The appellee bank sued upon two notes, one for $22,000, which was a renewal of two earlier notes executed by Peckham, deceased, and the other for $14,596, which was a re-renewal of one for $43,000 executed by Peckham, deceased. The history of those notes will be hereinafter set out.
The appellant answered, setting up both by defense and cross-action that the notes were a part of lengthy transactions pleaded by which appellee negligently made possible and corruptly participated in transactions by which Peckham embezzled and spent unlawfully more than $100,000 of appellants' trust funds, and impleaded appellees Harrell and Basham, who were active officials of the appellee bank, alleging their personal and official participation in such misappropriation.
Peckham was a trustee under a declaration of trust of the Wichita Royalty Company, an unincorporated concern, filed in the deed records of Wichita county, where all these interested parties resided. That instrument declared that it was "the general purpose of this company to purchase and sell oil and gas royalties and other oil and gas properties"; that the trustee should have "entire management of the affairs" of the company; that title to all assets of the trust should be carried in the name of the trust; that the trustee should not be liable for his acts thereunder except for willful and corrupt breach of trust; that the officers of the trust should fix and pay Peckham's compensation for his services as trustee. That salary was fixed at $5,000 per month, and paid regularly, and is not included in any of the transactions hereinafter mentioned. *Page 675
A jury was impaneled, and the court, after hearing the evidence, the pertinent portions of which will be below detailed, instructed a verdict for appellees and against the appellant trust.
It is important to bear in mind that this was an instructed verdict in the trial court, for I shall have numerous occasions to refer to the fact issues raised for the jury's determination, which, as far as we are concerned, must under such instructed verdict be found conclusively against appellees, and I shall so recite.
Let us first fix clearly some fundamentals which run through all the transactions:
(1) Peckham was as trustee merely the managing partner of Wichita Royalties. This was early announced by Mr. Justice DUNKLIN. See Thompson v. Schmitt, 115 Tex. 53, 274 S.W. 554. As such he was the agent of the other owners of beneficial interests in the trust, and, as said in the above-cited opinion, "all authority they possessed was delegated to them by" that declaration of trust "powers of attorney and similar instruments are to be strictly construed," and "authority delegated is limited to the meaning of the terms on which it is expressed." Skaggs v. Murchison,63 Tex. 353.
(2) Harrell, as active and authorized representative of the appellee bank, as a matter of law, knew the state of Peckham's personal affairs with the bank as well as such state of the Wichita Royalty Company affairs with that bank.
(3) The bank as a matter of law knew whatever Harrell or Basham, as its active vice presidents, learned in the performance of their duties as such officers.
(4) Harrell and Basham knew that Peckham was such trustee, and must at their peril inquire into his authority to have the various transactions he did as trustee have with the bank.
Now it therefore seems that the judgment should be reversed for one or all of three reasons:
(1) Peckham used a large sum of the trust funds to pay his personal obligations to the appellee bank and to Harrell and Basham, officials of the bank. Counsel for appellees in their briefs practically admit that same was slightly more than $7,000. Appellant contends it was more than $57,000. We shall not attempt to reconcile that difference. If Peckham took another's money, and with it paid an antecedent debt to the bank, the bank must return the money. Its innocence is no defense, for it has parted with nothing therefor. Peckham personally owed the bank before he embezzled those funds, and, the bank returning the money to the rightful owner, Peckham still owes the same to the bank. I know of no authority which holds to the contrary. Even in Interstate Nat. Bank v. Claxton,97 Tex. 569, 80 S.W. 604, 606, 65 L.R.A. 820, 104 Am. St. Rep. 885, relied on so strongly by appellees, in which the court absolved the bank of liability for a depositor's misappropriation of trust funds to the payment of personal debts of the depositor to strangers, the liability of the bank to return to the cestui que trust such of said funds as the depositor had paid to the depository itself on personal debts of the depositor is upheld. In the Claxton Case that doctrine, as expressed in Commercial Agricultural Bank v. Jones, 18 Tex. 811, was expressly upheld. "In that case the bank applied the money to its claim against Dye (the trustee), and it was upon that ground that the liability was at last rested," and again "in attempting to acquire such a right or benefit the bank becomes a party to the action of the trustee, and stands as any other person dealing with one holding property in a fiduciary capacity." And in Coleman v. Bank, 94 Tex. 608, 63 S.W. 867, 869, 86 Am. St. Rep. 871: "The principle does not allow the bank * * * to apply the (trust) fund to the individual debt due to it from the trustee." This same rule was said to require inquiry by the bank as to what funds were trustee funds before appropriating them to its own benefit, where the account contained commingled trust and personal money. Steere v. Stockyards Nat. Bank, 113 Tex. 387, 256 S.W. 586, 258 S.W. 1042. As against an instructed verdict, this last holding alone makes the judgment in our case erroneous, for inquiry would undoubtedly have shown facts as below set out to make at least a jury issue of knowledge of the misappropriation, if not establish it conclusively.
