by direct resolution or by acquiescence or implied assent, and the plain, unmistakable course was to push the inquiry, wherever begun, to the source of authority.

It is a perversion of speech to say that “the findings showed that Cassatt had paid the bank for every one of the drafts,” or that if the defendants had gone to Pella, and had ascertained the facts, they would have found that Cassatt was a depositor in the bank, that he had charged each draft to his account, that he had on deposit ample funds to meet the charge, that he gave due credit on the books of the bank to its Chicago correspondent for the amount of each draft, and that no step in the transaction was hidden from the bank, but was known to it and recorded in its books, and that a statement of the transactions to the bank could have caused no surprise, because the bank knew of each as it occurred during the whole period of twelve years.

The entries on the books, it may be said, tended to show the facts as stated; but the entire finding shows that Cassatt was not a depositor, and in no way made good to the bank the moneys taken from it by means of the drafts, which takings, it is expressly found, were acts" of theft or embezzlement. That finding of the ultimate fact of wrongful and unauthorized appropriation cannot be overcome by proof of book entries, which, even if honestly made, would amount only to evidence tending to show the contrary.

False entries took no money out of, and put none into, the bank; and it was not for the fraudulent bookkeeping, or forgeries, or any other wrong or series of wrongs which preceded the execution of the drafts, that the plaintiffs in error were held responsible. On the contrary, we agree that, if they are to be compelled to make restitution, it is because the particular sums which they received were wrongfully taken by Cassatt from the bank, and they were parties to the wrong. This proposition does not depend upon, and cannot be refuted by, the bookkeeping disclosed in the special finding.

It embraces the three propositions contended for by counsel, namely: “

(1) The person from whom restitution is sought must have been a party to the particular transaction in which the wrong was accomplished.

(2) The particular transad ion to which swell person was a party must have been bidden from the wronged party.

(3) A mere statement to the wronged party of the facts of such particular transaction would have at once disclosed the fraud.” While the transactions appeared upon the books, as stated in the findings, it is a misuse oí words, and inconsistent with honest thought, to say that they were known to the bank. Possession of facts, in books purposely kept in a manner to conceal the truth, is not, in law or morals, knowledge of the facts. Cassatt alone had knowledge of the truth, and, though he was president, his knowledge of his own frauds, perpetrated for Ms individual purposes, was not attributable to the bank.

The foregoing considerations dispose of the proposition that the bank, by allowing Cassatt to make a like prior use of drafts drawn by himself, had established a course of dealing which estops the bank to deny his authority. Of course, an estoppel may arise out of such a course of dealing, but whether, in a particular case, it has arisen is a question of fact depending upon the circumstances.

It is hardly credible that in the facts here disclosed a jury, or a right-minded court, could find an estoppel; but it is enough to say that it has not been found, and that the facts supposed to point that way which are staled in the finding do not overcome the ultimate fact stated that the sums for which these drafts were drawn were wrongfully taken by Cassatt. That is equivalent to a direct finding that he had no authority to draw and use the drafts in that way. Por the same reasons the proposition that the directors of the bank were guilty of culpable negligence is unavailing.

There is no finding that there was such negligence, nor, if there were, that the plaintiffs in error were influenced by it to accept the drafts, of which, on the facts known to them, Cassatt was making an improper use.

These considerations of bookkeeping, course of dealing, negligence of directors, and estoppel aside, the main question is simplified: When Cassatt tendered these drafts, — each one of them to the payee named in it in payment of an individual obligation, in which the bank was not interested, — was the taker, accepting the paper in discharge of the debt, a purchaser in good faith, or was he put upon notice of Oassa it’s lack of authority to draw upon the funds of his bank for his individual purposes? Upon that question our conclusion is that the opinion in Anderson v.

Kissam, 35 Fed. 699, is sound in principle and in accord with the weight of autiiority. The judgment rendered in that case, it is true, was reversed, but upon a minor point, unconnected with the main question, which there, as here, was fundamental; and the fair inference would seem to be that if the supreme court, with the question before it, had doubted the ruling and opinion below in that respect, it would not have left the question undetermined. The case of Goshen Nat. Bank v. State, upon which the plaintiffs in error chiefly rely, is distinguishable.

