Plaintiffs sold two stallions to defendant Waltz under a title-retaining contract by the terms of which Waltz was to pay $2,500 in full, $500 thereof on or before November 1, 1920, and the balance in two yearly instalments. *Page 448 It was orally agreed that Waltz should insure the horses, for the benefit of plaintiffs. These two horses, together with others owned by Waltz, and upon all of which he had taken out insurance in his own name, were later destroyed by fire, and drafts in payment of the insurance were taken to the defendant First National Bank of Filer. Waltz had an indebtedness at the bank in excess of the total amount of the insurance money, and a greater portion of this was applied by the bank on his indebtedness, with Waltz's consent. Waltz had not paid any part of the sum owing plaintiffs on the conditional sale contract.
This action was commenced by plaintiffs against Waltz and the First National Bank of Filer to recover on Waltz's obligation. The bank was sought to be held on the theory that plaintiffs were entitled to the proceeds of the insurance on the two horses sold to Waltz, which had been turned over to the bank. A jury was impaneled in the trial of the cause, and special interrogatories were submitted to it by the court. Answers of the jury to the interrogatories were in effect that defendant Waltz was required to carry insurance on the horses purchased from plaintiffs, for the benefit of plaintiffs; that the bank had applied the proceeds of the insurance upon a note owing by Waltz to the bank, which, at the time of such credit, was not due; and that the bank had had in its possession for collection the title note executed by Waltz in favor of plaintiffs.
The jury returned a verdict in favor of plaintiffs against defendant Waltz, and also found for Waltz on a counterclaim against plaintiffs by reason of a breach of warranty in regard to one of the horses purchased, leaving an amount due plaintiffs from defendant Waltz of $2,638.54. Judgment was entered on the verdict, allowing plaintiffs attorney's fees and costs in addition. The court adopted the answers of the jury to the special interrogatories, and with respect to one interrogatory, which the jury was called upon to answer, but failed so to do, as to whether, before or at *Page 449 the time of accepting the drafts covering the loss of the two horses purchased by defendant Waltz from plaintiffs, the defendant bank had notice of an agreement between plaintiffs and Waltz whereby Waltz was required to carry insurance on the horses so purchased, for the protection of plaintiffs' interest, the court found that the bank had no knowledge or notice of such agreement and of the trust character of said funds. The judgment directed the dismissal of plaintiffs' action as to the bank. Plaintiffs appeal from this part of the judgment.
But one question is necessary for determination, namely, whether the respondent bank, before or at the time it received the insurance money and credited a part of the same upon Waltz's note, had knowledge or notice of the trust character of the funds. The record does not disclose that Waltz notified the bank of any agreement whereby he was to take out insurance for the benefit of appellants, and the president, vice-president and cashier of the bank all testified that the bank had no knowledge or notice of the trust character of the funds. Neither is it shown that appellants notified the bank prior to the payment made by Waltz of any agreement or understanding between appellants and Waltz that insurance was to be taken out on the stallions for the benefit of appellants. There is some evidence in the record to the effect that a conversation was had between one of the appellants and the cashier of the bank touching the nature of the transaction between Waltz and appellants, but upon the whole record there is sufficient competent evidence to sustain the finding of the trial court that the bank had no knowledge or notice of the trust character of any part of the insurance money. It would seem to be the quite generally accepted rule that, if a trustee, in violation of his own duty, uses trust money to pay an antecedent debt of his own to a creditor who has no knowledge of the breach of trust, or notice of facts sufficient to put it upon inquiry, as to the true character of the *Page 450 funds, then the money becomes free from the trust and cannot be followed by the beneficiary into the hands of the creditor. (Cunningham v. Bank of Nampa, Ltd., 13 Idaho 167, 121 Am. St. 257, 88 P. 975, 10 L.R.A., N.S., 706; Smith v. WallaceNat. Bank, 27 Idaho 441, 150 P. 21; Shuman v. Citizens StateBank, 27 N.D. 599, 147 N.W. 388, L.R.A. 1915A, 728; Tough v.Citizens' State Bank, 89 Kan. 583, 132 P. 174; Kimmel v.Bean, 68 Kan. 598, 104 Am. St. 415, 75 P. 1118, 64 L.R.A. 785; Bailey v. Colton, 25 S.C. 436; Bright v. King, 20 Ky. Law Rep. 186, 45 S.W. 508; Smith v. Des Moines Nat. Bank,107 Iowa, 620, 78 N.W. 238; McEwen v. Davis, 39 Ind. 109; First StateBank v. Hill, (Tex.Civ.App.), 141 S.W. 300; and other cases cited under notes IIIa, 13 A.L.R. 327, and 50 A.L.R. 634.) This rule is applicable to the facts in the instant case and the finding of the trial court, and it follows therefore that the judgment must be affirmed. Other errors assigned by appellants and ably presented by counsel become unimportant in view of this conclusion.
Judgment affirmed. Costs to respondent.
Wm. E. Lee, C.J., and Givens, Taylor and T. Bailey Lee, JJ., concur.
Petition for rehearing denied. *Page 451