In the second place, over $100,000 of the embezzlement was done by this means: Peckham as trustee drew a check upon trust funds in appellee's bank and payable to appellee bank, and at his request and upon presentation of such check the bank withdrew the amount thereof from the Royalty Company's trust fund deposit, marked the check "paid," and placed such amount to Peckham's personal account, from whence Peckham expended the same for other than proper trust purposes and a part for personal financial adventures. At least it is undisputably so as to a substantial portion thereof, and an issue of fact as to the *Page 676 balance is made which, as to this appeal, amounts to the same thing.
At this point we consider Robbins v. Passaic Nat. Bank Trust Co., 109 N.J. Law, 250, 160 A. 418, 419, 82 A.L.R. 1368, and cases cited in notes thereto. In that case a managing partner procured checks drawn on the partnership account to the order of depository bank as payee, which checks were at the request of the managing partner cashed by said bank and placed to the personal account in said bank of the said partner, who thereupon dissipated same in his private enterprises. The court said: "There can be no doubt that as a fundamental proposition of law a check drawn to the order of a bank precludes the diversion of the proceeds of such check to a use other than that of the drawer, and such diversion can only be justified by the proof of authority from the drawer to so divert. * * * It is equally well settled that a partner may not use partnership funds for his private uses without the sanction of his co-partners." It is thus apparent that Peckham was without legal right to thus misuse the funds. Nor is it any answer to say that this was only an instrumentality used by Peckham which he could have accomplished by making as he did the checks payable to himself, in which event the bank would not have been privy to the transaction. It is sufficient to say that it was not done that way. If one aids another to embezzle, it is no answer to the former's guilt to offer proof that some other person or means was as available to accomplish the deed as the accused.
Moreover, each of these checks had printed thereon "endorsement of this check constitutes full receipt for the items shown on the accompanying voucher." Those vouchers (which Peckham removed before the check was delivered to the appellee bank) carried notations, some of them false, others showing improper uses, and some of them showing that the proceeds of the check was to be used to pay obligations of the appellant trust to the payee bank. Thus the bank was notified that this money was delivered to it for a trust purpose shown on accompanying voucher. We can at least say, and we need say here no more, that it was the duty of the bank to seek that information and ascertain why this check of known trust funds was payable to the bank when the bank was not in fact receiving the proceeds, and when by the check it was admitting full receipt for something shown on another paper, which was supposed to, but did not, accompany the check. It has been held in this state that, if one accepts and cashes a check insufficient to pay in full a disputed amount with a notation thereon that same is in full payment, same is full payment. First State Bank v. Knapp (Tex.Civ.App.) 3 S.W.2d 468. If in such case the notation is notice, I fail to see why it would not be notice in this case. In the Robbins Case, supra, the question of negligence in not inquiring what the notation on the check meant, though not on the same facts, was submitted to the jury, and such submission was held to be proper.