The drafts in that case were drawn by the cashier, and were used to pay his individual debt; but, as the opinion is careful to state, it was “proved on the trial that the cashier had the custody and possession of the blank drafts for the claimant [the bank], and that he had the right to sign drafts drawn by the claimant on its corresponding banks, and that he had the right Lo draw a draft on the corresponding bank of the claimant for himself, upon the same terms that he had to draw a draft for a stranger, * * * which means,” as the court assumed, “upon payment to the bank of the amount of the draft.” That this proof of special authority to draw a draft for his own use was the distinguishing point of the decision is declared in the later case of Bank of New York Nat.

Banking Ass’n v. American Dock & Trust Co., supra, where it was held that a by-law of a warehouse company, authorizing an officer of the company to sign warehouse receipts, did not.authorize him to sign a receipt for his own goods. ' “It is an acknowledged principle of the law of agency,” it was there said, “that a general power or authority given to the agent to do

an act in behalf of the principal does not extend to a case where it appears that the agent himself is the person- interested on the other side. If such a power is intended to be given, it must be expressed in language so plain that no other

interpretation can rationally be given it; for it is against the general law of reason that an agent should be intrusted with power to act for his principal and for himself at the same time.” See, also, Hanover Nat. Bank v. American Dock & Trust Co., 148 N. Y. 612, 43 N. E. 72. It is urged, however, “that there is a clearly-defined distinction between the acts of a cashier or president of a bank, in issuing its paper, and that of any ordinary agent.” There are dicta in some of the opinions cited which, without attempting to define it, assert in general terms that there is a distinction.

For instance, in Bank of New York Nat. Banking Ass’n v. American Dock & Trust Co., supra, in addition to what we have already quoted in reference to the case of Goshen Nat. Bank v. State, the court said: “And we also held, for the reason therein stated, that there was a difference in the case of bank or cashier’s drafts from most cases of agency.” There is a plain difference in the fact that such drafts, once they have been issued, are commercial paper, and may be accepted in trade and commerce without inquiry into the consideration for their issue. No other basis for a distinction is suggested in Goshen Nat.

Bank v. State, and that difference, it is to be observed, is not - in the character or extent of the agent’s authority, but in the nature of the subject on which it is exercised.

It is true, as there said, that “bank or cashier’s drafts are used so enormously at the present time in' the payment or settlement of debts, or in other commercial transactions, that they have almost acquired the characteristics of money.” An officer of a bank, however, has no right to appropriate the money of the bank to his individual uses, and, though a creditor, when offered money by his debtor, ordinarily may accept it without inquiry, yet if, at the time he receives it, he is told or knows that it belongs to another, for whom his debtor is an agent or trustee, on the plainest principles he acquires no title as against the true owner.

If, for instance, Cassatt had sent to the plaintiffs in error money of the bank, instead of drafts, advising them that it belongéd to the bank, there could be no question of their liability to make restitution; and in what respect is their position better as presented than it would be on the facts supposed, even conceding that the drafts sent them were the same, or “almost the same,” as money?

The drafts bore proof on their face that they were drawn upon the funds of the bank; and that they were not drawn in the course of the bank’s business, but in discharge of individual liabilities of the president of the bank to themselves, they, of course, understood. They therefore knew that, unless there had been conferred upon Cassatt an unusual and special authority, like that given the cashier in Goshen Nat. Bank v.

State, supra, to sign and issue drafts of the bank in his private transactions, the paper sent them was unauthorized, and that for the proceeds thereof they would be liable to the bank or its representatives. It is evident, however, that the drafts in question, when offered the plaintiffs in error, were not commercial paper, capable of treatment as money, a,nd that the considerations of public policy on which the bona Me holder of such paper is protected, even though the rights of an antecedent holder be questionable, have no application or relevancy to the case.

The drafts were drawn in favor of plaintiffs in error, and until accepted by them they were not contracts, and by accepting them they did1 not become assignees or purchasers* of existing obligations, but simply parties to the original cxecut ion thereof, into whose rights the way to full inquiry is open, unless closed by some estoppel outside of the paper itself, whatever its form.

