To enter into a detailed discussion of the testimony in this case, would require more space in the reports than it is practicable to give to the subject, so we will simply state our own findings as to the facts, which do not differ materially from those of the learned and lamented jurist who tried this case below and who, to the grief of his community and to the loss of the profession which he adorned, passed to the Great Beyond.
Arden A. Reed on May 6, 1921, and for several years prior thereto, was a resident of Malheur county, and was a depositor and customer of the First National Bank of Vale of which bank one A.W. Reed was cashier and manager. Before and up to May 6, he had, through correspondence, negotiated for the purchase of a tract of land in Malheur county from the *Page 359 plaintiff Clarence A. Lane, an old friend residing in the state of Delaware. The negotiations terminated in a purchase by the terms of which Arden A. Reed paid about $3,000 in cash and for $2,500 the balance due executed a promissory note on May 6, 1921, due January 15, 1922, which note was signed by himself and wife and secured by a mortgage upon the property which was conveyed to Arden A. Reed at the time of the purchase.
In the financial part of the transaction the Equitable Trust company, a banking institution of Wilmington, Delaware, acted for Mr. Lane through the defendant bank and the money and securities, United States bonds, treated as money, were delivered to the defendant bank to be forwarded to the Equitable Trust company and were so forwarded by it, the money being represented by a cashier's check. The note and mortgage were also forwarded at the same time. In a letter forwarding the document, the bank acting through its cashier, A.W. Reed, stated:
"As this note and mortgage is payable at this bank on or before January 15, 1922, I would suggest that it be sent here forcollection."
The Equitable Trust company in acknowledgment of the receipt of the document stated: "As soon as we can get the note endorsed, we will forward it to you for collection." Thereafter, on June 20, 1921, the defendant bank wrote to the Equitable Trust company as follows:
"With reference to power of attorney to satisfy this note, Mr. Reed will notify me a short time before he intends to take up this note and at that time I will forward you a release for same to be held in escrow until the mortgage is paid. This will be slightly more economical than drawing a power of attorney, recording the same and also recording the release." *Page 360
It seems to be clear to us that the bank not only assumed the duty of collecting this money and remitting it, and of delivering the release of the mortgage when it should be forwarded, but actually requested the business. No relation of banker and depositor was contemplated. Lane away in Delaware had no intention of being a depositor or creditor of the defendant bank. He was already a creditor of Arden A. Reed, and a well-secured creditor at that, and there was no reason for him to seek a new debtor. He trusted the defendant bank and its cashier to the extent of collecting this money and remitting it to him. Had they converted it to their own use they would have been guilty, under our statute, of the offense of embezzlement. Clearly, the bank's relation to the plaintiff was that of a trustee.
Now let us see what next happened. On October 21, 1921, Arden A. Reed called at the defendant bank to pay the note. He had to his credit on the books of the bank the sum of $5,503.84. The note then amounted, with accumulated interest, to the sum of $2,591.68. He drew his check in favor of the bank for that sum, upon the face of the check writing the words "payment in full, C.A. Lane mortgage". Albert W. Reed, cashier, accepted the check, charged the same against Arden A. Reed's checking account, entered the item as a withdrawal on the bank's statement later furnished to Arden A. Reed and later returned the check to Arden A. Reed with other checks stamped across the face "paid 10-22-21." Contemporaneously with the giving and acceptance of the check, the release of the mortgage not having yet arrived, Albert W. Reed, the cashier drew up a certificate of deposit in favor of the bank, which is as follows: *Page 361
"First National Bank. "Vale, Oregon, Oct. 21, 1921, No. 1097. "Arden A. Reed has deposited in this bank twenty-five hundred ninety-one dollars sixty-eight cents ($2,591.68), payable to the order of First Nat. Bank of Vale in escrow for C.A. Lane on the return of this certificate properly endorsed.
"Albert W. Reed, Cashier.
"Not subject to check."
Here was a setting apart of the particular funds created by the check of Arden A. Reed for a particular purpose, namely, to deliver such moneys to Lane upon the arrival of the release, which both the drawer of the check and the cashier knew, or at least confidently expected, would soon arrive. It was the advice of plaintiff's agent. It constituted, first, evidence of a payment to Lane's agent, and, second, an implied admission by the agent that a satisfactory payment had been made. So far as the kind of money was concerned, whether we treat it as an escrow proper or not, it indicates a setting apart by the bank of that particular deposit for the benefit of Lane. In effect, it said: "We hold this sum in trust for Lane to be delivered over to him when the release shall arrive." Whether or not Arden A. Reed requested this arrangement or demanded it, is in our view immaterial. Albert W. Reed, the cashier, says now that he made the arrangement at Arden A. Reed's request and Arden A. Reed testified that no such request was made. We are inclined to believe Arden A. Reed's testimony in opposition to that of Albert W. Reed. In a trial in another case, in which this matter was more or less involved, he testified as follows:
"Mr. Reed made no demand, but did make inquiry as to how he could be protected on this payment and, *Page 362 as stated above, the course adopted was at my suggestion with the view in mind that both the maker of the note would be protected in his payment and the owner of the same would be protected in issuing a satisfaction of mortgage."