The checks were payable to the bank, and it thus is privy to the transaction. This issue of privity to the transaction is also vital, and, if privity is found, is conclusive under the decisions of our Supreme Court. In the Jones Case, supra, Judge Wheeler said: "There was therefore a privity between the Bank and the plaintiffs (Wichita Royalty Company) and the Bank became directly and immediately responsible to the plaintiffs, and not merely to the agent employed by the plaintiffs in making the deposit. Being so responsible, there can be no clearer proposition than that they had no right to pass the deposit to the private account of Dye." I am aware of the explanation of the decision in the Jones Case as made in the Claxton Case, but the above statement of the law is not challenged. On the contrary, Judge Williams in the Claxton Case said: "We make these quotations, not for the purpose of questioning the soundness" of the Jones Case, but to differentiate.
In the Claxton Case the portion of the case which was reversed was the attempt of the trial court to hold the bank liable merely because the trustee, who had authority to carry the trust funds in his private account, had paid same out for nontrust purposes without knowledge or aid of the bank, and at the time insolvent. In our case, on the contrary, Peckham was expressly ordered by the terms of the trust agreement to carry all the trust property in the name of the trustee "as such trustee." Moreover, the rule applicable to our case is recognized in that opinion. The bank "incurs no liability in so doing, as long as it does not participate in any misapplication of funds or breach of trust." Again: "This case is to be distinguished from those in which a bank undertakes to acquire title to * * * a fund held in trust by a depositor. In attempting to acquire such a right or benefit the bank becomes a party to the action of the trustee, and stands as any other person dealing with one holding property in a fiduciary capacity. The question of notice of the title of the person holding the property and his power over it arises, and a bank cannot, any more than any other person, *Page 677 acquire that which belongs in equity to another, if it have notice of his rights; and, if it thus aid a trustee in diverting trust property from the beneficiary, it becomes liable as a wrongdoer." The following authorities announce liability on facts showing knowledge of the transfer of the funds to the private account of the trustee without the bank actively participating therein other than honoring the checks drawn to accomplish the transfer: Bacon v. Wright (Tex.Civ.App.) 52 S.W.2d 1111; U.S. F. G. Co. v. Adoue Lobit, 104 Tex. 379, 137 S.W. 648,138 S.W. 383, 37 L.R.A. (N.S.) 409, Ann.Cas. 1914B, 667; First State Bank v. Shannon (Tex.Civ.App.) 159 S.W. 398; Moore v. Hanscom,101 Tex. 293, 106 S.W. 876, 108 S.W. 150.
This brings us naturally to a consideration of those checks which were made payable to the bank, by the bank cashed and the money placed by the bank to Peckham's personal account, and by which cheeks the bank agreed as per notation on check that same was full receipt for items on "accompanying voucher," which vouchers had been previously detached and were in the office of Peckham, and which vouchers stated that the checks were for various payments on the Marlboro addition. Marlboro addition was well known by the bank to be a promotion enterprise by which Harrell, a vice president of the bank, with Peckham and others, were paving and otherwise laying out same to sell to the public for residence purposes and not connected in any way with the oil business. Laying aside for the moment whether the bank believed the enterprise as far as Peckham was concerned to be that of the Wichita Royalty Company, the bank, in participating in this division of funds by receiving the money by checks payable to itself and that, contrary to the face of the check, placing it in Peckham's personal account, must face the question of whether the trustee could lawfully engage in such enterprise. The trust agreement, which was Peckham's agency contract, says that the general purpose of this company is to engage in the oil and gas business. That Peckham had no authority to so spend the money on Marlboro addition would be no grounds for recovery unless the bank had, as above stated, actively participated therein. But the bank did participate in such, and by such participation in such diversion the bank assumed the duty under the cases above cited to see that such funds were devoted to trust purposes.
This brings us to the third cause of reversal, to wit, that a jury issue is made that the bank had actual knowledge of Peckham's embezzlement and plans therefor, and in that connection the discussion will also show that at least a jury issue is made of the bank's knowledge that such Marlboro addition promotion was not an oil and gas business, as above limited by the declaration of purpose.