A primary party to the execution of instruments originated as these were cannot be a “bona fide purchase!',” in the sense of the law merchant, and 1o hold the payee of such paper responsible for the proceeds received upon his own negotiation of it to a third party, who will be presumed to be an innocent purchaser, no more tends to discredit the paper, as an agency of business, than it tends to impair the value of money as a medium of exchange to hold one who receives it wrongfully accountable to the rightful owner.

If a bank president or cashier, because possessed of a general power to sign drafts, may draw drafts of the bank in favor of his individual creditor, and it is to be said that “there is nothing unusual or suspicious in this way of making the draft payable to the creditor of the cashier or president who drawrs it,” then in Claflin v. Bank, 25 N. Y. 293, for all we can see, it might just as well have been said that there was nothing unusual or suspicious in the acceptance or certification by the president of the bank of a check or draft drawn by himself.

The power of such an officer to draw drafts of his bank upon others is no grea ter than his authority to accept the checks or drafts of others upon Ms bank; yet in that case it was held that the general authority of the president of the bank to certify checks drawn upon it did not extend to checks drawn by himself, and it was declared not to be necessary for the principal in such case to show that the agent had acted unfairly or that he himself lmd sustained an injury, but that the act of the agent is deemed to be unauthorized, and the contracts void.

We agree with counsel for the defendant in error that the concern of the courts should not be to make it easy for persons in fiduciary positions to make way with that which is committed to their care, by relaxing this salutary rule, through considerations of the supposed necessities of business and commerce, and that the rule should not be suspended, where the opportunities for breach of trust are largest, merely because they are large. The best public policy requires that bank officers be rigidly held to the ordinary and well-understood .rule. There is, we believe, no good reason to the contrary.

In the first case, where there was a trial by jury and a general verdict, reference is made to Cassatt’s own testimony for proof that he “had authority to draw drafts to his own or his creditor’s order, upon payments by him to the bank for the same,” and on this assumption, it is contended, on the authority of Hanover Hat. Bank v. American Dock & Trust Co., and like cases, that the fact of drawing the drafts was a representation, on which the plaintiffs in error had a right to rely, that such payments had been made.

Whether he had such authority was a question of fact, of which the verdict is conclusive, unless material error of law occurred at the trial. The testimony referred to is quite indefinite and uncertain, but, if it affords ground for an inference that Cassatt did in fact draw drafts to his own . order, or in favor of his creditors, it shows no basis whatever for a belief that he did so with the knowledge of other officers of the bank.

In the case last referred to there was proof that the president of the warehouse company had issued receipts to himself before the one in question, and there was evidence of facts and circumstances, sufficient to go to the jury, tending to show that he had authority to do so.

It being apparent on the face of the drafts here in question that they were drawn upon the funds of the bank, it was impossible for the plaintiffs in error to receive them in discharge of Cassatt’s individual obligations to themselves without being put upon inquiry whether the president had in fact the authority which he assumed to exercise; and it was not enough to make inquiry of him, nor permissible to rely upon the implied representation deducible from the execution of the drafts.

That the execution of the drafts by the president of the bank in his own interest was without authority, and that the plaintiffs in error were not, and could not have been, innocent holders, the evidence was without conflict, and so clear that the court might have directed a verdict in favor of the plaintiff; and on this view of the case the other questions discussed, which in themselves are of minor importance, lose all significance. It is said that “the question of gambling was an issue in the case,” and the refusal of a special request for instruction on the subject, it is urged, was material'error.

Ho such issue appears in the pleadings, and no mention of the subject is found in the court’s charge to the jury.

In fact, however, by necessary implication, the question was excluded from consideration when the jury was told that the plaintiff could recover only upon proof that Cassatt, without the authority, knowledge, consent, or acquiescence of the board of directors of the bank, misapplied the moneys of the bank in question to his own use, and that the defendants had knowledge, or were aware of such facts as would amount to knowledge on their part, that he was so misapplying the money of the bank; and the statement that the defendants must have had such knowledge was repeated in substantially the same words and with equal clearness in a separate charge.

In short, the controlling question was fairly sub-milled to the jury, and, it is clear, was rightly decided. The allowance of interest was proper. The judgment in each of the cases is affirmed.