Justice DREW correctly states in the dissenting opinion the applicable law in this case as follows: "Before the bank may bring itself within the statutory protection, two conditions must be fulfilled: (1) the fiduciary must be empowered to endorse; and (2) there must be an absence of knowledge on the part of the bank of any fact which would make it guilty of bad faith." He adds: "Neither of these conditions has been met in the instant case." I think both conditions have been met. Ballen, the attorney, did have written authority from the administratrix "to collect any and all moneys due the said estate, and to endorse any and all checks payable to . . . the administratrix, and to deposit the funds so collected in the attorney's account". These three things Ballen was authorized to do were in the disjunctive. As far as the bank wasconcerned, Ballen's authority to endorse was not conditioned upon his depositing the funds so collected in his attorney account. His failure so to deposit was a breach of his trust, but the bank was protected in accepting the endorsement by the second thing authorized in his letter of attorney, to wit: "to endorse any and all checks". What he did with the funds he collected by the authorized endorsement was of no legal moment to the bank unless it had "actual knowledge that the fiduciary" was "committing a breach of his obligation as fiduciary in making said deposit" in his personal account. (See Sec. 9 of the Uniform Fiduciaries Act of 1923, P. L. 468).
The issue then narrows itself to this: Did the fact that Ballen deposited the endorsed checks in his personal account with defendant bank give the bank "actual knowledge" within the meaning of Sec. 9 of the Fiduciaries Act, supra, that the fiduciary was committing a *Page 87 breach of his obligation as fiduciary? My answer to this question is "no". We so held in Safe Deposit Trust Co. v.Diamond National Bank, 194 Pa. 334, 44 A. 1064, where an administrator endorsed "checks for the estate", deposited them in his individual account and subsequently checked out the proceeds for the private purposes and never made restitution. In holding the bank not liable for the resulting loss to the estate, we said: The administrator "had the undoubted right to draw the money and, if he chose, thereupon to deposit the money thus received to the credit of his own account, he had a perfect right to do so. What he did do was nothing more than the equivalent of such action on his part. The money having gone into his own account was subject to be drawn out upon his personal checks which the bank could not refuse to pay. The question is entirely different from the one which would arise if after the deposit was made it was claimed as money of the trust and the bank was notified of the claim before it was paid, but that is not this case."
In a substantially similar case Whiting v. Hudson Trust Co.,234 N.Y. 394, 138 N.E. 33, the New York Court of Appeals held: "Where an executor deposited estate funds in his 'special' personal account in a trust company, and thereafter converted them to his personal use, the trust company was not liable as a party to the wrong, the executor being legally entitled to deposit trust funds to his personal account". Speaking for the Court, Judge CARDOZO said: "The defendant [bank] did not become a party to a wrong crediting these checks [drawn to himself as trustee] to its depositor's personal account. . . . What it did was to accept the check for the use of the depositor upon an agreement that the proceeds should be subject to his order. When the order was given and the money disbursed, the situation was the same as if cash had been delivered for safekeeping and afterwards returned. In such a situation, the defendant is to be held liable, if at all, only upon a showing *Page 88 that by the form of the account it has facilitated a conversion and made itself, in so doing, a party to a tort."
In the case of Bischoff, as Admx. v. Yorkville Bank, 218 N.Y. 106, L.R.A. 1916 F, 1059, 112 N.E. 759, the Court of Appeals of New York held that a fiduciary may legally deposit the trust funds in a bank to his individual account and credit. The bank has the right to assume that the fiduciary will apply the funds to their proper purposes under the trust, and does not become privy to a misappropriation by merely paying or honoring the checks of a depositor drawn upon his individual account in which there are, to the knowledge of the bank, credits created by deposits of the trust funds. But its participation in a diversion of such funds may result from either acquiring an advantage or benefit directly through or from the diversion, or joining in a diversion, in which it was not interested, with actual notice or knowledge that the diversion was intended or was being executed, and thereby becoming privy to it. In that case Judge COLLIN, speaking for the Court, said: "A bank does not become privy to a misappropriation by merely paying or honoring the checks of a depositor drawn upon his 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 check. 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. . . . A fiduciary may legally deposit the trust funds in a bank to his individual account and credit. Knowledge on the part of the bank of the nature of the funds received and credited does not affect the character of the act. The bank has the right to presume that the fiduciary will apply the funds to their proper purposes under the trust." *Page 89
In the case of Allen, Admr., etc., v. Puritan Trust Co.,211 Mass. 409, 97 N.E. 916, the Supreme Judicial Court of Massachusetts held that a bank is not liable for loss to an estate through the transfer of the funds by the administrator to his individual account, if it has no notice that the transfer was for the purpose of effecting a misappropriation of the funds. In a footnote to this report in L.R.A. 1915 C, appears this statement: "There are three ways in which a bank may incur liability and be compelled to make good deposits that have been misappropriated by the fiduciary: (1) By a violation on its part of the contract, express or implied, between it and the owner of the fund . . . (2) By appropriating the fund, either with or without the fiduciary's consent, to the payment of the latter's debt to the bank . . . (3) By assisting the fiduciary to accomplish the misappropriation, the bank having knowledge, actual or constructive, that the fraud is being or about to be perpetrated by the fiduciary."
Sec. 9 of the Fiduciaries Act of 1923, supra, makes it necessary that in order to hold a bank liable under circumstances like those here present it would have to be shown that the bank had "actual knowledge that the fiduciary is committing a breach of his obligations as fiduciary in making said deposit" or that the bank had "knowledge of such facts that its action in receiving the deposit and paying the check amounts to bad faith". The bank had no such actual knowledge and it cannot be convicted of "bad faith" unless it knew when it cashed these checks that it was Ballen's duty under his power of attorney "to deposit the funds so collected in his attorney's account". On this record it cannot be determinedwhen the bank knew this. Therefore a trial is necessary to establish this controlling fact. If the defendant bank knew when it cashed these checks and permitted Ballen to deposit the proceeds in his personal account in that bank, that he was thereby committing a breach of trust, it was privy to this fraud and liable *Page 90 in the action. If it did not have this knowledge at that time it cannot be convicted of bad faith and no recovery against it should be permitted.
We may concede in this case that the nature of the endorsement we have here "should have placed any intelligent and careful banker upon notice"* (as alleged), and that the action of the bank is not demanding Ballen's letter of attorney, which would have revealed to it his duty to deposit the proceeds of these checks in his attorney's account, was negligence, but a finding of the bank's negligence will not in this action sustain a recovery against it. A recovery can be had only if the facts which may later be established show that the bank was privy to Ballen's fraud. Up to this point no such showing is made.
I agree that the judgment of the court below should be reversed with a procedendo.
* While the deposit by an agent or fiduciary, of paper drawn by him in his representative capacity, for credit to his individual account, might, along with other circumstances, be sufficient to charge the depository bank with notice of misappropriation by the agent or fiduciary, it seems to be settled that, without additional circumstances, it will not constitute such notice. (Citing cases.) 57 A.L.R. 925. See also Empire Trust Co. v. Cahan, 274 U.S. 473, opinion by Justice Holmes.