In his deposition in the present case he mends his hold as follows: "Mr. Arden A. Reed called at the bank and demanded a satisfaction of mortgage to be delivered with the note." In addition to this, in his deposition in this case he constantly shows a disposition to suppress facts which might be inimical to defendant bank, and to many of the questions propounded on cross-examination, if not to most of them, he made this stereotyped answer: "I fail to see where the above question is material and decline to answer the same." Many of the questions were material and there were none which an honest fair-minded witness should have declined to answer. To the writer it appears that there was something rotten in his conduct of the bank, which failed with only a very small dividend for its depositors, and which circumstance induced him to attempt to cover up its transactions. He is not a credible witness. When the deposition in this case was taken, he was in another state where it would have been difficult, if not impossible, to have compelled him to answer, so the plaintiff was compelled to let him exercise his own discretion in refusing to answer questions.
The relation of a bank to persons, not depositors, who send demands or notes for the purpose of collection, is far from being well settled. This diversity of opinion is referred to by counsel for appellants in the following language:
"In this but cursory investigation of counsel for the respondents that has been made, there are conflicts *Page 363 of the law applicable thereto, between the judiciary of the several states, and even the decisions of the federal courts are not uniform in their holdings, also, there appears contradictory holdings of the courts of the same state. Still more to be regretted is the diversity of the courses of reasoning adopted and set forth in order to bring about that which should be termed equity of justice, and the mystification that results when attempting to apply the rules as laid down by the courts as controlling."
We could not collate the various contradictions in the decisions on this subject with more effect than they are stated in the reply brief of appellants, but the necessity of economizing space forbids further quotation.
Where the collection is made for a depositor of the collecting bank, and where there are no specific instructions as to the disposition of the money and no fraud in inducing the collection, the weight of authority is that, if the bank places the money to his credit in the bank, no trust arises. Among the multitude of reasons for this holding, perhaps the most obvious one is that the general, and we might say immemorial, custom of banks, when making a collection for a depositor is, in the absence of specific directions to the contrary, to deposit the amount collected for him to the credit of his account. Such is the natural and obvious course to be pursued. In most cases depositors, having general accounts with a bank, are presumed to have some knowledge of its standing, and are also presumed to deal with it in reference to the usual custom of banks in matters of this kind; but this is as far as the authorities seem to agree and there is ample room for discussion and divergence of judicial decision upon cases where a stranger, not a depositor, has a single isolated transaction, which he *Page 364 intrusts to a strange bank to carry out for him. So we find decisions putting him in the same category with a depositor as a mere creditor of the collecting bank, other courts, equally able, holding that the bank is a trustee for his benefit to the amount of the collection that can be traced to the funds of the bank; and still others holding that the very fact of the collection and failure to remit as requested makes the bank a trustee. Many fine distinctions are made which it would not be profitable to discuss. While the testimony is conflicting, for reasons already stated, we are disposed to accept the statement of Arden A. Reed, that the so-called escrow agreement and the holding up of the money was a gratuitous act on the part of the bank's cashier. Whether it was intended by him as a precaution to insure the delivery of the release, or as a pretext for not at once forwarding the money of which his bank, even then tottering to its fall, needed in its business, is not material. Neither Arden A. Reed nor the cashier had any serious reason to doubt that the release would follow the payment of the money, knowing that the fact of payment could be so easily established and the penalty for not promptly executing the release so drastic that it would be improbable to the last degree that the release would not be forwarded. The bank was plaintiff's trustee to do these things; to collect the note from Arden A. Reed; to remit to the plaintiff through his bank, and to see that the release of the mortgage was properly delivered when it arrived. Instead of doing this, it collected the money by a way satisfactory to itself, made a show by setting apart and making and holding a certificate of deposit for the amount and converting the payment to its own use. *Page 365
When we speak of trusts, it is just as well once in awhile to go back to basic definitions instead of refined and technical decisions. The great chancellor Kent in Kane v. Bloodgood, 7 Johnson's Chancery (11 Am. Dec. 417, 421), has given a clear definition, which remains "like the shadow of a great rock in a weary land." He said:
"Every person who received money to be paid to another, or to be applied to a particular purpose to which he does not apply it, is a trustee, and may be sued either at law for money had and received, or in equity, as a trustee, for a breach of trust."
This definition, committed to memory by the writer 60 years ago, he has found sufficient in a general way to answer through all the changes of the law from the time it was uttered until the present.
In any view of the testimony, the bank was a trustee for Lane. The real question is, whether or not there was such a trust as was enforcible as against the right of depositors to participate in the fund. This we shall presently discuss, but, before doing so, we will advert to another ground urged by plaintiff for a recovery in this case in which it is urged, that at the time Arden A. Reed paid the note, and for a considerable time before that date, the bank was, to the knowledge of its officers, hopelessly insolvent, and that, by assuming to receive payment on the note and retaining the proceeds of the collection, a fraud was committed on the plaintiff, which results in a trust in his favor for the amount of the payment. If the facts show the premise to be true, the result claimed by plaintiff naturally follows.