On September 19, 1925, Peckham and Harrell and others purchased 51 acres of land which they platted in this town lot addition. Peckham's one-fourth share of the cash payment was $4,733. When Peckham later made a charge on the books of the trust for this, he set it up at $11,811. In January, Peckham, trustee, issued a check to the bank; the voucher notation showing it was for "Stephens Royalty" purchase, and at his request the bank placed the money to his personal account. In January, Peckham, Harrell, and others bought 6 acres more adjoining the 51-acre tract. In March, 1926, the property required expenditures for gas, water, lights, paving, etc. In March, Peckham, as trustee for the Royalty Company, borrowed $25,000. That day Peckham issued his personal check for $11,811 to purchase another one-fourth in the addition. This was to Peckham's brother for an interest which cost the brother $4,723. Five days later Peckham, trustee, issued a check to the bank as payee amounting to $17,623, notation on voucher "Marlboro purchase," and the bank at his request cashed the same and placed the proceeds to his personal credit. Without such deposit, Peckham had on deposit $341. After such deposit, that $11,811 was paid and also a $5,060 check to Harrell and Basham, officers of the bank, in another transaction I shall discuss later. Thus we have the bank undertaking to see that the trust funds in such check were devoted to Marlboro purchase and allowing it to be used to pay Peckham's debt to one of the bank's officers.
More than a month later Peckham executed a deed of his one-half interest in Marlboro addition to the Wichita Royalty Company, handed it to Scannell, the office manager, with instructions and intent that same should be kept subject to his (Peckham's) will at all times and be destroyed and not effective if Peckham desired it, and should be kept a secret. This document was never made public during Peckham's lifetime. Peckham rendered the property and treated it as his own, told all who inquired that it was his own. He later individually joined in obtaining a charter for a corporation to take over the addition, transferred his share to the corporation, and personally joined *Page 678 individually in borrowing money with the other title owners to pay the capital stock. The set-up on the books of the Wichita Royalty Company and the notations on the vouchers of the checks to the bank showed to Harrell and the bank that Peckham was charging the trust a profit over that which Harrell, the official of the bank handling the Wichita Royalty Company transactions with the bank, knew Peckham paid for the interest in Marlboro. Thereafter Peckham issued trust checks to the bank in the sum of $31,000, voucher notations showing cost of improving Marlboro, which checks were by the bank cashed and the proceeds placed to the personal account of Peckham when the bank knew through Harrell that in fact the cost of those improvements to Peckham was only $25,000. Harrell testified he never knew that Peckham claimed this Marlboro adventure was for the benefit of the trust.
Now we think the above last three paragraphs at least makes a jury issue as to whether the bank had actual knowledge of the fact (1) that Peckham was not in fact conducting this real estate adventure for his trust as against merely using its funds intending to take the benefits individually; (2) that Peckham was in fact charging the trust falsely a profit on the expenditures he made of its funds.
We thus conclude that, as to the checks made payable to the bank and by the bank diverted to Peckham's personal account, a portion of those proceeds are shown conclusively to have been embezzlements on their face and the balance (Marlboro) were without authority and at least raise an issue of fact regarding the bank's liability (1) for the illegal profits of G. W. Peckham therein and (2) whether any of the residence real estate adventures (a) were within the scope of Peckham's authority and such want of authority known to the bank, (b) actually were being conducted as such trust for trust purposes.