Without citing the many authorities in detail, or consuming space in quotations, the following cases settle the proposition in plaintiff's favor: St. Louis *Page 366 San Francisco Ry. Co. v. Johnston, 133 U.S. 566, 576, andWestern German Bank v. Norvell, 134 Fed. 724.
The note was paid on October 21, 1925, and on the 24th the bank closed its doors and ceased to do business. The exhibits on file do not show the deposits and withdrawals from any period earlier than the 18th of October, 1925, but show that on the 19th of October the withdrawals in excess of deposits amounted to $1,470.33, on the 20th, $3,408,68, on the 21st, $2,221.18, on the 22d $3,674.70, on the 24th, the day that the bank closed, $1,566.66, the 23d being Sunday no business was transacted, and at the time the bank closed on the 24th, it had actually in its vaults only $1,118.70, and cash balances in other banks amounting to $7,676.90, the result indicating rapid and continued withdrawals during the time indicated of about $12,000 in excess of deposits.
The final upshot of the matter, as disclosed by the listing of the receiver and others, is this: When the bank closed, its total alleged assets, good or bad, amounted to $494,081.56, and its admitted liabilities to $171,143.82. Of the assets, $269,356.89, presumably the best, has been liquidated and has resulted in a dividend to creditors of 5 per cent. So if a liquidation of the above amount of alleged assets produced only 5 per cent of dividends, it is safe to predict that a liquidation of the balance will probably result in a smaller dividend. We are, therefore, justified in assuming that this whole array of imposing assets was not actually worth $30,000 and that, with the constant excess of withdrawals over deposits, the officers of the bank, and especially the cashier, must have known of the practical worthlessness of these assets; must have been aware that the bank was hopelessly *Page 367 insolvent long before the transaction between Arden A. Reed and Lane, and to take the money under such circumstances was a gross fraud, and to keep it another fraud.
From the time they accepted the check until and including the time the bank closed its doors, there was enough money in its vaults, or in cash balance in other banks, to have covered the amount due Lane, and cash balances in other banks are for the purpose of this case the same as if the money had been in the vaults of the bank. There is no rule of law that requires a bank to keep all its money in its own safe. In fact, few banks in country towns do so, but from motive of safety or convenience prefer to have it kept in the vaults of the banks of larger commercial centers. It could call in its balances and keep its moneys in the unused hose of the president or the cashier, or bury them, if it saw fit, but for the purposes of this or any like case these balances should be treated as in its possession and were available for a basis of a draft in favor of Lane. But it is said that the fact that the payment by Arden A. Reed was by check defeats the trust; that such payment did not "swell the assets of the bank" as a payment as cash would have done. The phrase, "swell the assets of the bank," is a glib phrase, which is frequently parroted down from one court to the other, but has no application here. The bank was not acting primarily for him but for Lane for whom it was collecting the money. It took Reed's check as money and thereby diminished its debt to Reed by just that much. It was a good check and answered the bank's purpose and Reed's purpose just as well as that many actual dollars would have done. Suppose that instead of crediting Reed's note with the amount of the check the *Page 368 cashier had said, "Mr. Reed, we must have actual cash in payment of this note, just step to the paying teller's window and cash your check," and Reed had done this and at once returned to the cashier's window and paid the money on the note, every condition required by those decisions which put so much significance to the phrase "swell the assets" would have been complied with and yet the result would have been the same.
The same contention was made in the case of Hawaiian PineappleCo. v. Brown, 60 Mont. 140 (220 P. 114), which in some of its features resembles the case at bar. The court said:
"Many authorities support the view that where a collection is made by a bank which charges the amount collected to the account of the debtor who is a depositor in the bank, the assets of the bank are not augmented thereby; the theory being that this merely amounts to a shifting of the bank's liability. But the theory of these cases proceeds upon the hypothesis that the relation of debtor and creditor exists between the bank and the person for whom the collection is made. As we have seen, that relation did not exist between the Havre bank and the plaintiff. Still referring to the foregoing theory, inapplicable in this case, it is admitted that the company could have presented the check at the paying teller's window, received the amount in cash, then have paid it to the receiving teller, and this would have been an augmentation of the bank's assets. No such idle ceremony is called for. It would seem that futility could not go much further. When the bank was in duty bound to collect the cash and to remit, but instead retained the cash, when remitting would have decreased its assets, it follows that by retaining the cash its assets were augmented."
Some other contentions are made, but we feel that we have covered the substantial points urged. The case has been more than usually well briefed, and *Page 369 although the consideration of it has consumed several weeks of the writer's time it has been a pleasurable task. Every case cited has been read and considered, and, while there is great diversity of opinion among the courts, we agree with the conclusion of the learned circuit judge, and the decree will be affirmed.
AFFIRMED.
RAND, ROSSMAN and BEAN, JJ., concur.