This brings us to the third reason for reversal which we referred to above, the payment to Harrell and Basham, two officers of the bank, from Peckham's personal account out of funds of the trust put there by the bank of its own volition. The Stephens royalty was owned by Harrell and Basham, both active officers of appellee bank. On November 9, 1925, Peckham bought one-half of this royalty at a price of $22,407. On January 18, 1926, Peckham, as trustee for the Wichita Royalty Company, borrowed from the bank, acting by Harrell, the same owner above named, $15,000. On the same date Peckham, trustee, issued a check to the bank for $15,769 payable to the bank. The bank cashed the check and placed the proceeds to Peckham's individual account. Without that deposit Peckham's personal account balance was $1,084. Harrell as a matter of law knew this. The voucher of the said check stated it was a balance on $25,769, purchase price; of only one-fourth of the Stephens royalty, two checks of $5,000 each having been previously issued by the trust, one of them also payable to the bank with voucher notation of royalty purchase. One week later, January 25, 1926, and before Peckham had made any other deposit, Peckham issued his personal check to these two bank officials, Harrell and Basham, for $10,028, part payment on Stephens royalty. Harrell and Basham, and the bank through them, must be said to have thus actively participated with actual knowledge in Peckham's making an unlawful profit of $3,362 by the bank's cashing that check and putting it in Peckham's personal account. Again, on March 1, 1926, as above stated, Peckham as trustee borrowed $25,000 from the bank through Harrell. As trustee, Peckham issued on March 6th a check for $17,623, payable to the bank, with a notation on the voucher therefor that same was a Marlboro purchase. The bank collected this check and placed the same to the credit of Peckham individually. But, for that deposit, Peckham's individual balance would have been $134. On that day Harrell and Basham, knowing these things as a matter of law, or as we must assume, on an issue of fact, took from Peckham his personal check for $5,060, and, cashing same, obtained for themselves this fund directly known by them to be trust funds and funds known by Harrell to be placed by this bank in Peckham's personal account on pretense of paying for Marlboro addition. Now we note that this information came to Harrell in his capacity as officer of the bank. However, this court, speaking through Chief Justice Conner, quoted the following: "When a bank officer is acting as a president or director of another concern, * * * the knowledge acquired in the latter capacity is imputed to his bank according to the most general rule." Gaines v. First State Bank (Tex.Civ.App.) 28 S.W.2d 297, 300, affirmed 121 Tex. 559, 50 S.W.2d 774. The rule thus broadly stated charges the bank with Harrell's individual knowledge that Peckham was making an unlawful profit on his sale of the Stephens royalty to the Wichita royalty when Harrell and Basham made a deed of part of said royalty direct to the Wichita Royalty Company and *Page 679 at Peckham's direction, reciting a consideration greater than was actually paid to Harrell and Basham, and which unlawful profit Peckham was able to divert to himself without exciting suspicion by making the trust check to Harrell and Basham's bank and procuring that bank to put the proceeds in Peckham's personal account.
As applicable both to the second and third reasons, is the case of U.S. Fidelity Guaranty Co. v. Adoue Lobit, 104 Tex. 379,137 S.W. 648, 138 S.W. 383, 384, 37 L.R.A. (N.S.) 409, Ann.Cas. 1914B, 667. Compton as guardian had a certificate of deposit for about $12,000 from Adoue and Lobit, bankers. He individually owed the bank $7,000. He delivered this certificate to the bank with instructions to deposit it to his own account. This the bank did, and was repaid its $7,000. Compton thereupon paid another personal debt with the $5,000 balance. On motion for rehearing, the bank insisted that it was not liable, since it was admitted that the bank had no suspicion that the guardian was embezzling the trust funds, that it should not be required to return the $7,000 it had received, and especially the $5,000 Compton had paid to other creditors than the bank. The court said: "It is well settled in the authorities, and is in accordance with sound legal reason, that when, with knowledge of the trust character of the funds, the bank * * * aids in the appropriation of same to the trustee's personal debt, that it is, and of right should be, held liable." And again: "Its act in placing distinctly marked trust funds to the personal credit of Clagett was obviously wrongful, and it must bear the resulting consequences," and held the bank liable for the entire $12,000. This case seems to be the natural development of the Jones, Coleman, and Claxton Cases; the first illustrating the doctrine of benefits to the bank, the second and third the doctrine of nonparticipation; while this case places the liability on benefits obtained and participation in the wrong. It is noteworthy that Adoue and Lobit were exonerated of any intent to injure the trust funds, and their participation consisted solely in placing distinctly market trust funds to the personal checking account of Compton, whence they were diverted to Compton's private debts. It was sufficient that they have notice of the trust, had allowed themselves to be used as instruments for its diversion under circumstances which should have put them on notice.
This case cites Coleman v. Bank, 94 Tex. 607, 63 S.W. 867,86 Am. St. Rep. 871, as authority, and I see no conflict but a complete accord with Interstate Nat. Bank v. Claxton, 97 Tex. 569, 80 S.W. 604,65 L.R.A. 820 104 Am. St. Rep. 885. In the Claxton Case Claxton, the cestui, had given the trustee, a broker, full authority to deposit Claxton funds in the trustee's general account, to be commingled with personal funds as well as numerous trust funds of strangers to Claxton The account was not named in the bank in any way as a trust fund. The bank did nothing in connection with it, with one exception pointed out earlier in this opinion, except to honor checks given to persons not connected with the bank; in other words, did not participate in the diversion. Moreover, the Adoue Lobit Case is founded on Moore v. Hanscom, 101 Tex. 293,106 S.W. 876, 108 S.W. 150, which was a litigation of an angle of same case and facts as was involved in the Adoue Lobit Case. The court consisted of Justices Gaines, Brown, and Williams when both opinions were written, and two of those three great minds were still on the court when the Adoue Lobit Case was decided. Those three opinions were intended to be, and I believe are, in harmony. If not, then U.S. F. G. v. Adoue Lobit, being the last expression of that court, should control.
I see no reason why the fact that Peckham often did what the trust agreement forbade, to wit, used his personal account and the trust account each in the trust affairs as suited his convenience, should be of any importance. No one contends that the other partners in the Wichita Royalty Company condoned it or even knew of it. He had no right to do so, and the bank participating in such conduct does so at its peril.
It is true that Scannell, when he became trustee after Peckham's death, indorsed the notes Peckham had made for the trust, but no consideration moved to the trust for such act. Scannell did not know the true facts regarding the trust's claim against the bank and without knowledge there is no ratification, and, if Peckham was without authority to enter into this Marlboro transaction, then Scannell was equally without authority to ratify it. Even if it be said that the notes were valid obligations, this still would not justify the instructed verdict, for the cross-action was in excess in amount of the bank's suit.
If the controverted facts should be resolved by the trier thereof that Harrell knew of these unlawful acts of Peckham, in aid of which he loaned the agencies of the bank, then limitation would not begin running sooner than Peckham's death, as far as we are concerned; *Page 680 that is to say, limitation started running when the facts were, or should reasonably have been, discovered. In the present state of the record, there is nothing to show any reason why that date was sooner than Peckham's death. He had and exercised the sole and exclusive management of the trust until he died. In such event the bar of limitation is not complete, for Peckham had been dead less than two years when this suit was filed.
Moreover, as to those funds which the bank accepted from the trustee as being for the named purpose shown on the voucher, and then placed to Peckham's personal account, contrary to such voucher statements, the bank assumed the duty to see that same were used for trust purposes. The cestui que trust did not know of such diversion. The bank thereafter paid those funds out on Peckham's personal checks for nontrust purposes. The cestuis were still in ignorance thereof. Limitation does not run against a depositor in favor of the bank depository until demand therefor. "The fact that the conduct of the appellant bank was also wrongful or tortious, and that it may have so conducted itself with its president as to have given appellee (Wichita Royalty Company) a right of action for such wrongdoing, ought not, and we do not believe will, defeat his right of action upon the implied contract to pay. If we are correct in our position, the statutes of limitation did not begin to run until demand and refusal to pay." First State Bank v. Shannon (Tex.Civ.App.)159 S.W. 398, 401 (writ denied).
In the following cases Texas has been said to be committed to the rule that equitable frauds and resulting and constructive trusts are subject to the four-year statute of limitations (Rev.St. 1925, art. 5529) as well as "actual" frauds: Ripley v. Withee, 27 Tex. 14; Anding v. Perkins,29 Tex. 348; Hand v. Errington (Tex.Civ.App.) 233 S.W. 567 (Fort Worth); Id. (Tex.Com.App.) 242 S.W. 722; Id. (Tex.Com.App.) 248 S.W. 25. In the last case we held that limitation would not run against a cestui who was ignorant of the trust nor in favor of the trustee who was ignorant of the trust.
The judgment of the trial court is reversed, and the cause remanded.